UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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| ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2016.2018.
OR
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| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to .
Commission file number 001-36859
PayPal Holdings, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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| Delaware | 47-2989869 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
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2211 North First Street San Jose, California | 95131 |
| (Address of Principal Executive Offices) | (Zip Code) |
(408) 967-1000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | Name of each exchange on which registered |
| Common Stock, $0.0001 par value per share | The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [x] No [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [x]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filer | ý | Accelerated filer | o |
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| Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | o |
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| | Emerging growth company | o |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
As of June 30, 2016,2018, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was approximately $41.0$98.5 billion based on the closing sale price as reported on Thethe NASDAQ Global Select Market.
As of February 2, 2017,January 31, 2019, there were 1,207,583,2341,173,209,367 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference fromPortions of the registrant’s definitive proxy statement for the registrant'sits 2019 Annual Meeting of Stockholders expectedare incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. Such proxy statement will be held in May 2017.filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2018.
TABLE OF CONTENTS
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| Part I |
| Item 1. | | |
| Item 1A. | | |
| Item 1B. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| Part II |
| Item 5. | | |
| Item 6. | | |
| Item 7. | | |
| Item 7A. | | |
| Item 8. | | |
| Item 9. | | |
| Item 9A. | | |
| Item 9B. | | |
| Part III |
| Item 10. | | |
| Item 11. | | |
| Item 12. | | |
| Item 13. | | |
| Item 14. | | |
| Part IV |
| Item 15. | | |
| Item 16. | | |
Presentation of Information
On July 17, 2015, PayPal Holdings, Inc. (“PayPal Holdings”) became an independent publicly traded company through the pro rata distribution by eBay Inc. (“eBay”)(defined below) of 100% of the outstanding common stock of PayPal Holdings to eBay’s stockholders (which we refer to as the “separation” or the “distribution”). For additional information, see “Business—Separation from eBay Inc.” To accomplish this separation, in January 2015, eBay incorporated PayPal Holdings, Inc., which ultimately became the parent of PayPal, Inc. and holds directly or indirectly all of the assets and liabilities associated with PayPal, Inc. Unless otherwise expressly stated or the context otherwise requires, references to “we,” “our,” “us,” “the Company”Company,” or “PayPal” refer to PayPal Holdings, Inc. and its consolidated subsidiaries or, in the case of information as of dates or for periods prior to our separation from eBay, the consolidated entities of the payments business of eBay, including PayPal, Inc. and certain other assets and liabilities that were historically held at the eBay corporate level, but were specifically identifiable and attributable to the payments business, and references to our “Payments Platform” mean our combined payment solution capabilities, including our PayPal, PayPal Credit, Braintree, Venmo, Xoom, and PaydiantiZettle products.
References in this Annual Report on Form 10-K to “eBay” refer to eBay Inc., a Delaware corporation, and its consolidated subsidiaries, which prior to the separation and distribution, but not after such date, included the business and operations of PayPal.
Trademarks, Trade Names and Service Marks
PayPal owns or has rights to use the trademarks, service marks, and trade names that it uses in conjunction with the operation of its business. Some of the more important trademarks that PayPal owns or has rights to use that appear in this Annual Report on Form 10-K include: PayPal®, PayPal Credit®, Braintree, Venmo, Xoom and Xoom,iZettle, which may be registered or trademarked in the United States and other jurisdictions. PayPal’s rights to some of these trademarks may be limited to select markets. Each trademark, trade name, or service mark of any other company appearing in this Annual Report on Form 10-K is, to PayPal’s knowledge, owned by such other company.
PartPART I
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that involve expectations, plans or intentions, (suchsuch as those relating to future business, future results of operations or financial condition, new or planned features or services, or management strategies).strategies. You can identify these forward-looking statements by words such as “may,” “will,” “would,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan”“strategy,” “future,” “opportunity,” “plan,” “project,” “forecast,” and other similar expressions. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those discussed in “Item 1A. Risk Factors” of this Annual Report on Form 10-K, as well as in our consolidated financial statements, related notes, and the other information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission (“SEC”). We do not intend, and undertake no obligation except as required by law, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. You should read the information in this report in conjunction with the audited consolidated financial statements and the related notes that appear elsewhere in this report.
ITEM 1. BUSINESS
Overview
PayPal Holdings, Inc. was incorporated in Delaware in January 2015 and is a leading technology platform and digital payments company that enables digital and mobile payments on behalf of consumers and merchants worldwide. Our visionPayPal is committed to democratizedemocratizing financial services as we believe that managing and moving money is a right for allempowering people not justand businesses to join and thrive in the affluent.global economy. Our goal is to increaseenable our relevance for consumers and merchants to manage and move their money anywhere in the world, anytime, on any platform and using any device. Our combined payment solutions, including our PayPal, PayPal Credit, Braintree, Venmo, Xoom and PaydiantiZettle products, compose our proprietary Payments Platform.
PayPal’s service enables our customers to send and receive payments. We operate a two-sided proprietary global technology platform that links our customers,network where both merchants and consumers aroundhave PayPal accounts with stored balance functionality. Since PayPal serves as a proprietary payment method that is accepted by merchants, we are more than a connection to third-party payment networks. Our service enables the globe to facilitate the processingcompletion of payment transactions, allowing us to connect millionspayments on our Payments Platform on behalf of merchants and consumers worldwide.our customers. We offer our customers the flexibility to use their accountaccounts to both purchase and be paidreceive payment for goods and services, as well as to transfer and withdraw funds. We enable consumers to exchange funds more safely exchange funds with merchants using a variety of funding sources, which may include a bank account, a PayPal account balance, a PayPal Credit account, a credit andor debit card, or other stored value products such as coupons and gift cards. Our PayPal, Venmo and Xoom products also make it safer and simpler for friends and family to transfer funds to each other. We offer merchants an end-to-end payments solution that provides authorization and settlement capabilities, as well as instant access to funds. We help merchants connect with their customers and manage risk. We enable consumers to engage in cross-border shopping and merchants to extend their global reach while reducing the complexity and friction involved in enabling overseas and cross-border trade.
We generateearn revenues primarily by charging fees for providing transaction processingcompleting payment transactions for our customers and other payment-related services primarilythat are typically based on the volume of activity processed throughon our Payments Platform. We generallyGenerally, we do not charge consumers to fund or draw from their accounts; however, we generate revenue from consumers on fees charged to exchange currencies.for foreign currency exchange. We also earn revenue by providing other value added services to consumers and merchants, such aswhich comprise revenue earned through partnerships, our PayPal Credit products, subscription fees, gateway services, and gateway services.other services that we provide to our merchants and consumers. Our gateway services, which include our Payflow Gateway services and Braintree Gateway service that enable merchants to accept payments online with credit or debit cards. Our gateway services, provide the technology that links a merchant’s website to its processing network and merchant account.account and enables merchants to accept payments online with credit or debit cards.
Strategy
Our ability to grow revenue is affected by, among other things, consumer spending patterns, merchant and consumer adoption of digital payment methods, other than cash, the expansion of multiple commerce channels, the growth of mobile devices and merchant and consumer applications on those devices, the growth of consumers globally with Internetinternet and mobile access, the pace of transition from cash and checks to digital forms of payment, our share of the digital payments market, and our ability to innovate and bring new methods of paymentproducts and services that merchants and consumers value. Our strategy to drive growth in our business includes the following:
Growing our core business: through expanding our global capabilities, customer base and scale, increasing our customerscustomers' use of our products and services by better addressing their everyday needs related to accessing, managing and moving money, and expanding the adoption of our solutions by new merchants and consumers;
Expanding our value proposition for customers: by focusing on trust and simplicity, providing risk management and insights from our two-sided Payments Platform, and being technology and platform agnostic;
Extending through strategic partnerships: by building new strategic partnerships to provide better experiences for our customers, such as offering greater choice and flexibility, to acquireacquiring new customers, and reinforcereinforcing our role in the ecosystem; and
Seeking new areas of growth: organically and through acquisitions in our existing and new international markets around the world and focusing on innovation both in the digital and the physical world.
Key Performance Metrics
We measure the relevance of our products and services to our customers, and therefore the success of our business, through active customer accounts, payment volumetransactions, and payment transactions:volume:
Active Customer Accounts: An active customer account is an account registered directly with PayPal or a registered accountplatform access partner that successfully sent or received at least one payment or payment reversal throughhas completed a transaction on our Payments Platform, excludingnot including gateway-exclusive transactions, processed through our gateway and Paydiant products, inwithin the past 12 months. A platform access partner is a third party whose customers are provided access to PayPal's Payments Platform through such third party's login credentials. As of December 31, 2016,2018, we had approximately 197267 million active customer accounts across more than 200 markets. A market is a geographic area or political jurisdiction, such as a country, territory, or protectorate, in which we offer some or all of our services. A country, territory, or protectorate is identified by a distinct set of laws and regulations.
Number of Payment Transactions:Number of payment transactions is 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.
Total Payment Volume (“TPV”): TPV is the value of payments, net of payment reversals, successfully completed throughon our Payments Platform excluding transactions processed through our gateway and Paydiant products.
Number of Payment Transactions:Number ofor enabled by PayPal via a partner payment transactions is defined as the total number of payments, net of payment reversals, successfully completed through our Payments Platform, excluding transactions processed through our gateway and Paydiant products.solution, not including gateway-exclusive transactions.
Our Strengths
Our business is built on a strong foundation designed to drive growth and differentiate us from our competitors and drive growth.competitors. We believe that our competitive strengths include the following:
Two-sided Platform - Platform—our platform connecting merchants and consumers enables PayPal to offer unique end-to-end product experiences while gaining valuable insights into customer behavior through our data. Our platform provides for simple digital and mobile transactions while being both brandtechnology and technologyplatform agnostic.
ScaleScale— -our global scale allows us to drive organic growth. As of December 31, 2016,2018, we had 197267 million active customer accounts, which included 1521 million active merchant accounts, and in 2016,accounts. In 2018, we processed $354$578 billion of TPV in more than 200 markets around the world.
Brand - Brands—we have built a well-recognized and trusted brand.brands. Our marketing efforts play an important role in building brand visibility, usage, and overall preference among customers.
Risk Management - Management—our risk management system and tokenization usage are designed to help keep our customers safersafe and to help ensure we process legitimate transactions around the world, while minimizingidentifying and reducing illegal, high-risk, or fraudulent transactions.
Regulatory - Regulatory—we believe that our regulatory licenses, which giveenable us the ability to operate in markets around the world, are a cleardistinct advantage and support business growth.
Technology
Our Payments Platform utilizes a combination of proprietary and third-party technologies and services as well as technologies and services provided by third parties to efficiently and securely facilitate transactions between millions of merchants and consumers worldwide across different channels, markets and networks. Our Payments Platform connects with financial institutionsservice providers around the world and allows consumers to make purchases using a broadwide range of payment methods, regardless of where a merchant is located. Consumers who use our Payments Platform can engage in cross-border shopping by sendingsend payments in more than 200 markets across the globe and in more than 100 currencies, withdraw funds to their bank accounts in 56 currencies and hold balances in their PayPal accounts in 25 currencies.
A transaction on our Payments Platform can involve multiple participants in addition to us:us, including a merchant, a consumer, and the consumer’s funding source provider. The following diagram illustrates a typical payment transaction between a consumer and a merchant using our PayPal product on our Payments Platform:
We have developed intuitive user interfaces, customer tools, and transaction completion database and network applications on our Payments Platform transaction processing, database and network applications that help our customers to utilize our suite of products and services. Our Payments Platform, open application programming interfaces, and developer tools are designed to enable developers to innovate with ease and to offer robust applications to aour global ecosystem of merchants and consumers, while at the same time maintaining the security of our customers’ financial information.
The technology infrastructure supporting our Payments Platform simplifies the storage and processing of large amounts of data easesand facilitates the deployment and operation of large-scale global products and services, and automates much of the administration of large-scale clusters of computers.services. Our technology infrastructure has beenis designed around industry-standard architectures intended to reduce downtime in the event of outages or catastrophic occurrences. Our Payments Platform incorporates multiple layers of protection both for continuity and system redundancy purposes and to help address cyber-securitycybersecurity challenges. We engage in multiple effortshave a comprehensive cybersecurity program designed to protect our technology infrastructure and Payments Platform against these challenges, including regularly testing our systems to address potential vulnerabilities. We strive to continually improve our technology infrastructure and Payments Platform to enhance the customer experience and to increase efficiency, scalability, and security.
Consumer
Merchant and MerchantConsumer Payment Solutions
Our combined payment solution capabilities were built to offer our customers, bothmerchants and consumers and merchants, a broad range of products and services, in the digitalenabling our merchants to securely and mobile age,simply receive payments from their customers while allowing our consumers to make seamless transactions across different markets and networks while enabling our merchants to safely and simply receive payments from their customers.networks.
We partner with our merchants to help grow and expand their businesses by improving sales conversion,conversion; providing global reach, offering alternative payment methods,methods; reducing losses through proprietary protection programs, providing fraud prevention and risk management solutions; and leveraging data analytics. OnlineWe generate revenues from merchants primarily by charging fees for completing their payment transactions and mobile merchantsother payment-related services. Merchants can onboard quickly with PayPal and are generally not required to invest in new or specialized hardware. For our standard service, weWe do not charge merchants setup or recurring fees.fees for our standard service. We offer access to credit products tofor certain small and medium-sized merchants through our PayPal Working Capital (“PPWC”)and PayPal Business Loan products, which we collectively refer to as our business financing offerings. Our PayPal Working Capital product which, for a fee, allows thembusinesses to borrow a certain percentage of their annual payment volume processed by PayPal.PayPal for a fixed fee. Our PayPal Business Loan product provides businesses with short-term financing for a fixed fee based on an evaluation of both the applying business as well as the business owner. We believe that our PPWC product allowsbusiness financing offerings allow us to deepen our engagement with our existing small and medium-sized business merchants and expand services to new merchants by providing themaccess to capital to grow their business that they may not otherwise have effectivebe available effectively or efficient access toefficiently from traditional banks or other lending providers.
PayPal is a popular form of payment for mobile commerce, and our business has grown with the increased adoption of mobile devices. OurWe believe our Braintree products strengthen our position in mobile payments and extend our coverage to a new class of retailers and service providers that offer their services primarily through mobile applications. Through a single Braintree integration, a merchant can begin
accepting payments with credit or debit cards, PayPal, AndroidPayPal Credit, Google Pay, Apple Pay, digital currencies such as Bitcoin, orSamsung Pay, and other payment solutions. We also offer gateway services, including our Payflow Gateway services and Braintree Gateway service thatservices, which enable merchants to accept payments online with credit or debit cards. Our gateway services provide the payment gateway technology that links a merchant’s website to its processing network and merchant account.enable merchants to accept payments online with credit and debit cards.
We believe that our recent acquisition of iZettle in September 2018 will enable us to further expand our in-store presence and strengthen our Payments Platform to help small businesses around the world grow and thrive in an omnichannel retail environment. iZettle offers a card acceptance service that enables small businesses to take credit and debit card payments, as well as a software solution to record, manage and analyze sales. iZettle provides in-store capabilities in eleven countries, as well as near-term, in-store expansion opportunities into other existing PayPal markets.
We focus on providing affordable consumer products intended to democratize access tothe management and movement of money. We offer our customers the flexibility to use their account to both purchase and be paid for goods, as well as transfer and withdraw funds. We enable consumers to more safely exchange funds with merchants using a variety of financial resources, which may include a bank account, a PayPal account balance, a PayPal Credit account, a credit or debit card or other stored value products such as coupons and gift cards. We generally do not charge consumers to fund or draw from their accounts; however, we generate revenue from consumers on fees charged tofor foreign currency exchange currencies and on interest and fees from our PayPal Credit products.product. We offer our PayPal Credit product to consumers as a potential funding source at checkout. Once a consumer is approved for credit, PayPal Credit is made easily available as a funding source in theirhis or her account. We believe that our consumer credit products allow us to increase engagement with both consumers and merchants on our two-sided network as well asand differentiate ourselves from rivalother payment processors by helping merchants drive incremental sales through products like PayPal Credit. We are responsible for all servicing functions related to all of our credit products. In the U.S., all credit originated throughoriginating from our PayPal CreditWorking Capital and PPWCPayPal Business Loan products is currently extended through third-party financial institutions with whom we partner, and from whom we purchase the related receivables. For our consumer and merchant credit products outside the U.S., we extend credit through certain international PayPal subsidiaries.
During the fourth quarter of 2017, we expanded our Luxembourg banking subsidiary. Forstrategic consumer credit relationship with Synchrony Financial and agreed to sell our merchantU.S. consumer credit products outsidereceivables portfolio to Synchrony Bank. Following the closing of this transaction in July 2018, Synchrony Bank became the exclusive issuer of the U.S., we extend working capital advances in the U.K. through our Luxembourg banking subsidiary, PayPal branded consumer credit program and we extend working capital advancesno longer hold an ownership interest in Australiareceivables generated through an Australian subsidiary. We continue to evaluate partnerships and third-party sources of funding of our credit portfolio, including, but not limited to, commercial banks, securitization markets, private equity firms and sovereign wealth funds.the program.
We offer consumers person-to-person (“P2P”) payment solutions through our PayPal, website and mobile application, Venmo and Xoom.Xoom products. PayPal continues to be a key driver of our total P2P volumes, enabling both domestic and international P2P transfers across our Payments Platform. Our Venmo app in the U.S. is a leading mobile application used to move money between friendsour customers and family with their mobile device.to make purchases at approved merchants. Xoom is an international money transfer service that enables our customers to send money to, pay bills for, and send prepaid mobile phone reloads for family and friendsto people around the world in a secure, fast, and cost-effective way, using theira mobile device or personal computers.computer. P2P is a significant customer acquisition channel with network effects that help to establish relationships withfacilitates organic growth by enabling potential PayPal users by allowing them to join our Payments Platformestablish active accounts with us at the time of makingthey make or receiving payments, which drives organic customer-driven growth.receive a P2P payment.
Protecting Merchants and Consumers
Protecting merchants and consumers on our Payments Platform from financial and datafraud loss is imperative to successfully competing in the payments industry and sustainably growing our business sustainably. The risk to merchants and consumers (and their payments partners) from fraudulentbusiness. Fraudulent activities, such as account takeover, identity theft, and counterparty malicious activities, is growing.represent a significant risk to merchants and consumers, as well as their payment partners. We provide merchants and consumers with protection programs on most purchase transactions completed throughon our Payments Platform, exceptexcluding gateway-exclusive transactions or situations where our customer agreements specifically do not provide for transactions using our gateway and Paydiant products.protections. We believe that these programs, which protect both merchants and consumers from financial and datafraud loss due primarily due to fraud and counterparty non-performance, are generally much broader than similar protections provided by other participants in the payments industry. Many payments providers do not offer merchant protection in general, and those that do so generally do not provide protection for online or card not present transactions. As a result, merchants may incur losses for chargebacks and other claims on certain transactions when using other payments providers that theythe merchants would not incur if they used our payments services. We also provide consumer protection against losses on qualifying purchases and accept claims for review up to 180 days post transaction in the markets that we serve.post-transaction. We believe that this protection is generally consistent with, or better than, that offered by other payments providers. We believe that as a resultThese programs are designed to promote confidence on both the part of these programs, consumers can be confident that(i.e., when using our Payment Platform, they will only be required to pay if they receive the producttheir purchased item or service in the condition significantly as described,described) and merchants can be confident that(i.e., they will receive payment for the product that they are deliveringdeliver to the customer.customer).
Our ability to protect both consumers and merchants is based largely on our proprietary, end-to-end payments platform,Payments Platform and our ability to leverage the data we collect onfrom both sides of the transactions on our two-sided network (i.e., from buyers and sellers, orand from senders and receivers of money, on our two-sided network.payments). We believe mobile devices will continue to play an important parta significant and increasing role in the future of commerce, including by creating the opportunities to make our ecosystem safer. For example, PayPal is able to use location data from mobile devices and growing protection for the mobile operating environment to reduce financial and fraud risk to merchants and consumers. Our ongoing investment in systems and processes, designed to enhance the safety and security of our products, reflects our goal of having PayPal recognized as one of the world’s most trusted payments brands.
Competition
The global payments industry is highly competitive.competitive, rapidly changing, highly innovative, and increasingly subject to regulatory scrutiny and oversight. We compete against a wide range of businesses, including banks, credit card providers, technology and ecommerce companies and traditional retailers, many of whichthose that are larger than we are, have a dominant and secure position, or offer other products and services to consumers and merchants whichthat we do not offer.offer, as well as smaller companies that may be able to respond more quickly in the face of regulatory and technological changes. We compete against all forms of payments, including credit and debit cards; automated clearing house and bank transfers; other online payment services; mobile payments; and offline payment methods, including cash and check.
We compete primarily on the basis of the following:
ability to attract, retain, and engage both merchants and consumers with our two-sided platform;
ability to showdemonstrate to merchants that merchantsthey may achieve incremental sales by using and offering our end-to-end services;services to consumers;
consumer confidence in the safety and security of transactions on our Payments Platform, including the ability for consumers to use our products and services without sharing their financial information with the merchant or theany other party they are paying;
simplicity and transparency of our fee structure;
ability to develop products and services across multiple commerce channels, including mobile payments, credit products, and payments at the retail point of sale;
trust in our dispute resolution and buyer and seller protection programs;
customer service;service experience;
brand recognition;recognition and preference;
website, mobile platform and application onboarding, ease-of-use, speed, availability, and accessibility;dependability;
the technology-technology and payment-agnosticpayment agnostic nature of our Payments Platform;
system reliability and data security;
ability to assist merchants in complying with payments-related laws and regulations ;
ease and quality of integration into third-party mobile applications and operating systems; and
quality of developer tools, such as our application programming interfaces and software development kits.
In addition to the discussion in this section, see “Item 1A. Risk Factors” under the caption “Substantial“We face substantial and increasingly intense competition worldwide in the global payments industry may harm our business”industry” for further discussion of the potential impact of competition on our business.
Research and Development
Total research and development expense was $1.1 billion, $953 million and $834 million $792 millionin 2018, 2017 and $747 million in 2016, 2015 and 2014, respectively.
Intellectual Property
The protection of our intellectual property, including our trademarks (particularly those covering the PayPal name), patents, copyrights, domain names, trade dress, and trade secrets is important to the success of our business. We seek to protect our intellectual property rights by relying on applicable laws and regulations in the U.S. and internationally, as well as a variety of administrative procedures. We also rely on contractual restrictions to protect our proprietary rights inwhen offering or procuring products and services. We have routinely entered into confidentiality and invention assignment agreements with our employees and contractors, and nondisclosurenon-disclosure agreements with parties with whom we conduct business, to control use, access to, and limit disclosure of our proprietary information.
We pursue the registration of our domain names, trademarks, and service marks in the U.S. and internationally. Additionally, we have filed patent applications in the U.S. and in international patent applicationsjurisdictions covering certain aspects of our proprietary technology.technology and new innovations. We have registered our core brands as trademarksdomain names and domain namesas trademarks in the U.S. and a large number of other jurisdictions andjurisdictions. We also have in place an active program to continue to secure and enforce trademarks and domain names that correspondcorresponds to our brands in markets of interest.
For additional information regarding some of the risks relating to our intellectual property, including costs of protecting our intellectual property, see the information in “Item 1A. Risk Factors” under the captions “We“We are subject to patent litigation”litigation” and
“We may be unable to adequately protect or enforce our intellectual property rights, or third parties may allege that we are infringing their intellectual property rights.rights.”
Government Regulation
We operate globally and in a rapidly evolving regulatory environment characterized by a heightened regulatory focus on all aspects of the payments industry. That focus continues to become even more heightened as regulators on a global basis focus on such important issues as countering terrorist financing, anti-money laundering, privacy, cybersecurity, and consumer protection. Some of the laws and regulations to which we are subject were enacted recently, and the laws and regulations applicable to us, including those enacted prior to the advent of digital and mobile payments, are continuing to evolve through legislative and regulatory action and judicial interpretation. Non-compliance withNew or changing laws and regulations, including how such laws and regulations are interpreted and implemented, as well as increased penalties and enforcement actions related to non-compliance, changes in laws and regulations or their interpretation, and the enactment of new laws and regulations applicable to us could have a material adverse impact on our business, results of operations, and financial condition. Therefore, we monitor these areas closely to design compliant solutions for our customers who depend on us.
Government regulation impacts key aspects of our business. We are subject to regulations that affect the payments industry in the markets we operate.
Payments Regulation. Various laws and regulations govern the payments industry in the U.S. and globally.internationally. In the U.S., PayPal, Inc. holds licenses to operate as a money transmitter (or its equivalent), which, among other things, subjects PayPal, Inc. to reporting requirements, bonding requirements, limitations on the investment of customer funds, and inspection by state regulatory agencies. Outside the U.S., we provide localized versions ofsimilar services customized for various countries and foreign jurisdictions through our service to customers through various foreign subsidiaries. The activities of those non-U.S. entities are, or may be, supervised by a financial regulatory authority in the jurisdictions in which they operate. Among other regulatory authorities, the Luxembourg Commission de Surveillance du Secteur Financier (the “CSSF”), the Australian Securities and Investment Commission, the Monetary Authority of Singapore, the Reserve Bank of India, and the Central Bank of Russia have asserted jurisdiction over some or all of our activities in country.their respective jurisdictions. This list is not exhaustive, asand there are numerous other regulatory agencies that have or may assert jurisdiction over our activities. The laws and regulations applicable to the payments industry in any given jurisdiction are subject to interpretation and change.
Banking Agency Supervision. We serve our customers in the European Union (“EU”) through PayPal (Europe) S.à.r.l. et Cie, SCA, a wholly-owned subsidiary that is licensed and subject to regulation as a bank in Luxembourg by the CSSF. Consequently, we must comply with rules and regulations of the European banking industry, including those related to capitalization, funds management, corporate governance, anti-money laundering, disclosure, reporting, and inspection. We also are, or may be, subject to banking-related regulations in other countries now or in the future related to our role in the financial industry. In addition, based on our relationships with our partner financial institutions, in the U.S., we are, or may be, subject to indirect regulation and examination by these financial institutions’ regulators.
Consumer Financial Protection Bureau. The Consumer Financial Protection Bureau (the “CFPB”) has significant authority to regulate consumer financial products in the United States,U.S., including consumer credit, deposit, payment, and similar products. As a large market participant of remittance transfers, the CFPB has direct supervisory authority over our business. The CFPB and other similar regulatory agencies in other jurisdictions may have broad consumer protection mandates that could result in the promulgation and interpretation of rules and regulations that may affect our business.
Anti-Money Laundering and Counter-Terrorist Financing. PayPal is subject to anti-money laundering (“AML”) laws and regulations in the U.S. and other jurisdictions, as well as laws designed to prevent the use of the financial systems to facilitate terrorist activities. We have implemented a comprehensiveOur AML program is designed to prevent our payment network from being used to facilitate money laundering, terrorist financing, and other illicit activities, or to do business in countries or with persons and entities included on designated country or person lists promulgated by the U.S. Department of the Treasury’s Office of Foreign Assets Controls (“OFAC”) and equivalent authorities in other countries. Our AML and sanctions compliance program,programs, overseen by our compliance officer,AML/Bank Secrecy Act Officer, is composed of policies, procedures and internal controls, and is designed to address these legal and regulatory requirements and assist in managing money laundering and terrorist financing risks.
Interchange Fees. Interchange fees associated with four-party payments systems are being reviewed or challenged in various jurisdictions. For example, in the European Union,EU, the Multilateral Interchange Fee (“MIF”) Regulation (which became effective in December 2015) caps credit and debit interchange fees for cardscard payments and provides for business rules to be complied with by any company dealing with card transactions, including PayPal. As a result, the fees that we collect in certain jurisdictions may become the subject of regulatory challenge.
Data Protection and Information Security. Aspects of our operations or business are subject to privacy and data protection regulation in the United States,U.S., the European UnionEU, Asia Pacific, and elsewhere. For example, the EU adopted a comprehensive General Data Protection Regulation (the “GDPR”), which came into effect in May 2018, as supplemented by any national laws (such as in the United States,U.K., the Data Protection Act 2018) and further implemented through binding guidance from the European Data Protection Board,and expanded the scope of the EU data protection law to foreign companies processing personal data of European Economic Area (“EEA”) individuals, imposed a stricter data protection compliance regime, and included new data subject rights (e.g., the right to erasure, commonly known as the “right to be forgotten”). In the U.S., we are subject to privacy information safeguarding requirements under the Gramm-Leach-Bliley Act that require the maintenance of a written, comprehensive information security program and in Europe, the operations of our Luxembourg bank are subject to confidentiality and information safeguarding requirements under the Luxembourg Banking Act, among other laws. Regulatory authorities around the world are considering numerous legislative and regulatory proposals concerning privacy and data protection.protection that may contain additional privacy and data protection obligations than exist today. In addition, the interpretation and application of these privacy and data protection laws in the United States,U.S., Europe and elsewhere are often uncertain and in a state of flux.
Anti-Corruption. PayPal is subject to applicable anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, and similar anti-corruption laws in the jurisdictions in which it operates.we operate. Anti-corruption laws generally prohibit offering, promising, giving, accepting, or authorizing others to provide anything of value, either directly or indirectly, to or from a government official or private party in order to influence official action or otherwise gain an unfair business advantage, such as to obtain or retain business. We have implemented policies, procedures, and internal controls that are designed to comply with these laws and regulations.
Additional Regulatory Developments. Various regulatory agencies continue to examine a wide variety of issues, including virtual currencies, identity theft, account management guidelines, privacy, disclosure rules, securitycybersecurity, and marketing that may impact PayPal's business.
For an additional discussion on governmental regulation affecting our business, please see the risk factors related to regulation of our payments business and regulation in the areas of consumer privacy, data use, and/or security in “Item 1A. Risk Factors” under the caption “Risk“Risk Factors That May Affect Our Business, Results of Operations and Financial Condition”Condition” and “Item 3. Legal Proceedings” included elsewhere in this Annual Report on Form 10-K.
Seasonality
The Company does not experience meaningful seasonality with respect to net revenues. No individual quarter in 2016, 20152018, 2017 or 20142016 accounted for more than 30% of annual net revenue.
Financial Information About Segments
We operate in one business segment and have one reportable segment. See “Note 11—Segment and Geographical Information” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information including certain financial information about our operations in the U.S. and abroad. Additionally, please see the information in “Item 1A. Risk Factors” under the caption “Our international operations are subject to increased risks, which could harm our business,” which describes risks associated with our foreign operations.
Employees
As of December 31, 2016,2018, we employed approximately 18,10021,800 people globally, of whom approximately 10,18011,500 were located in the U.S. We consider our relationship with our employees to be good.
Separation from eBay Inc.
PayPal Holdings, Inc. was incorporated in Delaware in January 2015 for the purpose of owning and operating eBay’s Payments business in connection with the separation and distribution described below. Prior to the contribution of this business to PayPal Holdings, Inc., which occurred prior to the distribution in July 2015, PayPal Holdings, Inc. had no operations. On July 17, 2015 (the “distribution date”), PayPal became an independent publicly traded company through the pro rata distribution by eBay of 100% of the outstanding common stock of PayPal to eBay stockholders (which we refer to as the “separation” or the “distribution”). Each eBay stockholder 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 on the record date. Approximately 1.2 billion shares of PayPal common stock were distributed on July 17, 2015 to eBay stockholders. PayPal’s common stock began “regular way” trading under the ticker symbol “PYPL” on Thethe NASDAQ Stock Market on July 20, 2015. Prior to the separation, eBay transferred substantially all of the assets and liabilities and operations of eBay’s payments business to PayPal, which was completed in June 2015.
Available Information
The address of our principal executive offices is PayPal Holdings, Inc., 2211 North First Street, San Jose, California 95131. Our website is located at www.paypal.com, and our investor relations website is located at http://investor.paypal-corp.com. From time to time, we may use our investor relations site and other online and social media channels, including our PayPal Stories Blog (https://www.paypal.com/stories/us), Twitter handle (@PayPal)handles (@PayPal and @PayPalNews), LinkedIn page (https://www.linkedin.com/company/paypal), Facebook page (https://www.facebook.com/PayPalUSA/) and, YouTube channel (https:(https://www.youtube.com/paypalpaypal), 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/) to disclose material non-public information and comply with our disclosure obligations under Regulation FD.Fair Disclosure. Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available free of charge on our investor relations website as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The content of our websites and information that we may post on or provide to online and social media channels, including those mentioned above, and information that can be accessed through our websites or these online and social media channels is not incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites or these online and social media channels are intended to be inactive textual references only.
ITEM 1A. RISK FACTORS
The following discussion is divided into three sections. The first section, which begins immediately following this paragraph, discusses some of the risks that may adversely affect our business, results of operations and financial condition. The second section, captioned “Risks Related to theOur Separation and Our Operation as an Independent Publicly Traded Company,”from eBay” discusses some of the risks relating to our separation from eBay in July 2015 into an independent publicly traded company. The third section, captioned “Risks Related to Our Common Stock,” discusses some of the risks relating to an investment in our Common Stock. You should carefully review all of these sections for important information regarding risks and uncertainties that affect us, in addition to the other information appearing in this Annual Report on Form 10-K, including our consolidated financial statements and related notes.notes, for important information regarding risks and uncertainties that affect us. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks actually occurs,occur, our business, financial condition, results of operations, and future prospects could be materially and adversely affected.
Risk Factors That May Affect Our Business, Results of Operations, and Financial Condition
SubstantialWe face substantial and increasingly intense competition worldwide in the global payments industry may harm our business.industry.
The global payments industry is highly competitive, rapidly changing, highly innovative, and weincreasingly subject to regulatory scrutiny. We compete against a wide range of businesses, many of whichincluding businesses that are larger than we are, have a more dominant and secure position, or offer other products and services to consumers and merchants whichthat we do not offer. As online and offline commerce are increasingly converging, the pace of change, innovation and disruption is also increasing. The global payments industry is rapidly changing, highly innovative and increasingly subjectoffer, as well as smaller companies that may be able to respond more quickly to regulatory scrutiny, which may negatively affect the competitive landscape.and technological changes. Many of the areas in which we compete evolve rapidly with changing and disruptive technologies, shifting user needs, and frequent introductions of new products and services. Competition may also intensify as businesses against which we compete or merchants enter into business combinations and alliances, and established companies in other market segments expand to become competitive with different aspects of our business.
We compete primarily on the basis of the following:
ability to attract, retain, and engage both merchants and consumers with our two-sided platform;
ability to demonstrate to merchants that they may achieve incremental sales by using and offering our services to consumers;
consumer confidence in the safety and security of transactions on our Payments Platform, including the ability for consumers to use our products and services without sharing their financial information with the merchant or any other party they are paying;
simplicity and transparency of our fee structure;
ability to develop products and services across multiple commerce channels, including mobile payments, credit products, and payments at the retail point of sale;
trust in our dispute resolution and buyer and seller protection programs;
customer service experience;
brand recognition and preference;
website, mobile platform and application onboarding, ease-of-use, speed, availability, and dependability;
the technology and payment agnostic nature of our Payments Platform;
system reliability and data security;
ability to assist merchants in complying with payments-related laws and regulations ;
ease and quality of integration into third-party mobile applications and operating systems; and
quality of developer tools, such as our application programming interfaces and software development kits.
We compete against a wide range of businesses with varying roles in all forms of payments, including:
paper-based transactions (principally cash and checks);
providers of traditional payment methods, particularly credit and debit cards and Automated Clearing House transactions (in particular, well-established banks);
payment networks which facilitate payments for credit card users;
providers of “digital wallets” which offer customers the ability to pay online and/or on mobile devicesin-store through a variety of payment methods, including with mobile applications, through contactless payments, and with a variety of payment cards;
providers of mobile payments solutions that use tokenized card data approaches and contactless payments (e.g., near field communication functionality(“NFC”) or host card emulation functionality) to eliminate the need to swipe or insert a card or enter a personal identification number or password;
payment-card processors that offer their services to merchants, including for “card on file” payments where the merchant invites the consumer to select a payment method for their first transaction and subsequently usesto use the same payment method for subsequent transactions;
providers of “person-to-person” payments that facilitate individuals sending money with an email address or mobile phone number;
merchants and merchant associations providing proprietary payment networks to facilitate payments within their own retail network;
money remitters;
providers of card readers for mobile devices and of other point-of-sale and multi-channel technologies; and
providers of virtual currencies and distributed ledger technologies.
We often partner with many of these businesses and we consider the ability to continue establishing these partnerships as important to our business. Competition for relationships with these partners is very intense and there can be no assurance that we will be able to continue to establish, grow, or maintain these partner relationships.
We also face competition and potential competition from:
servicesservice providers that provide online merchants the ability to offer their customers the option of paying for purchases from their bank account or paying on credit;
issuers of stored value products targeted at online payments;
other global online and mobile payment-services providers;
other providers of online account-based payments;
payment services targeting users of social networks and online gaming, including those offering billing to the consumer’s mobile phone account;
mobile payment services between bank accounts;social commerce and peer-to-peer payments;
payment services enabling banks to offer their online banking customers the ability to send and receive payments through their bank account;account, including through immediate or real-time payments systems;
ecommerce services that provide special offers linked to a specific payment provider;
services that help merchants accept and manage virtual currencies; and
electronic funds transfer services as a method of payment for both online and offline transactions, particularly in Germany and the Netherlands.transactions.
Some of these competitors have greaterlarger customer bases, volume, scale, resources, and market share than we do, which may provide them significant competitive advantages. Some of our competitors may also be subject to less burdensome licensing, anti-money laundering, counter-terrorist financing, and other regulatory requirements. They may devote greater resources to the development, promotion, and sale of products and services, and they may offer lower prices or more effectively introduce their own innovative programs, products, and services that adversely impact our growth.
We compete primarily on the basis of the following:
ability to attract, retain and engage both merchants and consumers;
ability to show that merchants will achieve incremental sales by offering our PayPal services;
consumer confidence in safety and security of transactions on our Payments Platform, including the ability for consumers to use our PayPal products and services without sharing their financial information with the merchant or the party they are paying;
simplicity of our fee structure;
ability to develop services across multiple commerce channels, including mobile payments and payments at the retail point of sale;
trust in our dispute resolution and buyer and seller protection programs;
customer service;
brand recognition;
website, mobile platform and application onboarding, ease-of-use and accessibility;
the technology- and payment-agnostic nature of our Payments Platform;
system reliability and data security;
ease and quality of integration into third-party mobile applications and operating systems; and
quality of developer tools, such as our application programming interfaces and software development kits.
If we are not able to differentiate our businessproducts and services from those of our competitors, drive value for our customers, or effectively align our resources with our goals and objectives, we may not be able to compete effectively against our competitors. Our failure to compete effectively against any ofin the foregoing competitive threats could materially and adversely harm our business.
market.
Substantially all of our net revenues each quarter come primarily from transactions involving payments during that quarter, which may result in significant fluctuations in our operating results that could adversely affect our business, financial condition, results of operations, and cash flows, as well as the trading price of our common stock.
Substantially all of our net revenues each quarter come primarily from transactions involving payments during that quarter. As a result, our operating and financial results have varied on a quarterly basis during our limited operating history, and may continue to fluctuate significantly as a result of a variety of factors, including as a result of the risks set forth in this “Risk Factors” section. It is difficult for us to forecast accurately the level or source of our revenues or earnings (loss) accurately.earnings. In view of the rapidly evolving nature of our business, period-to-period comparisons of our operating results may not be meaningful, and you should not rely upon them as an indication of future performance. Due to the inherent difficulty in forecasting revenues, it is also difficult to forecast expenses as a percentage of net revenues. Quarterly and annual expenses as a percentage of net revenues reflected in our financial statements may be significantly different from historical or projected rates. Our operating results in one or more future quarters may fall below the expectations of securities analysts and investors. The trading price of our common stock couldmay decline perhaps substantially,significantly as a result of the factors described in this paragraph.
Global and regional economic conditions could harm our business.
Our operations and performance depend significantly on global and regional economic conditions. Adverse economic conditions and events have negatively impacted global and regional financial markets in the past, and uncertaintyUncertainty about global and regional economic events and conditions may result in consumers and businesses postponing or lowering spending in response to, among other factors:
tighter credit,
higher unemployment,
consumer debt levels or reduced consumer confidence.
financial market volatility,
fluctuations in foreign currency exchange rates and interest rates,
changes and uncertainties related to government fiscal and tax policies, including increased duties, tariffs, or other restrictions,
the inability of the U.S. Congress to enact a budget in a fiscal year, another sequestration, and/or another shutdown of the U.S. government,
government austerity programs, and
other negative financial news declines in income or asset values, and other factors. macroeconomic developments.
These and other global and regional economic events and conditions, including Brexit, could have a material adverse impact on the demand for our products and services, including a reduction in the volume and size of transactions on our Payments Platform. In addition, any financial turmoil affecting the banking system or financial markets could cause additional consolidation of the financial services industry, significant financial service institution failures, new or incremental tightening in the credit markets, low liquidity, and extreme volatility or distress in the fixed income, credit, currency, and equity markets, which could have a material adverse impact on our business. See also the risk factor captioned, “The United Kingdom's departure from the EU could adversely affect us.”
If we cannot keep pace with rapid technological developments to provide new and innovative products and services, the use of our products and services and, consequently, our revenues could decline.
Rapid, significant, and disruptive technological changes continue to impact the industries in which we operate, including developments in payment card tokenization, cryptocurrencies, mobile, social commerce (i.e., ecommerce through social networks), authentication, virtual currencies (including distributed ledger technologies, near field communicationand blockchain technologies), and NFC and other proximity payment devices,technology, such as contactless payments. WeAs a result, we expect new services and technologies to continue to emerge and evolve, and we cannot predict the effects of technological changes on our business. In addition to our own initiatives and innovations, we rely in part on third parties, including some of our competitors, for the development of and access to new or evolving technologies. These third parties may restrict or prevent our access to, or utilization of, those technologies, as well as their platforms or products. In addition, we may not be able to accurately predict which technological developments or innovations will become widely adopted and how those technologies may be regulated. We expect that new services and technologies applicable to the industries in which we operate will continue to emerge and may be superior to, or render obsolete, the technologies we currently use in our products and services. Developing and incorporating new technologies into our products and services may require substantial expenditures, take considerable time, and ultimately may not be successful. In addition, our ability to adopt new products and services and to develop new technologies may be inhibited by industry-wide standards, payments networks, changes to laws and regulations, resistance to change from consumers or merchants, third-party intellectual property rights, or other factors. Our success will depend on our ability to develop and incorporate new technologies and adapt to technological changes and evolving industry standards; if we are unable to do so in a timely or cost-effective manner, our business could be harmed.
Changes in how consumers fund their PayPal transactionsCyberattacks and security vulnerabilities could harm our business.
We pay significant transaction fees when consumers fund payment transactions using credit cards, lower fees when consumers fund payments with debit cards, nominal fees when consumers fund payment transactions by electronic transfer of funds from bank accounts, and nominal fees when consumers fund payment transactions from an existing PayPal account balance or through our PayPal Credit products. Our financial success is sensitive to changes in the rate at which our consumers fund payments using credit and debit cards (collectively, “payment cards”), which can significantly increase our costs. While we provide consumers with the opportunity to use their existing PayPal account balance to fund payment transactions, some of our consumers may prefer to use payment cards, especially if these payment cards offer functionality and benefits not associated with the use of their bank accounts. Some of our offerings, including the ability of consumers to make a limited number of “guest” payments without opening a PayPal account, have a higher rate of payment card funding than our basic product offering. An increase in the portion of our payment volume funded using payment cards or in fees associated with our funding mix, or other events or developments that make it more difficult or costly for us to fund transactions by electronic transfer of funds from bank accounts or existing PayPal account balances, could materially and adversely affect our financial performance and significantly harm our business. Some of
our plans to lower our funding costs, including our PayPal Credit products and enabling consumers to defer payment for a short period of time on some transactions, may increase the risk to us of nonpayment by consumers.
Negotiated arrangements with payment card networks and/or issuing banks, promoting greater choice and options for consumers to fund payment transactions could have an uncertain impact on our business. We have entered into a strategic partnership with partners such as Visa U.S.A. Inc. (“Visa”), MasterCard International Incorporated (“MasterCard”) and DFS Services LLC (“Discover”) to make it easier for merchants to accept and consumers to pay with these partners’ credit and/or debt cards and allow us to gain access to these partners tokenization services for in-store point of sale PayPal transactions. While we anticipate these and similar strategic partnerships we may enter in the future will result in an increase in the number of transactions and transaction volume that we process, we also anticipate that a greater percentage of customer transactions will be executed using a credit or debit card, which would likely increaseserious harm to our funding costs. If our transaction volume does not increase as expected, ourreputation, business, and results of operations could be adversely affected due to increased costs associated with our funding mix.
Our business is subject to cyberattacks and security and privacy breaches.financial condition.
Our business involves the collection, storage, processing, and transmission of customers’ personal data, including financial information.information and information about how they interact with our Payments Platform. In addition, a significant number of our customers authorize us to bill their payment cardcards or bank accounts directly for all transaction and other fees charged by us. We have built our reputation on the premise that our Payments Platform offers customers a more secure way to make payments. An increasing number of organizations, including large merchants, and businesses, other large technology companies, and financial institutions, andas well as government institutions, have disclosed breaches of their information security systems, some of which have involved sophisticated and highly targeted attacks, including on portions of their websites, ormobile applications, and infrastructure.
The techniques used to obtain unauthorized, improper, or illegal access to our systems, our data or customers' data, disable or degrade service, or sabotage systems are constantly evolving and have become increasingly complex and sophisticated, may be difficult to detect quickly, and often are not recognized or detected until after they have been launched against a target. UnauthorizedWe expect that unauthorized parties maywill continue to attempt to gain access to our systems or facilities through various means, including among others, hacking into our systems or facilities or those of our customers, partners, or vendors, or attempting to fraudulently induce (for example, through spear phishing attacks) our employees, customers, partners, vendors, or other users of our systems into disclosing user names, passwords, payment card information, or other sensitive information, which may in turn be used to access our information technology systems. Certain efforts may be state-sponsored and supported by significant financial and technological resources, making them even more sophisticated and difficult to detect. Numerous and evolving cybersecurity threats, including advanced and persisting cyberattacks, phishing and social engineering schemes, could compromise the confidentiality, availability, and integrity of the data in our systems. We believe that PayPal is a particularly attractive target for such breaches and attacks due to our name and brand recognition and the widespread adoption and use of our products and services. Although we have developed systems and processes that are designed to protect our data and customer data and to prevent data loss and other security breaches, and expect to continue to expend significant additional resources to bolster these protections, there can be no assurance that these security measures cannot provide absolute security.
Our information technology and infrastructure may be vulnerable to cyberattacks or security breaches, and third parties may be able to access our customers’ personal or proprietary information and payment card data that are stored on or accessible through those systems. OurWe have experienced from time to time, and may experience in the future, breaches of our security measures may also be breached due to human error, malfeasance, system errors or vulnerabilities, or other irregularities. Any actualActual or perceived breachbreaches of our security could, among other things:
interrupt our operations,
result in our systems or services being unavailable,
result in improper disclosure of data,
materially harm our reputation and brands,
result in significant regulatory scrutiny and legal and financial exposure,
cause us to incur significant remediation costs,
lead to loss of customer confidence in, or decreased use of, our products and services,
divert the attention of management from the operation of our business,
result in significant compensation or contractual penalties from us to our customers and their business partners as a result of losses to them or claims by them, and
adversely affect our business and results of operations.
In addition, any breaches of networkcyberattacks or data security atbreaches affecting companies that we acquire or our customers, partners, or vendors (including data center and cloud computing providers) could have similar negative effects. See Note 4—“Business Combinations,” Note 5—“Goodwill and Intangible Assets” and Note 13—“Commitments and Contingencies” to our consolidated financial statements for disclosure relating to the suspension of operations of TIO Networks (“TIO”) (which we acquired in July 2017) as part of an investigation of security vulnerability of the TIO platform. Actual or perceived vulnerabilities or data breaches have led and may lead to claims against us.
In addition, under payment card rules and our contracts with our card processors, if there is a breach of payment card information that we store, or that is stored by our direct payment card processing customers,vendors, we could be liable to the payment card issuing banks for their cost of issuing new cards and related expenses. We also expect to expend significant additional resources to protect against security or privacy breaches, and may be required to redress problems caused by breaches. Among other reasons, financialFinancial services regulators in various jurisdictions, including the U.S. and the European Union (“EU”),EU, have implemented or are considering proposals to impose new authentication requirements onfor banks and payment processors intended to reduce online fraud, which could impose significant costs, require us to change our business practices, make it more difficult for new customers to join PayPal, and reduce the ease of use of our products, which could harm our business. Additionally, whileWhile we maintain insurance policies, they may not be adequate to reimburse us for losses caused by security breaches, and we may not be able to collect fully, if at all, under these insurance policies.
breaches.
Systems failures and resulting interruptions in the availability of our websites, applications, products, or services could harm our business.
Our systems and those of our services providers and partners may experience service interruptions or degradation because of hardware and software defects or malfunctions, computerdistributed denial-of-service and other cyberattacks, human error, earthquakes, hurricanes, floods, fires, and other natural disasters, power losses, disruptions in telecommunications services, fraud, military or political conflicts, terrorist attacks, computer viruses or other malware, or other events. OurWe have experienced from time to time, and may experience in the future, disruptions in our systems also may be subjectdue to break-ins, sabotage, and intentional acts of vandalism. Some of our systems are not fully redundant, and our disaster recovery planning may not be sufficient for all eventualities. In addition, as a provider of payments solutions, we are subject to heightened scrutiny by regulators that may require specific business continuity, resiliency and disaster recovery plans, and more rigorous testing of such plans, which may be costly and time-consuming and may divert our resources from other business priorities.
We have experienced and expect to continue to experience system failures, denial of servicedenial-of-service attacks, and other events or conditions from time to time that interrupt the availability, or reduce or adversely affect the speed or functionality of our products and services. These events have resulted and likely will result in loss of revenue. A prolonged interruption in the availability or reduction in the availability, speed, or other functionality of our products and services could materially harm our business. Frequent or persistent interruptions in our services could cause current or potential customers to believe that our systems are unreliable, leading them to switch to our competitors or to avoid or reduce the use of our products and services, and could permanently harm our reputation and brands. Moreover, to the extent thatif any system failure or similar event results in damages to our customers or their business partners, these customers or partners could seek significant compensation or contractual penalties from us for their losses, and those claims, even if unsuccessful, would likely be time-consuming and costly for us to address, and could have other consequences described in this “Risk Factors” section under the caption “Our business is subject to cyberattacks“Cyberattacks and security vulnerabilities could result in serious harm to our reputation, business, results of operation, and privacy breaches.financial condition.”
Our Payments Platform has experienced significantand may in the future experience intermittent unavailability. Reliability is particularly critical for us because theThe full-time availability and expeditious delivery of our products and services is critical to our goal of gaining widespread acceptance among consumers and merchants for digital payments. We have undertaken certain system upgrades and re-platforming efforts designed to improve our reliability and speed. These efforts are costly and time-consuming, involve significant technical risk and may divert our resources from new features and products, and there can be no guarantee that these efforts will succeed. Because we are a regulated financial institution in certain jurisdictions, frequent or persistent site interruptions could lead to regulatory scrutiny, significant fines and penalties, and mandatory and costly changes to our business practices, and ultimately could cause us to lose existing licenses that we need to operate or prevent or delay us from obtaining additional licenses that we need to expandmay be required for our business.
We also rely on facilities, components, and services supplied by third parties, including data center facilities and cloud storage services. If these third parties cease to provide the facilities components or services, experience operational interference or disruptions, breach their agreements with us, or fail to perform their obligations and meet our expectations, or experience a cybersecurity incident, our operations could be disrupted or otherwise negatively affected, which could result in customer dissatisfaction and damage to our reputation and brands, and materially and adversely affect our business. We do not carry business interruption insurance sufficient to compensate us for all losses that may result from interruptions in our service as a result of systems failures and similar events.
In addition, we are continually improving and upgrading our information systems and technologies. Implementation of new systems and technologies is complex, expensive, and time-consuming. If we fail to timely and successfully implement new information systems and technologies, or improvements or upgrades to existing information systems and technologies, or if such systems and technologies do not operate as intended, this could have an adverse impact on our business, internal controls (including internal controls over financial reporting), results of operations, and financial condition.
Changes to payment card networks or bank fees, rules, or practices could harm our business.
We do not directly access the payment card networks, such as Visa and MasterCard, that enable our acceptance of credit cards and debit cards, including some types of prepaid cards. Accordingly, we must rely on banks or other payment processors to process transactions and must pay fees for thetheir services. From time to time, payment card networks have increased, and may continue to increase in the future, the interchange fees and assessments that they charge for each transaction whichthat accesses their networks. Payment card networks have orimposed, and may impose in the future, special fees or assessments for transactions that are executed through a “digital wallet” such as PayPal’s, and such feeswhich could particularly impact us and significantly increase our costs. Our payment card processors may have the right to pass any increases in interchange fees and assessments on to us as well as increase their own fees for processing. Any changes in interchange fees and assessmentsprocessing, which could increase our operating costs and reduce our operating income. We have entered into strategic partnerships with Visa and MasterCardMastercard and other credit card networks to further expand our relationships with these networks in a way that will make it easier for merchants to accept and consumers to choose to pay with Visa and MasterCardtheir respective credit and debit cards. During the termterms of thethese agreements, Visa and MasterCardMastercard have each agreed to not enact or impose any fees or rules that solely targeted attarget PayPal. Upon termination of the agreements, PayPal could become subject to special digital wallet fees or other special assessments.
In addition, in some jurisdictions, governmentsgovernmental regulations have required Visa and MasterCardpayment card networks to reduce interchange fees, or have opened investigations as to whether Visa’s or MasterCard’s interchange fees and practices violate antitrust law. In the U.S., the Federal Reserve Board issued a final rule capping debit card interchange fees at significantly lower rates than Visa or MasterCard previously charged. In the EU, the Multilateral Interchange Fee Regulation limits credit and debit interchange fees for payments and imposes business rules on card processing services.fees. Any material change in credit or debit card interchange rates in the U.S. or other markets,
including as a result of changes in interchange fee limitations, could adversely affect our competitive position against traditional credit and debit card service providers. Future changes to those regulations could potentially have an adverse effect onproviders and our business.
We are required by our processors to comply with payment card network operating rules, including special operating rules for payment service providers to merchants, and wemerchants. We have agreed to reimburse our processors for any fines they are assessed by payment card networks as a result of any rule violations by us or our merchants. We may also be directly liable to the payment card networks for rule violations. The payment card networks set and interpret the card operating rules. Fromrules and have alleged from time to time the networks have alleged that various aspects of our business model violate these operating rules. If such allegations are not resolved favorably, they may result in materialsignificant fines and penalties or require changes in our business practices that may be costly. The payment card networks could adopt new operating rules or interpret or re-interpret existing rules that we or our processors might find difficult or even impossible to follow, or costly to implement. As a result, we could lose our ability to give consumers the option of using payment cards to fund their payments or the choice of currency in which they would like their payment card to be charged. If we are unable to accept payment cards or are meaningfully limited in our ability to do so, our business would be adversely affected.
We and our payment card processors have implemented specific business processes for merchants to comply with payment card network operating rules for providing services to merchants. Any failure to comply with these rules could result in fines. We are also subject to fines from payment card networks if we fail to detect that merchants are engaging in activities that are illegal or that are considered “high risk,” primarilyincluding the sale of certain types of digital content. For “high risk” merchants, we must either prevent such merchants from using our PayPal services or register such merchants with the payment card networks and conduct additional monitoring with respect to such merchants. Although the amount of these fines has not been material to date, additional fines in the future could become materialsignificant and could result in a termination of our ability to accept payment cards or require changes in our process for registering new customers, which would materially harmadversely affect our business. Payment card network rules may also increase the cost of, impose restrictions on, or otherwise negatively impact the development of, our retail point-of-sale solutions, which may negatively impact their deployment and adoption.
Failure to deal effectively with fraud, fictitious transactions, bad transactions, and negative customer experiences would increase our loss rate and harm our business, and could severely diminish merchant and consumer confidence in and use of our services.
We incur substantial losses due to claims from consumersOur operations process a significant volume and dollar value of transactions on a daily basis. In the event that merchants havedo not performedfulfill their obligations to consumers or that theira merchant's goods or services do not match the merchant’s description.description, we may incur substantial losses as a result of claims from consumers. We seek to recover such losses from the merchant, but may not be able to recover in full if the merchant is unwilling or unable to pay. In addition, in the event of the bankruptcy or other business interruption of a merchant that sells goods or services in advance of the date of their delivery or use (e.g., airline, cruise or concert tickets, custom-made goods, and subscriptions), we could be liable to the buyers of such goods or services, either through our buyer protection program or through chargebacks on payment cards used by customers to fund their payment. While we have established reservesallowances for transaction losses based on assumptions and estimates that we believe are reasonable to cover such eventualities,losses incurred as of the reporting date, these reserves may be insufficient.
We also incur substantial losses from claims that the consumer did not authorize the purchase, from consumercustomer fraud, from erroneous transmissionstransactions, and fromas a result of customers who have closed bank accounts or have insufficient funds in themtheir bank accounts to satisfy payments. In addition, if losses incurred by us related to payment card transactions become excessive, they could potentially result in our losing the right to accept payment cards for payment, which would harm our business. We have taken measures to detect and reduce the risk of fraud, but these measures need to be continually improved and may not be effective against fraud, particularly new and continually evolving forms of fraud or in connection with new product offerings. If these measures do not succeed, our business could be harmed.
We are exposed to fluctuations in foreign currency exchange rates.rates that could materially and adversely affect our financial results.
We have significant operations internationally that are denominated in foreign currencies, primarilyincluding the British Pound, Euro, Australian Dollar, and Canadian Dollar, subjectingwhich subject us to foreign currency risk. The strengthening or weakening of the U.S. dollar versus the British Pound, Euro, Australian Dollar, and Canadian Dollar impacts the translation of our net revenues generated in these foreign currencies into the U.S. dollar. Additionally, inIn connection with providing our services in multiple currencies, we generally set our foreign exchange rates twice per day. We may face financial exposure if we incorrectly set our foreign exchange rates or as a result of fluctuations in foreign exchange rates between the times that we set them. Given that we also hold some corporate and customer funds in non-U.S. currencies, our financial results are affected by the translationremeasurement of these non-U.S. currencies into U.S. dollars. We also have foreign exchange risk on our assets and liabilities denominated in currencies other than the functional currency of our subsidiaries. While we regularly enter into transactions to hedge foreign currency risk for portions of our foreign currency translation and balance sheet exposure, it is impossible to predict or eliminate the effects of this exposure. Fluctuations in foreign exchange rates could significantly impact our financial results.
Any factors that reduce cross-border trade or make such trade more difficult could harm our business.
Cross-border trade (i.e., transactions where the merchant orand consumer are in different countries) is an important source of our revenue and profits. Cross-border transactions generally provide higher revenues and operating income than similar transactions that take place within a single country or market. Cross-border trade also represents our primary (and in some cases, our only) presence in certain important markets.
Cross-border trade is subject to, and may be negatively impacted by, foreign exchange rate fluctuations. In addition, the potential interpretation and application of laws of multiple jurisdictions (e.g., the jurisdiction of the merchant and of the consumer) are often extremely complicated in the context of cross-border trade. Changes to or the interpretation and/or application of laws and regulations applicable to cross-border trade could impose additional requirements (which mayand restrictions, impose conflicting obligations) and restrictions on cross-border tradeobligations, and increase the costs associated with cross-border trade. Any factors that increase the costs of cross-border trade for us or our customers or that restrict, delay, or make cross-border trade more difficult or impractical, would lowersuch as trade policy or higher tariffs, could negatively impact our revenues and profits and harm our business. See also the risk factor captioned, “Global and regional economic conditions could harm our business.”
Changes in how consumers fund their PayPal transactions could harm our business.
We pay transaction fees when consumers fund payment transactions using credit cards, lower fees when consumers fund payments with debit cards, and nominal fees when consumers fund payment transactions by electronic transfer of funds from bank accounts, or from an existing PayPal account balance or through our PayPal branded consumer credit products. Our financial success is sensitive to changes in the rate at which our consumers fund payments using credit and debit cards (collectively, “payment cards”), which can significantly increase our costs. Although we provide consumers with the opportunity to use their existing PayPal account balance to fund payment transactions, some of our consumers may prefer to use payment cards, especially if these payment cards offer features and benefits that are not provided as part of their PayPal accounts. An increase in the portion of our payment volume funded using payment cards or in fees associated with our funding mix, or other events or developments that make it more difficult or costly for us to fund transactions with lower-cost funding options, could materially and adversely affect our financial performance and significantly harm our business.
We have entered into strategic partnerships with major payment card networks and/or issuing banks to promote greater consumer choice and make it easier for merchants to accept and consumers to pay with these partners’ credit and/or debt cards and to allow us to gain access to these partners’ tokenization services for in-store point of sale PayPal transactions. These arrangements may have an uncertain impact on our business. While we anticipate that these and similar strategic partnerships we may enter into in the future will result in an increase in the number of transactions and transaction volume that we process, we also anticipate that a greater percentage of customer transactions will be executed using a payment card, which would likely increase the transaction costs associated with our funding mix, which could adversely affect our business, results of operations, and profitability.
The United Kingdom’s departure from the EU could adversely affect us.
The United Kingdom (“U.K.”) held a referendum onin June 23, 2016 in which a majority of voters approved an exit from the EUEuropean Union (“Brexit”EU”) (commonly referred to as “Brexit”). NegotiationsIn March 2017, the U.K. government initiated the exit process under Article 50 of the Treaty on European Union, which commenced a two-year period expiring on March 29, 2019, after which time the U.K. is expected to leave the EU in the absence of any effective extension to the Article 50 period. Political negotiations are underway; however, there is a significant lack of clarity over the terms of the U.K.'s exit from the EU and the terms of the U.K.'s future relationship with the EU. The U.K.'s financial service regulators are implementing Temporary Permission Regimes that are expected to commencebe put in place by the U.K.'s government to determinesupport European Economic Area (“EEA”) financial services firms in continuing to conduct business in the future terms ofU.K. should the U.K.’s relationship with exit the EU including, among other things, the terms of trade between the U.K. and the EU. The effects of Brexit will depend on any agreements the U.K. reaches to retain access to EU markets either during a transitional period or more permanently. The outcome of this referendum caused volatility in global stock markets and foreign currency exchange rate fluctuations and uncertainty about the terms and impact of Brexit may continue to do so in the future. without an agreement.
Brexit could adversely affect U.K., regional (including European), and worldwide economic and market conditions and could contribute to instability in global financial and foreign exchange markets, including volatility in the value of the British Pound and Euro, which in turn could adversely affect us or our customers and companies with which we do business, particularly in the U.K. Brexit could lead to greater restrictions on the supply and availability of goods and services between the U.K and the EEA region, with the potential inability of U.K. companies to fulfill orders leading in turn to a risk of increased merchant defaults and buyer protection claims. Brexit could also trigger a general deterioration in credit conditions, a downturn in consumer sentiment and overall negative economic growth. Any of these scenarios could have an adverse effect on our business or our customers.
In addition, Brexit could lead to legal uncertainty and potentially divergentincreased complexity for financial services firms as national laws and regulations asin the U.K. determines whichstart to diverge from EU laws to replace or replicate.and regulations. In particular, depending on the terms of Brexit, we may face new regulatory costs and challenges, including the following:
if we could lose our ability forare unable to utilize appropriate authorizations and regulator permissions, our EU operations could lose their ability to passportoffer services on a cross-border basis into the U.K. market throughand for our U.K. based operations to offer services on a cross-border basis in the banking license of PayPal (Europe) S.à r.l. et Cie, SCA (“PayPal (Europe)”),EEA markets. For example, our wholly-owned subsidiary that is licensed and subject to regulation as a bank in Luxembourg, and our corresponding ability to work primarily with the Luxembourg regulatorsregulator as the lead authority for various aspects of our U.K. operations;operations may also be impacted;
we could be required to obtain additional regulatory licensingpermissions to operate in the U.K. market, adding costs and potential inconsistency to our business;business (and, depending on the capacity of the U.K. authorities, the criteria for obtaining permission, and any possible transitional arrangements, there is a risk that our business in the U.K. could be materially affected or disrupted);
we could also be required to comply with regulatory requirements in the U.K. that are in addition to, or inconsistent with, the regulatory requirements of the EU.EU, leading to increased complexity and costs for our EU and UK operations; and
our ability to attract and retain the necessary human resources in appropriate locations to support the U.K. business and the EU business of PayPal could be adversely impacted.
Any of these effects ofThese and other factors related to Brexit and others we cannot anticipate could, adversely affectindividually or in the aggregate, have a material adverse impact on our business, results of operations, financial condition, and cash flows.
Our business is subject to extensive government regulation and oversight, as well as extensive, complex, overlapping and frequently changing rules, regulations and legal interpretations.results of operations.
Our business is subject to extensive government regulation and oversight. For a discussion of how government regulation impacts key aspects ofOur failure to comply with extensive, complex, overlapping, and frequently changing rules, regulations, and legal interpretations could materially harm our business, please see “Item 1. Business—Government Regulation” in this Annual Report on Form 10-K. business.
Our business is also subject to laws, rules, regulations, policies, and legal interpretations in the markets in which we operate, including, but not limited to, those governing governing:
banking,
credit,
deposit taking,
cross-border and domestic money transmission,
prepaid access,
foreign exchange,
privacy,
data protection,
cybersecurity,
banking secrecy,
payment services (including payment processing and settlement services),
consumer protection,
economic and trade sanctions,
anti-money laundering, and
counter-terrorist financing. The legal and regulatory requirements applicable to us are extensive, complex, frequently changing, and increasing in number, and may impose overlapping and/or conflicting requirements or obligations.
Financial and political events have increased the level of regulatory scrutiny on the payments industry, and regulatory agencies may view matters or interpret laws and regulations differently than they have in the past and in a manner adverse to our business. Our success and increased visibility may result in increased regulatory oversight and tighter enforcement ofand more restrictive rules and regulations that may apply to our business.
As we expand and localize our international activities, we arehave become increasingly becoming obligated to comply with the laws of the countries or markets in which we operate. In addition, because our services are accessible worldwide and we facilitate sales of
goods and provide services to customers worldwide, one or more jurisdictions may claim that we or our customers are required to comply with their laws. Laws regulating the Internet,internet, mobile, and related technologies outside of the U.S. often impose different, more specific, or even conflicting obligations on us, as well as broader liability. For example, certain transactions that may be permissible in a local jurisdiction may be prohibited by regulations of U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”) or U.S. anti-money laundering or counter-terrorist financing regulations.
Any failure or perceived failure to comply with existing or new laws, and regulations, or orders of any governmental authority (including changes to or expansion of the interpretation of those laws, and regulations)regulations, or orders), including those discussed in this risk factor, may subject us to significant fines, penalties, criminal and civil lawsuits, forfeiture of significant assets, and other enforcement actions in one or more jurisdictions;jurisdictions, result in additional compliance and licensure requirements;requirements, increase regulatory scrutiny of our business;business, restrict our operations;operations, and force us to change our business practices, make product or operational changes, or delay planned product launches or improvements. TheAny of the foregoing could, individually or in the aggregate, expose us to significant liability, impose significant costs, require us to expend substantial resources, increase the cost and complexity of compliance,harm our reputation, damage our brands and business, make our products and services less attractive, result in the loss of customers, limit our ability to grow the business, adversely affect our results of operations and harm our reputation.financial condition. The complexity of U.S. federal and state regulatory and enforcement regimes, coupled with the global scope of our operations and the evolving global regulatory environment, could result in a single event giving rise to a large number of overlapping investigations and legal and regulatory proceedings by multiple government authorities in different jurisdictions. We have implemented policies and procedures designed to help ensure compliance with applicable laws and regulations, but there can be no assurance that our employees, contractors, or agents will not violate such laws and regulations.
Payments Regulation
In the U.S., PayPal, Inc. has obtained licenses to operate as a money transmitter (or its equivalent) in the states where it issuch licenses are required, as well as in the District of Columbia, the U.S. Virgin Islands, and Puerto Rico. These licenses include not only the PayPal branded products and services in these states, but also our Braintree, Venmo, and Xoom branded products and services. We may also maintain such licenses for certain companies that we have recently acquired, such as Hyperwallet. As a licensed money transmitter, PayPal is subject to restrictions with respect to the investment of customer funds, reporting requirements, bonding requirements, and inspection by state regulatory agencies. Accordingly, if we violate these laws or regulations, we could be subject to liability and/or additional restrictions, forced to cease doing business with residents of certain states, forced to change our business practices, or be required to obtain additional licenses or regulatory approvals, thatwhich could impose substantial costs.
While we currently allow our customers with creditpayment cards to send payments from approximately 200 markets, we allow customers in only approximately half of those markets (including the U.S.) to also receive payments, in some cases with significant restrictions on the manner in which customers can withdraw funds. These limitations may adversely affect our ability to grow our business in these markets. Of the markets whose residents can use our PayPal services, almost 30 of them are in member states of the EU.
We principally provide our services to customers in the EU through PayPal (Europe) S.a.r.l. et Cie., SCA (“PayPal (Europe)”), our wholly-owned subsidiary that is licensed and subject to regulation as a bankcredit institution in Luxembourg. Accordingly, PayPal (Europe) is subject to significant fines or other enforcement action if it violates the disclosure, reporting, anti-money-laundering,anti-money laundering, capitalization, fund management, corporate governance, privacy, data protection, information security, banking secrecy, taxation, sanctions, or other requirements imposed on Luxembourg banks. In addition, EU laws and regulations are typically subject to different and potentially inconsistent interpretations by the countries that are members of the EU, which can make compliance more costly and operationally difficult to manage. Moreover, the countries that are EU members of the EU may each have different and potentially inconsistent interpretations ofdomestic regulations implementing European Directives, including the EU Payment Services Directive and the E-Money Directive, which could make compliance more costly and operationally difficult to manage. The Revised Payment Services Directive (“PSD2”) entered into force in January 2016 and will need to beis in the process of being implemented into national legislation, bywith certain requirements effective January 13, 2018. However, a number of EU member states have not yet fully implemented PSD2 into domestic legislation. Luxembourg, which is the home member state of PayPal (Europe), implemented PSD2 on July 28, 2018. The implementation of the PSD2 may negatively affect our business. Finally, ifPSD2 seeks to enable new payment models whereby a newly formed category of regulated payment provider would be able to access bank and payment accounts (including PayPal accounts) for the purposes of accessing account information or initiating a payment on behalf of a customer. Such access could subject us to data security and other legal and financial risks and could create new competitive forces and new types of competitors in the European payments market. PSD2 seeks to regulate more online platforms that handle payments for their sellers. PayPal merchants with affected business models which are not licensed, or which do not benefit from exemptions or integrate a compliant marketplaces solution may not be able to offer PayPal products in the future. PSD2 also imposes new standards (coming into force on September 14, 2019) for payment security and strong customer authentication that may make it more difficult and time consuming to carry out a PayPal transaction, which may adversely impact PayPal’s customer value proposition and its European business.
If the business activities of PayPal (Europe) exceed certain thresholds, or if the European Central Bank (“ECB”) so determines, that PayPal (Europe) ismay be deemed a significant supervised entity orsuch that some activity of PayPal (Europe) is subject to oversight by the ECB, PayPal (Europe) or certain of its activities could become directly regulated by the ECB in addition torather than the Luxembourg regulator the Commission de Surveillance du Secteur Financier,(the “CSSF”), as its national supervisor, which could subject us to additional requirements and would likely increase compliance costs.
In Australia, we serve our customers through PayPal Australia Pty. Ltd. (“PayPal Australia”), which is licensed by the Australian Securities and Investments Commission as a provider of a non-cash payment product and by the Australian Prudential Regulation Authority as a purchased payment facility provider, which is a type of authorized depository institution. Accordingly, PayPal Australia is subject to significant fines or other enforcement action if it violates the product disclosure, reporting, anti-money laundering, capital requirements, privacy, corporate governance or other requirements imposed on Australian depository institutions.
In many of the other markets outside the U.S. in which we do business, we serve our customers through PayPal Pte. Ltd., our wholly-owned subsidiary that is based in Singapore. PayPal Pte. Ltd. is supervised by the Monetary Authority of Singapore and is designated as a holder of a stored value facility, andbut does not hold a remittance license. As a result, PayPal Pte. Ltd. is not able to offer outbound remittance payments (including donations to charities) from Singapore, and can only offer payments for the purchase of goods and services in Singapore. In many of the markets (other than Singapore) served by PayPal Pte. Ltd., it is unclear and uncertain whether our Singapore-based service is subject only to Singapore law or, if it is subject to the application of local laws, whether such local laws would require a payment processor like us to be licensed as a payments service, bank, financial institution, or otherwise. Payment services legislation currently pending in Singapore may change how PayPal Pte. Ltd is regulated and, if such legislation is passed, our compliance and operating costs will likely increase.
In certain markets outside the U.S. (e.g., Australia), we provide our services to customers through a local subsidiary subject to local regulatory supervision or oversight, which may be the holder of a local payment license, certification, or other authorization. In such markets, we may be subject to significant fines or other enforcement action if we violate applicable reporting, anti-money laundering, capital requirements, privacy, corporation governance, risk management, or any other applicable requirements.
We are also subject to regulation in other markets in which we do business and we have been, and expect to continue to be, required to apply for various licenses, certifications, and regulatory approvals in a number of the countriesjurisdictions where we provide our services.services, including due to changes in applicable laws and regulations or the interpretation of such laws and regulations. There can be no assurance that we will be able to (or decide to) obtain any such licenses, certifications, and approvals. Even if we were able to obtain such licenses, certifications, and approvals,In addition, there are substantial costs and potential product changes involved in maintaining and renewing such licenses, certifications, and approvals, and we could be subject to fines or other enforcement action if we are found to violate disclosure, reporting, anti-money laundering, capitalization, corporate governance, or other requirements of such licenses. These factors could impose substantial additional costs, and involve considerable delay to the development or provision of our products or services, or could require significant and costly operational changes, or prevent us from providing anyour products or services in a given market.
In many other countries, it may not be clear whether we are required to be licensed as a payment services provider, bank, financial institution, or otherwise. In such markets, we may rely on local banks to process payments and conduct foreign exchange transactions in local currency. Local regulators may use their power to slow or halt payments to local merchants conducted through local banks or otherwise prohibit or impede us from doing business in a country.jurisdiction. Such regulatory actions or the need to obtain licenses, certifications, or other regulatory approvals could impose substantial costs, involve considerable delay to the provision or development of our services, require significant and costly operational changes, impose restrictions, limitations, or additional requirements on our business, or prevent us from providing any products or services in a given market. For example, in June 2016, we suspended our operations in Turkey following cease and desist instructions from Turkey’s regulatory body, Bankacýlýk Düzenleme Ve Denetleme Kurumu (“BDDK”), following the BDDK’s rejection of our application for an e-money payments license.
Consumer Protection
The financial services sector is subject to significant regulation and weWe are subject to consumer protection laws and regulations in the countries in which we operate. In the U.S., we are subject to federal and state consumer protection laws and regulations applicable to our activities, including the Electronic Fund Transfer Act (“EFTA”) and Regulation E as implemented by the Consumer Financial Protection Bureau (“CFPB”). Under suchThese regulations we are requiredrequire us to provide advance disclosure of changes to our services, follow specified error resolution procedures, and reimburse consumers for losses from certain transactions not authorized by the consumer, among other requirements. Additionally, technical violations of consumer protection laws could result in the assessment of actual damages or statutory damages or penalties of up to $1,000 in individual cases or up to $500,000 per violation in any class action and treble damages in some instances; we could also be liable for plaintiffs’ attorneys’ fees in such cases. We are subject to, and have paid amounts in settlement of, lawsuits containing allegations that our business violated the EFTA and Regulation E or otherwise advance claims for relief relating to our business practices (e.g., that we improperly held consumer funds or otherwise improperly limited consumer accounts).
In October 2016, the CFPB issued a final rule on prepaid accounts with an effective date of October 1, 2017.accounts. The rule’s definition of prepaid account includes certain loadable accounts that are capable of being loaded with funds and whose primary function is to conduct transactions with multiple, unaffiliated merchants, at ATMs and/or for person-to-person transfers, including certain digital wallets. The rule’s requirements include: the disclosure of fees and other information to the consumer prior to the creation of a prepaid account; the extension of Regulation E liability limits and error-resolution requirements to all prepaid accounts; the application of Credit Card Accountability Responsibility and Disclosure Act of 2009Regulation Z credit card requirements to prepaid accounts with overdraft and credit features; and the submission of prepaid account agreements to the CFPB and their publication to the general public. WeIn April 2017, the CFPB delayed the effective date of the final rule on prepaid accounts to April 1, 2018, and indicated that it would review, among other issues, the linking of credit cards to digital wallets that are evaluatingcapable of storing funds. In June 2017, the CFPB released proposed changes to its final rule, and in January 2018, the CFPB issued its requirements. Implementationfinal rule, modifying some aspects of the rule, couldwith an overall effective date of April 1, 2019. We are in the process of implementing certain changes to comply with the final rule. We expect that such implementation will require us to make substantial changes to our business practices and the design of certain products, allocate additionalU.S. consumer accounts and their operability, which could lead to customer dissatisfaction, require us to reallocate resources, and increase our costs, which could negatively affect our business.
In May 2015, we entered into a Stipulated Final Judgment and Consent Order (“Consent Order”) with the CFPB in which we settled regulatory claims arising from PayPal Credit practices between 2011 and 2015. The Consent Order included obligations on PayPal to pay $15 million in redress to consumers and a $10 million civil monetary penalty, and required PayPal to make various changes to PayPal Credit disclosures and related business practices. We continue to cooperate and engage with the CFPB and work to ensure compliance with the Consent Order, which may result in us incurring additional costs.
PayPal (Europe) principally offers its services in EU countries through a “passport” notification process through the Luxembourg regulator to regulators in other EU member states pursuant to EU Directives, and has completed the “passport” notification process in all EU member countries. The regulatorsregulations. Regulators in these countries could notify PayPal (Europe) of local consumer protection laws that apply to its business, in addition to Luxembourg consumer protection law, and could also seek to persuade the Luxembourg regulator to order PayPal (Europe) to conduct its or the PayPal group's activities in the local country directly or through a branch office. These or similar actions by these regulators could increase the cost of, or delay, our plans to expand our business in EU countries.
Economic and Trade Sanctions
We are subjectrequired to comply with U.S. economic and trade sanctions administered by OFAC.OFAC and the Council of the European Union, respectively. We have self-reported to OFAC certain transactions that were inadvertently processed but subsequently identified as possible violations of U.S. economic and trade sanctions. In March 2015, we reached a settlement with OFAC regarding possible violations arising from our sanctions compliance practices between 2009 and 2013, prior to the implementation of our real-time transaction scanning program. Subsequently, we have self-reported additional transactions as possible violations, and we have received new subpoenas from OFAC seeking additional information about certain of these transactions. Such self-reported transactions could result in claims or actions against us, including litigation, injunctions, damage awards, fines or penalties, or require us to change our business practices in a manner that could result in a material loss, require significant management time, result in the diversion of significant operational resources, or otherwise harm our business.
Anti-Money Laundering and Counter-Terrorist Financing
We are subject to various anti-money laundering and counter-terrorist financing laws and regulations around the world that prohibit, among other things, our involvement in transferring the proceeds of criminal activities. Regulators in the U.S. and other regulators globally continue to increase their scrutiny of compliance with these obligations, which may require us to further revise or expand our compliance program, including the procedures we use to verify the identity of our customers and to monitor international and domestic transactions. Many countries in which we operate also have anti-money laundering and counter-terrorist financing laws and regulations, and we have been and will continue to be required to make changes to our compliance program in various jurisdictions in response. Regulators regularly re-examine the transaction volume thresholds at which we must obtain and keep applicable records or verify identities of customers and any change in such thresholds could result in greater costs for compliance. In the EU, the implementation of the Fourth Anti-Money Laundering Directive and the regulation on information accompanying transfer of funds (commonly known as the Revised Wire Transfer Regulation), which both come into effect on June 26, 2017, could may make compliance more costly and operationally difficult to manage, lead to increased friction for customers, and result in a decrease in business. Penalties for non-compliance with the Fourth Anti-Money Laundering Directive could include fines of up to 10% of PayPal (Europe)’s total annual turnover. The EU institutions are also proposing changes toOn April 19, 2018, the FourthEuropean Parliament adopted the European Commission’s proposal for a Fifth Anti-Money Laundering Directive, containing more stringent provisions in certain areas, which could be even more stringent.may also increase compliance costs.
Privacy and Protection of User Data
We are subject to a number of laws, rules, directives, and directivesregulations (which we refer to as “privacy laws”) relating to the collection, use, retention, security, processing, and transfer (which we refer to as “process”) of personally identifiable information about our customers and employees (which we refer to as “personal data”) in the countries where we operate. MuchOur business relies on the processing of data in many jurisdictions and the movement of data across national borders. As a result, much of the personal data that we process, especially financial information, is regulated by multiple privacy laws and, in some cases, the privacy laws of multiple jurisdictions. In many cases, these laws apply not only to third-party transactions, but also to transfers of information between or among us, our subsidiaries, and other parties with which we have commercial relationships.
Regulatory scrutiny of privacy, data protection, and the collection, storage, use, and sharing of personal data is increasing on a global basis.around the world. There is uncertainty associated with the legal and regulatory environment aroundrelating to privacy and data protection laws, which continue to develop in ways we cannot predict, including with respect to evolving technologies such as cloud computing. Privacycomputing and blockchain technology.
Any failure, or perceived failure, by us to comply with our privacy policies and communicated to users prior to our collection, use, storage and transfer, and disclosure of their personal data, with applicable industry data protection or security standards, with any applicable regulatory requirements or orders, or with privacy, data protection, information security, or consumer protection-related laws may be interpreted and applied inconsistentlyregulations in one or more jurisdictions could result in proceedings or actions against us by data protection authorities (which we refer to as “supervisory authorities”), governmental entities or others, including class action privacy litigation in certain jurisdictions, would subject us to significant awards, fines, penalties, judgments, and negative publicity arising from country to country and impose inconsistentany financial or conflicting requirements. Complying with varying jurisdictional requirementsnon-financial damages suffered by any individuals. This could, increaseindividually or in the costs and complexity of compliance oraggregate, materially harm our business. Specifically, this would likely require us to change our business practices, in a manner adverse to our business, and violationswould increase the costs and complexity of privacy and data protection-related laws can result in significant penalties and damage to our brand and business.compliance. In addition, compliance with inconsistent privacy laws may restrict our ability to provide products and services to our customers. A determination that there have been violations of privacy or data protection laws could expose us to significant damage awards, fines and other penalties that could, individually or in the aggregate, materially harm our business and reputation.
PayPal relies on a variety of compliance methods to transfer personal data of EU citizens to the U.S., including reliance on Binding Corporate Rules (“BCRs”) for internal transfers of certain types of personal data and Standard Contractual Clauses (“SCCs”) as approved by the European Commission for transfers to and from third parties. PayPal must also ensure that third parties processing personal data of PayPal’s EU customers and/or employees outside of the EU have compliant transfer mechanisms. In October 2015, the European Court of Justice ruled that theinvalidated U.S.-EU Safe Harbor framework clauses one compliance methodthat were previously relied upon by which companies couldsome PayPal vendors to lawfully transfer personal data regardingof EU citizens ofto U.S. companies, and PayPal entered into SCCs with those third parties who had previously relied on the EU toU.S.-EU Safe Harbor framework. In July 2016, the U.S., could no longer be relied upon. The U.S. and EU authorities have agreed in principle on a replacement for Safe Harbor known as “Privacy Shield”. TheShield.” Both the Privacy Shield
approach has not been fully endorsed by all relevant parties framework and there have already beenSCCs are facing legal challenges to this initiative in the European justice system. PayPal has chosenTo the extent that the Privacy Shield or SCCs are invalidated, PayPal’s ability to adoptprocess EU model clauses published by the European Commission as a basis for the exportpersonal data with third parties outside of data from the EU could be jeopardized.
In 2016, the EU adopted the General Data Protection Regulation (“GDPR”), which became effective in May 2018. The EU data protection regime expands the scope of the EU data protection law to all foreign companies processing personal data of EU residents, imposes a strict data protection compliance regime with severe penalties of up to the U.S.greater of 4% of worldwide turnover or €20 million, and includes new rights such as the “portability” of personal data. Although the GDPR applies across the EU without a need for those partslocal implementing legislation, each EU member state has the ability to interpret the GDPR opening clauses, which permit region-specific data protection legislation and have the potential to create inconsistencies on a country-by-country basis. Implementation of the GDPR has required us to change our business that had previously relied on Safe Harbor. In addition, becausepractices and increased the costs and complexity of compliance.
PayPal also faces additional potential challenges from local data protection agencies (“DPAs”). Because PayPal (Europe) is headquartered in Luxembourg and subject to regulation as a bank in that jurisdiction, we have relied on the “one-stop-shop” concept under which Luxembourg has been our lead data protection regulator in the EU. However, a recent2015 European Court of Justice ruling (Weltimmo) affecting companies that do business in the EU potentially could make us subject to the local data protection laws or regulatory enforcement activities of the various EU member states in which we have established legal entities and which apply privacy laws that are different than, and which may even conflict with, those in Luxembourg.Luxembourg privacy laws.
In addition, because of the large number of text messages, emails, phone calls, and other communications we send or make to our customers for various business purposes, communication-related privacy laws that provide a specified monetary damage award or fine for each violation could result in particularly significant damage awards or fines. For example, under the Telephone Consumer Protection Act (“TCPA”), in the U.S., plaintiffs may seek actual monetary loss or statutory damages of $500 per violation, whichever is greater, and courts may trebletriple the damage award for willful or knowing violations. We have been, are, and may continue to be subject to lawsuits (including class-action lawsuits) containing allegations that our business violated the TCPA. These lawsuits seek damages (including statutory damages) and injunctive relief, among other remedies. Given the large number of communications we send to our customers, a determination that there have been violations of the TCPA or other communications-based statutes could expose us to significant damage awards that could, individually or in the aggregate, materially harm our business.
The EU has recently adopted a comprehensive overhaul of its data protection regime from the current national legislative approach to a single European Economic Area Privacy Regulation, the General Data Protection Regulation (“GDPR”), which comes into effect in 2018. The proposed EU data protection regime extends the scope of the EU data protection law to all foreign companies processing data of EU residents. It provides for a harmonization of the data protection regulations throughout the EU, thereby making it easier for non-European companies to comply with these regulations. It imposes a strict data protection compliance regime with severe penalties of up to the greater of 4% of worldwide turnover and €20 million and includes new rights such as the “portability” of personal data. Although the GDPR will apply across the EU without a need for local implementing legislation, as has been the case under the current data protection regime, local data protection authorities (“DPAs”) will still have the ability to interpret the GDPR, which has the potential to create inconsistencies on a country-by-country basis. We are evaluating the rule and its requirements. Implementation of the GDPR could require changes to certain of our business practices, thereby increasing our costs.
We post on our websites and applications our privacy policies and practices regarding the collection, use and disclosure of user data. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any applicable regulatory requirements or orders, or privacy, data protection, information security or consumer protection-related privacy laws and regulations in one or more jurisdictions could result in proceedings or actions against us by governmental entities or others, including class action privacy litigation in certain jurisdictions, subject us to significant fines, penalties, judgments and negative publicity, require us to change our business practices, increase the costs and complexity of compliance, and adversely affect our business. Data protection, privacy and information security have become the subject of increasing public, media and legislative concern. If our customers were to reduce their use of our products and services as a result of these concerns, our business could be materially harmed. As noted above, we are also subject to the possibility of security and privacy breaches, which themselves may result in a violation of these privacy laws.
If one or more of our counterparty financial institutions default on their financial or performance obligations to us or fail, we may incur significant losses.
We have significant amounts of cash, cash equivalents, and other investments on deposit or in accounts with banks or other financial institutions in the U.S. and abroad. As part of our currency hedging activities, we enter into transactions involving derivative financial instruments with various financial institutions. Certain banks and financial institutions are also lenders under our revolving credit facility.facilities. We regularly monitor our exposure to counterparty credit risk, and actively manage this exposure to mitigate the associated risk. Despite these efforts, we may be exposed to the risk of default by, or deteriorating operating results or financial condition or failure of, these counterparty financial institutions. The risk of counterparty default, deterioration, or failure may be heightened during economic downturns and periods of uncertainty in the financial markets. If one of our counterparties were to become insolvent or file for bankruptcy, our ability to recover losses incurred as a result of default or to access or recover our assets that are deposited or held in accounts with such counterparty may be limited by the counterparty’s liquidity or the applicable laws governing the insolvency or bankruptcy proceedings. In the event of default or failure of one or more of our counterparties, we could incur significant losses, which could negatively impact our results of operations and financial condition.
PayPal is not a bank or licensed lender in the U.S. and relies upon third parties to make loans and provide other products critical to our business.
business, which raises additional risks.
As PayPal is neither a chartered financial institution, nor licensed to make loans in any state in the U.S., we rely on a third-party chartered financial institutioninstitutions to issue theprovide PayPal Credit consumer productbranded credit products to our customers in the U.S., including consumer credits products such as PayPal Credit and a different chartered financial institution to issue thePayPal branded Mastercard credit cards, and business credit products such as PayPal Working Capital productand PayPal Business Loan products. Any termination or interruption in the U.S. Both of these chartered financial institutions are industrial banks chartered by the State of Utah.a partner bank’s ability or willingness to lend could interrupt, potentially materially, our ability to offer consumer and business loan products, which could materially and adversely affect our business. In the event of a termination or interruption in the ability of the chartered financial institution that currently issues the PayPal Credit consumer product in the U.S. to lend under the PayPal Credit consumer product, the chartered financial institution that issues the PayPal Working Capital product in the U.S. has agreed to take ownership of (and originate loans with respect to) all PayPal Credit consumer accounts. Nevertheless, any termination or interruption of either bank’s ability to lend could result in the inability or unwillingness to originate any new PayPal Credit or PayPal Working Capital loans. In the event of eitherpartner bank’s inability or unwillingness to lend, we would eithermay need to reach a similar agreement with another chartered financial institution or obtain our own bank charter or lending licenses. We may be unable to reach a similar agreement with another partner on favorable terms or at all, and obtainingall. Obtaining a bank charter or lending licenses would be a costly, time-consuming and costlyuncertain process, and would subject us to additional laws and regulatory requirements, which could be burdensome, and increase our costs.costs, and require us to change our business practices. In addition, our commercial relationships with third partiesas a service provider to these bank partners, which are federally supervised U.S. financial institutions, couldwe are subject usfrom time to time to examination by their federal banking regulators with respectregulators.
In July 2018, we completed the sale of our U.S. consumer credit receivables portfolio to Synchrony Bank, for total consideration of $6.9 billion. The purchase price is subject to a post-closing true-up and certain services thatother adjustments under the terms of the purchase agreement. As a part of a separate agreement, PayPal earns a revenue share on the portfolio of consumer receivables owned by Synchrony Bank, which includes both the sold and newly generated receivables and we provide.will not hold an ownership interest in newly generated consumer credit receivables. It may take us longer than expected to realize the anticipated benefits of the transaction, and those benefits may ultimately be smaller than anticipated or may not be realized at all, which could adversely affect our business and operating results. In addition, our increased reliance on Synchrony Bank subjects us to risks in the nature of those discussed in this “Risk Factors” section under the caption “We rely on third parties in many aspects of our business, which creates additional risk.”
In 2015,Our ability to receive the benefit of our business finance offerings may be subject to challenge.
Business loans under our PayPal Working Capital and PayPal Business Loan products are provided by a state chartered industrial bank under a program agreement with us. We acquire the receivables generated by those loans after they are originated.
A case decided in the U.S. Second Circuit Court of Appeals for the Second Circuit, Madden v. Midland Funding, LLC (786(786 F.3d 246 (2d Cir. 2015)), concluded that the buyer of a charged off credit card account could not rely on the National Bank Act's preemption of state interest rate limits for interest at rates imposed by the buyer after charge-off. A petition to the U.S. Supreme Court to review the decision was denied in June 2016, and the case has been remanded to the lower court to be determined in accordance with the ruling of the Second Circuit. The decision has resulted in some uncertainty as to whether non-bank entities purchasing loans originated by a bank may rely on federal preemption of state usury laws, and may create an increased risk of litigation by plaintiffs challenging our ability to collect interest and fees in accordance with the terms of certain loans. Although the Madden decision specifically addressed preemption under the National Bank Act, this decision could support future challenges to federal preemption for other institutions, including FDIC-insured, state chartered industrial banks like those that we rely onthe issuing bank of loans under PayPal Working Capital and PayPal Business Loan products. After the Madden decision, there continue to issue our loan products inbe a number of U.S. state and federal court legal actions challenging the U.S. Althoughviability of business models where a non-bank entity enters into a relationship with a third-party chartered financial institution for the issuance of credit products. While we believe the Madden casemanner in which PayPal branded credit products are offered can be distinguished from the manner in which we offer our credit products,Madden, there can be no assurancesassurance as to the outcome of any potential litigation, or that the possibleand an adverse determination could materially and adversely impact of such litigation will not have a material adverse impact onour PayPal Working Capital and PayPal Business Loan products and our business.
OurSome of our credit products expose us to additional risks.
OurWe offer our PayPal Credit consumer product and our PayPal Working Capital and PayPal Business Loan products are offered to a wide range of consumers and merchants in various markets, and the financial success of these products depends on the effective management of the risk related to these products.risk. The lendercredit decisioning process for the PayPal Credit consumer product extends credit usingin markets outside the U.S. uses proprietary segmentation and credit algorithms and other analytical techniques designed to analyze the credit risk of specific consumers based on, among other factors, their past purchasing and payment history with PayPal as well as their credit scores. Similarly, proprietary risk models and other indicators are applied to assess a merchantmerchants who wisheswish to obtain a PayPal Working Capital advance, among other indicators, the lender applies a proprietary risk modeluse our business finance offerings to help predict the merchant'stheir ability to repay the working capital advance.repay. These risk models may not accurately predict the creditworthiness of a consumer or merchant due to factors such as inaccurate assumptions, aboutincluding assumptions related to the particular consumer or merchant, or themarket conditions, economic environment, or limited transaction history or other data, among other factors. The accuracy of these risk models and the ability of the lender and our ability to manage credit risk related to our PayPal Credit and PayPal Working Capitalcredit products may also be affected by legal or regulatory changes,requirements, competitors’ actions, changes in consumer behavior, changes in the economic environment, and other factors. Our international expansion of our credit product offerings also exposes us to additional risks, including those discussed in the risk factor captioned “Our international operations subject us to increased risks, which could harm our business.”
Like other businesses with significant exposure to losses from consumer and merchant credit, we face the risk that PayPal Credit and PayPal Working Capital account holders will default on their payment obligation,obligations, creating the risk of potential charge-offs. We face similar risks with respect to U.S. consumer credit losses through the profit sharing relationship with Synchrony Bank. The non-payment rate among account holders may increase due to, among other things, changes to underwriting standards, worsening economic conditions, such as a recession or greatergovernment austerity in various countries,programs, increases in prevailing interest rates, and high unemployment rates. Account holders who miss payments often fail to repay their loans, and account holders who file for protection under the bankruptcy laws generally do not repay their loans.
We currently purchase receivables related to ourthe PayPal Creditbranded merchant credit products and originated loans with respect to our PayPal Working Capital Products.in the U.S. If we are unable to fund our purchase of these receivables adequately or in a cost-effective manner, or if we are unable to efficiently manage the cash resources utilized for these purposes, our business could be harmed.
Our international expansion ofCatastrophic events or geopolitical conditions may disrupt our PayPal Credit product offerings exposes us to additional risks, including those discussed below under the risk factor titled “Our international operations are subject to increased risks, which could harm our business.”business
Our business may be impacted byWar, terrorism, political events, war, terrorism,geopolitical instability, trade barriers and restrictions, public health issues, natural disasters, andor other business interruptions.
War, terrorism, geopolitical uncertainties, public health issues and other business interruptionscatastrophic events have caused and could cause damage or disruption to the economy and commerce on a global, regional or regionalcountry-specific basis, which could have a material adverse effect on our business, our customers, and companies with which we do business. Our business operations are subject to interruption by, among others, natural disasters, fire, power shortages, earthquakes, floods, nuclear power plant accidents and other industrial accidents, terrorist attacks and other hostile acts, labor disputes, public health issues and other events beyond our control. Such events could decrease demand for our products and services or make it difficult or impossible for us to deliver products and services to our customers. InOur corporate headquarters are located in the Silicon Valley, which is a seismically active region in California. Our business operations are subject to interruption by, among others, natural disasters, fire, power shortages, earthquakes, floods, nuclear power plant accidents, and events beyond our control such as other industrial accidents, terrorist attacks and other hostile acts, labor disputes and public health issues. A catastrophic event that results in a disruption or failure of a natural disaster, weour systems or operations could incurresult in significant losses and require substantial recovery time and experience significant expenditures in order to resume or maintain operations, which could have a material adverse impact on our business, financial condition, and results of operations.
Changes to our buyer and seller protection programs could increase our loss rate.
Our buyer and seller protection programs protect merchants and consumers from fraudulent transactions. In 2015, we increasedtransactions, and consumers if they do not receive the scope of our buyer protection program to cover digital goods and intangible goods and services.item ordered or if the item received is significantly different from its description. In addition, consumers who pay through PayPal may have reimbursement rights from their payment card issuer (usually a bank), which in turn will seek recovery from us. The risk of losses from our buyer and seller protection programs are specific to individual buyers, sellers, and transactions, and may also be impacted by regional variations to these programs, modifications to these programs resulting from changes in regulatory requirements, or changes that we decide to implement, such as expanding the scope of transactions covered by one or more of these programs. Upon PayPal becoming an independent publicly traded company on July 17, 2015, we extended our protection programs in several countries to cover certain customers’ purchases on eBay, and our costs associated with these programs have therefore increased. Increases in our loss rate, including as a result of changing our buyer and seller protection programs, could harm our business.
Our international operations are subject us to increased risks, which could harm our business.
Our international operations have generated approximately one-half of our net revenues in recent years. In addition to uncertainty about our ability to generate revenues from our foreign operations and expand into international markets, and the foreign currency risks discussed earlier in this “Risk Factors” section under the caption “We are exposed to fluctuations in foreign currency exchange rates,” thereThere are risks inherent in doing business internationally on both a domestic (i.e., in-country) and cross-border basis, including:including, but not limited to:
foreign currency and cross-border trade risks discussed earlier in this “Risk Factors” section under the captions “We are exposed to fluctuations in foreign currency exchange rates” and “Any factors that reduce cross-border trade or make such trade more difficult could harm our business”;
risks related to other government regulation or required compliance with local laws;
local licensing and reporting obligations;
obligations to comply with local regulatory and legal obligations related to privacy, data security, and data localization;
expenses associated with localizing our products and services, and customer data, including offering customers the ability to transact business in the local currency, and adapting our products and services to local preferences (e.g., payment methods) with which we may have limited or no experience;
trade barriers and changes in trade regulations;
difficulties in developing, staffing, and simultaneously managing a large number of varying foreign operations as a result of distance, language, and cultural differences;
stringent local labor laws and regulations;
credit risk and higher levels of payment fraud;
profit repatriation restrictions, foreign currency exchange restrictions, or extreme fluctuations in foreign currency exchange rates for a particular currency;
political or social unrest, economic instability, repression, or human rights issues;
geopolitical events, including natural disasters, public health issues, acts of war, and terrorism;
import or export regulations;
compliance with U.S. laws and foreign laws prohibiting corrupt payments to government officials, such as the Foreign Corrupt Practices Act and the U.K. Bribery Act, and other local anticorruption laws;
compliance with U.S. and foreign laws designed to combat money laundering and the financing of terrorist activities;
antitrust and competition regulations;
potentially adverse tax developments and consequences;
economic uncertainties relating to sovereign and other debt;
national or regional differences in macroeconomic growth rates;
different, uncertain, overlapping, or more stringent user protection, data protection, privacy, and other laws;
risks related to other government regulation or required compliance with local laws;
data localization requirements;
risks related to multiple overlapping legal or regulatory regimes, which may impose conflicting requirements on us;
national or regional differences in macroeconomic growth rates;
local licensinglaws and reporting obligations;regulations; and
increased difficulties in collecting accounts receivable.
Violations of the complex foreign and U.S. laws, rules and regulations that apply to our international operations may result in fines, criminal actions, or sanctions against us, our officers, or our employees; prohibitions on the conduct of our business; and damage to our reputation. Although we have implemented policies and procedures designed to promote compliance with these laws, violations bythere can be no assurance that our employees, contractors, or agents could nevertheless occur.will not violate our policies. These risks are inherent in our international operations and expansion, may increase our costs of doing business internationally, and could harm our business.
We are exposed to fluctuations in interest rates.
We are exposed to interest rate risk from our investment portfolio and from interest-rate sensitive assets, including assets underlying the customer balances we hold on our balance sheet as customer accounts. A low interest rate environment or reductions in interest rates may negatively impact our investment income and our net income. In addition, fluctuations in interest rates may adversely impact our customers’ spending levels and ability and willingness to pay outstanding amounts owed to us. Higher interest rates often lead to higher payment obligations by customers to us and other lenders under mortgage, credit card, and other consumer and merchant loans, which may reduce our customers’ ability to remain current on their obligations to us and therefore lead to increased delinquencies, charge-offs, and allowance for loan and interest receivable which could have an adverse effect on our net income.
In July 2015, weWe have entered into a revolving credit facility and a 364-day delayed-draw term loan credit facility. As a result,We have borrowed under these credit facilities from time to the extent of ourtime, and any borrowings under the facility, whichthese credit facilities bear interest at a floating rate, we will be exposedexposing us to interest rate fluctuations.
Use of our payments services for illegal purposes could harm our business.
Our payment system is susceptible to potentially illegal or improper uses, including money laundering, terrorist financing, illegal online gambling, fraudulent sales of goods or services, illicitillegal sales of prescription medications or controlled substances, piracy of software, movies, music, and other copyrighted or trademarked goods (in particular, digital goods), money laundering, bank fraud, child pornography human trafficking, prohibited sales of alcoholic beverages or tobacco products, online securities fraud, pyramid or ponzi schemes, or to facilitate other illegal activity. CertainUse of our payment system for illegal or improper uses has subjected us, and may subject us in the future, to claims, individual and class action lawsuits, and government and regulatory investigations, inquiries, or requests that could result in liability and reputational harm for us. Moreover, certain activity that may be legal in one countryjurisdiction may be illegal in another country,jurisdiction, and a merchant may intentionally or inadvertently be found responsible for importing or exporting illegal goods, resulting in liability for us. Changes in law have increased the penalties for intermediaries providing payment services for certain illegal activities, and government authorities may consider additional payments-related proposals are under active consideration by government authorities. Intellectualfrom time to time. Owners of intellectual property rights owners or government authorities may seek to bring legal action against providers of payments solutions, including PayPal, that are peripherally involved in the sale of infringing or allegedly infringing items. Any threatened or resulting claims could result in reputational harm, and any resulting liabilities, loss of transaction volume, or increased costs could harm our business.
Our failure to manage our customer funds and the assets underlying our customer funds properly could harm our business.
We hold a substantial amount of funds belonging to our customers, including depositsbalances in customer accounts and funds being remitted to sellers of goods and services.services or recipients of person to person (“P2P”) transactions. In certain jurisdictions where we operate, we are required to hold eligible liquid assets, as defined by the relevant regulators in each jurisdiction, equal to at least 100% of the aggregate amount of all customer balances. Our ability to manage and account accurately for the assets underlying our customer funds and comply with applicable liquid asset requirements requires a high level of internal controls. As our business continues to grow and we expand our product offerings, we must continue to strengthen our associated internal controls. For example, in March 2016, as approved byPayPal (Europe), with the Supervisory Boardpermission of PayPal (Europe) and as permitted by the CSSF, utilizes certain European customer balances held inby our Luxembourg banking subsidiary are being used to extendfund credit balances relating to our Europeancertain customers. Our success requires significant public confidence in our ability to properly manage our customers’ balances and handle large and growing transaction volumes and amounts of customer funds. Any failure to maintain the necessary controls or to manage our customer funds and the assets underlying our customer funds accurately and in compliance with applicable regulatory requirements could result in reputational harm, lead customers to discontinue or reduce their use of our products and result in significant penalties and fines, which could materially harm our business.
We are subject to regulatory activity and antitrust litigation under competition laws.
We are subject to scrutiny by various government agencies under U.S. and foreign laws and regulations, including antitrust and competition laws. An increasing number of governments are actively enforcing competition laws and regulations. Some jurisdictions also provide private rights of action for competitors or consumers to assert claims of anti-competitiveanticompetitive conduct. Other companies and government agencies have in the past and may in the future allege that our actions violate the antitrust or competition laws of the U.S., individual states, other countries, or the European Commission, or otherwise constitute unfair competition. An increasing number of governments are regulating competition law activities, including increased scrutiny in large markets such as China. Our business agreements or arrangements with customers or other companies could give rise to regulatory action or antitrust litigation. Some regulators, particularly those outside of the U.S., may perceive that our business to beproducts and services are used so broadly that otherwise uncontroversial business practices could be deemed anticompetitive. Any claims or investigations, even if without foundation,merit, may be very expensive to defend or respond to, involve negative publicity,
and substantial diversion of management time and effort, and could result in reputational harm, significant judgments, fines or remedial actions against us, or require us to change our business practices.
We are subject to patent litigation.
We have repeatedly been sued repeatedly for allegedly infringing other parties’ patents. At any given time, we are typically a defendant in a number of patent lawsuits and have been notified of several other potential patent disputes.lawsuits. We expect that we will increasinglycontinue to be subject to patent infringement claims because, among other reasons:
our products and services continue to expand in scope and complexity;complexity and to converge with technologies not previously associated with the payments space;
we continue to expand into new business areas, including through acquisitions; and
the number of patent owners who may claim that we, any of the companies that we have acquired, or our customers infringe their patents, and the aggregate number of patents controlled by such patent owners, continues to increase.
Such claims may be brought directly against us or against our customersusers whom we may indemnify either because we are contractually obligated to do so or we choose to do so as a business matter. We believe that an increasing numbermany of thesethe claims against us and other technology companies have been, and continue to be, initiated by third parties whose sole or primary business is to assert such claims. In addition, we have seen significant patent disputes between operating companies in some technology industries. Patent claims, whether meritorious or not, are time-consuming and costly to manage, defend, and resolve, and could require us to make expensive changes in our methods of doing business, enter into costly royalty or licensing agreements, make substantial payments to satisfy adverse judgments or settle claims or proceedings, or cease conducting certain operations, which would harm our business.
We may be unable to adequately protect or enforce our intellectual property rights, or third parties may allege that we are infringing their intellectual property rights.
The protection of our intellectual property, including our trademarks, patents, copyrights, domain names, trade dress, and trade secrets, is important to the success of our business. We seek to protect our intellectual property rights by relying on applicable laws and regulations in the U.S. and internationally, as well as a variety of administrative procedures. We also rely on contractual restrictions to protect our proprietary rights when offering or procuring products and services, including confidentiality and invention assignment agreements entered into with our employees and contractors and confidentiality agreements with parties with whom we conduct business.
Effective intellectual property protection may not be available in every country in which we offer our products and services are made available.services. We may be required to expend significant time and expense in order to prevent infringement or to enforce our rights.
Although we have generally taken measures to protect our intellectual property rights, there can be no assurance that we will be successful in protecting or enforcing our rights in every jurisdiction, or that contractual arrangements and other steps that we have taken to protect our intellectual property will prevent third parties from infringing or misappropriating our intellectual property or deter independent development of equivalent or superior intellectual property rights by others. If we are unable to prevent third parties from adopting, registering, or using trademarks and trade dress that infringe, dilute, or otherwise violate our trademark rights, the value of our brands could be diminished and our business could be adversely affected. Also, we may not be able to discover or determine the extent of any unauthorized use of our proprietary rights. We have licensed in the past, and expect to license in the future, certain of our proprietary rights, such as trademarks or copyrighted material, to others. These licensees may take actions that diminish the value of our proprietary rights or harm our reputation. Any failure to adequately protect or enforce our intellectual property rights, or significant costs incurred in doing so, could diminish the value of our intangible assets and materially harm our business.
As the number of products in the technology and payments industries increases and the functionality of these products further overlaps, and as we acquire technology through acquisitions or licenses, we may become increasingly subject to intellectual property infringement and other claims. Litigation may be necessary to determine the validity and scope of the patent and other intellectual property rights of others. The ultimate outcome of any allegation is often uncertain and, regardless of the outcome, any such claim, with or without merit, may be time-consuming, result in costly litigation, divert management’s time and attention from our business, and require us to, among other things, redesign or stop providing transaction processing and other payment-related services or redesign, stop selling our products or services, pay substantial amounts to satisfy judgments or settle claims or lawsuits, pay substantial royalty or licensing fees, or satisfy indemnification obligations that we have with certain parties with whom we have commercial relationships. Our failure to obtain necessary license or other rights, or litigation or claims arising out of intellectual property matters, may harm or restrict our business.
We are regularly subject to general litigation, regulatory disputes,actions, and government inquiries.
We are regularly subject to claims, individual and class action lawsuits, government and regulatory investigations, inquiries, actions or requests, and other proceedings involvingalleging violations of laws, rules and regulations with respect to competition, and antitrust, law, intellectual property, privacy, data protection, information security, anti-money laundering, counter-terrorist financing, sanctions, anti-corruption, consumer protection, fraud, accessibility, claims, securities, tax, labor and employment, commercial disputes, services, charitable fundraising, contract disputes, escheatment of unclaimed or abandoned property, those matters described in Note 13—“Commitments and Contingencies—Litigation and Regulatory Matters—General Matters” to our consolidated financial statements, and other matters. In particular, our business faces ongoing consumer protection and intellectual property litigation, as discussed above. The number and significance of these disputes and inquiries have increasedmay increase as our company has grown larger, our business has expandedexpands in scale, scope and geographic reach, and our products and services have increasedincrease in scale and complexity. In addition, the laws, rules and regulations affecting our business, including those pertaining to Internetinternet and mobile commerce, data protection, payments services, and credit, are subject to ongoing interpretation by the courts and governmental authorities, and the resulting uncertainty in the scope and application of these laws, rules, and regulations increases the risk that we will be subject to private claims and governmental actions alleging violations of those laws, rules and regulations.violations.
The scope, outcome, and impact of claims, lawsuits, government investigations, disputes, and proceedings thatto which we are subject to cannot be predicted with certainty. Regardless of the outcome, such investigations and proceedingsmatters can have an adverse impact, which may be material, on usour business, results of operations, or financial condition because of legal costs, diversion of management resources, reputational damage, and other factors. Determining reserves for our pending litigation and regulatory proceedings is a complex, fact-intensive process that is subject to management’sinvolves a high degree of judgment. Resolving one or more of such legal and regulatory proceedings or other matters could potentially require us to make substantial payments to satisfy judgments, fines, or penalties or to settle claims or proceedings, any of which could materially and adversely affect our business.business, results of operations, or financial condition. These proceedings could also result in reputational harm, criminal sanctions, consent decrees, or orders preventingthat prevent us from offering certain products or services, requiring arequire us to change in our business practices in costly ways, or development ofdevelop non-infringing or otherwise altered products or technologies. Any of these consequences could materially and adversely affect our business.business, results of operations, and financial condition.
Certain
While certain of our customer agreements contain arbitration provisions with class action waiver provisions that may limit our exposure to consumer class action litigation, but there can be no assurance that we will be successful in enforcing these arbitration provisions, orincluding the class action waiver provisions, in them, in the future or in any given case. Legislative, administrative, or regulatory developments may directly or indirectly prohibit or limit the use of pre-dispute arbitration clauses and class action waiver provisions. Any such prohibitions or limitations on or discontinuation of the use of, such arbitration or class action waiver provisions could subject us to additional lawsuits, including additional consumer class action litigation, or materially impactand significantly limit our ability to avoid exposure from consumer class action litigation.
Changes in U.S. tax laws could have a material adverse effect on our business, cash flow, results of operations, and financial conditions.
On December 22, 2017, the U.S. government enacted comprehensive Federal tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The Tax Act made changes to the corporate tax rate, business-related deductions, and taxation of foreign earnings, among others, that are generally effective for taxable years beginning after December 31, 2017. Throughout calendar year 2018, the U.S. Treasury and certain states issued proposed and final legislation and clarifying guidance with respect to the various provisions of the Tax Act. Additional legislation and guidance is expected to be issued in 2019, which could have a material adverse impact on the value of our U.S. deferred tax assets, result in significant changes to currently computed income tax liabilities for past and current tax periods, and increase our future U.S. tax expense. We are continuing to evaluate the Tax Act and its requirements, as well as its application to our business and its impact on our effective tax rate. At this stage, it is unclear how many U.S. states will continue to incorporate these federal law changes, or portions thereof, into their tax codes. The implementation by us of new practices and processes designed to comply with, and benefit from, the Tax Act and its rules and regulations could require us to make substantial changes to our business practices, allocate additional resources, and increase our costs, which could negatively affect our business, results of operations, and financial condition.
We may have exposure to greater than anticipated tax liabilities.
The determination of our worldwide provision for income taxes and other tax liabilities requires estimation and significant judgment, and there are many transactions and calculations where the ultimate tax determination is uncertain. For example, compliance with the Tax Act may require the collection of information not regularly produced within the Company, the use of estimates in our financial statements, and the exercise of significant judgment in accounting for its provisions.
Like many other multinational corporations, we are subject to tax in multiple U.S. and foreign tax jurisdictions. Our determination of our tax liability is always subject to audit and review by applicable domestic and foreign tax authorities, and we are currently undergoing a number of investigations, audits, and reviews by taxing authorities throughout the world. Any adverse outcome of any such audit or review could have a negative effect on our business, and the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the periods for which such determination is made. While we have established reserves based on assumptions and estimates that we believe are reasonable to cover such eventualities, these reserves may prove to be insufficient.
In addition, our future income taxes could be adversely affected by earnings being lower than anticipated, or by the incurrence of losses, in jurisdictions that have lower statutory tax rates and higher than anticipated in jurisdictions that have higher statutory tax rates,rates; by changes in the valuation of our deferred tax assets and liabilities, as a result of gains on our foreign exchange risk management program,program; or changes in tax laws, regulations, or accounting principles, as well as certain discrete items.
Various levels of government, such as U.S. federal and state legislatures, and international organizations, such as the Organization for Economic Co-operation and Development (“OECD”) and the EU, are increasingly focused on tax reform and other legislative or regulatory action to increase tax revenue. Any such tax reform or other legislative or regulatory actions could increase our effective tax rate.
We and our merchants may be subject to sales reporting and record-keeping obligations.
A number of U.S. states, the U.S. federal government and foreign countries have implemented or are in the process of implementing reporting or record-keeping obligations on companies that engage in or facilitate ecommerce to improve tax compliance. Additionally, a number of jurisdictions are reviewing whether payment service providers and other intermediaries could be deemed
to be the legal agent of merchants for certain tax purposes. We have modified our softwaresystems to meet known requirements and expect further modifications will be required to comply with future requirements, which may changenegatively impact our customer experience and increase operational costs. Any failure by us to comply with these and similar reporting and record-keeping obligations could result in substantial monetary penalties and other sanctions, adversely impact our ability to do business in certain jurisdictions, and harm our business. In addition, in June 2018, the U.S. Supreme Court ruled in South Dakota v. Wayfair, Inc. that states may collect internet sales tax on online purchases made outside of the state, which could adversely affect some of our merchants and indirectly harm our customers.
Acquisitions, joint ventures, strategic investments, and other strategic transactions could result in operating difficulties and could harm our business.
Acquisitions, joint ventures, strategic investments, and other strategic transactions are important elements of our overall corporate strategy. We expect to continue to evaluate and consider a wide array of potential strategic transactions as part of our overall business strategy, including business combinations, acquisitions, and dispositions of certain businesses, technologies, services, products, and other assets, as well as joint ventures, strategic investments, and commercial and strategic partnerships. These transactions may involve significant challenges, uncertainties and risks, including:
the potential loss of key customers, vendors, and other key business partners of the companies we acquire, or dispose of, following and continuing after announcement of our transaction plans;
difficulty making strategic hires of new employees, declining employee morale, and retention issues affecting employees (particularly the potential loss of key personnel) of companies that we acquire or dispose of, which may result from changes in compensation, management, reporting relationships, future prospects, or the direction of the acquired or disposed business;
difficulty making strategic hires of new employees;
diversion of management time and a shift of focusfocus;
inability to realize synergies expected to result from operating the business to the transaction, and in the case of an acquisition, integration and administration;acquisition;
the need to integrateand difficulty of integrating the operations, systems (including accounting, compliance, management, information, compliance, human resource, and other administrative systems), technologies, data assets, products, and personnel of each acquired company, which is an inherently risky and potentially lengthy and costly process;
the inefficiencies and lack of control that may result if such integration is delayed or not implemented, and unforeseen difficulties and expenditures that may arise as a result;
the need to implement and difficulty of implementing and/or improveenhancing controls, procedures, and policies appropriate for a larger public company at acquired companies that,which, prior to the acquisition, may have lacked such controls, procedures, and policies or whose controls, procedures, and policies did not meet applicable legal and regulatory standards;
the inefficiencies and other standards;lack of control that may result if integration of acquired companies is delayed or not implemented, and unforeseen difficulties and costs that may arise as a result;
potential exposure to new or increased regulatory oversight and regulatory obligations associated with new products and services or entry into new markets;
risks associated with our expansion into new international markets;
unidentified issues discovered in our due diligence process, including product or service quality issues, intellectual property issues, and legal contingencies;
risks associated with the complexity of entering into and effectiveeffectively managing joint ventures, strategic investments, and other strategic partnershipspartnerships;
risks associated with undetected cyberattacks or security breaches at companies that we acquire or with which we may combine or partner;
lawsuits or regulatory actions resulting from the transaction;
liability for activities or conduct of the acquired company before the acquisition, including intellectual propertylegal and other litigationregulatory claims or disputes, violations of laws rules and regulations, commercial disputes, tax liabilities, and other known and unknown liabilities;
the potential loss of key employees following the transaction;
the acquisition of new customer and employee personal information, which in and of itself may require regulatory approval and and/or additional controls, policies, and procedures, and subject us to additional exposure and additional complexity and costs of compliance; and
our dependence on the accounting, financial reporting, operating metrics and similar systems, controls and processes of acquired businesses, and the risk that errors or irregularities in those systems, controls, and processes will lead to errors in our financial statements or make it more difficult to manage the acquired business.
At any given time, we may be engaged in discussions or negotiations with respect to one or more of these or other types of transactions, any of which could, individually or in the aggregate, be material to our financial condition and results of operations. There can be no assurance that we will be successful in identifying, negotiating, and consummating favorable transaction opportunities. It may take us longer than expected to fully realize the anticipated benefits of these transactions, and those benefits may ultimately be smaller than anticipated or may not be realized at all, which could adversely affect our business and operating results. Any acquisitions or dispositions may also require us to issue additional equity securities, spend our cash, or incur debt (and increased interest expense), recognize liabilities, and record amortization expenses related to intangible assets or write-offs of goodwill or intangibles, which could adversely affect our results of operations and dilute the economic and voting rights of our stockholders.stockholders and adversely affect our results of operations and the interests of holders of our indebtedness, as applicable.
We completed our acquisition of iZettle AB (publ) (“iZettle”) on September 20, 2018. Prior to the closing of the acquisition, the UK Competition and Markets Authority (“CMA”) initiated a review of the transaction. On December 5, 2018, the CMA referred the acquisition for a Phase 2 investigation and on December 24, 2018, directed PayPal to appoint a monitoring trustee. The deadline for the final decision is May 21, 2019. PayPal is working cooperatively with the CMA and has agreed to hold parts of the PayPal and iZettle businesses separate as agreed with the CMA, pending completion of the CMA’s investigation. Our ability to successfully and timely integrate iZettle’s business and operations with ours and realize the potential synergies and anticipated benefits from the acquisition is subject to the timing and possible outcome of the CMA’s review. The CMA has broad discretion and may impose requirements, limitations or costs, mandate remedies, such as divestitures of certain business assets, or place additional restrictions on the conduct of our businesses, to ensure sufficient competition in the U.K. market. No assurance can be given as to the ultimate impact and outcome of the CMA review, that approval from the CMA will be obtained, or the terms and conditions of such approval.
Because acquisitions are inherently risky, our transactions may not be successful and may, in some cases, harm our operating results or financial condition. Any acquisitions or dispositions may also require us to issue additional equity securities, spend our cash, or incur debt (and increased interest expense), recognize liabilities, and record amortization expenses related to intangible assets or impairment of goodwill or intangibles, which could dilute the economic and voting rights of our stockholders and adversely affect our results of operations and the interests of holders of our indebtedness, as applicable.
Joint ventures and minority investmentinvestments inherently involve a lesser degree of controlinfluence over business operations, thereby potentially increasing the financial, legal, operational, and/or compliance risks associated with the joint venture or minority investment. In addition, we may be dependent on joint venture partners, controlling shareholders, management or other persons or entities who
control them and who may have business interests, strategies or goals that are inconsistent with ours. Business decisions or other actions or omissions of the joint venture partners, controlling shareholders, management or other persons or entities who control themjoint ventures or companies in which we invest may adversely affect the value of our investment, result in litigation or regulatory action against us, and otherwise damage our reputation and brand.
There are risks associated with our indebtedness.
We have incurred indebtedness, and we may incur additional indebtedness in the future. Our ability to pay interest and repay the principal for our indebtedness is dependent upon our ability to manage our business operations and generate sufficient cash flows to service such debt. In addition, changes by any rating agency to our outlook or credit rating could negatively affect the value of both our debt and equity securities and increase our borrowing costs. If our credit ratings are downgraded or other negative action is taken, the interest rate payable by us under out indebtedness may increase. In addition, any downgrades to our credit ratings may affect our ability to obtain additional financing in the future and may affect the terms of any such financing. Any of these factors could adversely affect our financial condition and results of operations.
We rely on third parties in many aspects of our business, which creates additional risk.
We rely on third parties in many aspects of our business, including the following:
networks, banks, payment processors, and payment gateways that link us to the payment card and bank clearing networks to process transactions;
unaffiliated third-party lenders to make consumer and merchant loans originated inoriginate the U.S. for our PayPal Credit and PayPal Mastercard consumer credit products, PayPal Working Capital, products, respectively;and PayPal Business Loan products;
third parties that provide loan servicing and customer statements processing;
third parties that provide certain outsourced customer support and product development functions, which are critical to our operations; and
third parties that provide facilities, infrastructure, components, and services, including data center facilities and cloud computing.
Third parties that
Because we rely on third parties to process transactionsprovide certain of our services and to facilitate certain of our business activities, we face increased operational risk. These third parties may be subject to financial, legal, regulatory, and labor issues, cybersecurity incidents, privacy breaches, service terminations, disruptions or interruptions, or other problems, which may impose additional costs or requirements on us or prevent these third parties from providing services to us or our customers on our behalf, which could harm our business. In addition, these third parties may breach their agreements with us, disagree with our interpretation of contract terms or applicable laws and regulations, refuse to continue or renew these agreements on commercially reasonable terms or at all, fail or refuse to process transactions adequately, and these andor provide other third parties on whom we rely may breach their agreements with us, refuse to renew these agreements on commercially reasonable terms,services adequately, take actions that degrade the functionality of our services, impose additional costs or requirements on us or our customers, or give preferential treatment to competitive services. Financial or regulatory issues, labor issues, or other problems that prevent these third parties from providing services to us or our customers could harm our business. If our service providers do not perform satisfactorily, our operations could be disrupted, which could result in customer dissatisfaction, damage our reputation, and harm our business.
Price increases or financial penalties by, or service terminations, disruptions or interruptions at, companies that we rely on to provide services to us or our customers could disrupt our operations and harm our business. Some third parties who provide services to us may have or gain market power and be able to increase their prices to us without competitive constraint. In addition, thereThere can be no assurance that third parties who provide services directly to us or our customers on our behalf will continue to do so on acceptable terms, or at all. If any third parties were to stop providingdo not adequately or appropriately provide their services or perform their responsibilities to us or our customers on acceptable terms, including as a result of bankruptcy or other business interruption,our behalf, we may be unable to procure alternatives from other third parties in a timely and efficient manner and on acceptable terms, or at all.
Our developer platforms, which are open to merchants and third-party developers, subject us to additional risks.
We provide third-party developers with access to application programming interfaces, software development kits and other tools designed to allow them to produce applications for use, with a particular focus on mobile applications. There can be no assurance that merchants or third-party developers will develop and maintain applications and services on our open platforms on a timely basis or at all, and a number of factors could cause such third-party developers to curtail or stop development for our platforms. In addition, our business is subject to many regulatory restrictions. It is possible that merchants and third-party developers who utilize our development platforms or tools could violate these regulatory restrictions and we may be held responsible for such violations,subject to business disruptions, losses or costs to remediate any of the deficiencies, customer dissatisfaction, reputational damage, legal or regulatory proceedings, or other adverse consequences which could harm our business.
Our retail point of sale solutions expose us to additional risks.
We have announced several retail point of sale solutions, which enable merchants to accept payments using a payments card reader attached to, or otherwise communicating with, a mobile device or to scan payment cards and codes using the mobile device’s embedded camera, and which enable consumers to use their mobile devices to pay at the point of sale. We have entered into strategic partnerships with Visa, MasterCard and Discovermajor payment card networks to further expand our relationship with these companies in a way that will make it easier for merchants to accept and consumers to choose to pay for transactions utilizing these companies' credit and debit cards. As partcards via PayPal at the point of thosesale. Those agreements we will gainprovide us with access to each of these partner's tokenization services in the U.S. for in-store point-of-sale PayPal transactions, which we expect will increase the number of point of sale transactions that we process. We believe that our recent acquisition of iZettle will enable us to further expand our in-store presence. As we continue to expand our product and service offerings at the retail point of sale, we will face additional risks, including:
increased expectations from offline retailers regarding the reliability and availability of our systems and services and correspondingly lower amounts of downtime, which we may not be able to meet;
significant competition at the retail point of sale, particularly from established payment card providers, such as Visa, MasterCard and American Express, many of which have substantially greater resources than we do;
increased targeting by fraudsters; given that our fraud models are less developed in this area, we may experience increases in fraud and associated transaction losses as we adjust to fraudulent activity at the point of sale;
exposure to product liability claims to the extent that hardware devices that we produce for use at the retail point of sale malfunction or are not in compliance with laws, which could result in substantial liability and require product recalls or other actions;
exposure to additional laws, rules, and regulations;
increased reliance on third parties involved with processing in-store payments, including independent software providers, electronic point of sale providers, hardware providers (such as cash register and pin-pad providers), payment processors, and banks that enable in-store transactions; and
lower operating income than our other payment solutions.
Unless we are able to successfully manage these risks, including driving adoption of, and significant volume through, our retail point of sale solutions over time, our business may be harmed.
Our success largely depends on key personnel. Because competition for our key employees is intense, we may not be able to attract, retain, and develop the highly skilled employees we need to support our business. The loss of key personnel could harm our ability to maintain and grow our business.
Our future success and performance depends substantially onare significantly dependent upon the continued services of key personnel, including our executive team and other highly skilled employees, and our ability to attract, retain, and motivate such personnel. Competition for key personnel is intense, especially in the San Francisco Bay Area, where our corporate headquarters are located and where the cost of living is high, and we may be unable to successfully attract, integrate, or retain sufficiently qualified key personnel. In making employment decisions, particularly in the technology and payments industries, job candidates often consider the value of the equity awards they would receive in connection with their employment, and fluctuations in our stock price volatility, or a perception that the market price of our stock may not increase or may increase more slowly than stock prices at other technology or payments companies, may make it more difficult to attract, retain, and motivate employees. We aremay be limited in our ability to recruit internationally by restrictive domestic immigration laws or policies. Potential changes in U.S. immigration policy may make it difficult to renew or obtain visas for any highly skilled personnel that we have hired or are actively recruiting. Negative sentiments towards the U.S. as a result of these potential changes may also adversely affect our international recruiting efforts. Furthermore, legislative or administrative changes to immigration or visa laws and regulations may impair our hiring processes or projects involving personnel who are not citizens of the country where the work is to be performed. In addition, we do not have long-term employment agreements with any of our key personnel and do not maintain any “key person” life insurance policies. The loss of the services of any of our key personnel, or our inabilityif we are not able to attract or retain highly qualified key personnel effectively, could harm our business.business and growth prospects.
We are subject to risks associated with information disseminated through our products and services.
Companies providing online services may be subject to claims relating to information disseminated through them, including claims alleging defamation, libel, harassment, hate speech, breach of contract, invasion of privacy, negligence, copyright or trademark infringement, or other theories based on the nature and content of the materials disseminated through the services, among other things. The laws relating to the liability of companies providing online services for information disseminated through their services are subject to frequent challenges both in the U.S. and foreign jurisdictions.challenges. We are also subject to potential liability to third parties for the customer-provided content on our products and services, particularly in jurisdictions outside the U.S. where the applicable laws are unsettled. If we become liable for information provided by our customers and carried on our products and services, we could be directly harmed and we may be forced to implement new measures to reduce our exposure to this liability, including expending substantial resources or discontinuing certain product or service offerings, which could harm our business.
Risks Related to theOur Separation and Our Operation as an Independent Publicly Traded Companyfrom eBay
If the distribution, together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 368(a)(1)(D) and 355 of the Internal Revenue Code (the “Code”), eBay, PayPal and eBay stockholders could be subject to significant tax liabilities and, in certain circumstances, we could be required to indemnify eBay for material taxes pursuant to indemnification obligations under the tax matters agreement.liabilities.
On July 17, 2015, we became an independent publicly traded company through the pro rata distribution by eBay Inc. of 100% of our outstanding common stock to eBay’s stockholders (which we sometimes refer to as the “separation” or the “distribution”). eBay received an opinion from its outside legal counsel regarding the qualification of the distribution, together with certain related transactions, as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 368(a)(1)(D) and 355 of the Code. The opinion was based on and relied on, among other things, certain facts and assumptions, as well as certain representations, statements, and undertakings of eBay and of us, including those relating to the past and future conduct of eBay and of us. If any of these representations, statements, or undertakings were, or became, inaccurate or incomplete, or if eBay or we breach any of our respective covenants in the separation documents, the opinion of counsel may be invalid and the conclusions reached therein could be jeopardized.
Notwithstanding the opinion of counsel, the IRS could determine that the distribution, together with certain related transactions, should be treated as a taxable transaction if the IRS determines that any of these representations, assumptions, or undertakings upon which such opinion was based are incorrect or have been violated or if the IRS disagrees with the conclusions in the opinion of counsel. An opinion of counsel is not binding on the IRS or any court and there can be no assurance that the IRS will not challenge the conclusions reached in the opinion. The IRS did not provide any opinion in advance of the separation that our proposed transaction is tax-free.
If the distribution, together with certain related transactions, failed to qualify as a transaction that is generally tax-free under Sections 368(a)(1)(D) and 355 of the Code, in general, eBay would recognize taxable gain as if it had sold the PayPal common stock in a taxable sale for its fair market value, eBay stockholders who received PayPal common stock in the distribution may be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares, and we could incur significant liabilities.
We may not be able to engage in desirable strategic or capital-raising transactions for a period of time following the separation. In addition, we could be liable for adverse tax consequences resulting from engaging in significant strategic or capital-raising transactions.
To preserve the tax-free treatment to eBay of the separation and the distribution, under the tax matters agreement that we entered intoThere are risks associated with eBay, for a period of time following the distribution, we are generally prohibited from taking certain actions that prevent the distribution and related transactions from qualifying as a transaction that is generally tax-free, for U.S. federal income tax purposes under Sections 368(a)(1)(D) and 355 of the Code. These restrictions may limit our ability to pursue certain strategic transactions or other transactions that we or our stockholders consider desirable or may prevent us from engaging in certain capital-raising transactions.
We have limited history of operating as an independent, publicly traded company in our current form, and our historical financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results.
The consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K were derived in part from the consolidated financial statements and accounting records of eBay and do not necessarily reflect the financial condition, results of operations, or cash flows that we would have achieved as a separate, independent, publicly traded company during the periods presented or those that we will achieve in the future, primarily as a result of the factors described below:
Prior to the separation, our business was operated by eBay as part of its broader corporate organization, rather than as an independent company. eBay or its affiliates performed various corporate functions for us, such as legal, finance, treasury, accounting, tax, auditing, human resources, certain compliance functions, and public affairs. Our historical financial results prior to separation reflect allocations of corporate expenses from eBay for such functions, which are likely to be less than the comparable expenses we would have incurred had we operated as a separate publicly traded company. In addition, we may need to significantly increase our investment in certain of these functions to ensure appropriate levels of administrative, legal and regulatory compliance.
Prior to the separation, our business was integrated with the other businesses of eBay. Historically, we shared economies of scope and scale in costs, employees, vendor relationships and customer relationships. Although we have entered into arm’s length agreements with eBay, including the operating agreement, these arrangements may not retain or fully capture the benefits that we enjoyed as a result of being integrated with eBay and may result in our paying higher charges than in the past for these services. This could have an adverse effect on our results of operations and financial condition.
As a part of eBay, we benefited from, among other things, the acquisition of new customers from eBay, capital to fund acquisitions, investments and credit, and data from eBay that helped us to manage risks and maintain a low loss rate. In addition, being a part of eBay enabled us to leverage eBay’s technology capabilities, data, commerce platforms and relationships with retailers, brands and large merchants worldwide. The loss of these synergies and benefits could adversely affect our results of operations and financial condition.
Generally, our working capital requirements and capital for our general corporate purposes, including acquisitions and capital expenditures, were historically satisfied as part of the corporate-wide cash management policies of eBay. We may need to obtain additional financing from banks, through public offerings or private placements of debt or equity securities, or through strategic relationships or other arrangements, which may or may not be available and may be more costly.
The cost of capital for our business may be higher than eBay’s cost of capital prior to the separation.
We may continue to experience significant changes in our cost structure, management, financing, and business operations as a result of operating as an independent company separate from eBay. For additional information, please see “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes included in Part IV, Item 15 of this Annual Report on Form 10-K.
eBay remains a significant source of our revenues.
We continue to derive a significant amount of revenues and operating income from eBay. Our relationship with eBay is governed in part by an operating agreement that was entered into at separation and has a term of five years. When our operating agreement with eBay expires, or if it is terminated prior to its expiration, or if there is a significant change in our relationship with eBay, including if eBay becomes a merchant of record, eliminates or modifies any of its risk management or customer protection programs, directs transactions to a different provider of payment services or offers eBay customers more payment options, our business could be materially harmed.
eBay may fail to perform under various agreements that were executed as part of the separation or we may fail to have necessary systems and services in place when certain of the transaction agreements expire.eBay.
In connection with theour separation from eBay, we entered into a separation and distribution agreement with eBay, as well as various other agreements, including an operating agreement, colocation services agreements, transition services agreements, a tax matters agreement, an employee matters agreement, an intellectual property matters agreement, a data sharing addendum, and a product development agreement. The separation agreement, the tax matters agreement, the employee matters agreement, and the intellectual property matters agreement determinedetermined the allocation of assets and liabilities (including by means of licensing) between the companies following the separation for those respective areas and include any necessary indemnifications related to liabilities andassociated indemnification obligations. The operating agreement, the colocation services agreementsdata sharing addendum, and the data sharing addendumproduct development agreement establish certain commercial relationships between eBay and us related to payment processing, credit, information technology infrastructure and data sharing. The transition services agreements provide forDisputes between eBay and us have arisen and others may arise in the performancefuture; an adverse outcome in such matters could materially and adversely affect our business, results of certain services by each company for the benefit of the other for a limited period of time after the separation.operations, and financial condition. If either we or eBay isare unable to satisfy itsour performance, and payment, or indemnification obligations under these agreements, including its respective indemnification obligations, we could incur operational difficulties or losses or be required to make substantial indemnification or other payments to eBay.
Our relationship with eBay is governed, in part, by an operating agreement entered into at separation with a term of five years (expiring July 2020). This operating agreement defines a number of important elements of our commercial relationship with eBay, as well as certain obligations and restrictions that limit PayPal’s provision of services to certain competitive platform operators of eBay (as specified in the operating agreement). eBay remains a significant source of our revenues and operating income. We expect the portion of our revenue and operating income attributable to eBay to continue to decline due to various factors (many of which are beyond our control), including the expiration (or earlier termination) of the operating agreement with eBay, and the extent to which eBay intermediates payments on its platform (including by acting as a merchant of record), limits the availability of PayPal as a payment option or offers (or promotes) alternative payment options, directs transactions on its platforms to different providers of payment services, or eliminates or modifies its risk management or customer protection programs on its platforms, which could result in customer dissatisfaction, reduction in eBay volume, and other consequences adverse to our business. If we do not haveare unable to generate sufficient business from our non-eBay customers to offset the expected reduction in place our own systems and services, or if we do not have agreements with other providersthe portion of these services once these transaction agreements expire or terminate, we may not be able to operate our business effectivelyattributable to eBay, it could materially impact the growth in our business and our ability to meet our long-term financial condition and result of operations may be adversely affected.
After the separation, certain of our directors may have actual or potential conflicts of interest because of their previous or continuing positions at eBay.
Because of their current or former positions with eBay, certain of our directors own eBay common stock and equity awards. Following the separation, even though our board of directors consists of a majority of directors who are independent, some of our directors continue to have a financial interest in eBay common stock and equity awards. In addition, one of our directors continues to serve on the eBay board of directors. Continuing ownership of eBay common stock and equity awards or service as a director at both companies could create, or appear to create, potential conflicts of interest if we and eBay were to have disagreements about the agreements between us or face decisions that could have different implications for us and eBay.targets.
Risks Related to Our Common Stock
The price of our common stock has fluctuated and may continue to fluctuate significantly.
The price of our common stock has fluctuated and may continue to fluctuate significantly due to a number of factors, some of which may be beyond our control, including, but not limited to:
actual or anticipated fluctuations in our operating results;
changes in financial estimates by us or securities analysts and recommendations or lack of coverage and reports by securities analysts;
changes in our capital structure;
the activities of our competitors;
speculation, coverage, or sentiment in the media or the investment community;
the operating and stock price performance and valuation of comparable companies;
our quarterly or annual earnings, or those of other companies in our industry;
the public's reaction to our press releases, our other public announcements, and our filings with the SEC;
additions or departures of key personnel;
announcements related to litigation, regulation, or disputes;
changes to the regulatory and legal environment under which we operate; and
market conditions or trends in the payments industry, the industries of merchants, and the domestic and worldwide economy as a whole.
As a result of these and other factors, investors in our common stock may not be able to resell their shares at or above the price at which they purchase our common stock. In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies like us. These broad market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance. In addition, in the past, some companies that have had volatile market prices for their securities have been subject to class action or derivative lawsuits. The filing of a lawsuit against us, regardless of the outcome, could have a negative effect on our business, financial condition, and results of operations, as it could result in substantial legal costs and a diversion of management's attention and resources.
Our amended and restated certificate of incorporation designates the state courts of the State of Delaware, or, if no state court located in the State of Delaware has jurisdiction, the federal court for the District of Delaware, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could discourage lawsuits against us and our directors and officers.
Our amended and restated certificate of incorporation provides that unless the corporation otherwise determines, the state courts of the State of Delaware, or, if no state court located in the State of Delaware has jurisdiction, the federal court for the District of Delaware, will be the sole and exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a claim of breach of a fiduciary duty owed by any of our directors or officers to us or our stockholders, any action asserting a claim against us or any of our directors or officers arising pursuant to any provision of the Delaware General Corporation Law (“DGCL”) or our amended and restated certificate of incorporation or bylaws, or any action asserting a claim against us or any of our directors or officers governed by the internal affairs doctrine. This exclusive forum provision may limit the ability of our stockholders to bring a claim in a judicial forum that such stockholders find favorable for disputes with us or our directors or officers, which may discourage such lawsuits against us and our directors and officers. Alternatively, if a court outside of Delaware were to find this exclusive forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings described above, we could incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition, or results of operations.
Certain provisions in our amended and restated certificate of incorporation and bylaws may prevent or delay an acquisition of our company, which could decrease the trading price of our common stock.
Certain provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of deterring coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the bidder and by encouraging prospective acquirers to negotiate with our boardBoard of directorsDirectors rather than to attempt a hostile takeover. These provisions include, among others:
rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings;
the fact that directors may not be elected, removed, or replaced at stockholder-requested special meetings unless a person, entity, or group owns at least a majority of our outstanding common stock;
the right of our boardBoard of Directors to issue preferred stock and to determine the voting, dividend, and other rights of preferred stock without stockholder approval; and
the ability of our directors, and not stockholders, to fill vacancies on our board of directors in most circumstances and to determine the size of our board of directors;
the prohibition on stockholders acting by written consent; and
the absence of cumulative rights in the election of directors.
We have also elected not to be governed by Section 203 of the DGCL, which provides that, subject to limited exceptions, persons that acquire, or are affiliated with a person that acquires, more than 15% of the outstanding voting stock of a Delaware corporation shall not engage in any business combination with that corporation, including by merger, consolidation, or acquisitions of additional shares, for a three-year period following the date on which that person or its affiliates becomes the holder of more than 15% of the corporation’s outstanding voting stock. Our amended and restated certificate of incorporation, however, contains a provision that generally mirrors Section 203 of the DGCL, except that it provides for a 20% threshold instead of the 15% provided for by the DGCL. These provisions could delay or prevent a change of control that our stockholders may favor.
Certain of the above provisions were added pursuant to the agreement between eBay Inc. and certain entities under the control of Carl C. Icahn. TheseWhile these provisions are not intended to make us immune from takeovers. However, these provisionstakeovers, they will apply even if the offer may be considered beneficial by some stockholders and may delay or prevent an acquisition that our boardBoard of directorsDirectors determines is not in the best interests of us and our stockholders. These provisions may also prevent or discourage attempts to remove and replace incumbent directors.
In addition, an acquisition or further issuance of our stock (including preferred stock) could trigger the application of Section 355(e) of the Code. For a discussion of Section 355(e), see “Material U.S. Federal Income Tax Consequences” in our registration statement on Form 10, as amended, filed with the Securities and Exchange Commission. Under the tax matters agreement, in such circumstances, we would be required to indemnify eBay for any resulting taxes, which could materially and adversely affect us. Moreover, this indemnity obligation might discourage, delay or prevent a change of control that our stockholders may consider favorable. Please refer to “Certain Relationships and Related Person Transactions” and “Description of PayPal’s Capital Stock” in our registration statement on Form 10, as amended, filed with the Securities and Exchange Commission for a more detailed description of these agreements and provisions.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We own and lease various properties in the U.S. and other countries around the world. We use the properties for executive and administrative offices, data centers, product development offices, and customer service offices. As of December 31, 2016,2018, our owned and leased properties provided us with aggregate square footage as follows:
| | | | United States | | Other Countries | | Total | United States | | Other Countries | | Total |
| | (In millions) | (In millions) |
| Owned facilities | 1.2 |
| | — |
| | 1.2 |
| 1.1 |
| | 0.2 |
| | 1.3 |
|
| Leased facilities | 1.0 |
| | 1.4 |
| | 2.4 |
| 1.2 |
| | 1.9 |
| | 3.1 |
|
| Total facilities | 2.2 |
| | 1.4 |
| | 3.6 |
| 2.3 |
| | 2.1 |
| | 4.4 |
|
We own a total of 22approximately 106 acres of land, with approximately 85 acres in the U.S. Our corporate headquarters are located in San Jose, California and occupy approximately 0.7 million of owned square feet.
ITEM 3. LEGAL PROCEEDINGS
The information set forth under “Note 12—13—Commitments and Contingencies—Litigation and Regulatory Matters” to the consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Price Range of Common Stock
OurPayPal common stock began “regular way” tradingis quoted on the NASDAQ Stock Market under the ticker symbol “PYPL” on The NASDAQ Stock Market on July 20, 2015. The following table sets forth the range of market prices as reported by The NASDAQ Stock Market for the period from July 20, 2015 to December 31, 2016.
|
| | | | | | | |
| | High | | Low |
| Year Ended December 31, 2015 | | | |
| Third Quarter (July 20, 2015 - September 30, 2015) | $ | 42.55 |
| | $ | 30.00 |
|
| Fourth Quarter | $ | 38.52 |
| | $ | 30.75 |
|
| | | | |
| | High | | Low |
| Year Ended December 31, 2016 | | | |
| First Quarter | $ | 41.75 |
| | $ | 30.52 |
|
| Second Quarter | $ | 41.49 |
| | $ | 34.00 |
|
| Third Quarter | $ | 41.30 |
| | $ | 35.72 |
|
| Fourth Quarter | $ | 44.52 |
| | $ | 38.06 |
|
As of February 2, 2017,January 31, 2019, there were approximately 3,9323,824 holders of record of our common stock. The actual number of stockholders is significantly greater than this number of record holders, and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees.
Dividend Policy
We have never paid any cash dividends and we currently do not anticipate paying any cash dividends in the foreseeable future.
Stock Repurchase Activity
We did not repurchase any shares of our common stock in 2015. In January 2016,April 2017, our Board of Directors authorized a stock repurchase program that provides for the repurchase of up to $2$5 billion of our common stock, with no expiration from the date of authorization. This program became effective in December 2017 upon completion of a previous stock repurchase program. In July 2018, our Board of Directors authorized an additional stock repurchase program isthat provides for the repurchase of up to $10 billion of our common stock, with no expiration from the date of authorization. This program will become effective upon completion of the April 2017 stock repurchase program. Our stock repurchase programs are intended to offset the impact of dilution from our equity compensation programs and, subject to market conditions and other factors, may also be used to make opportunistic repurchases of our common stock to reduce outstanding share count. Any share repurchases under our stock repurchase programprograms may be made through open market transactions, block trades, privately negotiated transactions including accelerated share repurchase agreements or other means at times and in such amounts as management deems appropriate, and will be funded from our working capitalcash from operations or other financing alternatives. However,Moreover, any stock repurchases are subject to market conditions and other uncertainties and we cannot predict if or when any stock repurchases will be made. Moreover, weWe may terminate our stock repurchase programprograms at any time without notice.
The stock repurchase activity under our stock repurchase programprograms during the three months ended December 31, 20162018 is summarized as follows:
|
| | | | | | | | | | | | | | |
| | Shares Repurchased | | Average Price
Paid per Share(1) | | Value of Shares Repurchased | | Remaining Amount Authorized for Repurchases |
| | (In millions, except per share amounts) |
| Period ended October 31, 2016 | — |
| | — |
| | — |
| | $ | 1,055 |
|
| Period ended November 30, 2016 | 1.3 |
| | $ | 38.92 |
| | $ | 50 |
| | $ | 1,005 |
|
| Period ended December 31, 2016 | — |
| | — |
| | — |
| | $ | 1,005 |
|
| | 1.3 |
| | | | $ | 50 |
| | |
|
| | | | | | | | | | | | | |
| | Total number of shares purchased | | Average price
paid per share(1) | | Total number of shares purchased as part of publicly announced plans or programs | | Approximate dollar value of shares that may yet be purchased under the plans or programs |
| | (In millions, except per share amounts) |
| October 1, 2018 through October 31, 2018 | — |
| | $ | — |
| | — |
| | $ | 12,074 |
|
| November 1, 2018 through November 30, 2018 | 1.1 |
| | $ | 84.21 |
| | 1.1 |
| | 11,980 |
|
| December 1, 2018 through December 31, 2018 | 6.0 |
| | $ | 84.18 |
| | 6.0 |
| | 11,474 |
|
| | 7.1 |
| | | | 7.1 |
| | $ | 11,474 |
|
(1) Average price paid per share includes broker commissions.
These repurchased shares of common stock were recorded as treasury stock and were accounted forNo activity has occurred to date under the cost method. No repurchased shares of common stock have been retired.July 2018 repurchase program.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data reflect the consolidated operations of PayPal. PayPal derived the selected consolidated income statement data for the years ended December 31, 2016, 20152018, 2017, and 20142016 and the selected consolidated balance sheet data as of December 31, 20162018 and 20152017 as set forth below, from its audited consolidated financial statements, which are included in “Item 15. Exhibits, and Financial Statement Schedules” of this Annual Report on Form 10-K. PayPal derived the selected consolidated income statement data for the yearyears ended December 31, 20132015 and 2014 and selected consolidated balance sheet data as of December 31, 2016, 2015, and 2014 from audited consolidated financial statements not included in this Annual Report on Form 10-K. PayPal derived the selected consolidated income statement data for the year ended December 31, 2012 and the selected consolidated balance sheet data as of December 31, 2013 and 2012 from PayPal’s underlying financial records, which were derived from the financial records of eBay. The historical results do not necessarily indicate the results expected for any future period. To ensure a full understanding, you should read the selected consolidated financial data presented below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes included elsewhere in this report.
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 | | 2013 | | 2012 | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | (In millions, except per share amounts) | (In millions, except per share amounts) |
| Consolidated Statement of Income Data: | | | | | | | | | | | | | | | | | | |
| Net revenue | $ | 10,842 |
| | $ | 9,248 |
| | $ | 8,025 |
| | $ | 6,727 |
| | $ | 5,662 |
| |
| Net revenues | | $ | 15,451 |
| | $ | 13,094 |
| | $ | 10,842 |
| | $ | 9,248 |
| | $ | 8,025 |
|
| Operating income | 1,586 |
| | 1,461 |
| | 1,268 |
| | 1,091 |
| | 880 |
| 2,194 |
| | 2,127 |
| | 1,586 |
| | 1,461 |
| | 1,268 |
|
| Net income | 1,401 |
| | 1,228 |
| | 419 |
| | 955 |
| | 778 |
| 2,057 |
| | 1,795 |
| | 1,401 |
| | 1,228 |
| | 419 |
|
| Net income per share: | | | | | | | | | | | | | | | | | | |
| Basic | $ | 1.16 |
| | $ | 1.00 |
| | $ | 0.34 |
| | $ | 0.78 |
| | $ | 0.64 |
| $ | 1.74 |
| | $ | 1.49 |
| | $ | 1.16 |
| | $ | 1.00 |
| | $ | 0.34 |
|
| Diluted | $ | 1.15 |
| | $ | 1.00 |
| | $ | 0.34 |
| | $ | 0.78 |
| | $ | 0.64 |
| $ | 1.71 |
| | $ | 1.47 |
| | $ | 1.15 |
| | $ | 1.00 |
| | $ | 0.34 |
|
Weighted average shares(1)(2): | | | | | | | | | | | | | | | | | | |
| Basic | 1,210 |
| | 1,222 |
| | 1,218 |
| | 1,218 |
| | 1,218 |
| 1,184 |
| | 1,203 |
| | 1,210 |
| | 1,222 |
| | 1,218 |
|
| Diluted | 1,218 |
| | 1,229 |
| | 1,224 |
| | 1,224 |
| | 1,224 |
| 1,203 |
| | 1,221 |
| | 1,218 |
| | 1,229 |
| | 1,224 |
|
| Consolidated Balance Sheet Data: | | | | | | | | | | | | | | | | | | |
| Total assets | $ | 33,103 |
| | $ | 28,881 |
| | $ | 21,917 |
| | $ | 19,160 |
| | $ | 16,183 |
| $ | 43,332 |
| | $ | 40,774 |
| | $ | 33,103 |
| | $ | 28,881 |
| | $ | 21,917 |
|
| Total long-term liabilities | 1,513 |
| | 1,505 |
| | 386 |
| | 509 |
| | 428 |
| 2,042 |
| | 1,917 |
| | 1,513 |
| | 1,505 |
| | 386 |
|
1(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 yearsyear ended December 31, 2014 2013, and 2012 werewas calculated using the number of common shares distributed on July 17, 2015.
2(2) The weighted average number of common shares outstanding for basic and diluted earnings per share for the year ended December 31, 2015 was based on the number of common shares distributed on July 17, 2015 for the period prior to distribution and the weighted average number of common shares outstanding for the period beginning after the distribution date.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that involve expectations, plans or intentions (such as those relating to future business, future results of operations or financial condition, new or planned features or services, or management strategies). YouThese forward-looking statements can identify these forward-looking statementsbe identified by words such as “may,” “will,” “would,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan”“strategy,” “future,” “opportunity,” “plan,” “project,” “forecast,” and other similar expressions. These forward-looking statements involve risks and uncertainties that could cause our actual results and financial condition to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those discussed in “Item 1A. Risk Factors” of this Annual Report on Form 10-K, as well as in our consolidated financial statements, related notes, and the other information appearing elsewhere in this report and our other filings with the SEC.Securities and Exchange Commission (“SEC”). We do not intend, and undertake no obligation except as required by law, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. You should read the following “Management's Discussion and Analysis of Financial Condition and Results of Operations” in conjunction with the audited consolidated financial statements and the related notes that appear elsewhere in this report.
Separation from eBay Inc.
On September 30, 2014, eBay Inc. (“eBay”) announced its intent to separate its payments business into an independent, publicly traded company. To accomplish this separation, in January 2015, eBay incorporated PayPal Holdings, Inc. (“PayPal Holdings”) which is now the parent of PayPal, Inc. and holds directly or indirectly all of the assets and liabilities associated with PayPal, Inc. In June 2015, the board of directors of eBay approved the separation (the “separation”) of eBay's payments business through the distribution (the “distribution”) of 100% of the outstanding common stock of PayPal Holdings to eBay's stockholders. PayPal Holdings' registration statement on Form 10, as amended, was declared effective by the U.S. Securities and Exchange Commission on June 29, 2015. On July 17, 2015 (the “distribution date”), PayPal Holdings became an independent publicly traded company through the pro rata distribution by eBay of 100% of the outstanding common stock of PayPal Holdings to eBay stockholders. Each eBay stockholder of record as of the close of business on July 8, 2015 received one share of PayPal Holdings common stock for every share of eBay common stock held on the record date. Approximately 1.2 billion shares of PayPal Holdings common stock were distributed on July 17, 2015 to eBay stockholders. PayPal Holdings' common stock began “regular way” trading under the ticker symbol “PYPL” on The NASDAQ Stock Market on July 20, 2015.
Prior to the separation, eBay transferred substantially all of the assets and liabilities and operations of eBay's payments business to PayPal Holdings, which was completed in June 2015 (the “capitalization”). The consolidated financial statements prior to the capitalization were prepared on a stand-alone basis and were derived from eBay's consolidated financial statements and accounting records. The consolidated financial statements reflect our financial position, results of operations, comprehensive income and cash flows as our business was operated as part of eBay prior to the capitalization. Following the capitalization, our consolidated financial statements include the accounts of PayPal Holdings and its wholly-owned subsidiaries. The consolidated financial position, results of operations and cash flows as of dates and for periods prior to the separation may not be indicative of what our financial position, results of operations and cash flows would have been as a separate stand-alone entity during the periods presented, nor are they indicative of what our financial position, results of operations and cash flows may be in the future. For additional information, see “Note 1—Overview and Summary of Significant Accounting Policies” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Unless otherwise expressly stated or the context otherwise requires, references to “we,” “our,” “us,” “the Company” and “PayPal” refer to PayPal Holdings and its consolidated subsidiaries or, in the case of information as of dates or for periods prior to the separation, the consolidated entities of the payments business of eBay, including PayPal, Inc. and certain other assets and liabilities that had been historically held at the eBay corporate level but were specifically identifiable and attributable to the payments business.subsidiaries.
Business Environment
We are a leading technology platform and digital payments company that enables digital and mobile payments on behalf of consumers and merchants worldwide. Our visionPayPal is committed to democratizedemocratizing financial services as we believe that managing and moving money is a right for allempowering people not justand businesses to join and thrive in the affluent.global economy. Our goal is to increaseenable our relevance for consumers and merchants to manage and move their money anywhere in the world, anytime, on any platform, and using any device. We also facilitate person-to-person (“P2P”) payments through our PayPal, Venmo and Xoom products. Our combined payment solutions, including our PayPal, PayPal Credit, Braintree, Venmo, Xoom, and PaydiantiZettle products, compose our proprietary Payments Platform.
We operate globally and in a rapidly evolving regulatory environment characterized by a heightened regulatory focus on all aspects of the payments industry. That focus continues to become even more heightened as regulators on a global basis focus on such important issues as countering terrorist financing, anti-money laundering, privacy, cybersecurity, and consumer protection. Some of the laws and regulations to which we are subject were enacted recently, and the laws and regulations applicable to us, including those enacted prior to the advent of digital and mobile payments, are continuing to evolve through legislative and regulatory action and judicial interpretation. Non-compliance withNew or changing laws and regulations, including how such laws and regulations are interpreted and implemented, as well as increased penalties and enforcement actions related to non-compliance, changes in laws and regulations or their interpretation, and the enactment of new laws and regulations applicable to us could have a material adverse impact on our business, results of operations, and financial condition. Therefore, we monitor these areas closely to ensuredesign compliant solutions for our customers who depend on us.
Information security risks for global payments and technology companies like us have significantly increased in recent years. We are not immune to these risks and there can be no assurance that we will not suffer such losses in the future. For additional information regarding our information security risks, see “Item 1A. Risk Factors” under the caption—“Cyberattacks and security vulnerabilities could result in serious harm to our reputation, business and financial condition.”
The United Kingdom (U.K.(“U.K.”) held a referendum onin June 23, 2016 in which a majority of voters approved an exit from the European Union (EU) (“Brexit”EU”) (commonly referred to as “Brexit”). In March 2017, the U.K. government initiated the exit process under Article 50 of the Treaty on European Union, which commenced a two-year period expiring on March 29, 2019, after which time the U.K. is expected to leave the EU in the absence of any effective extension to the Article 50 period. Political negotiations are underway; however, there is a significant lack of clarity over the terms of the U.K.'s exit from the EU and the terms of the U.K.'s future relationship with the EU. The U.K.'s financial service regulators are implementing Temporary Permission Regimes (“TPR”) that are expected to be put in place by the U.K.'s government to support European Economic Area (“EEA”) financial service firms in continuing to conduct business in the U.K. should the U.K. exit the EU without an agreement. The final TPR rules are expected to be published in the first quarter of 2019 and will come into effect when the U.K. leaves the EU. Accordingly, we may need to adjust our business to comply with additional legal and regulatory requirements if accessing the TPR. We are currently unable to determine the impact that Brexit will have on our business, as any impact will depend, in part, on the outcome of this referendum caused volatility in global stock marketstariff, trade, regulatory, and foreign currency exchange rate fluctuations. other negotiations. For additional information on how Brexit could affect our business, see “Item 1A. Risk Factors” under the caption—“The United Kingdom’s departure from the EU could adversely affect us.”
Brexit could adversely affect the U.K., Europeanregional (including European) and worldwide economic and market conditions, and could contribute to instability in regional or global financial and foreign exchange markets, including volatility in the value of the British Pound and Euro. We have foreign exchange exposure management programs designed to help reduce the impact from foreign currency rate movements.
In 2016, 20152018, 2017, and 2014,2016, net revenues generated from our U.K. operations constituted 12%11%, 13%11% and 14%12%, respectively, of total net revenues. In 2016, 20152018, 2017, and 2014,2016, net revenues generated from the EU (excluding the U.K.) constituted approximatelyless than 20% of total net revenues. For additional information on how Brexit could affectApproximately 31% and 30% of our business, see “Item 1A. Risk Factors” under the caption—“The United Kingdom’s departuregross loans and interest receivables as of December 31, 2018 and 2017, respectively, were generated from our U.K. operations. Approximately 7% and 5% of our gross loans and interest receivables as of December 31, 2018 and 2017, respectively, were generated from the European Union could adversely affect us.”EU (excluding the U.K.) operations.
Information security risks for global payments and technology companies have significantly increased in recent years. Although we are not aware of any material impacts relating to cyber-attacks or other information security breaches on our Payments Platform, there can be no assurance that we are immune to these risks and will not suffer such losses in the future. See “Item 1A. Risk Factors” under the caption—“Our business is subject to cyberattacks and security and privacy breaches.”
Overview of Results of Operations
The following table provides a summary of our consolidated operating resultsGAAP financial measures for the years ended December 31, 2016, 20152018, 2017, and 2014:2016:
| | | | Year Ended December 31, | | Percent Increase/(Decrease) | Year Ended December 31, | | Percent Increase/(Decrease) |
| | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | 2018 | | 2017 | | 2016 | | 2018 | | 2017 |
| | (In millions, except percentages and per share amounts) | (In millions, except percentages and per share amounts) |
| Net revenues | $ | 10,842 |
| | $ | 9,248 |
| | $ | 8,025 |
| | 17 | % | | 15 | % | $ | 15,451 |
| | $ | 13,094 |
| | $ | 10,842 |
| | 18 | % | | 21 | % |
| Operating expenses | 9,256 |
| | 7,787 |
| | 6,757 |
| | 19 | % | | 15 | % | 13,257 |
| | 10,967 |
| | 9,256 |
| | 21 | % | | 18 | % |
| Operating income | 1,586 |
| | 1,461 |
| | 1,268 |
| | 9 | % | | 15 | % | 2,194 |
| | 2,127 |
| | 1,586 |
| | 3 | % | | 34 | % |
| Operating margin | 15 | % | | 16 | % | | 16 | % | | ** |
| | ** |
| 14 | % | | 16 | % | | 15 | % | | ** |
| | ** |
|
| Income tax expense | 230 |
| | 260 |
| | 842 |
| | (12 | )% | | (69 | )% | 319 |
| | 405 |
| | 230 |
| | (21 | )% | | 76 | % |
| Effective tax rate | 14 | % | | 17 | % | | 67 | % | | ** |
| | ** |
| 13 | % | | 18 | % | | 14 | % | | ** |
| | ** |
|
| Net income | $ | 1,401 |
| | $ | 1,228 |
| | $ | 419 |
| | 14 | % | | 193 | % | $ | 2,057 |
| | $ | 1,795 |
| | $ | 1,401 |
| | 15 | % | | 28 | % |
Net income per diluted share(2) | $ | 1.15 |
| | $ | 1.00 |
| | $ | 0.34 |
| | 15 | % | | 192 | % | $ | 1.71 |
| | $ | 1.47 |
| | $ | 1.15 |
| | 16 | % | | 28 | % |
| Net cash provided by operating activities | $ | 3,158 |
| | $ | 2,546 |
| | $ | 2,220 |
| | 24 | % | | 15 | % | $ | 5,483 |
| | $ | 2,531 |
| | $ | 3,158 |
| | 117 | % | | (20 | )% |
All amounts in tables are rounded to the nearest millions,million, except as otherwise noted. As a result, certain amounts may not recalculate using the rounded amounts provided.
(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 July 17, 2015.
(2) The weighted average number of common shares outstanding for diluted earnings per share for the year ended December 31, 2015 was based on the number of common shares distributed on July 17, 2015 for the period prior to distribution and the weighted average number of common shares outstanding for the period beginning after the distribution date.
** Not Meaningful
Net revenues increased $1.6$2.4 billion, or 17%18%, in 20162018 and $1.2$2.3 billion, or 15%21%, in 2015.2017. The increase was primarily driven by growth in TPV (as defined below under “Net Revenues”) of 26%27% in 20162018 and 20%27% in 2015.2017. Net revenues from Xoom (acquiredour acquisitions completed in November 2015)2018 and 2017 collectively contributed twoapproximately one percentage point to the growth rate in 2018. The increase from the impact of acquisitions was offset by a decrease in interest and fee income due to the sale of our U.S. consumer credit receivables portfolio to Synchrony Bank in July 2018, which resulted in a negative impact of approximately four percentage points to the 2016net revenues growth rate in 2018. In 2017, net revenues from our acquisitions of TIO and had no impact to the 2015 growth rate.Swift were not material.
Total operating expenses increased $1.5$2.3 billion, or 19%21%, in 20162018 and $1$1.7 billion, or 15%18%, in 2015.2017. The increase in 20162018 was due primarily to an increase in transaction expense, general and administrative, transaction and loan lossesloss, sales and highermarketing, and restructuring and other expenses. Operating expenses related to our acquisitions completed in 2018 and 2017 collectively contributed approximately three percentage points to the growth rate in total operating expenses incurredin 2018. In March 2018, management decided to
operate as an independent public company (primarily in customer support and operations, general and administrative, and depreciation and amortization), partially offset by a decrease in restructuring expense. wind down TIO's operations. The increase in total operating expense in 20152017 was due primarily due to an increase in transaction expense, transactionsales and loan losses,marketing, general and administrative, product development, and customer supportrestructuring and operations expense. Xoom operatingother charges. Operating expenses contributed three percentage pointsrelated to the 2016 growth rateTIO and Swift collectively contributed one percentage point to the 20152017 growth rate.
Operating income increased $125$67 million, or 9%3%, in 20162018 and $193increased $541 million, or 15%34% in 2015.2017. Operating income increased in 20162018 and 20152017 due primarily due to the increase in net revenues, offset by the growth in operating expenses. Our acquisitions completed in 2018 and total operating expenses increasing less compared2017 collectively had a negative impact of approximately seven percentage points to the increase2018 growth rate in net revenues from operating efficiencies. Xoomincome. Our acquisitions in 2017 collectively had a negative impact of four percentage points negative impact to 2016on our 2017 growth rates and a one percentage point negative impact to 2015 growth rates.rate in operating income. Our operating margin was 15%14%, 16%, and 16%15% in 2016, 20152018, 2017, and 2014,2016, respectively. Operating margin decreased in 2016 primarily due to2018 was negatively impacted by growth in our transaction expense, and transaction and loan losses which together increased 30%26% in 20162018, compared to 2015.net revenues, which increased 18% in the same period, as well as the negative impact of acquisitions. These impacts in 2018 were partially offset by operating efficiencies in our business. Operating margin in 2017 was flatnegatively impacted by growth in 2015our transaction expense, which increased 32% in 2017, compared to 2014.net revenues, which increased 21% in the same period, as well as restructuring expense of $40 million incurred in 2017. These impacts in 2017 were offset by operating efficiencies in our business, and a one-time benefit of $322 million pertaining to reversal of allowances related to loans and interest receivables due to the designation as held for sale of our U.S. consumer credit portfolio in November 2017.
Net income increased by $173$262 million, or 14%15%, in 20162018 and $809$394 million, or 193%28%, in 2015.2017. The increase in net income in 20162018 was attributable to an increase in operating income of $125 million, a decrease in income tax expense of $30$67 million and an increase in other income (expense), net of $18 million.$109 million, which was driven by unrealized gains on equity investments and an increase in interest income, partially offset by an increase in interest expense. The increase in net income was further impacted by a decrease in income tax expense of $86 million, primarily driven by a reduction in net tax expense recognized with respect to the Tax Act, partially offset by an increase in tax expense due to the increase in operating income and other income (expense), net. The increase in net income in 20152017 was attributable to an increase in operating income of $193$541 million and a decreasean increase in other income (expense), net of $28 million, partially offset by an increase in income tax expense of $582 million primarily resulting from the recognition of deferred tax liabilities in 2014 relating to undistributed foreign earnings of certain foreign subsidiaries for 2013 and prior years.$175 million.
Non-GAAP financial measures
The following table provides a summary of our consolidated non-GAAP financial measures for the years ended December 31, 2016, 20152018, 2017, and 2014:2016:
| | | | Year Ended December 31, | | Percent Increase/(Decrease) | Year Ended December 31, | | Percent Increase/(Decrease) |
| | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | 2018 | | 2017 | | 2016 | | 2018 | | 2017 |
| | (In millions, except percentages and per share amounts) | (In millions, except percentages and per share amounts) |
| Non-GAAP net revenues | | $ | 15,451 |
| | $ | 13,055 |
| | $ | 10,842 |
| | 18 | % | | 20 | % |
| Non-GAAP operating income | $ | 2,174 |
| | $ | 1,975 |
| | $ | 1,648 |
| | 10 | % | | 20 | % | $ | 3,349 |
| | $ | 2,755 |
| | $ | 2,174 |
| | 22 | % | | 27 | % |
| Non-GAAP operating margin | 20 | % | | 21 | % | | 21 | % | | ** |
| | ** |
| 22 | % | | 21 | % | | 20 | % | | ** |
| | ** |
|
| Non-GAAP income tax expense | $ | 394 |
| | $ | 402 |
| | $ | 298 |
| | (2 | )% | | 35 | % | $ | 618 |
| | $ | 510 |
| | $ | 394 |
| | 21 | % | | 29 | % |
| Non-GAAP net income | $ | 1,825 |
| | $ | 1,588 |
| | $ | 1,343 |
| | 15 | % | | 18 | % | $ | 2,913 |
| | $ | 2,318 |
| | $ | 1,825 |
| | 26 | % | | 27 | % |
Non-GAAP net income per diluted share(1)(2) | $ | 1.50 |
| | $ | 1.29 |
| | $ | 1.10 |
| | 16 | % | | 18 | % | |
| Free Cash Flow | $ | 2,489 |
| | $ | 1,824 |
| | $ | 1,728 |
| | 36 | % | | 6 | % | |
| Non-GAAP net income per diluted share | | $ | 2.42 |
| | $ | 1.90 |
| | $ | 1.50 |
| | 28 | % | | 27 | % |
Free Cash Flow(1) | | $ | 4,660 |
| | $ | 1,864 |
| | $ | 2,489 |
| | 150 | % | | (25 | )% |
All amounts in tables are rounded to the nearest millions,million, except as otherwise noted. As a result, certain amounts may not recalculate using the rounded amounts provided.
(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 years ended December 31, 2014 and 2013 was calculated using the number of common shares distributed on July 17, 2015.** Not Meaningful
(2)(1) The weighted average number of common shares outstanding for diluted earnings per share for the year ended December 31, 2015 was based on2018 includes a positive impact of approximately $1.4 billion due to the numbercompletion of common shares distributed onthe sale of our US consumer credit receivables portfolio in July 17, 20152018. The year ended December 31, 2017 includes a negative impact of approximately $1.3 billion due to the change in presentation of the U.S. consumer credit receivables portfolio subsequent to its designation as held for the period prior to distribution and the weighted average number of common shares outstanding for the period beginning after the distribution date.sale in November 2017.
** Not Meaningful
Non-GAAP net revenues, non-GAAP operating income, non-GAAP operating margin, non-GAAP income tax expense, non-GAAP net income, non-GAAP net income per diluted share, and free cash flow are not financial measures prepared in accordance with generally accepted accounting principles (“GAAP”). For information on how we compute these non-GAAP financial measures and a reconciliation to the most directly comparable financial measures prepared in accordance with GAAP, please refer to “Non-GAAP Financial Information” below.
Impact of Foreign Currency Exchange Rates
We have significant international operations internationally that are denominated in foreign currencies, primarily the British Pound, Euro, Australian Dollar, and Canadian Dollar, subjecting us to foreign currency risk which may adversely impact our financial results. The strengthening or weakening of the U.S. dollar versus the British Pound, Euro, Australian Dollar, and Canadian Dollar, as well as other currencies in which we conduct our international operations, impacts the translation of our net revenues and expenses generated in these foreign currencies into the U.S. dollar. In 2016, 20152018, 2017, and 2014,2016, we generated approximately 47%46%, 50%46% and 52%47% of our net revenues from customers domiciled outside of the United States, respectively. During each of these periods, the United Kingdom (“U.K.”) was the only country, other than the United States, where we generated more than 10% of total net revenues in. In 2016, 2015 and 2014, net revenues generated from the EU (excluding the U.K.) constituted approximately 20%
of total net revenues. Because we have generated substantial net revenues internationally in recent periods, including during the periods presented, we are subject to the risks of doing business in countries outside of the U.S. as discussed under “Item 1A. Risk Factors—Risk Factors That May Affect Our Business, Results of Operations and Financial Condition.Condition.”
We calculate the year-over-year impact of foreign currency movements on our business using prior period foreign currency exchange rates applied to current period transactional currency amounts. While changes in foreign currency exchange rates affect our reported results, we have a foreign currency exchange exposure management program whereby we designate certain foreign currency exchange contracts as cash flow hedges intended to help reduce the impact on earnings from foreign currency exchange rate movements. However, it is impossible to predict or eliminate the effects of this exposure. Gains and losses from these foreign currency exchange contracts are recognized as a component of transaction revenues in the same period the forecasted transactions impact earnings.
In the years ended December 31, 20162018 and 2015,2017, the year-over-year foreign currency movements relative to the U.S. dollar had the following impact on our reported results:
|
| | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 |
| | (in millions) |
| Unfavorable impact to net revenues (exclusive of hedging impact) | $ | (196 | ) | | $ | (527 | ) |
| Hedging impact | 119 |
| | 182 |
|
| Unfavorable impact to net revenues | (77 | ) | | (345 | ) |
| Favorable impact to operating expense | 86 |
| | 310 |
|
| Net impact to operating income | $ | 9 |
| | $ | (35 | ) |
|
| | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
| | (In millions) |
| Favorable impact to net revenues (exclusive of hedging impact) | $ | 123 |
| | $ | 10 |
|
| Hedging impact | (23 | ) | | 17 |
|
| Favorable impact to net revenues | 100 |
| | 27 |
|
| Unfavorable impact to operating expense | (18 | ) | | (21 | ) |
| Net favorable impact to operating income | $ | 82 |
| | $ | 6 |
|
While we enter into foreign currency exchange contracts to help reduce the impact on earnings from foreign currency exchange rate movements, it is impossible to predict or eliminate the total effects of this exposure.
Additionally, in connection with our services that are paid for in multiple currencies, we generally set our foreign currency exchange rates twice per day,daily, and may face financial exposure if we incorrectly set our foreign currency exchange rates or as a result of fluctuations in foreign currency exchange rates between the times that we set our foreign currency exchange rates. Given that we also have foreign currency exchange risk on our assets and liabilities denominated in currencies other than the functional currency of our subsidiaries, we have an additional foreign currency exchange exposure management program whereby we use foreign currency exchange contracts to offset the impact of foreign currency exchange rate movements on our assets and liabilities. The foreign currency exchange gains and losses on our assets and liabilities are recorded in “Otherother income (expense), net,” which is and are offset by the gains and losses on the foreign currency exchange contracts. These foreign currency exchange contracts reduce, but do not entirely eliminate, the impact of foreign currency exchange rate movements on our assets and liabilities.
Financial Results
Net revenues
Revenue description
We earn revenue primarily by processing customer transactionsDue to the diversification of PayPal’s business through strategic partnerships, new products, and acquisitions, in the first quarter of 2018, we updated our definitions of “active accounts” and “total payment volume (TPV)” as described below.
Active Accounts: 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. The definition of active accounts has been expanded to include payments made or outstanding balances held on our co-branded credit card program. The definition has also been expanded to include accounts from our platform access partners. A platform access partner is a third party whose customers are provided access to PayPal’s Payments Platform through such third party’s login credentials. This expanded definition captures uniquely identifiable accounts for which PayPal receives economic benefits for completed transactions processed on behalf of customers who have established a relationship with PayPal.
Total Payment Volume: 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. The definition of TPV has been expanded to include PayPal’s diversification into new partner payment solutions such as certain tokenized transactions and contextual commerce which expand our opportunities for growth.
The revised definition also captures TPV from otherour merchant debit card program. Due to their inclusion in TPV, revenues from these transactions were reclassified from “other value added services. services” to “transaction revenues” with no change to “total net revenues.”
These revisions also impacted previously reported results for other non-financial key performance metrics, including number of payment transactions and payment transactions per active account. Prior period metrics have been revised in this filing to conform to the new definitions.
Our revenues are classified into the following two categories:
Transaction revenues: Net transaction fees charged to merchants and consumers and merchantson a transaction basis primarily based on the volume of activity, or Total Payments Volume (“TPV”), processed throughTPV, completed on our Payments Platform. We define TPV as the value of payments, net of payment reversals, successfully completed through our Payments Platform, excluding transactions processed through our gateway and Paydiant products. Growth in TPV is directly impacted by the number of payment transactions that we enable on our Payments Platform. 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.or enabled by PayPal via a partner payment solution not including gateway-exclusive transactions. We earn additional fees on transactions settled in foreign currencies when we enable cross-border transactions (i.e., transactions where the merchant or consumer wereare in different countries).
Other value added services: Net revenues derived principallyprimarily from revenue earned through partnerships, subscription fees, gateway fees, and other services we provide to our merchants and customers. We also earn revenues from interest and fees earned primarily on our PayPal Creditcredit portfolio of loans receivable, portfolio, subscription fees, gateway fees, gain on sale of participation interestsinterest in certain consumer loans
receivable, revenue share we earn through partnerships, and advances, and interest earned on certain PayPal customer account balances, fees earned through our Paydiant products and other services that we provide to consumers and merchants.balances.
Our revenues can be significantly impacted by the following:
The mix of merchants, products, and services;
The mix between domestic and cross-border transactions;
GeographicThe geographic region or country in which a transaction occurs; and
The amount of PayPal Creditour credit loans receivable outstanding with consumersmerchants and merchants.consumers.
Net revenues analysis
The components of our net revenue for the years ended December 31, 2016, 20152018, 2017 and 20142016 were as follows:
| | | | Year Ended December 31, | | Percent Increase/ (Decrease) | Year Ended December 31, | | Percent Increase/ (Decrease) |
| | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | 2018 | | 2017(1) | | 2016(1) | | 2018 | | 2017 |
| | (In millions, except percentages) | (In millions, except percentages) |
| Transaction revenues | $ | 9,490 |
| | $ | 8,128 |
| | $ | 7,107 |
| | 17 | % | | 14 | % | $ | 13,709 |
| | $ | 11,501 |
| | $ | 9,585 |
| | 19 | % | | 20 | % |
| Other value added services | 1,352 |
| | 1,120 |
| | 918 |
| | 21 | % | | 22 | % | 1,742 |
| | 1,593 |
| | 1,257 |
| | 9 | % | | 27 | % |
| Net revenues | $ | 10,842 |
| | $ | 9,248 |
| | $ | 8,025 |
| | 17 | % | | 15 | % | $ | 15,451 |
| | $ | 13,094 |
| | $ | 10,842 |
| | 18 | % | | 21 | % |
(1) Amounts in the prior period were reclassified to conform to current period presentation.
Transaction revenues
Transaction revenues increased by $1.4$2.2 billion, or 17%19%, in 20162018 compared to 2015,2017, and by $1.0$1.9 billion, or 14%20%, in 20152017 compared to 2014. Xoom transaction revenues contributed two percentage points to the 2016 growth rate and had no impact to the 2015 growth rate.2016. The increase in transaction revenues in 20162018 and 20152017 was due primarily to the growth in TPV, mainly from our PayPal and Braintree products, and in the number of payment transactions, both of which were dueresulted primarily to increased engagement from our customers (measured by payment transactions per active account) and thean increase in our active customer accounts. Current year acquisitions did not have a material impact on the growth rate of transaction revenues; however, they contributed approximately 2.9 million new active accounts during the year. Net gainslosses from our foreign currency exchange contracts recognized as a component of transaction revenues in 20162018 were $119$23 million, compared to $182net gains of $17 million in 2015.2017. Refer to “Note 8—10—Derivative Instruments” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information on our foreign currency exposure management program.
The following table provides a summary of our active customer accounts, number of payment transactions, TPV and related metrics:
| | | | Year Ended December 31, | | Percent Increase/ (Decrease) | Year Ended December 31, | | Percent Increase/ (Decrease) |
| | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | 2018 | | 2017(1) | | 2016(1) | | 2018 | | 2017 |
| | (In millions, except percentages) | (In millions, except percentages) |
Active customer accounts(1) | 197 |
| | 179 |
| | 162 |
| | 10 | % | | 11 | % | |
Active accounts(2) | | 267 |
| | 229 |
| | 199 |
| | 17 | % | | 15 | % |
Number of payment transactions(2)(3) | 6,129 |
| | 4,928 |
| | 3,964 |
| | 24 | % | | 24 | % | 9,871 |
| | 7,769 |
| | 6,295 |
| | 27 | % | | 23 | % |
Payment transactions per active account(3)(4) | 31.1 |
| | 27.5 |
| | 24.5 |
| | 13 | % | | 12 | % | 36.9 |
| | 34.0 |
| | 31.6 |
| | 9 | % | | 8 | % |
Total TPV(4) | $ | 354,014 |
| | $ | 281,764 |
| | $ | 234,635 |
| | 26 | % | | 20 | % | |
TPV(5) | | $ | 578,419 |
| | $ | 456,179 |
| | $ | 359,928 |
| | 27 | % | | 27 | % |
| Percent of cross-border TPV | 22 | % | | 22 | % | | 24 | % | | ** |
| | ** |
| 19 | % | | 21 | % | | 22 | % | | ** |
| | ** |
|
All amounts in tables are rounded to the nearest millions,million except as otherwise noted. As a result, certain amounts may not recalculate using the rounded amounts provided.
1(1) Prior period amounts were revised to reflect updated definitions of active accounts and TPV discussed above.
(2) Reflects active accounts as of the end of the applicable period. An active customer account is an account registered directly with PayPal or a registered accountplatform access partner that successfully sent or received at least one payment or payment reversal throughhas completed a transaction on our Payments Platform, excludingnot including gateway-exclusive transactions, processed through our gateway and Paydiant products, inwithin the past 12 months.
2(3) PaymentNumber of payment transactions are the total number of payments, net of payment reversals, successfully completed throughon our Payments Platform excluding transactions processed through our gateway and Paydiant products.or enabled by PayPal via a partner payment solution, not including gateway-exclusive transactions.
3(4) 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 periodperiod.
4(5) Total Payment Volume or “TPV”TPV is the value of payments, net of payment reversals, successfully completed throughon our Payments Platform excluding transactions processed through our gateway and Paydiant products.or enabled by PayPal via a partner payment solution, not including gateway-exclusive transactions.
** Not meaningful
The percentage growth in transactionTransaction revenues was lowergrew more slowly than the percentage growth inboth TPV and number of payment transactions in 20162018 due to a higher proportion of P2P transactions (primarily from our PayPal and Venmo products) from which we earn lower fees and a lower proportion of cross border transactions. Transaction revenues grew more slowly than both TPV and the number of payment transactions in 2017 due primarily to a higher portionproportion of person-to-person (“P2P”)P2P transactions, (includingprimarily from our PayPal and Venmo products) for which we earn
lower rates, and a higher portion of TPV generated by large merchants who generally pay lower rates with higher transaction volume. The percentage growth in transaction revenues was lower than the percentage growth in TPV and payment transactions in 2015 due to a higher portion of TPV generated by large merchants who generally pay lower rates on higher transaction volume and a lower mix of cross-border transactions. Cross-border transactions generally provide higher revenues than similar transactions that take place within a single country or market. The percent of TPV generated by large merchants increased in 2016 and 2015.products. The impact of increases or decreases in prices charged to our customers did not significantly impact transaction revenue growth in 20162018 or 2015.2017.
Other value added services
Net revenues from other value added services increased by $232$149 million, or 21%9%, in 20162018 compared to 2015,2017, and by $202$336 million, or 22%27%, in 20152017 compared to 2014.2016. Growth in net revenues from other value-added services in 20162018 and 2017 was due primarily to interest and fee income earned on our PayPal Credit loans receivable portfolio. In 2018, net revenue from other value added services was also positively impacted by growth in interest earned on customer balances. The completion of the sale of our U.S. consumer credit receivables portfolio in July 2018 resulted in lower interest and fee income in the second half of 2018, partially offset by an increase in revenue share with Synchrony Bank and approximately $109 million of revenue earned from transition servicing activities. Swift revenues contributed approximately nine percentage points and three percentage points to the 2018 and 2017 growth rates, respectively.The total consumer and merchant loans receivable balance, including loans and receivables, held for sale, as of December 31, 2018, 2017, and 2016 was $2.7 billion, $7.8 billion, and December 31, 2015 was $5.7 billion, respectively, which reflected a year-over-year decrease of 66% in 2018 compared to 2017, and $4.4 billion, respectively, reflecting a year over yearan increase of 29%37% in 2017 compared to 2016. The decline in 2018 was primarily driven by the completion of the sale of U.S. consumer credit receivables portfolio.
In November 2017, we reached an agreement to sell our U.S. consumer credit receivables portfolio to Synchrony Bank to free up balance sheet capacity and cash flow for other uses and mitigate balance sheet risk. Historically, this portfolio was reported as outstanding principal balances, net of any participation interest sold and pro rata allowances, including unamortized deferred origination costs and estimated collectible interest and fees. Upon approval by our Board of Directors of the decision to sell these receivables, the portfolio was reclassified as held for sale, and recorded at the lower of cost or fair value. Due to the designation as held for sale, the associated allowance for this portfolio was reversed, resulting in an increase of approximately $39 million in revenue from other value added services in 2017.
Following the closing of this transaction in July 2018, Synchrony Bank became the exclusive issuer of the PayPal Credit online consumer financing program in the U.S., and we no longer hold an ownership interest in the receivables generated through the program (other than receivables that have been or are designated to be charged off and are fully reserved). The increasetransaction was accounted for as a true sale, and following the completion of the sale, the receivables are no longer reported on our consolidated financial statements. Subsequent to the sale, we earn a revenue share on the portfolio of consumer receivables owned by Synchrony Bank, which is recorded in net revenues from other value added services. We expect this transaction to negatively impact other value-added services in 2015 was due primarilyrevenue growth for the first two quarters of 2019. The corresponding negative impact on total net revenue growth rate for each of those quarters is expected to interestbe between 6% and fee income earned on loans receivable outstanding from consumers and merchants that used our PayPal Credit products, revenue share earned under our credit program agreement with Synchrony Financial,8%, although this estimate is subject to various uncertainties and the gain on sale of a participation interest in certain consumer loans receivable that we purchased, as described further below.
In the third quarter of 2015, we amended the terms of our credit program agreement with Synchrony Financial. As a result of the amendment, we recognized $78 million of additional revenue under the agreement during 2015. In addition, as part of the amended agreement, our obligation to purchase the portfolio of consumer loan receivables relating to the customer accounts arising out of the credit program agreement with Synchrony Financial was terminated. We retain an option to purchase the portfolio at the end of the new contract term.
In the second quarter of 2015, we completed an arrangement with certain investors under which we sold participation interests in certain consumer loans and interest receivable related to our PayPal Credit products with a gross book value of approximately $708 million. As a result of the arrangement, theactual impact to net revenues from other value added services during 2015 was a net decrease of $35 million compared to 2014 due to the reduction in net revenues earned from interest and fees on the participation interests sold, partially offset by the gain recognized on the sale of the participation interest (inclusive of the gain of $26 million recognized on the initial sale of approximately $708 million in certain consumer loans receivable) and servicing fees.may be different.
Operating Expenses
Beginning with the first quarter of 2016, we reclassified certain operating expenses in our consolidated statements of income to better align our external and internal financial reporting. These classification changes relate primarily to real estate and information technology operating expenses that were previously allocated among customer support and operations expense, sales and marketing expense and product development expense. Our management no longer allocates these operating expenses for internal financial reporting purposes or general management of the business and has therefore discontinued this allocation for external financial reporting purposes. As a result, starting with the first quarter of 2016 these operating expenses were reported as part of general and administrative expenses. These changes have no impact on the previously reported consolidated net income for prior periods, including total operating expenses, financial position or cash flows for any periods presented, and do not eliminate any of the costs allocated to us by eBay for any periods prior to the separation. Prior period amounts have been reclassified to conform to the current period presentation. See “Note 1—Overview and Summary of Significant Accounting Policies” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information on the effects of the changes on the presentation of operating expenses to our previously reported consolidated statement of income. Growth rates presented below are calculated based upon the reclassified prior period amounts.
The following table summarizes our operating expenses and related metrics we use to assess the trend in each:
| | | | Year Ended December 31, | | Percent Increase/ (Decrease) | Year Ended December 31, | | Percent Increase/ (Decrease) |
| | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | 2018 | | 2017 | | 2016 | | 2018 | | 2017 |
| | (In millions, except percentages) | (In millions, except percentages) |
| Transaction expense | $ | 3,346 |
| | $ | 2,610 |
| | $ | 2,170 |
| | 28 | % | | 20 | % | $ | 5,581 |
| | $ | 4,419 |
| | $ | 3,346 |
| | 26 | % | | 32 | % |
| Transaction and loan losses | 1,088 |
| | 809 |
| | 646 |
| | 34 | % | | 25 | % | 1,274 |
| | 1,011 |
| | 1,088 |
| | 26 | % | | (7 | )% |
| Customer support and operations | 1,267 |
| | 1,110 |
| | 991 |
| | 14 | % | | 12 | % | 1,482 |
| | 1,364 |
| | 1,267 |
| | 9 | % | | 8 | % |
| Sales and marketing | 969 |
| | 937 |
| | 954 |
| | 3 | % | | (2 | )% | 1,313 |
| | 1,128 |
| | 969 |
| | 16 | % | | 16 | % |
| Product development | 834 |
| | 792 |
| | 747 |
| | 5 | % | | 6 | % | 1,071 |
| | 953 |
| | 834 |
| | 12 | % | | 14 | % |
| General and administrative | 1,028 |
| | 873 |
| | 733 |
| | 18 | % | | 19 | % | 1,451 |
| | 1,155 |
| | 1,028 |
| | 26 | % | | 12 | % |
| Depreciation and amortization | 724 |
| | 608 |
| | 516 |
| | 19 | % | | 18 | % | 776 |
| | 805 |
| | 724 |
| | (4 | )% | | 11 | % |
| Restructuring | — |
| | 48 |
| | — |
| | ** |
| | ** |
| |
| Restructuring and other charges | | 309 |
| | 132 |
| | — |
| | 134 | % | | ** |
|
| Total operating expenses | $ | 9,256 |
| | $ | 7,787 |
| | $ | 6,757 |
| | 19 | % | | 15 | % | $ | 13,257 |
| | $ | 10,967 |
| | $ | 9,256 |
| | 21 | % | | 18 | % |
Transaction expense rate1 | 0.95 | % | | 0.93 | % | | 0.92 | % | | | | | |
Transaction and loan loss rate2 | 0.31 | % | | 0.29 | % | | 0.28 | % | | | | | |
Transaction expense rate(1) | | 0.96 | % | | 0.97 | % | | 0.93 | % | | | | |
Transaction and loan loss rate(2) | | 0.22 | % | | 0.22 | % | | 0.30 | % | | | | |
1(1) Transaction expense rate is calculated by dividing transaction expense by TPV. Prior year rates were revised to reflect updated TPV definition, as discussed above.2(2) Transaction and loan loss rate is calculated by dividing transaction and loan losses by TPV. Prior year rates were revised to reflect updated TPV definition, as discussed above.
** Not Meaningful
Transaction expense
Transaction expense is primarily composed of the costs we incur to accept a customer’s funding source of payment. These costs include fees paid to payment processors and other financial institutions in order to draw funds from a customer’s credit or debit card, bank account, or other funding source they have stored in their digital wallet. Transaction expense also includes fees paid to disbursement partners to enable a transaction and interest expense on borrowings incurred to finance our portfolio of loans receivable arising from our PayPal Credit funding option.transaction. We refer to the allocation of funding sources used by our consumers as our “funding mix.” The cost of funding a transaction with a credit or debit card is generally higher than the cost of funding a transaction from a bank or through internal sources such as a PayPal account balance or PayPal Credit. As we expand the availability and presentation of alternative funding sources to our customers, a change inour funding mix canmay change, which could increase or decrease our transaction expense rate. For example, in connection with our customer choice initiatives, we expect that our transaction expense rate will increase. The cost of funding a transaction is also impacted by the geographic region or country in which a transaction occurs because we generally pay lower rates for transactions funded with credit cards outside the U.S. than in the U.S.
Transaction expense increased $736 million,by $1.2 billion, or 28%26%, in 20162018 compared to 2015.2017, and increased by $1.1 billion, or 32%, in 2017 compared to 2016. The increasesincrease in transaction expense in 20162018 was primarily attributable to an increase in TPV which increased 26% in 2016. Transaction expense increased by $440 million, or 20%, in 2015 compared to 2014.of 27%. The increase in transaction expense in 20152017 was primarily attributable to an increase in TPV offsetof 27% and higher assessments charged by favorable foreign currency fluctuations due to the strengthening of the U.S. dollar.payment processors and other financial institutions.
OurThe transaction expense rate in 2016 increased2018 remained relatively consistent with the transaction expense rate for 2017. The increase in our transaction expense rate in 2017 compared to 20152016 was due primarily to changes in funding mix.higher assessments charged by payment processors and other financial institutions. For the years ended December 31, 2016, 20152018, 2017, and 2014,2016, approximately 2% of TPV was funded with PayPal Credit. For the years ended December 31, 2018, 2017, and 2016, 2015 and 2014, approximately 45%43%, 45%43%, and 48%44% of TPV, respectively, was generated outside of the U.S. Our transaction expense rate in 2015 increased compared to 2014 due to higher assessments charged by payments processors and other financial institutions partially offset by cost efficiencies from our Payments Platform and a more favorable funding mix. Interest expense on borrowings incurred to finance our portfolio of loans receivable, included in transaction expense, was not material for the years ended December 31, 2016, 2015 and 2014.
Transaction and loan losses
Transaction losses include the expense associated with our customerbuyer and seller protection programs, fraud, and chargebacks. Loan losses include the losses associated with our PayPal Creditmerchant and consumer loans receivable portfolio. We expect ourportfolio, except loans and interest receivable, held for sale. Our transaction and loan losses to fluctuate depending on many factors, including TPV, macroeconomic conditions, changes to our customer protection programs, the impact of regulatory changes, and the credit quality of loans receivable arising from transactions funded with our PayPal Creditcredit products for consumers and working capitalloans and advances to select merchant sellers. Additionally, prior to the distribution we recovered certain amounts from eBay related to customer protection programs offered on eligible eBay purchases made with PayPal. These costs included the actual amount of protection losses associated with eBay's customer protection programs that we administered and
funded on behalf of eBay, which were included as a reduction of transaction and loan losses. Recoveries associated with protection losses incurred on eligible eBay purchases during the years ended December 31, 2015 and 2014 were $27 million and $43 million, respectively. Following the distribution, we no longer administer eBay's customer protection programs or recover amounts from eBay associated with protection losses incurred on eligible eBay purchases; instead, we and eBay each independently administer our own customer protection programs. Further, our customer protection programs extend to customers’ eligible purchases on eBay and therefore we have incurred and expect to continue to incur incremental costs associated with our customer protection programs following the distribution.merchants.
The components of our transaction and loan losses for the years ended December 31, 2016, 20152018, 2017, and 20142016 were as follows:
| | | | Year Ended December 31, | | Percent Increase/(Decrease) | Year Ended December 31, | | Percent Increase/(Decrease) |
| | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | 2018 | | 2017 | | 2016 | | 2018 | | 2017 |
| | (In millions, except percentages) | (In millions, except percentages) |
| Transaction losses | $ | 655 |
| | $ | 511 |
| | $ | 408 |
| | 28 | % | | 25 | % | $ | 1,059 |
| | $ | 823 |
| | $ | 655 |
| | 29 | % | | 26 | % |
| Loan losses | 433 |
| | 298 |
| | 238 |
| | 45 | % | | 25 | % | 215 |
| | 188 |
| | 433 |
| | 14 | % | | (57 | )% |
| Transaction and loan losses | $ | 1,088 |
| | $ | 809 |
| | $ | 646 |
| | 34 | % | | 25 | % | $ | 1,274 |
| | $ | 1,011 |
| | $ | 1,088 |
| | 26 | % | | (7 | )% |
Transaction loss rate(1) | | 0.18 | % | | 0.18 | % | | 0.18 | % | | | | |
(1) Transaction loss rate is calculated by dividing transaction losses by TPV. Prior year rates were revised to reflect updated TPV definition, as discussed above.
Transaction and loan losses increased $279by $263 million, or 34%26%, in 20162018 compared to 2015,2017, and increased $163decreased by $77 million, or 25%7%, in 20152017 compared to 2014.2016.
Transaction losses increased by $144$236 million, or 28%29%, in 20162018 compared to 20152017, and increased by $168 million, or 26%, in 2017 compared to 2016, due primarily attributable to higher TPV. Our transaction loss rate calculated by dividing transaction loss by TPV,remained flat in 2016 was flat compared to 2015. The growth in transaction losses in 2016 was higher than the growth in TPV in 2016 due primarily to lower incremental costs in 2015 associated with our customer protection programs following the distribution. Transaction losses increased by $103 million, or 25%, in 2015 compared to 2014 primarily attributable to higher TPV. Our transaction loss rate in 2015 increased compared to 2014 due to lower recoveries in 2015 associated with transaction losses incurred on eligible eBay purchases offset by improved consumer loss performance2018, 2017, and a higher provision in the prior year from actual losses incurred.2016.
Loan losses increased $135by $27 million, or 45%14%, in 20162018 compared to 20152017 and increased $60decreased by $245 million, or 25%57%, in 20152017 compared to 2014.2016. The increase in loan losses in 20162018 was primarily due to the increase in our merchant loans and advances receivable balances, partially offset by a decline resulting from the sale of our U.S. consumer credit receivables portfolio in the third quarter of 2018 and the portfolio's designation as held for sale during the first two quarters of 2018. The decrease in loan losses in 2017 was due primarily to an increase in the reversal of approximately $283 million of allowance on loans receivable balance year over year and additional reserves recorded in the current period due to increases to forecasted principal balance delinquency rates. the designation of our U.S. consumer credit portfolio as held for sale.
The total consumer loans receivable balance as of December 31, 2018, 2017, and 2016 was $704 million, $326 million, and 2015 was $5.1 billion and $4.0 billion, respectively, reflecting a year over yearyear-over-year increase of 28%.116% from 2017 to 2018 and a decrease of 94% from 2016 to 2017. The increase in consumer loan lossesreceivables in 20152018 was due primarily to an increasegrowth in the loans receivable balance year over year. The totalinternational markets. Approximately 93% of our consumer loans receivable balancereceivables outstanding as of December 31 20152018 and 2014 was $4.0 billion and $3.7 billion, respectively, reflecting a year over year increase of 8% in 2015, including the sale of additional participation interests to certain investorsDecember 31, 2017 were due from consumers in the second quarter of 2015.U.K. The increasedecrease in consumer loansloan receivables in 2016 and 20152017 was due to the growth in thedesignation of U.S. consumer credit portfolio of loans receivable outstanding arising from consumers who chose PayPal Credit as a funding option and an increase in working capital advances to selected merchant sellers.held for sale.
The following table provides information regarding the credit quality of our pool of consumer loans and interest receivable balance:
|
| | | | | |
| | December 31, |
| | 2016 | | 2015 |
Weighted average U.S. consumer FICO scores(1) | 682 |
| | 686 |
|
Percentage of loans receivable with FICO scores > 680(1) | 52.1 | % | | 53.6 | % |
Percentage of loans receivable with FICO scores < 599(1) | 11.1 | % | | 9.4 | % |
| Percent of loans and interest receivable current | 90.0 | % | | 90.1 | % |
Percent of loans and interest receivable > 90 days(3) | 4.1 | % | | 3.9 | % |
Net charge off rate(2) | 6.4 | % | | 5.9 | % |
|
| | | | | |
| | December 31, |
| | 2018 | | 2017 |
| Percent of consumer loans and interest receivables current | 94.9 | % | | 96.0 | % |
Percent of consumer loans and interest receivables > 90 days outstanding(1) | 1.7 | % | | 1.2 | % |
Net charge off rate(2) | 3.1 | % | | 3.9 | % |
(1)Excludes certain outstanding consumer loans outside Represents percentage of balances which are 90 days past the U.S., for which no FICO scores are available, with an outstanding balance of $117 million and $70 million at December 31, 2016 and 2015, respectively. billing date to the consumer.
(2) Net charge off rate is the annual ratio of net credit losses on consumer loans receivables as a percentage of the average daily amount of consumer loans and interest receivables balance during the year.
(3) Represents percentage of balances which are 90 days past the billing date to the consumer.
We offer credit productsbusiness financing solutions to certain existing smallsmall- and medium-sized merchants through our PayPal Working Capital product. The total PayPal Working Capitalmerchants. Total merchant loans, advances, and interest and fees receivable (“merchant receivables”) outstanding as of December 31, 2018, 2017, and 2016, net of participation interest sold, were $1.9 billion, $1.0 billion, and December 31, 2015 were $558 million and $421 million, respectively, reflecting a year over yearyear-over-year increase of 33%85% from 2017 to 2018 and an increase of 81% from 2016 to 2017. The increase in merchant receivables in 2018 was due to thegrowth in our PayPal Business Loan (“PPBL”) portfolio and an increase in the availability of our credit productsPayPal Working Capital (“PPWC”) product. Approximately 87% and 10% of our merchant receivables outstanding as of December 31 2018 were due from merchants in the U.S. and U.K. as compared to 83% and 13% as of December 31, 2017, respectively. The increase in merchant receivables in 2017 was due to the acquisition of Swift, which included their pre-existing loan receivables portfolio, and an increase in the availability of our PPWC product domestically and internationally. To assess a merchant seeking a PayPal Working Capital advance, we use, among other indicators, a risk model that we have internally developed that we refer to as our PayPal Working Capital Risk Model (“PRM”), as a credit quality indicator to help predict the merchant's ability to repay the principal balance and fixed fee related to the working capital advance. The PRM uses multiple variables as predictors of the merchant's ability to repay a working capital advance. Primary drivers of the model include the merchant's annual payment volume and payment processing history with PayPal, prior repayment history with the PayPal Working Capital product, and other measures. Merchants are assigned a PRM credit score within the range of 350 to 750. We generally expect that merchants to which we extend a working capital advance will have PRM scores greater than 525. We generally consider scores above 610 to be very good and to pose less credit risk. We assess a participating merchant’s PRM score on a recurring basis. At December 31, 2016 and December 31, 2015, the weighted average PRM score related to our PayPal Working Capital balances outstanding was 625 and 630, respectively.
The determination of the number of days our merchant receivables are outstanding is based on the current expected repayment period of the advance and fixed fee as compared to the original expected repayment period. We generally calculate the repayment rate based on the merchant's estimated future payment volume so that repayment of the advance and fixed fee is expected to occur within 9 to 12 months from the date of the advance. On a regular basis, we recalculate the repayment period based on the repayment activity on the receivable. As such, actual repayment periods are dependent on actual payment processing volumes. We monitor receivables with repayment periods greater than the original expected repayment period. In the second quarter of 2016, we refined our estimate of the original expected repayment period to take into account the variability in repayment patterns. Prior period amounts have been updated to reflect this change.
The following table provides information regarding the credit quality of our merchant receivables:
|
| | | | | |
| | December 31, |
| | 2016 | | 2015 |
| Percentage of merchant receivables with PRM scores > 610 | 67.7 | % | | 69.1 | % |
| Percentage of merchant receivables with PRM scores < 525 | 12.9 | % | | 10.7 | % |
Percent of merchant receivables within original expected repayment period(1) | 82.8 | % | | 87.2 | % |
Percent of merchant receivables > 90 days outstanding(1) | 7.5 | % | | 4.0 | % |
|
| | | | | |
| | December 31, |
| | 2018(1) | | 2017 |
| Merchant loans and advances | | | |
| Percent of merchant receivables within original expected or contractual repayment period | 91.0 | % | | 87.4 | % |
| Percent of merchant receivables > 90 days outstanding after the end of original expected or contractual repayment period | 3.7 | % | | 5.5 | % |
(1) Amounts in the prior periods were updatedExcludes $30 million of loan receivables related to reflect changes in our estimate of the original expected repayment period.iZettle merchant receivables.
The changes in percentage of merchant receivables past their expected repayment period at December 31, 2016 over December 31, 2015 were due primarily to the increase in longer duration merchant loans in 2016 compared to the prior year, which increased the seasonality of repayments trends. Modifications to the acceptable risk parameters of our PayPal Creditcredit products for the periods presented did not have a material impact on our loans.loans and interest receivables. For additional information, see “Note 11—Loans and Interest Receivable” in the notes to the consolidated financial statements, and “Item 1A. Risk Factors” under the caption—“Some of our credit products expose us to additional risks.” included elsewhere in this Annual Report on Form 10-K.
Customer support and operations
Customer support and operations expenses include costs incurred to provide 24-hour call support to our customers, our site operations, and other infrastructure costs incurred to support our Payments Platform, costs to support our trust and security programs protecting our merchants and consumers, and other costs incurred inrelated to the delivery of our operations centers. products.
Customer support and operations costs increased $157$118 million, or 14%9%, in 20162018 compared to 20152017 and $119increased $97 million, or 12%8%, in 20152017 compared to 2014.2016. The increase in 20162018 was due primarily attributable to an increase in contractoremployee-related expenses and employee relatedplatform infrastructure expenses to servicesupport the growth in our active customer accounts and the number of payment transactions occurring on our Payments Platform. The increase in 2015 was predominantly related to an increase in headcount to service the growth in our active customer accounts and the number of payment transactions occurring on our Payments Platform, partially offset by a decrease in contractor and consulting expenses. Our acquisitions completed in 2018 and 2017 collectively contributed approximately one percentage point to the growth rate in 2018. The increase in 2017 was due primarily to an increase in network infrastructure expenses and contractor and employee related expenses to operate as an independent public company offsetsupport the growth in part by favorable foreign currency fluctuations due toour active accounts and the strengtheningnumber of the U.S. dollar.payment transactions occurring on our Payments Platform.
Sales and marketing
Sales and marketing expenses consist primarily of customer acquisition, business development, advertising, marketing programs, and employee compensation and contractor costs to support these programs.
Sales and marketing expenses increased $32$185 million, or 3%16%, in 20162018 compared to 2015.2017 and increased $159 million, or 16%, in 2017 compared to 2016. The increase in 20162018 and 2017 was due primarily to higher employee-related expense and higher spend on external marketing spend related to Xoom on advertising campaigns intended to enhance our global brand recognition. Salescampaigns. Our acquisitions completed in 2018 and marketing expense decreased by $17 million, or 2%, in
2015 compared to 2014. The decrease in 2015 was due primarily to a decrease in employee and contractor related expenses and favorable foreign currency fluctuations due2017 collectively contributed approximately seven percentage points to the strengthening of the U.S. dollar, offsetgrowth rate in part by higher marketing spend.2018.
Product development
Product development expenses consist primarily of employee compensation and contractor costs that are incurred in connection with the development of our Payments Platform, new products, and the improvement of our existing products. Product development expenses exclude software and website development costs that are capitalized. The amortization of developed technology is included in depreciation and amortization expense.
Product development expenses increased $42$118 million, or 5%12%, in 20162018 compared to 20152017 and increased $45$119 million, or 6%14%, in 20152017 compared to 2014.2016. The increase in 20162018 and 2017 was due primarily to an increase in employee related expenses, driven primarily by Xoom, offset by a decrease in contractor relatedemployee-related expenses. The increase in 20152018 was due primarilyalso attributable to investmentsan increase in our Payments Platform, creating new mobile experiences for our customerscontractor and supporting our strategic initiatives, partially offset by a decreaseconsulting expenses. Our acquisitions completed in employee2018 and contractor related expenses.2017 collectively contributed approximately two percentage points to the growth rate in 2018.
General and Administrativeadministrative
General and administrative expenses consist primarily of costs incurred to provide support to our business, including legal, human resources, finance, risk and compliance, executive, and other support operations. Our legal expenses, including those related to ongoing legal proceedings, case settlements and judgments, and regulatory proceedings, settlements, judgments, and fines, may fluctuate substantially from period to period.
For periods prior to the separation, our consolidated financial statements include expenses associated with workplace resources and information technology that were previously allocated to the Payments segment of eBay, and additional expenses related to certain corporate functions, including senior management, legal, human resources and finance. These expenses also include allocations related to stock-based compensation. The expenses that were incurred by eBay have been allocated to us based on direct usage or benefit where identifiable, with the remainder allocated on a pro rata basis of revenue, headcount, or other systematic measure. The corporate costs and allocation of expenses from eBay may not be indicative of the expenses that may have been incurred had we been a separate stand-alone entity during the periods presented, nor are the results stated herein indicative of the expenses we may incur in the future. Such expenses could be higher or lower. In the periods presented, a significant portion of expenses associated with these functions and allocated to us in our consolidated financial statements are included in general and administrative expenses.
General and administrative expenses increased $155$296 million, or 18%26%, in 20162018 compared to 20152017 and increased $140$127 million, or 19%12%, in 20152017 compared to 2014.2016. The increase in 20162018 was due primarily to an increase in employeeemployee-related expenses, contractor relatedprofessional service expenses, and facilities cost. Additional expenses incurred to operate as an independent public companysupport our mergers and continued investmentsacquisitions and the sale of our U.S. consumer credit receivables portfolio also contributed to the growth rate in compliance programs.2018. Our acquisitions completed in 2018 and 2017 collectively contributed approximately five percentage points to the growth rate in 2018. The increase in 20152017 was due primarily to an increase in expenses incurred to operate as an independent public company and an increase in expenses associated with professional services, including contractor relatedemployee-related expenses and regulatory matters. In 2015, $121 million of corporate costsprofessional service expenses, and expenses allocated to us by eBay were includedcontinued investments in general and administrative expenses compared to $207 million in 2014, representing a decrease of $86 million, or 42%, compared to 2014.compliance programs.
Depreciation and Amortizationamortization
The primary components of our depreciation and amortization expenses include the depreciation and amortization of software, including the amortization of capitalized software and website development costs, amortizationdepreciation of equipment used to deliver our services, and the amortization of acquired intangible assets.
Depreciation and amortization expenses increased $116decreased $29 million, or 19%4%, in 20162018 compared to 20152017, and increased $92$81 million, or 18%11%, in 20152017 compared to 2014.2016. The increasesdecrease in 20162018 was primarily attributable to fully depreciated assets partially offset by an increase in amortization of acquired intangibles due to acquisitions completed in 2018 and 2015 were2017, which contributed seven percentage points to the growth rate. The increase in 2017 was due primarily to additional depreciation expenses associated with investments in our technology platform and in 2015, anplatform. Additionally, the increase in capital expendituresdepreciation and amortization in 2017 was partially attributable to operate as an independent public company. Amortization expense forimpairment charge of $30 million related to a portion of our acquired TIO customer-related intangible assets was $150 million, $93 millionassets. For additional information, see “Note 5—Goodwill and $84 million in the years ended December 31, 2016, 2015 and 2014, respectively. The increase in amortization of intangibles in 2016 and 2015 was due primarilyIntangible Assets” to our acquisitions.
consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Restructuring and other charges
Restructuring and other charges primarily consist of restructuring expenses and cost adjustments related to our loans and receivables, held for sale portfolio. Restructuring and other charges increased by $177 million in 2018 compared to 2017 due to an increase of $152 million in cost adjustments, which were primarily driven by charge-offs against loans and interest receivables, held for sale portfolio, prior to its sale in July 2018, and a net loss of $40 million incurred at the conclusion of this sale. Restructuring and other charges increased by $132 million in 2017 compared to 2016 due to restructuring charges of $40 million and cost adjustments of $92 million, which were driven by charge-offs against our U.S. consumer credit receivables portfolio subsequent to its designation as held for sale in November 2017.
In January 2015, at a regular meetingthe first quarter of eBay’s board2018 and 2017, management approved strategic reductions of directors (the “eBay Board”), the eBay Board approved a plan to implement a strategic reduction of its existing global workforce.workforce, which resulted in restructuring charges of $25 million and $40 million, respectively. The reduction wasapproved in the first quarter of 2018 also included restructuring charges related to the decision to wind down TIO operations. We incurred employee and severance benefits expenses under both the 2018 and 2017 strategic reductions, which were substantially completed by the end of 2015 primarily impacting sales2018 and marketing and product development expenses. Restructuring expenses were $48 million in 2015.2017, respectively. No restructuring expenses were recognized in 20162016.
Other income (expense), net
Other income (expense), net increased $109 million, or 2014.149%, in 2018 compared to 2017, and increased $28 million, or 62%, in 2017 compared to 2016. The increase in 2018 was primarily driven by net unrealized gains on equity investments due to the favorable impact of observable price changes, which contributed $86 million (including $55 million in the fourth quarter). Additionally, the increase was attributable to growth in interest income of $83 million due to higher interest rates and increase in corporate cash, partially offset by an increase of $70 million in interest expense associated with higher amounts of notes payable outstanding under our credit agreements. The increase in 2017 was primarily driven by an increase in interest income.
Income tax expense
On December 22, 2017, the U.S. government enacted the Tax ExpenseCuts and Jobs Act (the “Tax Act”). The Tax Act included significant changes to the U.S. corporate income tax system including: a federal corporate rate reduction from 35% to 21%; limitations on the deductibility of interest expense and executive compensation; creation of new minimum taxes such as the base erosion anti-abuse tax (“BEAT”) and Global Intangible Low Taxed Income (“GILTI”) tax; and the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system, which resulted in a one time U.S. tax liability on those earnings which have not previously been repatriated to the U.S. (the “Transition Tax”).
In connection with our initial analysis of the impact of the Tax Act, we recorded a provisional estimate of discrete net tax expense of $180 million for the period ended December 31, 2017. This discrete expense consisted of provisional estimates of $1,468 million net expense for the Transition Tax payable in installments over eight years, $1,295 million net benefit for the decrease in our deferred tax liability on unremitted foreign earnings, and $7 million net expense for remeasurement of our deferred tax assets/liabilities for the corporate rate reduction and changes in our valuation allowance.
During the year ended December 31, 2018, we completed our accounting for the income tax effects of the Tax Act. We recognized additional discrete net tax expense of $20 million to the provisional amounts recorded at December 31, 2017 for the enactment-date effects of the Tax Act, for a total of $200 million of discrete net tax expense. The $200 million of total discrete net expense consists of $1,490 million of net federal and state Transition Tax, the majority of which is payable in installments over eight years, $1,295 million net benefit for the decrease in our deferred tax liability on unremitted foreign earnings, and $5 million net expense for remeasurement of our deferred tax assets and liabilities for the corporate rate reduction and changes in our valuation allowance. We elected to account for GILTI as a current-period expense when incurred. Legislation and clarifying guidance is expected to continue to be issued by the U.S. Treasury and various states in 2019, which could have a material adverse impact on the value of our U.S. deferred tax assets, result in significant changes to currently computed income tax liabilities for past and current tax periods, and increase our future U.S. tax expense.
Our effective tax rate was 13% in 2018, 18% in 2017, and 14% in 2016, 17% in 2015, and 67% in 2014.2016. The decrease in our effective tax rate in 20162018 was primarily due to a favorable shift in earnings and discrete net tax adjustments duringexpense recorded for U.S. tax reform in 2017, partially offset by reduced tax benefits for U.S. expenses in 2018 due to the year ended December 31, 2016 and other separation-related costs incurred during the year ended December 31, 2015.lower U.S. tax rate. The decreaseincrease in our effective tax rate during 2015 comparedin 2017 was primarily due to 2014 was due primarily todiscrete net tax expense recorded for U.S. tax reform, partially offset by the recognitionadoption of the new stock-based compensation accounting standard in 2014 of a U.S. deferred tax liability of approximately $650 million on $1.9 billion of undistributed foreign earnings of certain of our foreign subsidiaries for 2013 and prior years.2017. See “Note 16—Income Taxes” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information on our effective tax rate.
Non-GAAP Financial Information
Non-GAAP financial information is defined as a numerical measure of a company’s performance that excludes or includes amounts that are different thancreate differences between the most directly comparable measure calculated and presented in accordance with accounting principlesU.S. generally accepted in the United Statesaccounting principles (“GAAP”). Pursuant to the requirements of Regulation S-K, portionsthe following portion of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includeincludes a reconciliation of certain non-GAAP financial measures to the most directly comparable GAAP financial measures. The presentation of non-GAAP financial measures should not be considered in isolation or as a substitute for our related financial results prepared in accordance with GAAP.
We present non-GAAP financial measures to enhance an investor’s evaluation of our ongoing operating results and to facilitate meaningful comparisoncomparisons of our results between periods. Management uses these non-GAAP financial measures to, among other things,things: evaluate our ongoing operations, for internal planning and forecasting purposes, and in the calculation of performance-based compensation.
We exclude 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, and non-GAAP income tax expense: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 that management does not believe are reflective of ongoing operating results.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.
Separation. These are significant expenses related to the separation of our business from eBay into a separate, independent publicly traded company. These consist primarily of third-party consulting fees, legal fees, employee retention payments and other expenses incurred to complete the separation. We exclude these items because management does not believe they are reflective of our ongoing operating results.
Restructuring. These consist of significant expenses for employee severance and other exit and disposal costs. We exclude restructuring charges primarily because management does not believe they are reflective of our ongoing operating results.
Other certainCertain other significant gains, losses, benefits, or charges that are not indicative of our 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. We exclude these amounts from our non-GAAP results because management does not believe they are indicative of our ongoing operating results.
Tax effect of non-GAAP adjustments. This amountadjustment is usedmade 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 following table providestables provide reconciliations of our consolidated non-GAAP financial measures to the most directly comparable GAAP financial measures for the years ended December 31, 2016, 20152018, 2017, and 2014:
2016:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| | (In millions, except percentages) |
| GAAP operating income | $ | 1,586 |
| | $ | 1,461 |
| | $ | 1,268 |
|
| Stock-based compensation expense and related employer payroll taxes | 455 |
| | 356 |
| | 309 |
|
| Amortization of acquired intangible assets | 133 |
| | 85 |
| | 70 |
|
| Separation | — |
| | 15 |
| | — |
|
| Restructuring | — |
| | 48 |
| | 1 |
|
| Acquisition related transaction expense | — |
| | 10 |
| | — |
|
| Total non-GAAP operating income adjustments | 588 |
| | 514 |
| | 380 |
|
| Non-GAAP operating income | $ | 2,174 |
| | $ | 1,975 |
| | $ | 1,648 |
|
| Non-GAAP operating margin | 20 | % | | 21 | % | | 21 | % |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (In millions, except percentages) |
| GAAP net revenues | $ | 15,451 |
| | $ | 13,094 |
| | $ | 10,842 |
|
Other(1) | — |
| | (39 | ) | | — |
|
| Non-GAAP net revenues | $ | 15,451 |
| | $ | 13,055 |
| | $ | 10,842 |
|
(1) Elimination of allowance on interest receivable due to the U.S. consumer credit portfolio designation as held for sale.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| | (In millions, except percentages) |
| GAAP income before income taxes | $ | 1,631 |
| | $ | 1,488 |
| | $ | 1,261 |
|
| GAAP income tax expense | 230 |
| | 260 |
| | 842 |
|
| GAAP net income | 1,401 |
| | 1,228 |
| | 419 |
|
| Non-GAAP adjustments to net income: | | | | | |
| Non-GAAP operating income adjustments (see table above) | $ | 588 |
| | $ | 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 | (164 | ) | | (142 | ) | | (106 | ) |
| Non-GAAP net income | $ | 1,825 |
| | $ | 1,588 |
| | $ | 1,343 |
|
| | | | | | |
| GAAP income tax expense | $ | 230 |
| | $ | 260 |
| | $ | 842 |
|
| Tax effect of non-GAAP adjustments | 164 |
| | 142 |
| | 106 |
|
| Non-GAAP income tax expense | $ | 394 |
| | $ | 402 |
| | $ | 948 |
|
| | | | | | |
| GAAP net income per diluted share | $ | 1.15 |
| | $ | 1.00 |
| | $ | 0.34 |
|
| Non-GAAP net income per diluted share | $ | 1.50 |
| | $ | 1.29 |
| | $ | 1.10 |
|
Shares used in GAAP diluted share calculation(1)(2) | 1,218 |
| | 1,229 |
| | 1,224 |
|
Shares used in non-GAAP diluted share calculation(1)(2) | 1,218 |
| | 1,229 |
| | 1,224 |
|
| | | | | | |
| GAAP effective tax rate | 14 | % | | 17 | % | | 67 | % |
| Tax effect of non-GAAP adjustments to net income | 4 | % | | 3 | % | | (49 | )% |
| Non-GAAP effective tax rate | 18 | % | | 20 | % | | 18 | % |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 |
| 2017 |
| 2016 |
| | (In millions, except percentages) |
| GAAP operating income | $ | 2,194 |
|
| $ | 2,127 |
|
| $ | 1,586 |
|
| Stock-based compensation expense and related employer payroll taxes | 920 |
|
| 761 |
|
| 455 |
|
Amortization of acquired intangible assets(1) | 146 |
|
| 129 |
|
| 133 |
|
| Restructuring | 25 |
|
| 40 |
|
| — |
|
Other(2) | 40 |
|
| (302 | ) |
| — |
|
| Acquisition related transaction expense | 24 |
|
| — |
|
| — |
|
| Total non-GAAP operating income adjustments | 1,155 |
|
| 628 |
|
| 588 |
|
| Non-GAAP operating income | $ | 3,349 |
|
| $ | 2,755 |
|
| $ | 2,174 |
|
| Non-GAAP operating margin | 22 | % |
| 21 | % |
| 20 | % |
1(1) On July 17, 2015,Includes $30 million impairment related to a portion of acquired TIO customer-related intangible assets in 2017.
(2) Includes net loss ($40 million) related to the distribution date, eBay stockholderssale 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 shareour U.S. consumer credit receivables portfolio for the year ended December 31, 2014 was calculated using2018. Includes elimination of allowance on loans receivable ($283 million), allowance on interest receivable ($39 million) due to the numberdesignation of common shares distributed on the distribution date.
2 The weighted average numberU.S. consumer credit portfolio as held for sale, certain fees associated with the sale of common shares outstanding for basicthe portfolio ($5 million), and diluted earnings per shareimpairment of an investment in an intellectual property fund ($15 million) for the year ended December 31, 2015 was based on2017.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (In millions, except percentages) |
| GAAP income before income taxes | $ | 2,376 |
| | $ | 2,200 |
| | $ | 1,631 |
|
| GAAP income tax expense | 319 |
| | 405 |
| | 230 |
|
| GAAP net income | 2,057 |
| | 1,795 |
| | 1,401 |
|
| Non-GAAP adjustments to net income: | | | | | |
| Non-GAAP operating income adjustments (see table above) | $ | 1,155 |
| | $ | 628 |
| | $ | 588 |
|
Other(1) | 43 |
| | 224 |
| | — |
|
| Tax effect of non-GAAP adjustments | (342 | ) | | (329 | ) | | (164 | ) |
| Non-GAAP net income | $ | 2,913 |
| | $ | 2,318 |
| | $ | 1,825 |
|
| | | | | | |
| GAAP income tax expense | $ | 319 |
| | $ | 405 |
| | $ | 230 |
|
| Non-GAAP tax adjustments | 299 |
| | 105 |
| | 164 |
|
| Non-GAAP income tax expense | $ | 618 |
| | $ | 510 |
| | $ | 394 |
|
| | | | | | |
| GAAP net income per diluted share | $ | 1.71 |
| | $ | 1.47 |
| | $ | 1.15 |
|
| Non-GAAP net income per diluted share | $ | 2.42 |
| | $ | 1.90 |
| | $ | 1.50 |
|
| Shares used in GAAP diluted share calculation | 1,203 |
| | 1,221 |
| | 1,218 |
|
| Shares used in non-GAAP diluted share calculation | 1,203 |
| | 1,221 |
| | 1,218 |
|
| | | | | | |
| GAAP effective tax rate | 13 | % | | 18 | % | | 14 | % |
| Tax effect of non-GAAP adjustments to net income | 5 | % | | — | % | | 4 | % |
| Non-GAAP effective tax rate | 18 | % | | 18 | % | | 18 | % |
(1) Years ended December 31, 2018 and 2017 include tax expense related to the numberTax Act ($20 million and $180 million, respectively)and intra-entity transfer of common shares distributed on July 17, 2015 for the period prior to distributionintellectual property ($23 million and the weighted average number of common shares outstanding for the period beginning after the distribution date.$44 million, respectively).
In addition to the non-GAAP measures discussed above, we also use free cash flow to assess our operating performance. Free cash flow represents cash flows from operating activities less purchases of property and equipment. We consider free cash flow to be a key performanceliquidity measure that provides useful information to management and investors about the amount of cash generated by the business after the purchases of property and equipment, and including investments in our Payments Platform, which can
then be used to, among other things, invest in our business, make strategic acquisitions, and return cash to shareholders.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 our cash balance for the period. A reconciliation of free cash flow to the most directly comparable GAAP financial measure is presented below:
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| | (In millions) | (In millions) |
Net cash provided by operating activities | $ | 3,158 |
| | $ | 2,546 |
| | $ | 2,220 |
| $ | 5,483 |
| | $ | 2,531 |
| | $ | 3,158 |
|
| Less: Purchases of property and equipment | (669 | ) | | (722 | ) | | (492 | ) | (823 | ) | | (667 | ) | | (669 | ) |
Free cash flow | $ | 2,489 |
| | $ | 1,824 |
| | $ | 1,728 |
| $ | 4,660 |
| | $ | 1,864 |
| | $ | 2,489 |
|
(1) The year ended December 31, 2018 includes a positive impact of approximately $1.4 billion due to the completion of the sale of our US consumer credit receivables portfolio in July 2018. The year ended December 31, 2017 includes a negative impact of approximately $1.3 billion due to the change in presentation of the U.S. consumer credit receivables portfolio subsequent to its designation as held for sale in November 2017.
Liquidity and Capital Resources
We require liquidity and access to capital to fund our global operations, including customer protection programs, our PayPal Creditcredit products, capital expenditures, investments in our business, potential acquisitions, working capital, and other cash needs. The following table summarizes the cash, cash equivalents, and investment balances availableinvestments as of December 31, 20162018 and December 31, 2015:2017:
|
| | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 |
| | (In millions) |
Cash, cash equivalents and available-for-sale investment securities(1)(2) | $ | 6,447 |
| | $ | 5,707 |
|
|
| | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
| | (In millions) |
Cash, cash equivalents, and investments(1)(2) | $ | 9,710 |
| | $ | 7,487 |
|
(1)Excludes assets related to customer accounts of $14.4$20.1 billion and $12.3$18.2 billion at December 31, 20162018 and December 31, 2015,2017, respectively.
(2) Excludes total restricted cash of $17$77 million and $26$81 million at December 31, 20162018 and December 31, 2015,2017, respectively, and cost methodequity investments of $50293 million and $26$88 million as of December 31, 20162018 and December 31, 2015,2017, respectively.
Foreign Cash, Cash Equivalents and Investments
Cash, cash equivalents and investments held by our foreign subsidiaries (i.e., any entities where earnings would be subject to United States tax upon repatriation) were $5.0$8.7 billion as of December 31, 20162018 and $4.2$6.1 billion at December 31, 2015,2017, or 78%89% and 74%81% of our total cash, cash equivalents, and investments as of those dates, respectively.respective dates. At December 31, 2018, all of our cash, cash equivalents, and investments held by foreign subsidiaries were subject to U.S. taxation under Subpart F, GILTI, or the one-time Transition Tax as further discussed in “Note 16—Income Taxes” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Subsequent repatriations will not be taxable from a U.S. federal tax perspective, but may be subject to state or foreign withholding tax. A significant aspect of our global cash management activities involves meeting our customers' requirements to access their cash while simultaneously meeting our regulatory financial ratios commitments in various jurisdictions. Our global cash balances are required not only to provide operational liquidity to our businesses, but also to support our global regulatory requirements across our regulated subsidiaries. As such, not all of our cash is available for general corporate purposes.
Credit Facilities
In the fourth quarter of 2017, we entered into a credit agreement (“2017 Credit Agreement”) that provided for an unsecured $3.0 billion, 364-day delayed-draw term loan credit facility, which was available in up to three borrowings. In the fourth quarter of 2018, we entered into an amended credit agreement (“Amended Credit Agreement”) which amends and restates in its entirety the 2017 Credit Agreement. The Amended Credit Agreement provides for an unsecured $5.0 billion, 364-day delayed-draw term loan credit facility, which is available in up to four separate borrowings. Funds borrowed under the Amended Credit Agreement may be used to repurchase equity securities from shareholders, to repay intercompany debt, and for other general corporate purposes of the Company and our subsidiaries. Amounts available under the Amended Credit Agreement may be borrowed until April 2019, subject to customary borrowing conditions, and the Amended Credit Agreement will terminate in November 2019.
In the first quarter of 2018, we effected two drawdowns aggregating to $2.0 billion under the 2017 Credit Agreement, which were in addition to the outstanding balance of $1.0 billion as of December 31, 2017. In the second quarter of 2015,2018, we received a contribution of approximately $3.8repaid $1.0 billion of cash from eBay, as well as a related estimated deferred tax liability of $236 million associated with foreign earnings that are not considered indefinitely reinvested. In the fourth quarter of 2015, we reassessedborrowings outstanding under the measurement of the deferred tax liability based on updated valuation information and reduced the deferred tax liability balance to $172 million2017 Credit Agreement. The borrowings outstanding as of December 31, 2015. The adjustment2018 and 2017 bore interest at LIBOR of one month plus a margin of 1.125% resulting in a weighted average interest rate of 3.34% and 2.78%, respectively. As of December 31, 2018, $2.0 billion was outstanding under the Amended Credit Agreement. Accordingly, at December 31, 2018, $3.0 billion of borrowing capacity was available in up to four drawdowns for the deferred tax liability was recorded as a contribution from eBay and resulted in an increasepurposes permitted by the Amended Credit Agreement, subject to net parent investment within stockholders' equity. This cash is being used for general corporate purposes in both our international and domestic operations.customary conditions to borrowing.
In the third quarter of 2015, we entered into a credit agreement (“2015 Credit Agreement” and, collectively with the Amended Credit Agreement, the “Credit Agreements”) that provides for an unsecured $2.0 billion, five-year revolving credit facility that includes a $150 million letter of credit sub-facility and a $150 million swingline sub-facility, with available borrowings under the revolving credit facility reduced by the amount of any letters of credit and swingline borrowings outstanding. Borrowings and other amounts payable under the Credit Agreement are guaranteed by PayPal, Inc. (the “Guarantor”).outstanding from time to time. We may, also, subject to the agreement of the applicable lenders, increase the commitments under the revolving credit facility by up to $500 million. Subject to specified conditions, we may designate one or more of our subsidiaries as additional borrowers under the Credit Agreement provided that we and the Guarantor guarantee all borrowings and other obligations of any such subsidiaries under the Credit Agreement. As of December 31, 2016, no subsidiaries were designated as additional borrowers. Funds borrowed under the 2015 Credit Agreement may be used for working capital, capital expenditures, acquisitions and other general corporate purposes.
Loans under the Credit Agreement will bear interest at either (i) the London Interbank Offered Rate (“LIBOR”) plus a margin (based on our public debt ratings) ranging from 1.00 percent to 1.625 percent or (ii) a formula based on the agent bank’s prime rate, the federal funds effective rate or LIBOR plus a margin (based on our public debt ratings) ranging from zero percent to 0.625 percent. Subject to certain conditions stated in the Credit Agreement, we and any of our subsidiaries designated as additional borrowers may borrow, prepay and re-borrow amounts under the revolving credit facility at any time during the term of the Credit Agreement. The 2015 Credit Agreement will terminate and all amounts owing thereunder will be due and payable onin July 17, 2020, unless (a)2020.
During the commitments are terminated earlier, either at our request or, if an eventthird quarter of default occurs, by2017, we drew down $800 million under the lenders (or automatically in the case of certain bankruptcy-related events), or (b) the maturity date is extended upon our request, subject to the agreement of the lenders. The2015 Credit Agreement, contains customary representations, warranties, affirmative and negative covenants, including financial covenants, eventswhich was repaid during the fourth quarter of default and indemnification provisions2017. The borrowing bore interest at LIBOR of one month plus a margin of 1.125% resulting in favora weighted-average interest rate of the banks. The negative
covenants include restrictions regarding the incurrence of liens, subject to certain exceptions. The financial covenants require us to meet a quarterly financial test with respect to a minimum consolidated interest coverage ratio and a maximum consolidated leverage ratio, based on our public debt ratings.
2.36%. As of December 31, 2016,2018, no borrowings or letters of credit were outstanding under the 2015 Credit Agreement. Accordingly, at December 31, 2016,2018, $2.0 billion of borrowing capacity was available for the purposes permitted by the 2015 Credit Agreement, subject to customary conditions to borrowing.
We also maintain uncommitted credit facilities in various regions throughout the world, with borrowing capacity of approximately $300 million in the aggregate. Interest rate terms for these facilities vary by region and reflect prevailing market rates for companies with strong credit ratings. As of December 31, 2018, no amounts were outstanding under these facilities, and therefore, approximately $300 million of borrowing capacity was available, subject to customary conditions to borrowing.
For additional information regarding the terms of our credit facilities, refer to “Note 12—Notes Payable” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
We have a cash pooling arrangement with a financial institution for cash management purposes. The arrangement allows for cash withdrawals from the financial institution based upon our aggregate operating cash balances held within the financial institution (“Aggregate Cash Deposits”). The arrangement also allows us to withdraw amounts exceeding the Aggregate Cash Deposits up to an agreed-upon limit. The net balance of the withdrawals and the Aggregate Cash Deposits are used by the financial institution as a basis for calculating our net interest expense or income under these arrangements. As of December 31, 2016,2018, we had a total of $2.0$4.3 billion in cash withdrawals offsetting our $2.0$4.3 billion in Aggregate Cash Deposits held within the financial institution under the cash pooling arrangement.
Liquidity for Credit Portfolio Growth
Growth in the portfolio of loan receivables increases our liquidity needs and any failure to meet those liquidity needs could adversely affect our business. We continue to evaluate partnerships and third party sources of funding of our credit portfolio. In June 2018, the Luxembourg Commission de Surveillance du Secteur Financier (the “CSSF”) agreed that PayPal’s management may designate up to 35% of European customer balances held in our Luxembourg banking subsidiary to be used to extend credit for European and U.S. credit activities. As of December 31, 2016,2018, the cumulative amount approved by management to be designated for credit activities aggregated to $1.5 billion and represented approximately 26% of European customer balances potentially available for corporate use by us at that date as determined by applying financial regulations maintained by the CSSF. No additional amount has been designated for corporate usage by management during the year ended December 31, 2018. We may periodically seek to designate additional amounts of customer balances, if necessary, based on utilization of the approved funds and anticipated credit funding requirements. Our objective is to expand the availability of our credit products with capital from external sources, although there can be no assurance that we werewill be successful in achieving that goal. Under certain exceptional circumstances, corporate liquidity could be called upon to meet our obligations related to our European customer balances.
In November 2017, we reached an agreement to sell our U.S. consumer credit receivables portfolio to Synchrony Bank. Historically, this portfolio was reported as outstanding principal balances, net of any participation interest sold and pro rata allowances including, unamortized deferred origination costs and estimated collectible interest and fees. In July 2018, we completed the transaction for total consideration of $6.9 billion, which includes cash consideration of $6.5 billion and a long-term receivable in the amount of $426 million, which was recorded at that time at its present value of $261 million. Following the closing of this transaction, Synchrony Bank became the exclusive issuer of the PayPal credit online consumer financing program in the U.S., and we no longer hold an ownership interest in the receivables generated through the program (other than charged off or designated to be charged off receivables).
Credit Ratings
As of December 31, 2018, we continue to be rated investment grade by Standard and Poor's Financial Services, LLC and Fitch Ratings, Inc. We expect that these credit rating agencies will continue to monitor our performance, including our capital structure and results of operations. Our goal is to be rated investment grade, but as circumstances change, there are factors that could result in our credit ratings being downgraded or put on a watch list for possible downgrading. If that were to occur, it could increase our borrowing costs,rates, including the interest rate on loans under ourthe Credit Agreement.Agreements.
Risk of Loss
The risk of losses from our customerbuyer and seller protection programs are specific to individual customers, merchants and transactions, and may also be impacted by regional variations in, the programs and changes or modifications to, the programs, resulting fromincluding as a result of changes toin regulatory requirements. For the periods presented in these consolidated financial statements included in this report, our transaction loss rates, calculated by dividing transaction loss by TPV, ranged between 0.17% andwas 0.18% of TPV. Historical trends may not be an indication of future results. In addition, prior to the distribution, we recovered certain amounts from eBay related to customer protection programs offered on eligible eBay purchases made with PayPal. These costs included the actual amount of protection losses associated with eBay's customer protection programs that we administered and funded on behalf of eBay, which are included as a reduction of transaction and loan losses. Following the distribution, we no longer administer eBay's customer protection programs or recover amounts from eBay associated with transaction losses incurred on eligible eBay purchases; instead, we and eBay each independently administer our own customer protection programs. Further, our customer protection programs extend to customers’ eligible purchases on eBay and therefore we have incurred and expect to continue to incur incremental costs associated with our customer protection programs following the distribution.
Growth in our portfolio of loan receivables originated through PayPal Credit products increases our liquidity needsAcquisitions and any failure to meet those liquidity needs could adversely affect our business. We continue to evaluate partnerships and third-party sources of funding of our credit portfolio, including, but not limited to, commercial banks, securitization markets, private equity firms and sovereign wealth funds. Consistent with this strategy, in March 2016, as approved by management and our Luxembourg banking subsidiary Supervisory Board and as permitted within regulations set forth by the Luxembourg Commission de Surveillance du Secteur Financier (the “CSSF”), we designated $800 million of European customer balances held in our Luxembourg banking subsidiary to be used to extend credit to our European customers. These funds are classified as cash and cash equivalents in our consolidated balance sheet and represent approximately 20% of European customer balances potentially available for corporate use by us at December 31, 2016 as determined by applying financial regulations maintained by the CSSF. We may periodically seek to designate additional amounts of customer balances to be used to extend credit to our European customers, if necessary, based on utilization of the approved funds and anticipated credit funding requirements. Our objective is to expand the availability of our credit products with capital from external sources, although there can be no assurance that we will be successful in achieving that goal.Stock Repurchases
In January 2016,July 2018, we completed our Boardacquisition of Directors authorized a stock repurchase program that providesSimility for approximately $107 million in cash. We acquired Simility to enhance our ability to deliver fraud prevention and risk management solutions to merchants globally.
In September 2018, we completed our acquisition of iZettle for approximately $2.1 billion in cash (net of cash acquired of $103 million) and $22 million in equity. We acquired iZettle to expand our in-store presence and strengthen our Payments Platform to help small businesses around the repurchaseworld grow and thrive in an omnichannel retail environment.
In November 2018, we completed our acquisition of upHyperwallet for approximately $399 million in cash. We acquired Hyperwallet to $2enhance our payout capabilities and improve our ability to provide an integrated suite of payment solutions to ecommerce platforms and marketplaces around the world.
During the year ended December 31, 2018, we repurchased approximately $2.5 billion of our common stock with no expiration from the date of authorization. Thisthrough open market repurchases and approximately $1.0 billion pursuant to an accelerated share repurchase agreement under our stock repurchase program isprograms. As of December 31, 2018, a total of approximately $11.5 billion remained available for future repurchases of our common stock under our stock repurchase programs. During the year ended December 31, 2017, we repurchased approximately $1.0 billion of our common stock under our stock repurchase programs. As of December 31, 2017, a total of approximately $5.0 billion remained available for future repurchases of our common stock under our stock repurchase programs. Our programs are intended to offset the impact of dilution from our equity compensation programs and, subject to market conditions and other factors, may also be used to make opportunistic repurchases of our common stock to reduce outstanding share count. Any share repurchases under our stock repurchase programprograms may be made through open market transactions, block trades, privately negotiated transactions including accelerated share repurchase agreements or other means at times and in such amounts as management deems appropriate, and will be funded from our working capitalcash from operations or other financing alternatives. However,Moreover, any stock repurchases are subject to market conditions and other uncertainties and we cannot predict if or when any stock repurchases will be made. Moreover, weWe may terminate our stock repurchase programprograms at any time without notice. During the year ended December 31, 2016, we repurchased approximately $995 million of our common stock
under our stock repurchase program. As of December 31, 2016, a total of approximately $1.0 billion remained available for future repurchases of our common stock under our stock repurchase program.Other Considerations
Our liquidity, access to capital, and borrowing costs could be adversely impacted by declines in our credit rating, our financial performance and global credit market conditions, as well as a broad range of other factors. In addition, our liquidity, access to capital, and borrowing costs could also be negatively impacted by the outcome of any of the legal or regulatory proceedings to which we are a party. See “Risk“Item 1A. Risk Factors—Risk Factors That May Affect Our Business, Results of Operations and Financial Condition”Condition” and “Note 12—13—Commitments and Contingencies” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional discussion of these and other risks facing our business.
We believe that our existing cash, cash equivalents, available-for-saleand investments, cash expected to be generated from operations, and our expected access to capital markets, together with potential external funding through third-partythird party sources, such as commercial banks, private equity firms, and sovereign wealth funds, will be sufficient to fund our operating activities, anticipated capital expenditures, and PayPal Creditour credit products for the foreseeable future. Depending on market conditions, we may from time to time issue debt, including in private or public offerings, to fund our operating activities, finance acquisitions, repurchase shares under our share repurchase programs, or reduce our cost of capital.
Cash Flows
In March 2016, we designated $800 million of European customer balances held in our Luxembourg banking subsidiary to be used to extend credit to our European customers. We have presented changes in funds receivable and customer accounts as cash flows from investing activities inThe following table summarizes our consolidated statements of cash flows based on the nature of the activity underlying our customer accounts which includes purchases of investments, maturities and sales of investments and changes in funds receivable and customer accounts. We have elected to conform the prior period statement of cash flows to the current period presentation to enhance transparency and provide comparability. See “Note 1—Overview and Summary of Significant Accounting Policies” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information on the effects of the changes on the presentation of our statement of cash flows to our previously reported consolidated statement of cash flows.flows:
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| | (In millions) | (In millions) |
| Net cash provided by (used in): | | | | | | | | | | |
| Operating activities | $ | 3,158 |
| | $ | 2,546 |
| | $ | 2,220 |
| $ | 5,483 |
| | $ | 2,531 |
| | $ | 3,158 |
|
| Investing activities | (4,999 | ) | | (8,038 | ) | | (2,881 | ) | 840 |
| | (4,485 | ) | | (5,904 | ) |
| Financing activities | 2,038 |
| | 4,728 |
| | 1,284 |
| (1,262 | ) | | 4,084 |
| | 2,038 |
|
| Effect of exchange rates on cash and cash equivalents | — |
| | (44 | ) | | (26 | ) | |
| Net increase/(decrease) in cash and cash equivalents | $ | 197 |
| | $ | (808 | ) | | $ | 597 |
| |
| Effect of exchange rates on cash, cash equivalents, and restricted cash | | (113 | ) | | 36 |
| | — |
|
| Net increase (decrease) in cash, cash equivalents, and restricted cash | | $ | 4,948 |
| | $ | 2,166 |
| | $ | (708 | ) |
Operating Activities
Cash flows from operating activities includes net income adjusted for certain non-cash expenses, timing differences between expenses recognized for provision for transaction and loan losses and actual cash transaction losses paid,incurred, and changes in other assets and liabilities. Significant non-cash expenses for the period include depreciation and amortization and stock-based compensation, and deferred tax expenses.compensation. The cash impact from actual transaction losses paidincurred during a period areis reflected as a negative impact to changes in other currentassets and non-current assetsliabilities in cash from operating activities. The expenses recognized during the period for provision for loan losses are estimates of probable incurred losses on our PayPal Creditconsumer and merchant credit products for which(excluding the receivable has not been charged off.U.S. consumer credit portfolio from and after November 2017). Actual charge offscharge-offs of receivables related to our PayPal Creditconsumer and merchant credit products are reflected as a reduction in changes in principal loans receivable impacting investing activities(excluding the U.S. consumer credit portfolio from and thusafter November 2017) have no impact on cash from operating activities.
We generated cash from operating activities of $5.5 billion in 2018 primarily due to operating income of approximately $2.2 billion and the positive impact of $1.4 billion of changes in the loans and interest receivable, held for sale, net following the sale of our U.S. consumer credit receivables portfolio. Adjustments for non-cash expenses of depreciation and amortization and stock-based compensation were approximately $1.6 billion during 2018. Adjustments for non-cash expenses related to the provision for transaction and loan losses were approximately $1.3 billion and cost basis adjustments to loans and interest receivable held for sale were $244 million during 2018. The cash generated from operating activities was negatively impacted by changes in other assets and liabilities of $708 million, primarily related to actual cash transaction losses incurred during the period.
We generated cash from operating activities of $2.5 billion in 2017 due primarily to operating income of approximately $2.1 billion. Adjustments for non-cash expenses of depreciation and amortization and stock-based compensation were approximately $1.5 billion during 2017. Adjustments for non-cash expenses related to the provision for transaction and loan losses were approximately $1.0 billion during 2017. The cash generated from operating activities was negatively impacted by adjustments for non-cash expenses related to deferred income taxes of approximately $1.3 billion during 2017. The cash generated from operating activities was also negatively impacted by changes in working capital primarily related to loans and interest receivable held for sale, net of $1.3 billion due to changes in the presentation of originations and collections on loans within the U.S. consumer credit portfolio subsequent to its designation as held for sale in November 2017, which were presented in operating activities instead of investing activities, offset by changes in other assets and liabilities of $634 million. Collections on the U.S. consumer credit portfolio for originations that occurred prior to November 2017 will continue to be reflected in investing activities.
We generated cash from operating activities of $3.2 billion in 2016 due primarily to operating income of approximately $1.6 billion. Adjustments for non-cash expenses of depreciation and amortization and stock-based compensation (including excess tax benefits from stock-based compensation) were approximately $1.1 billion during 2016. Adjustments for non-cash expenses related to the provision for transaction and loan losses were approximately $1.1 billion during 2016. The cash generated from operating activities was negatively impacted by changes in working capital primarily related to transaction loss allowance for cash losses, net.
We generated cash from operating activities of $2.5 billionCash paid for income taxes in 2015 due primarily to operating income of approximately $1.5 billion. Adjustments for non-cash expenses of depreciation2018, 2017, and amortization2016 was $328 million, $117 million, and stock-based compensation (including excess tax benefits from stock-based compensation) were approximately $928$48 million, during 2015. Adjustments for non-cash expensesrespectively.
related to transactionInvesting Activities
Cash flows from investing activities includes purchases, maturities and loan losses were approximately $809 million during 2015. Thesales of investments, cash generated from operating activities was negatively impacted bypaid for acquisitions, purchases and sales of property and equipment, changes in working capital primarily related to actual transaction losses paid during the period. Additional uses of cash impacting cash generated from operating activities include net cash outflows relating to settlement of eBay payablesprincipal loans receivable, and receivables of approximately $96 million and increases in accounts receivable of approximately $22 million.funds receivable.
We generated cash from operatinginvesting activities of $2.2 billion$840 million in 20142018 due primarily to operating incomematurities and sales of approximately $1.3 billion. Adjustments for non-cash expensesinvestments of depreciation and amortization and stock-based compensation (including excess tax benefits from stock-based compensation) were approximately $774 million. Adjustments to non-cash expenses for transaction and loan losses were $646 million. The cash generated from operating activities was offset by uses$21.9 billion, changes in principal loans receivable, net of cash primarily related to transaction loss allowance for cash losses, net$3.1 billion, and changes in other working capital.
Cash paid for income taxes in 2016, 2015funds receivable from customers of $1.1 billion. These cash inflows were offset by purchases of investments of $22.4 billion, acquisitions of $2.1 billion (net of cash and 2014 was $48 million, $216 millionrestricted cash acquired), and $47 million, respectively.
Investing Activitiespurchases of property and equipment of $823 million.
The net cash used in investing activities of $5$4.5 billion in 2017 was due primarily to purchases of investments of $19.4 billion, an increase in funds receivable of $1.6 billion (including the reclassification of $700 million of European customer balances held in our Luxembourg banking subsidiary as cash and cash equivalents), changes in principal loans receivable portfolio (net of collections) originated through our consumer and merchant credit products (excluding originations and collections pertaining to the U.S. consumer credit portfolio from and after November 2017 which are presented in operating activities), of $920 million, acquisitions, net of cash acquired of $323 million, and purchases of property and equipment of $667 million. These net cash outflows were offset by maturities and sales of investments of $18.4 billion. Collections on the U.S. consumer credit portfolio for originations that occurred prior to November 2017 will continue to be reflected in investing activities.
The net cash used in investing activities of $5.9 billion in 2016 was due primarily to purchases of available for sale investments of $21.0 billion, increases in our loan receivable portfolio (net of collections) originated through our PayPal Creditcredit products of $1.5 billion, purchases of property and equipment of $669 million and net increases in funds receivable from customers and customer accounts of $176 million,$1.1 billion, including the reclassification of $800 million of European customer balances held in our Luxembourg banking subsidiary as cash and cash equivalents. These net cash outflows were offset by maturities and sales of investments of $18.4 billion.
Financing Activities
Cash flows from financing activities includes proceeds from issuance of common stock, purchases of treasury stock, tax withholdings related to net share settlements of equity awards, borrowings and repayments under financing arrangements, funds payable and amounts due to customers, and excess tax benefits from stock based compensation (for periods prior to 2017).
The net cash used in investingfinancing activities of $8$1.3 billion in 20152018 was due primarily to purchasesthe repurchase of investments$3.5 billion of $21.6 billion, acquisitions, netour common stock under our stock repurchase programs, repayments of cash acquiredborrowings under financing arrangements of $1.2 billion, increases in our loan receivable portfolio (net of collections) originated through our PayPal Credit products of $819 million and purchases of property and equipment of $722 million. These net cash outflows were offset in part by maturities and sales of investments of $16.1$1.1 billion, and tax withholdings related to net share settlement of equity awards of $419 million, partially offset by cash inflows relatingfrom borrowings under financing arrangements of $2.1 billion and changes in funds payable and amounts due to receivables from eBaycustomers of $575 million.
The net cash used in investing activities of $2.9 billion in 2014 was due primarily to purchases of available for sale investments of $8.7 billion, increases in our loan receivable portfolio (net of collections) originated through our PayPal Credit products of $1 billion, purchases of property and equipment of $492 million and net cash outflows relating to receivables from eBay of $362 million. These net cash outflows were offset in part by maturities and sales of investments of $7.8$1.6 billion.
Financing Activities
The net cash provided by financing activities of $2$4.1 billion in 2017 was due primarily to increases in funds payable and amounts due to customers of $4.3 billion and borrowings of $1.8 billion. These cash inflows were partially offset by repayments of borrowings of $980 million (including a loan of $170 million assumed in connection with our acquisition of Swift), the repurchase of $1.0 billion of our common stock under our stock repurchase programs, and tax withholdings related to net share settlement of equity awards of $166 million.
The net cash provided by financing activities of $2.0 billion in 2016 was due primarily to increases in funds payable and amounts due to customers of $3$3.0 billion, offset in part by the repurchase of $995 million of our common stock under our stock repurchase program.
The net cash provided by financing activities of $4.7 billion in 2015 was due primarily to a contribution of approximately $3.9 billion of cash from eBay and increases in funds payable and amounts due to customers of $1.6 billion, offset in part by repayments of borrowings from eBay of $862 million.
The net cash provided by financing activities of $1.3 billion in 2014 was due primarily to increases in funds payable and amounts due to customers of $1.3 billion, offset in part by repayments of borrowings from eBay.programs.
Free Cash Flow
We define free cash flow as cash flows from operating activities less purchases of property and equipment.
Free cash flow was $2.5$4.7 billion in 2016,2018, an increase of $665$2.8 billion from 2017. The increase in free cash flow during the period was due to an increase in cash generated from operating activities of $3.0 billion, which was primarily impacted by changes in the loans and interest receivable held for sale, net, due to the completion of the sale of that portfolio, partially offset by purchases of property and equipment, which were $156 million higher compared to the prior year. Free cash flow generated during 2018 was used for repurchasing our common stock under our stock repurchase programs, funding our credit portfolio, acquisitions, and general business purposes.
Free cash flow was $1.9 billion in 2017, a decrease of $625 million from 2015.2016. The increasedecrease in free cash flow during the period was primarily due to higherlower cash generated from operating activities of $612$627 million, which was impacted by the change in presentation from investing activities to operating activities of originations and lower purchases of property and equipment of $53 million.collections on the U.S. consumer credit portfolio subsequent to its designation as held for sale in November 2017. Free cash flow generated during 20162017 was used for funding our credit portfolio, repurchasing our common stock under our stock repurchase program, and general business purposes.
Free cash flow was $1.8 billion in 2015, an increase of $96 million from 2014. The increase in free cash flow during the period was primarily due to higher cash generated from operating activities of $326 million, offset in part by higher purchases of property and equipment of $230 million. Free cash flow generated during 2015 was used towards our acquisitions completed in 2015,programs, funding our credit portfolio, acquisitions, and general business purposes.
Free cash flow is a non-GAAP financial measure. See “Non-GAAP Financial Information” for information on how we compute free cash flow and a reconciliation to the most directly comparable GAAP financial measure.
Effect of Exchange Rates on Cash, Cash Equivalents, and Restricted Cash
Currency exchange rates did not haveWe had a material impact on cash and cash equivalents in 2016. The negative effect of currency exchange rates on cash, and cash equivalents, and restricted cash during 2015 and 20142018 of $44$113 million, and $26 million, respectively, was due to the strengthening of the U.S. dollar against certain foreign currencies, primarily the Australian dollar and to a lesser extent, the Euro. The positive effect of currency exchange rates on cash, cash equivalents, and restricted cash during 2017 of $36 million was due to the weakening of the U.S. dollar against certain foreign currencies, primarily the Euro. Currency exchange rates did not have a material impact on cash, cash equivalents, and restricted cash in 2016.
Off-Balance Sheet Arrangements
As of December 31, 20162018 and 2015,2017, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures, or capital resources.
Future Liquidity and Obligations
As of December 31, 2016,2018, approximately $28.8$1.8 billion of unused credit was available to PayPal Credit account holders compared to $24.8$26.4 billion of unused credit as of December 31, 2015.2017. While this amount represents the total unused credit available, we have not experienced, and do not anticipate, that all of our PayPal Credit account holders will access their entire available credit at any given point in time. In addition, the individual lines of credit that make up this unused credit are subject to periodic review and termination by the chartered financial institution that is the issuer of PayPal Credit products based on, among other things, account usage and customer creditworthiness. WhenThe decrease in unused credit in 2018 as compared to 2017 was due to the sale of our U.S. consumer credit portfolio.
Prior to the completion of the sale of our U.S. consumer credit receivables portfolio in July 2018, when a consumer fundsfunded a purchase in the U.S. using a PayPal Creditcredit product issued by a chartered financial institution, the chartered financial institution extendsextended credit to the consumer, fundsfunded the extension of credit at the point of sale, and advancesadvanced funds to the merchant. We subsequently purchasepurchased the receivables related to the consumer loans extended by the chartered financial institution and, as a result of such purchase, bearbore the risk of loss in the event of loan defaults. Although the chartered financial institution continuescontinued to own each customer account, we ownowned the related receivable (excluding participation interests sold) and arewere responsible for all servicing functions related to the account. Subsequent to the completion of the sale of our U.S. consumer credit receivables portfolio in July 2018, we no longer purchase the receivables related to U.S. consumer loans extended by the chartered financial institution.
We have certain fixed contractual obligations and commitments that include future estimated payments for general operating purposes. Changes in our business needs, contractual cancellation provisions, fluctuating interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of these payments. The following table summarizes our obligations as of December 31, 20162018 that are expected to impact liquidity and cash flow in future periods. We believe we will be able to fund these obligations through our existing cash and investment portfolio and cash expected to be generated from operations.
| | | | Purchase Obligations | | Operating Leases | | Total | Purchase Obligations | | Operating Leases | | Transition Tax | | Total |
| Payments Due During the Year Ending December 31, | (In millions) | (In millions) |
| 2017 | $ | 321 |
| | $ | 102 |
| | $ | 423 |
| |
| 2018 | 129 |
| | 106 |
| | 235 |
| |
| 2019 | 97 |
| | 93 |
| | 190 |
| $ | 320 |
| | $ | 124 |
| | $ | 39 |
| | $ | 483 |
|
| 2020 | 59 |
| | 63 |
| | 122 |
| 78 |
| | 111 |
| | 114 |
| | 303 |
|
| 2021 | 4 |
| | 47 |
| | 51 |
| 11 |
| | 96 |
| | 114 |
| | 221 |
|
| 2022 | | 6 |
| | 81 |
| | 114 |
| | 201 |
|
| 2023 | | 5 |
| | 63 |
| | 212 |
| | 280 |
|
| Thereafter | 22 |
| | 141 |
| | 163 |
| 19 |
| | 189 |
| | 638 |
| | 846 |
|
| | $ | 632 |
| | $ | 552 |
| | $ | 1,184 |
| $ | 439 |
| | $ | 664 |
| | $ | 1,231 |
| | $ | 2,334 |
|
The significant assumptions used in our determination of amounts presented in the above table are as follows:
Purchase obligation amounts include minimum purchase commitments for advertising, capital expenditures (computer equipment, software applications, engineering development services and construction contracts), and other goods and services entered into in the ordinary course of business.
LeaseOperating lease amounts include minimum rental payments under our non-cancelable operating leases primarily for office facilities,
as well as computer and office equipment that we utilize under lease arrangements.data center facilities. The amounts presented are consistent with contractual terms and are not expected to differ significantly from actual results under our existing leases, unless a substantial change in our headcount needs requires us to expand our occupied space or exit an office facility early.
Transition Tax represents the one-time mandatory tax on previously deferred foreign earnings under the Tax Act, as further discussed in “Note 16—Income Taxes” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
As we are unable to reasonably predict the timing of settlement of liabilities related to unrecognized tax benefits, net, the table above does not include $244$615 million of such non-current liabilities included in deferred and other tax liabilities recorded on our consolidated balance sheetsheets as of December 31, 2016.2018.
Seasonality
The Company does not experience meaningful seasonality with respect to net revenues. No individual quarter in 2016, 20152018, 2017, or 20142016 accounted for more than 30% of annual net revenue.
Critical Accounting Policies and Estimates
The application of U.S. GAAP requires us to make estimates and assumptions about certain items and future events that directly affect our reported financial condition. We have established detailed policies and control procedures to provide reasonable assurance that the methods used to make estimates and assumptions are well controlled and are applied consistently from period to period. The accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to our financial statements. An accounting estimate is considered critical if both (a) the nature of the estimate or assumption is material due to the levels of subjectivity and judgment involved, and (b) the impact within a reasonable range of outcomes of the estimate and assumption is material to our financial condition. Senior management has discussed the development, selection, and disclosure of these estimates with the Audit, Risk, and Compliance Committee of our Board of Directors. Our significant accounting policies, including recent accounting pronouncements, are described in “Note 1—Overview and Summary of Significant Accounting Policies” to the consolidated annual financial statements included elsewhere in this Annual Report on Form 10-K.
A quantitative sensitivity analysis is provided where that information is reasonably available, can be reliably estimated, and provides material information to investors. The amounts used to assess sensitivity are included to allow users of this report to understand a general direction cause and effect of changes in the estimates and do not represent management’s predictions of variability. For all of these estimates, it should be noted that future events rarely develop exactly as forecasted, and estimates require regular review and adjustment.
Transaction and loan losses
Transaction and loan losses include the expense associated with our customer protection programs, fraud, chargebacks, and credit losses associated with our loans receivable balances. We expect ourOur transaction and loan losses to fluctuate depending on many factors, including: total TPV, macroeconomic conditions, changes to our customer protection programs, the impact of regulatory changes, and the credit quality of loans receivable arising from transactions funded with our credit products, which include our PayPal Credit productsconsumer product and working capitalmerchant loans and advances to selected merchant sellers.arising from our PPWC and PPBL products.
We establish allowances for estimated transaction losses arising from processing customer transactions, such as chargebacks for unauthorized credit card use and merchant-related chargebacks due to non-delivery of goods or services, ACH returns, buyer protection program claims, account takeovers, and account overdrafts. Additions to the allowance, in the form of provisions, are reflected in transaction and loan losses in our consolidated statements of income. The allowances are monitored regularly and are updated based on actual claims data reported by our claims processors and other actual data received.data. The allowances are based on known facts and circumstances, internal factors including experience with similar cases, historical trends involving loss payment patterns, and the mix of transaction and loss types.
We also establish an allowance for loans receivable, which represents our estimate of probable incurred loan losses inherent in our merchant loans and advances and consumer loans receivable and merchant working capital advances.receivable. Increases to the allowance for loans receivable are reflected as transaction and loan losses in our consolidated financial statements. This evaluation process is subject to numerous estimates and judgments. In connection with the sale of our U.S. consumer credit receivables portfolio to Synchrony Bank, and the designation of that portfolio as held for sale in November 2017, we released corresponding allowances against those loans and interest receivable balances. No allowances were established on any newly originated U.S. consumer loan receivables from and after November 2017. Adjustments to the cost basis of this portfolio, which are primarily driven by charge offs, are recorded in restructuring and other charges in our consolidated statements of income. For our consumer loans receivable,loan receivables not subject to the sale agreements with Synchrony Bank, consisting primarily of our international consumer receivables, the allowance is primarily based on forecasted principal balance delinquency rates (“roll rates”). Roll rates are the percentage of balances which we estimate will migrate from one stage of delinquency to the next based on our historical experience, as well as external factors such as estimated bankruptcies and levels of unemployment. Roll rates are applied to the principal amount of our consumer loan receivables for each stage of delinquency, from current to 180 days past the payment due date, in order to estimate the principal loans which have incurred losses and are probable to be charged off. For merchant working capitalloans and advances receivable the allowance is primarily based on principal balances, forecasted delinquency rates, and recoveries through the use of a vintage-based loss forecasting model.
The determination of delinquency, from current to 180 days past due, for principal balances related to merchant working capital advances is based on the current expected repayment period of the advance and fixed fee as compared to the original expected repayment period. We calculate the repayment rate based on the merchant's expected future payment volume such that repayment of the advance and fixed fee is typically expected to occur within 9 to 12 months from the date of the advance. On a regular basis, we recalculate the repayment period based on the actual repayment activity on the receivable. As such, actual repayment periods are dependent on actual payment processing volumes.
The allowance for loss against the interest receivable is primarily determined by applying historical average customer account roll rates to the interest receivable balance in each stage of delinquency to project the value of accounts that have incurred losses and are probable to be charged off. The allowance for fees receivable is primarily based on fee balances, forecasted delinquency rates, and recoveries through the use of a vintage-based loss forecasting model. Increases to the allowance for interest receivable isare reflected as a reduction of net revenues in our consolidated statementstatements of income. Increases to the allowance for fees receivable isare recognized as a reduction in deferred revenues included in other current liabilities in our consolidated balance sheet.
We charge off consumer loan receivable balances in the month in which a customer balance becomes 180 days past the payment due date. We charge off the merchant receivable when the updated repayment period is 180 days past the original expected repayment period and the merchant has not made a payment in the last 60 days. We also charge off the receivable when the updated repayment period is 360 days past the original expected repayment period regardless of whether or not the merchant has made a payment within the last 60 days. Bankrupt accounts are charged off within 60 days of receiving notification from the bankruptcy courts. Loans receivable past the payment due date continue to accrue interest until such time as they are charged off, with the portion of the reserve related to the interest receivable balance classified as a reduction of revenue.sheets.
Determining appropriate allowances for these losses is an inherently uncertain process and ultimate losses may vary from the current estimates. We regularly update our allowance estimates as new facts become known and events occur that may impact the settlement or recovery of losses. The allowances are maintained at a level we deem appropriate to adequately provide for losses incurred at the balance sheet date. Based on our results for the year ended December 31, 2016,2018, an aggregate ten percent increase in our transaction and loan loss rate would negatively impact transaction and loan losses by approximately $109$127 million.
Accounting for Income Taxes
Our annual tax rate is based on our income, statutory tax rates, and tax planning opportunities available to us in the various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective government taxing authorities. Significant judgment is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties. We review our tax positions quarterly and adjust the balances as new information becomes available. Our income tax rate is significantly affected by the tax rates that apply to our foreign earnings. In addition to local country tax laws and regulations, our income tax rate depends on the extent that our foreign earnings are indefinitely reinvested outsidetaxed by the U.S. through new provisions under the Tax Act such as the new GILTI tax and BEAT or as a result of our indefinite reinvestment assertion. Indefinite reinvestment is determined by management’s judgment about, and intentions concerning, our future operations. To the extent we do not intend to repatriate these earnings to fund U.S. operations, we do not provide for U.S. federal income and foreign withholding tax on these earnings.
Deferred tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings, and available tax planning strategies. These sources of income rely heavily on estimates that are based on a number of factors, including our historical experience and short rangeshort-range and long-range business forecasts. To the extent deferred tax assets are not expected to be realized, we record a valuation allowance.
We recognize and measure uncertain tax positions in accordance with U.S. GAAP, pursuant to which we only recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. U.S. GAAP further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the quarter in which such change occurs. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
We file annual income tax returns in multiple taxing jurisdictions around the world. A number of years may elapse before an uncertain tax position is audited by the relevant tax authorities and finally resolved. While it is often difficult to predict the final
outcome or the timing of resolution of any particular uncertain tax position, we believe that our reserves for income taxes are adequate such that we reflect the benefits more likely than not to be sustained in an examination. We adjust these reserves, as well as the related interest, where appropriate in light of changing facts and circumstances. Settlement of any particular position could require the use of cash.
Based on our results for the year ended December 31, 2016,2018, a one-percentage point increase in our effective tax rate would have resulted in an increase in our income tax expense of approximately $16$24 million.
Loss Contingencies
We are currently involved in various claims, legal proceedings, and investigations of potential operating violations by regulatory oversight authorities. We regularly review the status of each significant matter and assess our potential financial exposure. If the potential loss from any claim, legal proceeding, or potential regulatory violation is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of probability and whether an exposure is reasonably estimable. Our judgments are subjective based on the status of the legal or regulatory proceedings, the merits of our defenses, and consultation with in-house and outside legal counsel. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims, litigation, or other violation and may revise our estimates. Due to the inherent uncertainties of the legal and regulatory process in the multiple jurisdictions in which we operate, our judgments may be materially different than the actual outcomes.
Revenue Recognition
Application of the various accounting principles in U.S. GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates. Complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting. Specifically, the determination of whether we are a principal to a transaction (gross revenue) or an agent (net revenue) can require considerable judgment. Further, we provide incentive payments to consumers and merchants, which require judgment to determine whether the payments should be recorded as a reduction to gross revenue. Changes in judgments with respect to these assumptions and estimates could impact the amount of revenue recognized.
Valuation of Goodwill and Intangibles
The valuation of assets acquired in a business combination and asset impairment reviews require the use of significant estimates and assumptions. The acquisition method of accounting for business combinations requires us to estimate the fair value of assets acquired, liabilities assumed, and any non-controlling interest in an acquired business to properly allocate purchase price consideration between assets that are depreciated and amortized from goodwill. Impairment testing for assets, other than goodwill and indefinite-lived intangible assets, requires the allocation of cash flows to those assets or group of assets and if required, an estimate of fair value for the assets or group of assets. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions, which woulddo not reflect unanticipated events and circumstances that may occur.
We evaluate goodwill and intangible assets for impairment on an annual basis, or sooner if indicators of impairment exist. Under the Financial Accounting Standards Board (“FASB”) guidance,U.S. GAAP, the evaluation of indefinite-lived intangible assets for impairment allows for a qualitative assessment to be performed, which is similar to the FASB guidanceU.S. GAAP for evaluating goodwill for impairment. In performing these qualitative assessments, we consider relevant events and conditions, including but not limited to: macroeconomic trends, industry and market conditions, overall financial performance, cost factors, company-specific events, legal and regulatory factors, and our market capitalization. If the qualitative assessments indicate that it is more likely than not that the fair value of the reporting unit or indefinite-lived intangible assets are less than their carrying amounts, we must perform a quantitative impairment test.
Under the quantitative impairment test, if the carrying amount of the reporting unit goodwill or indefinite-lived intangible asset exceeds the implied fair value of the respective reporting unit goodwill or indefinite-lived intangible asset, an impairment loss is recorded in the statement of income. Measurement of the fair value of a reporting unit is based on one or more of the following fair value measures: amounts at which the unit as a whole could be bought or sold in a current transaction between willing parties, using present value techniques of estimated future cash flows, or using valuation techniques based on multiples of earnings or revenue, or a similar performance measure.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential for economic losses to be incurred on market risk sensitive instruments arising from adverse changes in market factors such as interest rates, foreign currency exchange rates, and equity priceinvestment risk. Management establishes and oversees the implementation of policies governing our investing, funding, and foreign currency derivative activities in order to mitigate market risks. We monitor risk exposures on an ongoing basis.
Interest Rate Risk
We are exposed to interest rate risk relating to our investment portfolio and from interest-rate sensitive assets underlying the customer balances we hold on our consolidated balance sheetsheets as customer accounts. We seek to reduce earnings volatility that may result from changes in interest rates.
As of December 31, 20162018 and December 31, 2015,2017, approximately 25%78% and 24%39%, respectively, of our total cash, cash equivalents, and investment portfolio was held in cash and cash equivalents. The assets underlying the customer balances we hold on our consolidated balance sheetsheets as customer accounts are maintained in interest and non-interest bearing bank deposits, time deposits, and U.S. and foreign government and agency securities. We classify the assets underlying the customer balances as current based on their purposesecurities, and availability to fulfill our direct obligation under amounts due to customers.corporate debt securities. We seek to preserve principal while holding eligible liquid assets, as defined by applicable regulatory requirements and commercial law in the jurisdictions where we operate, equal to at least 100% of the aggregate amount of all customer balances. We do not pay interest on amounts due to customers.
In the fourth quarter of 2017, we entered into an unsecured $3.0 billion, 364 day delayed-draw term loan credit facility, which was available in up to three borrowings (“2017 Credit Agreement”). In the fourth quarter of 2018, we entered into an amended and restated credit agreement (“Amended Credit Agreement”), which provides for an unsecured $5.0 billion, 364-day delayed-draw term loan credit facility, which is available in up to four separate borrowings. In the third quarter of 2015, we entered into a $2$2.0 billion senior unsecured credit facility maturing in 2020. 2020 (“2015 Credit Agreement”). We also maintain uncommitted credit facilities in various regions throughout the world with borrowing capacity of approximately $300 million in the aggregate.
Borrowings under the revolving facility,Amended Credit Agreement and 2015 Credit Agreement, if any, bear interest at floating rates. As a result, we will beare exposed to fluctuations in interest rates to the extent of our borrowings under the revolving credit facility.borrowings. As of December 31, 2016,2018, we had $2.0 billion of borrowings outstanding under the Amended Credit Agreement at a weighted average interest rate of 3.34%. Accordingly, at December 31, 2018, $3.0 billion of borrowing capacity was available for the purposes permitted by the Amended Credit Agreement, subject to customary conditions to borrowing. As of December 31, 2018, no borrowings or letters of credit were outstanding under the 2015 Credit Agreement.Agreement or our uncommitted credit facilities.
Interest rates may also adversely impact our customers’ spending levels and ability and willingness to pay outstanding amounts owed to us. Higher interest rates often lead to higher payment obligations by customers of our credit products to us, and otheror to lenders under mortgage, credit card, and other consumer loan obligations,and merchant loans, which may reduce our customers’ ability to remain current on their obligations to us and therefore may lead to increased delinquencies, charge-offs, and allowancesallowance for loan and interest receivable, which could have an adverse effect on our net earnings.income.
A 100 basis point increase in interest rates would not have had a material impact on our financial assets or liabilities at December 31, 20162018 and December 31, 2015.2017.
Foreign Currency Exchange Rate Risk
We have significant operations internationally that are denominated in foreign currencies, primarily the British Pound, Euro, Australian Dollar, and Canadian Dollar, subjecting us to foreign currency exchange rate risk which may adversely impact our financial results. We transact business in various foreign currencies and have significant international revenues as well asand costs. In addition, we charge our international subsidiaries for their use of intellectual property and technology and for certain corporate services. Our cash flow,flows, results of operations, and certain of our intercompany balances that are exposed to foreign exchange rate fluctuations may differ materially from expectations, and we may record significant gains or losses due to foreign currency fluctuations and related hedging activities. We are generally a net receiver of foreign currencies and therefore benefit from a weakening of the U.S. dollar, and are adversely affected by a strengthening of the U.S. dollar, relative to foreign currencies.
We have a foreign currency exchange exposure management program designed to identify material foreign currency exposures, manage these exposures, and reduce the potential effects of currency fluctuations on our reported consolidated cash flows and results of operations through the execution of foreign currency exchange contracts. These foreign currency exchange contracts are accounted for as derivative instruments; for additional details related to our foreign currency exchange contracts, please see “Note 8—10—Derivative Instruments” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
We use foreign currency exchange forward contracts to protect our forecasted U.S. dollar-equivalent earnings from adverse changes in foreign currency exchange rates. These hedging contracts reduce, but do not entirely eliminate, the impact of adverse currency exchange rate movements. We designate these contracts as cash flow hedges for accounting purposes. The effective portion of the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (“AOCI”) and subsequently reclassified into revenuethe financial statement line item in which the hedged item is recorded in the same period the forecasted transaction affects earnings. The ineffective portion ofIf we elect to discontinue our cash flow hedges and it is probable that the unrealizedoriginal forecasted transaction will occur, we continue to report them in AOCI until the forecasted transaction affects earnings at which point we also reclassify the de-designated hedges into earnings. Gains and losses on derivatives held after we discontinue our cash flow hedges and gains and losses on these contracts, if any, isderivative instruments that are not designated as cash flow hedges are recorded immediately in earnings.
the same financial statement line item to which the derivative relates.
We considered the historical trends in currency exchange rates and determined that it was reasonably possible that changes in exchange rates of 20% for all currencies could be experienced in the near term. If the U.S. dollar weakened by 20% at December 31, 20162018 and December 31, 2015,2017, the amount recorded in AOCI related to our foreign currency exchange forward contracts, before taxes, would have been approximately $341$707 million and $321$536 million lower, respectively. If the U.S. dollar strengthened by 20% at December 31, 20162018 and December 31, 2015,2017, the amount recorded in AOCI related to our foreign currency exchange forward contracts, before taxes, would have been approximately $341$707 million and $321$536 million higher, respectively.
We have an additional foreign currency exchange management program whereby we use foreign currency exchange contracts to offset the foreign currency exchange risk on our assets and liabilities denominated in currencies other than the functional currency of our subsidiaries. These contracts are not designated as hedging instruments and reduce, but do not entirely eliminate, the impact of currency exchange rate movements on our assets and liabilities. The foreign currency exchange gains and losses on our assets and liabilities are recorded in “Otherother income (expense), net,” which is and are offset by the gains and losses on the foreign currency exchange contracts.
Adverse changes in exchange rates of 20% for all currencies would have resulted in an adverse impact on income before income taxes of approximately $160$295 million and $136$243 million at December 31, 20162018 and December 31, 2015,2017, respectively, without considering the offsetting effect of hedging. Foreign currency exchange contracts in place as of December 31, 20162018 would have positively impacted income before income taxes by approximately $128$308 million, resulting in a net positive impact of approximately $13 million. Foreign currency exchange contracts in place as of December 31, 2017 would have positively impacted income before income taxes by approximately $211 million, resulting in a net negative impact of approximately $32 million. Foreign currency exchange contracts in place as of December 31, 2015 would have positively impacted income before income taxes by approximately $133 million, resulting in a net negative impact of approximately $3 million. These reasonably possible adverse changes in currency exchange rates of 20% were applied to total monetary assets and liabilities denominated in currencies other than the functional currencies of our subsidiaries at the balance sheet dates to compute the adverse impact these changes would have had on our income before income taxes as of these dates.in the near term.
Equity PriceInvestment Risk
As of December 31, 20162018 and December 31, 2015,2017, our cost methodequity investments totaled $50$293 million and $26$88 million, respectively, which represented less thanapproximately 3% and 1% of our total cash and investment portfolio at those dates, respectively, and were primarily related to cost method investmentsminority equity interests in privately held companies.companies that are not publicly traded. As of December 31, 20162018 and 2015,2017, we did not hold any marketable equity instruments. We review our investments for impairment when events and circumstances indicate a decline in fair value of such assets below carrying value is other-than-temporary.value. Our analysis includes a review of recent operating results and trends, recent sales and acquisitions of the securities in which we have invested, and other publicly available data.
European Debt Exposures
We actively monitor our exposure to the European markets, including the impact of sovereign debt issues associated with Cyprus, Greece, Ireland, Italy, Portugal and Spain. As of December 31, 2016 and December 31, 2015, we did not have any direct investments in the sovereign debt of these countries or in debt securities issued by corporations or financial institutions organized in these countries. We maintain a small number of operating bank accounts with local and foreign banks in the aforementioned countries that have balances that we do not consider material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited consolidated financial statements covering the years ended December 31, 2018, 2017, and 2016 and accompanying notes listed in Part IV, Item 15(a)(1) of this Annual Report on Form 10‑K are included elsewhere in this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Based on the evaluation of our disclosure controls and procedures (as defined in the Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), our principal executive officer and our principal financial officer have concluded that as of December 31, 2016,2018, the end of the period covered by this report, our disclosure controls and procedures were effective.
Management's report on internal control over financial reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our management, including our principal executive officer and principal financial
officer, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2016.2018.
The effectiveness of our internal control over financial reporting as of December 31, 20162018 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in Item 15(a) of this Annual Report on Form 10-K.
Changes in internal controls over financial reporting. There were no changes in our internal controls over financial reporting as defined in Exchange Act Rule 13a-15(f) that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Incorporated by reference from our Proxy Statement for our 20172019 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2016.2018.
Code of Ethics, Governance Guidelines and Committee Charters
We have adopted a Code of Business Conduct and Ethics that applies to all PayPal employees and directors. We have also adopted a Code of Ethics for Senior Financial Officers that applies to our senior financial officers, including our principal executive officer, principal financial officer and principal accounting officer. The Code of Ethics for Senior Financial Officers is included in our Code of Business Conduct and Ethics posted on our website at https://investor.paypal-corp.com/corporate-governance.cfm. We will post any amendments to or waivers from the Code of Ethics for Senior Financial Officers at that location.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from our Proxy Statement for our 20172019 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2016.2018.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Incorporated by reference from our Proxy Statement for our 20172019 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 20162018.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Incorporated by reference from our Proxy Statement for our 20172019 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 20162018.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Incorporated by reference from our Proxy Statement for our 20172019 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2016.2018.
PART IV
ITEM 15. EXHIBITS, AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
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| 1. Consolidated Financial Statements | Page Number |
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Notes to Consolidated Financial Statements | |
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| 2. Financial Statement Schedule | |
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| All other schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. | |
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The information required by this Item is set forth in the Index of Exhibits that followsprecedes the signature page of this Annual Report. | |
Report of Independent Registered Public Accounting Firm
To the the Board of Directors and ShareholdersStockholders of PayPal Holdings, Inc.
In our opinion,Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial positionbalance sheets of PayPal Holdings, Inc. and its subsidiaries at(the “Company”) as of December 31, 20162018 and December 31, 2015,2017, and the resultsrelated consolidated statements of their operationsincome, comprehensive income, stockholders’ equity and their cash flows for each of the three years in the period ended December 31, 20162018, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2018 appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016,2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s ReportManagement's report on Internal Controlinternal control over Financial Reportingfinancial reporting appearing under Item 9A. Our responsibility is to express opinions on these the Company’s consolidatedfinancial statements on the financial statement schedule, and on the Company’sCompany's internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidatedfinancial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidatedfinancial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 8, 20177, 2019
We have served as the Company’s auditor since 2000.
PayPal Holdings, Inc.
CONSOLIDATED BALANCE SHEETS
| | | | As of December 31, | As of December 31, |
| | 2016 | | 2015 | 2018 | | 2017 |
| | (In millions, except par value) | (In millions, except par value) |
| ASSETS | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | $ | 1,590 |
| | $ | 1,393 |
| $ | 7,575 |
| | $ | 2,883 |
|
| Short-term investments | 3,385 |
| | 2,018 |
| 1,534 |
| | 2,812 |
|
| Accounts receivable, net | 214 |
| | 137 |
| 313 |
| | 283 |
|
| Loans and interest receivable, net of allowances of $339 in 2016 and $233 in 2015 | 5,348 |
| | 4,184 |
| |
| Loans and interest receivable, net of allowances of $172 in 2018 and $129 in 2017 | | 2,532 |
| | 1,314 |
|
| Loans and interest receivable, held for sale | | — |
| | 6,398 |
|
| Funds receivable and customer accounts | 14,363 |
| | 12,261 |
| 20,062 |
| | 18,242 |
|
| Prepaid expenses and other current assets | 833 |
| | 655 |
| 947 |
| | 713 |
|
| Total current assets | 25,733 |
| | 20,648 |
| 32,963 |
| | 32,645 |
|
| Long-term investments | 1,539 |
| | 2,348 |
| 971 |
| | 1,961 |
|
| Property and equipment, net | 1,482 |
| | 1,344 |
| 1,724 |
| | 1,528 |
|
| Goodwill | 4,059 |
| | 4,069 |
| 6,284 |
| | 4,339 |
|
| Intangible assets, net | 211 |
| | 358 |
| 825 |
| | 168 |
|
| Other assets | 79 |
| | 114 |
| 565 |
| | 133 |
|
| Total assets | $ | 33,103 |
| | $ | 28,881 |
| $ | 43,332 |
| | $ | 40,774 |
|
| LIABILITIES AND EQUITY | | | | | | |
| Current liabilities: | | | | | | |
| Accounts payable | $ | 192 |
| | $ | 145 |
| $ | 281 |
| | $ | 257 |
|
| Notes payable | | 1,998 |
| | 1,000 |
|
| Funds payable and amounts due to customers | 15,163 |
| | 12,261 |
| 21,562 |
| | 19,742 |
|
| Accrued expenses and other current liabilities | 1,459 |
| | 1,179 |
| 2,002 |
| | 1,781 |
|
| Income taxes payable | 64 |
| | 32 |
| 61 |
| | 83 |
|
| Total current liabilities | 16,878 |
| | 13,617 |
| 25,904 |
| | 22,863 |
|
| Deferred tax liability and other long-term liabilities | 1,513 |
| | 1,505 |
| 2,042 |
| | 1,917 |
|
| Total liabilities | 18,391 |
| | 15,122 |
| 27,946 |
| | 24,780 |
|
| Commitments and contingencies (Note 12) |
| |
| |
| Commitments and contingencies (Note 13) | |
| |
|
| Equity: | | | | | | |
| Common stock, $0.0001 par value; 4,000 shares authorized; 1,207 and 1,224 outstanding | — |
| | — |
| |
| Treasury stock at cost, 27 shares as of December 31, 2016 | (995 | ) | | — |
| |
| Common stock, $0.0001 par value; 4,000 shares authorized; 1,174 and 1,200 shares outstanding as of December 31, 2018 and 2017, respectively | | — |
| | — |
|
| Treasury stock at cost, 91 and 47 shares as of December 31, 2018 and 2017, respectively | | (5,511 | ) | | (2,001 | ) |
| Additional paid-in-capital | 13,579 |
| | 13,100 |
| 14,939 |
| | 14,314 |
|
| Retained earnings | 2,069 |
| | 668 |
| 5,880 |
| | 3,823 |
|
| Accumulated other comprehensive income (loss) | 59 |
| | (9 | ) | 78 |
| | (142 | ) |
| Total equity | 14,712 |
| | 13,759 |
| 15,386 |
| | 15,994 |
|
| Total liabilities and equity | $ | 33,103 |
| | $ | 28,881 |
| $ | 43,332 |
| | $ | 40,774 |
|
The accompanying notes are an integral part of these consolidated financial statements.
PayPal Holdings, Inc.
CONSOLIDATED STATEMENTS OF INCOME
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| | (In millions, except for per share amounts) | (In millions, except for per share amounts) |
| Net revenues | $ | 10,842 |
| | $ | 9,248 |
| | $ | 8,025 |
| $ | 15,451 |
| | $ | 13,094 |
| | $ | 10,842 |
|
| Operating expenses: | | | | | | | | | | |
| Transaction expense | 3,346 |
| | 2,610 |
| | 2,170 |
| 5,581 |
| | 4,419 |
| | 3,346 |
|
| Transaction and loan losses | 1,088 |
| | 809 |
| | 646 |
| 1,274 |
| | 1,011 |
| | 1,088 |
|
| Customer support and operations | 1,267 |
| | 1,110 |
| | 991 |
| 1,482 |
| | 1,364 |
| | 1,267 |
|
| Sales and marketing | 969 |
| | 937 |
| | 954 |
| 1,313 |
| | 1,128 |
| | 969 |
|
| Product development | 834 |
| | 792 |
| | 747 |
| 1,071 |
| | 953 |
| | 834 |
|
| General and administrative | 1,028 |
| | 873 |
| | 733 |
| 1,451 |
| | 1,155 |
| | 1,028 |
|
| Depreciation and amortization | 724 |
| | 608 |
| | 516 |
| 776 |
| | 805 |
| | 724 |
|
| Restructuring | — |
| | 48 |
| | — |
| |
| Restructuring and other charges | | 309 |
| | 132 |
| | — |
|
| Total operating expenses | 9,256 |
| | 7,787 |
| | 6,757 |
| 13,257 |
| | 10,967 |
| | 9,256 |
|
| Operating income | 1,586 |
| | 1,461 |
| | 1,268 |
| 2,194 |
| | 2,127 |
| | 1,586 |
|
| Other income (expense), net | 45 |
| | 27 |
| | (7 | ) | 182 |
| | 73 |
| | 45 |
|
| Income before income taxes | 1,631 |
| | 1,488 |
| | 1,261 |
| 2,376 |
| | 2,200 |
| | 1,631 |
|
| Income tax expense | 230 |
| | 260 |
| | 842 |
| 319 |
| | 405 |
| | 230 |
|
| Net income | $ | 1,401 |
| | $ | 1,228 |
| | $ | 419 |
| $ | 2,057 |
| | $ | 1,795 |
| | $ | 1,401 |
|
| | | | | | | | | | | |
| Net income per share: | | | | | | | | | | |
| Basic | $ | 1.16 |
| | $ | 1.00 |
| | $ | 0.34 |
| $ | 1.74 |
| | $ | 1.49 |
| | $ | 1.16 |
|
| Diluted | $ | 1.15 |
| | $ | 1.00 |
| | $ | 0.34 |
| $ | 1.71 |
| | $ | 1.47 |
| | $ | 1.15 |
|
| | | | | | | | | | | |
| Weighted average shares: | | | | | | | | | | |
| Basic | 1,210 |
| | 1,222 |
| | 1,218 |
| 1,184 |
| | 1,203 |
| | 1,210 |
|
| Diluted | 1,218 |
| | 1,229 |
| | 1,224 |
| 1,203 |
| | 1,221 |
| | 1,218 |
|
The accompanying notes are an integral part of these consolidated financial statements.
PayPal Holdings, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| | (In millions) |
| Net income | $ | 1,401 |
| | $ | 1,228 |
| | $ | 419 |
|
| Other comprehensive income (loss), net of reclassification adjustments: | | | | | |
| Foreign currency translation | (15 | ) | | (37 | ) | | (42 | ) |
| Unrealized gains (losses) on investments, net | 11 |
| | (16 | ) | | — |
|
| Tax (expense) benefit on unrealized gains/losses on investments, net | (1 | ) | | 3 |
| | — |
|
| Change in unrealized gains/losses on hedging activities, net | 74 |
| | (69 | ) | | 217 |
|
| Tax (expense) benefit on unrealized gains/losses on hedging activities, net | (1 | ) | | — |
| | (4 | ) |
| Other comprehensive (loss) income, net of tax | 68 |
| | (119 | ) | | 171 |
|
| Comprehensive income | $ | 1,469 |
| | $ | 1,109 |
| | $ | 590 |
|
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (In millions) |
| Net income | $ | 2,057 |
| | $ | 1,795 |
| | $ | 1,401 |
|
| Other comprehensive income (loss), net of reclassification adjustments: | | | | | |
| Foreign currency translation | (68 | ) | | 43 |
| | (15 | ) |
| Unrealized (losses) gains on investments, net | (1 | ) | | (7 | ) | | 11 |
|
| Tax benefit (expense) on unrealized gains (losses) on investments, net | 1 |
| | 1 |
| | (1 | ) |
| Unrealized gains (losses) on hedging activities, net | 293 |
| | (242 | ) | | 74 |
|
| Tax (expense) benefit on unrealized gains (losses) on hedging activities, net | (5 | ) | | 4 |
| | (1 | ) |
| Other comprehensive income (loss), net of tax | 220 |
| | (201 | ) | | 68 |
|
| Comprehensive income | $ | 2,277 |
| | $ | 1,594 |
| | $ | 1,469 |
|
The accompanying notes are an integral part of these consolidated financial statements.
PayPal Holdings, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
| | | | Common Stock Shares | | Treasury Stock | | Additional Paid-In Capital | | Net Parent Investment | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total Equity | Common Stock Shares | | Treasury Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total Equity |
| |
| | (In millions) | (In millions) |
| Balances at December 31, 2013 | 1,218 |
| | $ | — |
| | $ | — |
| | $ | 7,451 |
| | $ | (61 | ) | | $ | — |
| | $ | 7,390 |
| |
| Net income | — |
| | — |
| | — |
| | 419 |
| | — |
| | — |
| | 419 |
| |
| Net transfers from eBay | — |
| | — |
| | — |
| | 268 |
| | — |
| | — |
| | 268 |
| |
| Foreign currency translation | — |
| | — |
| | — |
| | — |
| | (42 | ) | | — |
| | (42 | ) | |
| Change in unrealized gains/losses on hedging activities, net | — |
| | — |
| | — |
| | — |
| | 217 |
| | — |
| | 217 |
| |
| Tax expense on unrealized losses on hedging activities, net | — |
| | — |
| | — |
| | — |
| | (4 | ) | | — |
| | $ | (4 | ) | |
| Balances at December 31, 2014 | 1,218 |
| | $ | — |
| | $ | — |
| | $ | 8,138 |
| | $ | 110 |
| | $ | — |
| | $ | 8,248 |
| |
| Net income | — |
| | — |
| | — |
| | 560 |
| | — |
| | 668 |
| | 1,228 |
| |
| Net transfers from eBay | — |
| | — |
| | — |
| | 4,143 |
| | — |
| | — |
| | 4,143 |
| |
| Foreign currency translation | — |
| | — |
| | — |
| | — |
| | (37 | ) | | — |
| | (37 | ) | |
| Unrealized losses on investments, net | — |
| | — |
| | — |
| | — |
| | (16 | ) | | — |
| | (16 | ) | |
| Tax benefit on unrealized losses on investments, net | — |
| | — |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
| |
| Change in unrealized gains (losses) on hedging activities, net | — |
| | — |
| | — |
| | — |
| | (69 | ) | | — |
| | (69 | ) | |
| Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes | 6 |
| | — |
| | 64 |
| | — |
| | — |
| | — |
| | 64 |
| |
| Stock-based compensation | — |
| | — |
| | 185 |
| | — |
| | — |
| | — |
| | 185 |
| |
| Stock-based compensation tax impact | — |
| | — |
| | 10 |
| | — |
| | — |
| | — |
| | 10 |
| |
| Reclassification of net parent investment in connection with separation | — |
| | — |
| | 12,841 |
| | (12,841 | ) | | — |
| | — |
| | $ | — |
| |
| Balances at December 31, 2015 | 1,224 |
| | $ | — |
| | $ | 13,100 |
| | $ | — |
| | $ | (9 | ) | | $ | 668 |
| | $ | 13,759 |
| 1,224 |
| | $ | — |
| | $ | 13,100 |
| | $ | (9 | ) | | $ | 668 |
| | $ | 13,759 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 1,401 |
| | 1,401 |
| — |
| | — |
| | — |
| | — |
| | 1,401 |
| | 1,401 |
|
| Foreign currency translation | — |
| | — |
| | — |
| | — |
| | (15 | ) | | — |
| | (15 | ) | — |
| | — |
| | — |
| | (15 | ) | | — |
| | (15 | ) |
| Unrealized losses on investments, net | — |
| | — |
| | — |
| | — |
| | 11 |
| | — |
| | 11 |
| |
| Tax benefit on unrealized losses on investments, net | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) | |
| Change in unrealized gains/losses on hedging activities, net | — |
| | — |
| | — |
| | — |
| | 74 |
| | — |
| | 74 |
| |
| Unrealized gains on investments, net | | — |
| | — |
| | — |
| | 11 |
| | — |
| | 11 |
|
| Tax expense on unrealized gains on investments, net | | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
| Change in unrealized gains (losses) on hedging activities, net | | — |
| | — |
| | — |
| | 74 |
| | — |
| | 74 |
|
| Tax expense on unrealized gains on hedging activities, net | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
| Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes | 10 |
| | — |
| | (10 | ) | | — |
| | — |
| | — |
| | (10 | ) | 10 |
| | — |
| | (10 | ) | | — |
| | — |
| | (10 | ) |
| Common stock repurchased | (27 | ) | | (995 | ) | | — |
| | — |
| | — |
| | — |
| | (995 | ) | (27 | ) | | (995 | ) | | — |
| | — |
| | — |
| | (995 | ) |
| Stock-based compensation | — |
| | — |
| | 449 |
| | — |
| | — |
| | — |
| | 449 |
| — |
| | — |
| | 449 |
| | — |
| | — |
| | 449 |
|
| Stock-based compensation tax impact | — |
| | — |
| | 40 |
| | — |
| | — |
| | — |
| | 40 |
| — |
| | — |
| | 40 |
| | — |
| | — |
| | 40 |
|
| Balances at December 31, 2016 | 1,207 |
| | $ | (995 | ) | | $ | 13,579 |
| | $ | — |
| | $ | 59 |
| | $ | 2,069 |
| | $ | 14,712 |
| 1,207 |
| | $ | (995 | ) | | $ | 13,579 |
| | $ | 59 |
| | $ | 2,069 |
| | $ | 14,712 |
|
| Net income | | — |
| | — |
| | — |
| | — |
| | 1,795 |
| | 1,795 |
|
| Foreign currency translation | | — |
| | — |
| | — |
| | 43 |
| | — |
| | 43 |
|
| Unrealized losses on investments, net | | — |
| | — |
| | — |
| | (7 | ) | | — |
| | (7 | ) |
| Tax benefit on unrealized losses on investments, net | | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Change in unrealized gains (losses) on hedging activities, net | | — |
| | — |
| | — |
| | (242 | ) | | — |
| | (242 | ) |
| Tax benefit on unrealized losses on hedging activities, net | | — |
| | — |
| | — |
| | 4 |
| | — |
| | 4 |
|
| Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes | | 13 |
| | — |
| | (21 | ) | | — |
| | — |
| | (21 | ) |
| Common stock repurchased | | (20 | ) | | (1,006 | ) | | — |
| | — |
| | — |
| | (1,006 | ) |
| Stock-based compensation | | — |
| | — |
| | 756 |
| | — |
| | — |
| | 756 |
|
| Income tax adjustment for intra entity transfers | | — |
| | — |
| | — |
| | — |
| | (41 | ) | | (41 | ) |
| Balances at December 31, 2017 | | 1,200 |
| | $ | (2,001 | ) | | $ | 14,314 |
| | $ | (142 | ) | | $ | 3,823 |
| | $ | 15,994 |
|
| Net income | | — |
| | — |
| | — |
| | — |
| | 2,057 |
| | 2,057 |
|
| Foreign currency translation | | — |
| | — |
| | — |
| | (68 | ) | | — |
| | (68 | ) |
| Unrealized losses on investments, net | | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
| Tax benefit on unrealized losses on investments, net | | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Change in unrealized gains (losses) on hedging activities, net | | — |
| | — |
| | — |
| | 293 |
| | — |
| | 293 |
|
| Tax expense on unrealized gains on hedging activities, net | | — |
| | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) |
| Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes | | 18 |
| | — |
| | (251 | ) | | — |
| | — |
| | (251 | ) |
| Common stock repurchased | | (44 | ) | | (3,510 | ) | | (15 | ) | | — |
| | — |
| | (3,525 | ) |
| Stock-based compensation | | — |
| | — |
| | 891 |
| | — |
| | — |
| | 891 |
|
| Balances at December 31, 2018 | | 1,174 |
| | $ | (5,511 | ) | | $ | 14,939 |
| | $ | 78 |
| | $ | 5,880 |
| | $ | 15,386 |
|
The accompanying notes are an integral part of these consolidated financial statements.
PayPal Holdings, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| | (In millions) | (In millions) |
| Cash flows from operating activities: | | | | | | | | | | |
| Net income | $ | 1,401 |
| | $ | 1,228 |
| | $ | 419 |
| $ | 2,057 |
| | $ | 1,795 |
| | $ | 1,401 |
|
| Adjustments: | | | | | | | | | | |
| Transaction and loan losses | 1,088 |
| | 809 |
| | 646 |
| 1,274 |
| | 1,011 |
| | 1,088 |
|
| Depreciation and amortization | 724 |
| | 608 |
| | 516 |
| 776 |
| | 805 |
| | 724 |
|
| Stock-based compensation | 438 |
| | 346 |
| | 299 |
| 853 |
| | 733 |
| | 438 |
|
| Deferred income taxes | 52 |
| | 127 |
| | 680 |
| (171 | ) | | (1,299 | ) | | 52 |
|
| Excess tax benefits from stock-based compensation | (40 | ) | | (26 | ) | | (41 | ) | — |
| | — |
| | (40 | ) |
| Gain on sale of principal loans receivable held for sale, net | (24 | ) | | (40 | ) | | — |
| |
| Cost basis adjustments to loans and interest receivable held for sale | | 244 |
| | 92 |
| | — |
|
| Other | | (172 | ) | | (25 | ) | | (24 | ) |
| Changes in assets and liabilities: | | | | | | | | | | |
| Accounts receivable | (77 | ) | | (22 | ) | | (13 | ) | (59 | ) | | 12 |
| | (77 | ) |
| Receivable from eBay | — |
| | 121 |
| | (24 | ) | |
| Principal loans receivable held for sale, net | 24 |
| | 14 |
| | — |
| |
| Changes in loans and interest receivable held for sale, net | | 1,407 |
| | (1,308 | ) | | 24 |
|
| Transaction loss allowance for cash losses, net | (643 | ) | | (493 | ) | | (414 | ) | (1,046 | ) | | (817 | ) | | (643 | ) |
| Other current assets and non-current assets | (145 | ) | | (384 | ) | | (38 | ) | (112 | ) | | (188 | ) | | (145 | ) |
| Accounts payable | 11 |
| | 12 |
| | 42 |
| 26 |
| | 62 |
| | 11 |
|
| Payable to eBay | — |
| | (217 | ) | | (2 | ) | |
| Income taxes payable | 69 |
| | 40 |
| | 37 |
| (44 | ) | | 19 |
| | 69 |
|
| Other current liabilities and non-current liabilities | 280 |
| | 423 |
| | 113 |
| 450 |
| | 1,639 |
| | 280 |
|
| Net cash provided by operating activities | 3,158 |
| | 2,546 |
| | 2,220 |
| 5,483 |
| | 2,531 |
| | 3,158 |
|
| Cash flows from investing activities: | | | | | | | | | | |
| Purchases of property and equipment | (669 | ) | | (722 | ) | | (492 | ) | (823 | ) | | (667 | ) | | (669 | ) |
| Proceeds from sales of property and equipment | — |
| | 26 |
| | — |
| 3 |
| | — |
| | — |
|
| Changes in principal loans receivable, net | (1,523 | ) | | (819 | ) | | (1,023 | ) | 3,121 |
| | (920 | ) | | (1,523 | ) |
| Purchases of investments | (21,041 | ) | | (21,626 | ) | | (8,744 | ) | (22,381 | ) | | (19,418 | ) | | (21,041 | ) |
| Maturities and sales of investments | 18,429 |
| | 16,148 |
| | 7,766 |
| 21,898 |
| | 18,448 |
| | 18,429 |
|
| Acquisitions, net of cash acquired | (19 | ) | | (1,225 | ) | | (2 | ) | |
| Funds receivable and customer accounts | (176 | ) | | (395 | ) | | (24 | ) | |
| Notes payable and receivable from eBay | — |
| | 575 |
| | (362 | ) | |
| Net cash used in investing activities | (4,999 | ) | | (8,038 | ) | | (2,881 | ) | |
| Acquisitions, net of cash and restricted cash acquired | | (2,124 | ) | | (323 | ) | | (19 | ) |
| Funds receivable | | 1,146 |
| | (1,605 | ) | | (1,081 | ) |
| Net cash provided by (used in) investing activities | | 840 |
| | (4,485 | ) | | (5,904 | ) |
| Cash flows from financing activities: | | | | | | | | | | |
| Proceeds from issuance of common stock | 109 |
| | 75 |
| | — |
| 144 |
| | 144 |
| | 109 |
|
| Purchases of treasury stock | (995 | ) | | — |
| | — |
| (3,520 | ) | | (1,006 | ) | | (995 | ) |
| Excess tax benefits from stock-based compensation | 40 |
| | 26 |
| | 41 |
| — |
| | — |
| | 40 |
|
| Contribution from (to) eBay | — |
| | 3,858 |
| | (71 | ) | |
| Tax withholdings related to net share settlements of restricted stock units and restricted stock awards | (118 | ) | | (18 | ) | | — |
| (419 | ) | | (166 | ) | | (118 | ) |
| Borrowings (repayments) under financing arrangements | (21 | ) | | (862 | ) | | (21 | ) | |
| Borrowings under financing arrangements | | 2,075 |
| | 1,800 |
| | — |
|
| Repayments under financing arrangements | | (1,115 | ) | | (980 | ) | | (21 | ) |
| Funds payable and amounts due to customers | 3,023 |
| | 1,649 |
| | 1,335 |
| 1,573 |
| | 4,292 |
| | 3,023 |
|
| Net cash provided by financing activities | 2,038 |
| | 4,728 |
| | 1,284 |
| |
| Effect of exchange rate changes on cash and cash equivalents | — |
| | (44 | ) | | (26 | ) | |
| Net increase (decrease) in cash and cash equivalents | 197 |
| | (808 | ) | | 597 |
| |
| Cash and cash equivalents at beginning of period | 1,393 |
| | 2,201 |
| | 1,604 |
| |
| Cash and cash equivalents at end of period | $ | 1,590 |
| | $ | 1,393 |
| | $ | 2,201 |
| |
| Net cash (used in) provided by financing activities | | (1,262 | ) | | 4,084 |
| | 2,038 |
|
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | | (113 | ) | | 36 |
| | — |
|
| Net change in cash, cash equivalents, and restricted cash | | 4,948 |
| | 2,166 |
| | (708 | ) |
| Cash, cash equivalents, and restricted cash at beginning of period | | 8,285 |
| | 6,119 |
| | 6,827 |
|
| Cash, cash equivalents, and restricted cash at end of period | | $ | 13,233 |
| | $ | 8,285 |
| | $ | 6,119 |
|
PayPal Holdings, Inc.
CONSOLIDATED STATEMENTSTATEMENTS OF CASH FLOWS—(Continued)
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| | (In millions) | (In millions) |
| Supplemental cash flow disclosures: | | | | | | | | | | |
| Cash paid for interest | $ | 4 |
| | $ | 16 |
| | $ | 19 |
| $ | 69 |
| | $ | 6 |
| | $ | 4 |
|
| Cash paid for income taxes | $ | 48 |
| | $ | 216 |
| | $ | 47 |
| |
| Cash paid for income taxes, net | | $ | 328 |
| | $ | 117 |
| | $ | 48 |
|
| | | | | | | |
| The below table reconciles cash, cash equivalents, and restricted cash as reported in the consolidated balance sheets to the total of the same amounts shown in the consolidated statements of cash flows: | | | | | | |
| Cash and cash equivalents | | $ | 7,575 |
| | $ | 2,883 |
| | $ | 1,590 |
|
| Short term investments | | 16 |
| | 15 |
| | 17 |
|
| Funds receivable and customer accounts | | 5,642 |
| | 5,387 |
| | 4,512 |
|
| Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows | | $ | 13,233 |
| | $ | 8,285 |
| | $ | 6,119 |
|
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Overview and Summary of Significant Accounting Policies
Overview and Organization
PayPal Holdings, Inc. (“PayPal,” the “Company,” “we,” “us,” or “our”) was incorporated in Delaware in January 2015 and is a leading technology platform and digital payments company that enables digital and mobile payments on behalf of consumers and merchants worldwide. Our visionPayPal is committed to democratizedemocratizing financial services as we believe that managing and moving money is a right for allempowering people not justand businesses to join and thrive in the affluent.global economy. Our goal is to increaseenable our relevance for consumers and merchants to manage and move their money anywhere in the world, anytime, on any platform and using any device. We provide safer and simpler ways for businesses of all sizes to accept payments from merchant websites, mobile devices and applications, and at offline retail locations through a wide range of payment solutions. We also facilitate person-to-person payments through our PayPal, Venmo, and Xoom.Xoom products. Our combined payment solutions, including our PayPal, PayPal Credit, Braintree, Venmo, Xoom, and PaydiantiZettle products, compose our proprietary Payments Platform. The terms “we,” “our,” “us,” “the Company,” and “PayPal” mean PayPal Holdings, Inc. and, unless otherwise expressly stated or the context requires, its subsidiaries.
We operate globally and in a rapidly evolving regulatory environment characterized by a heightened regulatory focus on all aspects of the payments industry. Government regulation impacts key aspectsThat focus continues to become even more heightened as regulators on a global basis focus on such important issues as countering terrorist financing, anti-money laundering, privacy, cybersecurity, and consumer protection. Some of our business. Wethe laws and regulations to which we are subject to regulations that affectwere enacted recently, and the payments industry in the markets in which we operate. Non-compliance with laws and regulations applicable to us, including those enacted prior to the advent of digital and mobile payments, are continuing to evolve through legislative and regulatory action and judicial interpretation. New or changing laws and regulations, including how such laws and regulations are interpreted and implemented, as well as increased penalties and enforcement actions related to non-compliance, changes in laws and regulations or their interpretation, and the enactment of new laws and regulations applicable to us could have a material adverse impact on our business, results of operations, and financial condition. Therefore, we monitor these areas closely to design compliant solutions for our customers who depend on us.
Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
On July 17, 2015 (the “distribution date”), PayPal became an independent publicly traded company through the pro rata distribution by eBay Inc. (“eBay”) of 100% of the outstanding common stock of PayPal to eBay stockholders (which we refer to as the “separation” or the “distribution”). Each eBay stockholder 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 on the record date. Approximately 1.2 billion shares of PayPal common stock were distributed on July 17, 2015 to eBay stockholders. PayPal's common stock began “regular way” trading under the ticker symbol “PYPL” on The NASDAQ Stock Market on July 20, 2015.
Prior to the separation, eBay transferred substantially all of the assets and liabilities and operations of eBay's payments business to PayPal, which was completed in June 2015 (the “capitalization”). The consolidated financial statements prior to the capitalization were prepared on a stand-alone basis and were derived from eBay's consolidated financial statements and accounting records. The consolidated financial statements reflect our financial position, results of operations, comprehensive income and cash flows as our business was operated as part of eBay prior to the capitalization. Following the capitalization, the consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All periods presented have been accounted for in conformity with U.S. generally accepted accounting principles (“GAAP”).
For periods prior to the capitalization, the consolidated financial statements include expenses associated with real estate and information technology that were previously allocated to the payments business of eBay, and additional expenses related to certain corporate functions, including senior management, legal, human resources and finance. These expenses also include allocations related to stock-based compensation. The expenses that were incurred by eBay were allocated to us based on direct usage or benefit where identifiable, with the remainder allocated on a pro rata basis of revenue, headcount, or other systematic measure. We consider the expense allocation methodology and results to be reasonable for all periods presented. The consolidated financial statements also include certain assets and liabilities that were historically held at the eBay corporate level, but which are specifically identifiable and attributable to us. The consolidated financial position, results of operations and cash flows of PayPal prior to the distribution may not be indicative of our results had we been a separate stand-alone entity throughout the periods presented, nor are the results stated herein indicative of what the Company’s financial position, results of operations and cash flows may be in the future. All intercompany transactions and accounts have been eliminated. Transactions between the Company and eBay are included in these consolidated financial statements for all periods presented.
Beginning with the first quarter of 2016, we reclassified certain operating expenses in our consolidated statements of income to better align our external and internal financial reporting. These classification changes relate primarily to real estate and information
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
technology operating expenses that were previously allocated among customer support and operations expense, sales and marketing expense and product development expense. As of the first quarter of 2016, our management did not allocate these operating expenses for internal financial reporting and general management of the business and has therefore discontinued this allocation for external financial reporting purposes. As a result, starting with the first quarter of 2016, these operating expenses were reported as part of general and administrative expenses. These changes have no impact on the previously reported consolidated net income for prior periods, including total operating expenses, financial position or cash flows for any periods presented, and do not eliminate any of the costs allocated to us by eBay for any periods prior to the separation. Prior period amounts have been reclassified to conform to the current period presentation.
The following tables presents the effects of the changes on the presentation of operating expenses to the previously reported consolidated statement of income:
|
| | | | | | | | | | | |
| | Year Ended December 31, 2015 |
| (In millions) | As Reported | | Adjustments | | Revised |
| Transaction expense | $ | 2,610 |
| | $ | — |
| | $ | 2,610 |
|
| Transaction and loan losses | 809 |
| | — |
| | 809 |
|
| Customer support and operations | 1,220 |
| | (110 | ) | | 1,110 |
|
| Sales and marketing | 985 |
| | (48 | ) | | 937 |
|
| Product development | 947 |
| | (155 | ) | | 792 |
|
| General and administrative | 560 |
| | 313 |
| | 873 |
|
| Depreciation and amortization | 608 |
| | — |
| | 608 |
|
| Restructuring | 48 |
| | — |
| | 48 |
|
| Total operating expenses | $ | 7,787 |
| | $ | — |
| | $ | 7,787 |
|
| | | | | | |
|
| | | | | | | | | | | |
| | Year Ended December 31, 2014 |
| (In millions) | As Reported | | Adjustments | | Revised |
| Transaction expense | $ | 2,170 |
| | $ | — |
| | $ | 2,170 |
|
| Transaction and loan losses | 646 |
| | — |
| | 646 |
|
| Customer support and operations | 1,055 |
| | (64 | ) | | 991 |
|
| Sales and marketing | 998 |
| | (44 | ) | | 954 |
|
| Product development | 890 |
| | (143 | ) | | 747 |
|
| General and administrative | 482 |
| | 251 |
| | 733 |
|
| Depreciation and amortization | 516 |
| | — |
| | 516 |
|
| Restructuring | — |
| | — |
| | — |
|
| Total operating expenses | $ | 6,757 |
| | $ | — |
| | $ | 6,757 |
|
| | | | | | |
The accompanying consolidated financial statements include the financial statements of PayPal and our wholly and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Investments in entities where we hold less than a 20% ownership interesthave the ability to exercise significant influence, but not control, over the investee are accounted for using the costequity method of accounting, andaccounting. For such investments, our share of the investees’investee's results of operations is included in other income (expense), net on our consolidated statementstatements of income to the extent dividends are received. Ourand our investment balance is included in long-term investments on our consolidated balance sheet.sheets. Investments in entities where we do not have the ability to exercise significant influence over the investee are accounted for at cost minus impairment, if any, and are adjusted for changes resulting from observable price changes, which are included in other income (expense), net on our consolidated statements of income and our investment balance is included in long-term investments on our consolidated balance sheets.
In the opinion of management, these consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for fair presentation of the consolidated financial statements for all periods presented. We have evaluated all subsequent events through the date the financial statements were issued. Certain amounts for prior years have been reclassified to conform to the financial statement presentation as of and for the year ended December 31, 2016.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2018.
Use of estimates
The preparation of consolidated financial statements in conformity with GAAPU.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses including allocations from eBay, during the reporting period. On an ongoing basis, we evaluate our estimates, including but not limited to those related to provisions for transaction and loan losses, legalloss contingencies, income taxes, revenue recognition, and the valuation of goodwill and intangible assets. We base our estimates on historical experience and on various other assumptions which we believe to be reasonable under the circumstances. Actual results could differ from thesethose estimates.
Cash and cash equivalents
Cash and cash equivalents are short-term, highly liquid investments with original maturities of three months or less when purchased and are composed of primarily of bank deposits, government and agency securities and commercial paper.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Investments
Short-term investments which include time deposits, government and agency securities and corporate debt securities with original maturities of greater than three months but less than one year when purchased,purchased. Government and agency securities and corporate debt securities are classified as available-for-sale and are reported at fair value using the specific identification method. Unrealized gains and losses are excluded from earnings and reported as a component of other comprehensive income (loss), net of related estimated tax provisions or benefits.
Long-term investments include corporate debt securities, government and agency securities and cost methodequity investments with maturities exceeding one year. DebtCorporate debt securities and government and agency securities are classified as available-for-sale and are reported at fair value using the specific identification method. Unrealized gains and losses are excluded from earnings and reported as a component of other comprehensive income (loss), net of related estimated tax provisions or benefits.
We elect to account for foreign currency denominated available-for-sale investments underlying funds receivable and customer accounts, short-term investments and long-term investments under the fair value option as further discussed in “Note 5—7—Funds Receivable and Customer Accounts” and “Note 6—8—Investments.” The changes in fair value related to initial measurement and subsequent changes in fair value are included in earnings as a component of other income (expense), net.
Our cost methodequity investments consist primarily of investmentsminority equity interests in privately held companies that are not publicly traded where we do not have the ability to exercise significant influence, or have control over the investee. Theseinvestee, and are reported in long-term investments on our consolidated balance sheets. For our equity investments that do not have a readily determinable fair value, we measure these equity investments at cost minus impairment, if any, and adjust for changes resulting from observable price changes in orderly transactions for an identical or similar investment in the same issuer (the “Measurement Alternative”). All gains and losses on these investments, realized and unrealized, are recognized in other income (expense), net on our consolidated statements of income. Our investments where we have the ability to exercise significant influence, but not control, over the investee are accounted for as equity method investments, are recorded at costreported in long-term investments on our consolidated balance sheets and our share of the investee's results of operations is included in other income (expense), net. The equity method investments are subject to periodic teststesting for other-than-temporary impairment.
We assess whether an impairment loss on our Measurement Alternative investments and an other-than-temporary impairment loss on our debt securities and equity method investments has occurred due to declines in fair value or other market conditions. If any impairment is identified for Measurement Alternative investments or impairment is considered other-than-temporary,other than temporary for our debt securities and equity method investments, we will write down the investment to its fair value and record the corresponding charge through other income (expense), net in our consolidated statements of income. With respect to our debt securities, this assessment takes into account the severity and duration of the decline in value, our intent to sell the security, whether it is more likely than not we will be required to sell the security before recovery of its amortized cost basis, and whether we expect to recover the entire amortized cost basis of the security (that is, whether a credit loss exists).
Loans and interest receivable, netheld for sale
Loans and interest receivable, net represents consumer receivables originated under PayPal Credit consumer accounts and working capital advancesIn November 2017, we reached an agreement to select small and medium-sized PayPal merchants throughsell our PayPal Working Capital product. In the U.S., we work with independent chartered financial institutions that extend credit to the consumer or merchant using our PayPal credit products.
For our consumer credit products outside the U.S., we extend credit through our Luxembourg banking subsidiary. For our merchant credit products outside the U.S., we extend working capital advances in the U.K. through our Luxembourg banking subsidiary, and we extend working capital advances in Australia through an Australian subsidiary. We purchase the related receivables extended by the independent chartered financial institution and are responsible for servicing functions relatedportfolio to all of our credit products. As part of the arrangement with the independent chartered financial institution in the U.S. that we work with, we sell back a participation interest in the pool of consumer receivables outstanding under PayPal Credit consumer accounts. ForSynchrony Bank. Historically, this arrangement, gains or losses on the sale of the participation interest are not materialportfolio was reported as the carrying amount of the participation interest sold
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
approximates the fair value at time of transfer. However, we have a separate arrangement with certain investors under which we sell to these investors a participation interest in certain consumer loans receivable that we purchased, where the consideration received exceeds the carrying amount of the participation interest sold which results in a gain reflected as net revenues in our consolidated financial statements. See “Note 10—Loans and Interest Receivable, net” for additional information related to this arrangement. We apply a control-oriented, financial-components approach and account for the asset transfer as a sale and derecognize the portion of the participation interest for which control has been surrendered.
Loans, advances and interest and fees receivable are reported at their outstanding principal balances, net of any participation interest sold and pro-rata allowances, including unamortized deferred origination costs and estimated collectible interest and fees. Upon approval of the decision from our Board of Directors to sell these receivables, the portfolio was reclassified as held for sale, and recorded at the lower of cost or fair value, determined on an aggregate basis. Following the closing of this transaction in July 2018, Synchrony Bank became the exclusive issuer of the PayPal Credit online consumer financing program in the U.S. We maintainno longer hold an ownership interest in the servicing rightsreceivables generated through the program (other than charged off or designated to be charged off receivables) and thus, no longer record these receivables on our consolidated financial statements. PayPal earns a revenue share on the portfolio of consumer receivables owned by Synchrony Bank, which includes both the sold and newly generated receivables, and it is recorded in revenue from other value added services on our consolidated financial statements. This transaction was accounted for as a true sale based on our determination that it met all the necessary criteria for such accounting, including legal isolation for transferred assets, ability of the transferee to pledge or exchange the transferred assets without constraint, and the transfer of control. We also concluded that our continuing involvement in the revenue share arrangement does not invalidate this determination.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Loans and interest receivable, held for sale, represents consumer receivables originated under PayPal credit consumer accounts that were subject to the sale agreement with Synchrony Bank. Until the transaction with Synchrony Bank closed, we continued to work with independent chartered financial institutions to extend credit to U.S. consumers using our PayPal credit product. We purchased the related receivables extended by an independent chartered financial institution and were responsible for the entirerelated servicing functions. During the years ended December 31, 2018 and 2017, we purchased approximately $4.7 billion and $8.7 billion, respectively, in U.S. consumer credit receivables.
As part of the arrangements we had with the independent chartered financial institutions in the U.S., we sold back a participation interest in the pool of U.S. consumer receivables outstanding under PayPal Credit consumer accounts. For these arrangements, gains or losses on the sale of the participation interest were not material as the carrying amount of the participation interest sold approximated the fair value at time of transfer. However, we had a separate arrangement with certain investors under which we sold to these investors a participation interest in certain U.S. consumer loans receivable that we purchased where the consideration received exceeded the carrying amount of the participation interest sold, which resulted in a gain reflected as net revenues in our consolidated financial statements. The independent chartered financial institution and other investors had no recourse against us related to their participation interests for failure of debtors to pay when due. The participation interests held by the chartered financial institution and other investors had the same priority to the interests held by us and were subject to the same credit, prepayment, and interest rate risk associated with this pool of consumer receivables. All risks of loss were shared pro rata based on participation interests held among all participating stakeholders. We applied a control-oriented, financial-components approach and accounted for the asset transfer as a sale and derecognized the portion of the participation interest for which control had been surrendered. In connection with its purchase of our U.S. consumer credit receivable portfolio, Synchrony Bank also acquired the participation interests in the pool of consumer receivables outstandingheld by the chartered financial institution and receive a fee approximating the fair value for servicing the assets underlying the participation interest sold.other investors.
The terms of our consumer relationships require us to submit monthly bills to the consumer detailing loan repayment requirements. The terms also allow us to charge the consumer interest and fees in certain circumstances. Due to the relatively small dollar amount of individual loans and interest receivable, we do not require collateral on these balances.
Loans and interest receivable, net
Loans and interest receivable, net represents merchant receivables originated under our PayPal Working Capital (“PPWC”) product and PayPal Business Loan (“PPBL”) product and consumer loans not classified as held for sale. In the U.S., we partner with independent chartered financial institutions that extend credit to the consumer (up through the completion of the sale of our U.S. consumer credit portfolio to Synchrony Bank), or to the merchant using our PPWC product or PPBL product, and purchase the related receivables extended by the independent chartered financial institutions. During the years ended December 31, 2018 and 2017, we purchased approximately $3.3 billion and $1.5 billion, respectively, in merchant receivables.
For our consumer credit products outside the U.S., we extend credit through our Luxembourg banking subsidiary. For our merchant credit products outside the U.S., we extend working capital advances in the U.K. and loans in Germany through our Luxembourg banking subsidiary, and we extend working capital loans in Australia through an Australian subsidiary.
As part of our arrangements with independent chartered financial institutions in the U.S., we sell back a participation interest in the pool of merchant receivables. For these arrangements, gains or losses on the sale of the participation interest are not material as the carrying amount of the participation interest sold approximates the fair value at time of transfer. The independent chartered financial institution has no recourse against us related to their participation interests for failure of debtors to pay when due. The participation interests held by the chartered financial institution and other investors have the same priority to the interests held by us and are subject to the same credit, prepayment, and interest rate risk associated with this pool of merchant receivables. All risks of loss are shared pro rata based on participation interests held among all participating stakeholders. We apply a control-oriented, financial-components approach and account for the asset transfer as a sale and derecognize the portion of the participation interest for which control has been surrendered.
Loans, advances, and interest and fees receivable are reported at their outstanding principal balances, net of any participation interest sold and pro rata allowances, including unamortized deferred origination costs and estimated collectible interest and fees. We maintain the servicing rights for the entire pool of consumer and merchant receivables outstanding and receive a fee approximating the fair value for servicing the assets underlying the participation interest sold.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Allowance for loans and interest receivable
The allowance for loans and interest receivable represents management’s estimate of probable incurred losses inherent in our PayPal Credit portfolio of receivables.loans and receivables, net. Increases to the allowance for loans receivablereceivables are reflected as a component of transaction and loan losses in our consolidated financial statements. The evaluation process to assess the adequacy of allowances is subject to numerous estimates and principle judgments.
For our consumer loans receivable not classified as held for sale, the allowance is primarily based on forecasted principal balance delinquency rates (“roll rates”). Roll rates are the percentage of balances which we estimate will migrate from one stage of delinquency to the next based on our historical experience, as well as external factors such as estimated bankruptcies and levels of unemployment. Roll rates are applied to the principal amount of our consumer receivables for each stage of delinquency, from current to 180 days past the payment due date, in order to estimate the principal loans which have incurred losses and are probable to be charged off. We charge off consumer loan receivable balances in the month in which a customer balance becomes 180 days past the payment due date.
In connection with our agreement to sell our U.S. consumer credit receivables to Synchrony Bank and the designation of that portfolio as held for sale, in November 2017, we reversed the corresponding allowances against those loans and interest receivable balances. Such allowances on any newly originated U.S. consumer loans and interest receivables, held for sale were not established. Adjustments to the cost basis of this portfolio until the sale was completed, which were primarily driven by charge-offs, were recorded in restructuring and other charges in our consolidated statements of income.
For merchant working capitalloans and advances receivable, the allowance is primarily based on principal balances, forecasted delinquency rates, and recoveries through the use of a vintage-based loss forecasting model.
The determination of delinquency, from current to 180 days past due, for principal balances related to merchant working capital advancesreceivables outstanding is based on the current expected or contractual repayment period of the loan or advance and interest or fixed fee as compared to the original expected repayment period.
For our PPWC product, there is a general requirement that at least 10% of the original amount of the loan or advance plus the fixed fee must be repaid every 90 days. We calculate the repayment rate based onof the merchant's expected future payment volume suchso that repayment of the loan or advance and fixed fee is typically expected to generally occur within 9 to 12 months from the date of the loan or advance. On a regularmonthly basis, we recalculate the repayment period based on the actual repayment activity on the receivable. As such, actual repayment periods are dependent on actual merchant payment processing volumes. See “Note 10—Loans and Interest Receivable, Net” for additional information onFor our PPBL product, we receive fixed periodic payments over the delinquency statuscontractual term of our PayPal Credit portfolio of receivables.the loan which generally ranges from 3 to 12 months. We actively monitor receivables with repayment periods greater than the original expected or contractual repayment period.
The allowance for loss against interest receivable is primarily determined by applying historical average customer account roll rates to the interest receivable balance in each stage of delinquency to project the value of accounts that have incurred losses and are probable to be charged off. The allowance for fees receivable is primarily based on fee balances, forecasted delinquency rates, and recoveries through the use of a vintage-based loss forecasting model. Increases to the allowance for interest receivable isare reflected as a reduction of net revenues in our consolidated statementstatements of income. Increases to the allowance for fees receivable isare recognized as a reduction in deferred revenues included in other current liabilities in our consolidated balance sheet.
We charge off consumer loan receivable balances in the month in which a customer balance becomesreceivables under our PPWC product when the repayments are 180 days past the payment due date. We charge off the merchant receivable when the updated repayment period is 180 days past the original expected repayment periodour expectation of repayments and the merchant has not made a payment in the last 60 days. We also charge off the receivabledays or when the updated repayment period isrepayments are 360 days past the original expected repayment perioddue regardless of whether or not the merchant has made a payment within the last 60 days. We charge off the receivables under our PPBL product when the repayments are 180 days past due.
Bankrupt accounts are charged off within 60 days for merchants and 90 days for consumers after receipt of receiving notification from the bankruptcy courts.of bankruptcy. Consumer loans receivable past the payment due date continue to accrue interest until such time as they are charged off. Charge-offs that are recovered are recorded as a reduction to our allowance for loans and interest receivable.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Customer accounts
We hold all customer balances, (bothboth in the U.S. and internationally)internationally, as direct claims against us which are reflected on our consolidated balance sheetsheets as a liability classified as amounts due to customers. Certain jurisdictions where PayPal operates require us to hold eligible liquid assets, as defined by the regulators in these jurisdictions, equal to at least 100% of the aggregate amount of all customer balances. Therefore, we restrict the use of the assets underlying the customer balances to meet these regulatory requirements and separately classify the assets as customer accounts in our consolidated balance sheet.sheets. We classify the assets underlying the customer balances as current based on their purpose and availability to fulfill our direct obligation under amounts due to customers.
In March 2016, as approved by management and our Luxembourg banking subsidiary Supervisory Board and as permitted within regulations set forth byJune 2018, the Luxembourg Commission de Surveillance du Secteur Financier (the “CSSF”), we designated $800 million agreed that PayPal’s management may designate up to 35% of European customer balances held in our Luxembourg banking subsidiary to be used to extend credit for European and U.S. credit activities. As of December 31, 2018, the cumulative amount approved by management to our European customers. This is consistent with our strategy of diversifying funding sourcesbe designated for our credit businessactivities aggregated to $1.5 billion and does not represent a change in our credit business development strategy or risk appetite. These funds are classified as cash and cash equivalents in our consolidated balance sheet and representrepresented approximately 20%26% of European customer balances potentially available for corporate use by the Company at December 31, 2016us as determined by applying financial regulations maintained by the CSSF. On the date PayPal’s management designates the European customer balances held in our Luxembourg banking subsidiary to be used to extend credit, the balances are classified as cash and cash equivalents and no longer classified as customer accounts in our consolidated balance sheets. No additional amount has been designated for corporate usage by management during the year ended December 31, 2018. The remaining assets underlying the customer balances remain separately classified as customer accounts in our consolidated balance sheet.sheets. We do not commingle these customer accounts with corporate funds and maintain these assets separately in interest and non-interest bearing bank deposits, time deposits, corporate debt securities, and U.S. and foreign government and agency securities. See “Note 5—7—Funds Receivable and Customer Accounts” for additional information related to customer accounts. Due to the above approved plan,
Accordingly, we have generally presented changes in funds receivable and customer accounts as cash flows from investing activities in our consolidated statements of cash flows based on the nature of the activity underlying our customer accounts. We have elected to conform the prior year statement of cash flows to the current period presentation to provide comparability.
The following table presents the effects of the changes on the presentation of the statement of cash flows to the previously reported cash flows from investing activities and cash flows from financing activities in the consolidated statement of cash flows for the years ended December 31, 2015 and 2014. These changes have no impact on the previously reported total net cash flows:
|
| | | | | | | | | | | |
| | Full Year December 31, 2015 |
| (In millions) | As Reported | | Adjustments | | Revised |
| Cash flows from investing activities: | | | | | |
| Purchases of investments | $ | (7,542 | ) | | $ | (14,084 | ) | | $ | (21,626 | ) |
| Maturities and sales of investments | 3,318 |
| | 12,830 |
| | 16,148 |
|
| Funds receivable and customer accounts | — |
| | (395 | ) | | (395 | ) |
| | | | | | |
| Cash flows from financing activities: | | | | | |
| Funds receivable and customer accounts | (1,649 | ) | | 1,649 |
| | — |
|
| | | | | | |
| Net change | $ | (5,873 | ) | | $ | — |
| | $ | (5,873 | ) |
|
| | | | | | | | | | | |
| | Full Year December 31, 2014 |
| (In millions) | As Reported | | Adjustments | | Revised |
| Cash flows from investing activities: | | | | | |
| Purchases of investments | $ | (76 | ) | | $ | (8,668 | ) | | $ | (8,744 | ) |
| Maturities and sales of investments | 409 |
| | 7,357 |
| | 7,766 |
|
| Funds receivable and customer accounts | — |
| | (24 | ) | | (24 | ) |
| | | | | | |
| Cash flows from financing activities: | | | | | |
| Funds receivable and customer accounts | (1,335 | ) | | 1,335 |
| | — |
|
| | | | | | |
| Net change | $ | (1,002 | ) | | $ | — |
| | $ | (1,002 | ) |
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Funds receivable and funds payable
Funds receivable and funds payable arise due to the time required to initiate collection from and clear transactions through external payment networks. When customers fund their PayPal account using their bank account or a credit card or debit card, or withdraw funds from their PayPal account to their bank account or through a debit card transaction, there is a clearing period before the cash is received or settled, usually one to three business days for U.S. transactions and generally up to five business days for international transactions.
Allowance for negative customer balances
Negative customer balances occur primarily when there In addition, a portion of our customers' funds are insufficientsettled directly to their bank account. These funds in a customer’s PayPal account to cover charges applied for Automated Clearing House (“ACH”) returns, debit card transactions, chargebacks, nondelivery or unsatisfactory delivery of goods or services. Negative balances can be cured by the customer by addingare also classified as funds receivable and funds payable and arise due to the account, receiving payments, ortime required to initiate collection from and clear transactions through back-up funding sources. We also utilize third-party collection agents. For negative customer balances thatexternal payment networks. These funds are not expected to be cured or otherwise collected, we provide an allowance for uncollectible accounts. The allowance is estimatedclassified differently on our consolidated statement of cash flows as operating activities based on known facts and circumstances, internal factors including our experience with similar cases, and historical trends involving collection and write-off patterns. Negative customer balances are included in other current assets, netthe nature of the allowance. Adjustments to the allowance for negative customer balances are recorded as a component of transaction and loan loss. The allowance for negative customer balances was $144 million and $119 million at December 31, 2016 and 2015, respectively.this activity.
Property and equipment
Property and equipment consists primarily of computer equipment, software and website development costs, land and buildings and leasehold improvements. Property and equipment are stated at historical cost less accumulated depreciation. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets; generally, one to three years for computer equipment and software, including capitalized software and website development costs, three years for furniture and fixtures, up to thirty years for buildings and building improvements, and the shorter of five years or the non-cancelable term of the lease for leasehold improvements.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Goodwill and intangible assets
Goodwill is tested for impairment at a minimum on an annual basis. Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit’s carrying value is compared to its fair value. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. The fair value of the reporting unit is estimated using income and market approaches. The discounted cash flow method, a form of the income approach, uses expected future operating results and a market participant discount rate. The market approach uses comparable company prices and other relevant information generated by market transactions (either publicly traded entities or mergermergers and acquisitions) to develop pricing metrics to be applied to historical and expected future operating results of the reporting unit. Failure to achieve these expected results, changes in the discount rate or market pricing metrics, may cause a future impairment of goodwill at the reporting unit level. We conducted our annual impairment test of goodwill as of August 31, 20162018 and 2015.2017. We determined that no adjustment to the carrying value of goodwill of our reporting unit was required. As of December 31, 2016,2018, we determined that no events occurred or circumstances changed from August 31, 20162018 through December 31, 2016 indicated2018 that a further assessment was necessary.would more likely than not reduce the fair value of the reporting unit below its carrying amount.
Intangible assets consist of acquired customer-related intangible assets, marketing related intangibles, developed technologiestechnology, and other intangible assets including purchased partner relationships, purchased technology, patents and contractual agreements.assets. Intangible assets are amortized over the period of estimated benefit using the straight-line method and estimated useful lives ranging from one to eight years. No significant residual value is estimated for intangible assets.
Impairment of long-lived assets
We evaluate long-lived assets (including intangible assets) for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. An asset is considered impaired if its carrying amount exceeds the future net cash flow the asset is expected to generate.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Allowance for transaction losses and negative customer balances
We are exposed to transaction losses due to credit card and other payment misuse as well as nonperformance of and credit losses from sellers who accept payments through PayPal. We establish an allowance for estimated losses arising from processingcompleting customer transactions, such as chargebacks for unauthorized credit card use and merchant-related chargebacks due to non-delivery of goods or services, ACHAutomated Clearing House (“ACH”) returns, buyer protection program claims, account takeovers, and account overdrafts. This allowance represents an accumulation of the estimated amounts necessary to provide for transaction losses incurred as of the reporting date, including those which we have not yet identified. The allowance is monitored regularly and is updated based on actual claims data reported by our claims processors and other actual data received. The allowance is based on known facts and circumstances, internal factors including experience with similar cases, historical trends involving loss payment patterns, and the mix of transaction and loss types. Additions to the allowance are reflected as a component of transaction and loan losses in our consolidated statements of income. At December 31, 20162018 and 2015,2017, the allowance for transaction losses totaled $78$129 million and $66$92 million, respectively, and was included in accrued expenses and other current liabilities.liabilities in our consolidated balance sheets.
Negative customer balances occur primarily when there are insufficient funds in a customer’s PayPal account to cover charges applied for ACH returns, debit card transactions, merchant-related chargebacks due to nondelivery, or unsatisfactory delivery of goods or services. Negative customer balances can be cured by the customer by adding funds to their account, receiving payments, or through back-up funding sources. We also utilize third-party collection agents. For negative customer balances that are not expected to be cured or otherwise collected, we provide an allowance for uncollectible accounts. The allowance is estimated based on known facts and circumstances, internal factors including our experience with similar cases, and historical trends involving collection and write-off patterns. Negative customer balances are included in other current assets, net of the allowance in our consolidated balance sheets. Adjustments to the allowance for negative customer balances are recorded as a component of transaction and loan loss in our consolidated statements of income. The allowance for negative customer balances was $215 million and $174 million at December 31, 2018 and 2017, respectively.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Derivative instruments
We transact business in various foreign currencies and have significant international revenues and costs denominated in foreign currencies, subjecting our operationswhich subjects us to foreign currency risk. We have a foreign currency exposure management program whereby we enter into foreign currency exchange contracts that qualify as cash flow hedges, generally with maturities of 18 months or less, to reduce the volatility of cash flows primarily related to forecasted revenue denominated in certain foreign currencies. All outstanding derivatives are recognized on thein our consolidated balance sheetsheets at fair value. The effective portion of the designated derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and is subsequently reclassified into the financial statement line item in which the hedged item is recorded in the same period the forecasted transaction affects earnings. Beginning in 2018, we evaluate the effectiveness of our foreign currency exchange contracts on a quarterly basis by comparing the critical terms of the derivative instruments with the critical terms of the forecasted cash flows of the hedged item and if the critical terms are the same we conclude the hedge will be perfectly effective. Prior to and during 2018, we evaluated the effectiveness of some of our foreign currency exchange contracts on a monthly basis by comparing the change in the fair value of the derivative instruments with the change in the fair value of the forecasted cash flows of the hedged item. We do not exclude any component of the changes in fair value of the derivative instruments from the assessment of hedge effectiveness. If we elect to discontinue our cash flow hedges and it is probable that the original forecasted transaction will occur, we continue to report them in accumulated other comprehensive income (loss) until the forecasted transaction affects earnings, at which point we also reclassify the de-designated hedges into earnings. Gains and losses on derivatives held after we discontinue our cash flow hedge and gains and losses on derivative instruments that are not designated as cash flow hedges are recorded in the same financial statement line item to which the derivative relates.
We also hedge our economic exposure to foreign currency denominated monetary assets and liabilities with foreign currency contracts. The gains and losses on the foreign exchange contracts economically offset transaction gains and losses on the remeasurement of certain foreign currency denominated monetary assets and liabilities recognized in earnings. Accordingly, these outstanding non-designated derivatives are recognized on thein our consolidated balance sheetsheets at fair value, and changes in fair value from these contracts are recorded in other income (expense), net in the consolidated statementstatements of income. Our hedging program is not designed or operated for trading or speculative purposes.
We report cash flows arising from derivative instruments consistent with the classification of cash flows from the underlying hedged items that these derivatives are hedging. Accordingly, the cash flows associated with derivatives designated as cash flow hedges and our non-designated derivatives that hedge foreign currency denominated monetary assets and liabilities are classified in cash flows from operating activities in our consolidated statements of cash flows.
Our derivative instruments expose us to credit risk to the extent counterparties may be unable to meet the terms of the agreements.arrangement. We seek to mitigate thissuch risk by limiting counterparties to, major financial institutions and by spreading the risk across several major financial institutions.institutions and by entering into collateral security arrangements. In addition, the potential risk of loss with one counterparty resulting from this type of credit risk is monitored on an ongoing basis. See “Note 8—10—Derivative Instruments” for additional information related to the derivative instruments.
Fair value of financial instruments
Our financial assets and liabilities are valued using market prices on both active markets (Level 1) and less active markets (Level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily available pricing sources for comparable instruments, identical instruments in less active markets, or models using market observable inputs. As of December 31, 2016,2018 and 20152017, we did not have any assets or liabilities requiring measurement at fair value without observable market values that would require a high level of judgment to determine fair value (Level 3). Our financial instruments, including cash, cash equivalents, accounts receivable, loans and interest receivable, funds receivable, certain customer accounts, accounts payable, and funds payable and amounts due to customers are carried at cost, which approximates their fair value due to the short-term maturity
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Concentrations of risk
Our cash, cash equivalents, accounts receivable, loans and interest receivable, and funds receivable and customer accounts are potentially subject to concentration of credit risk. Cash, cash equivalents, and customer accounts are placed with financial institutions that management believes are of high credit quality. In addition, funds receivable are generated primarily with financial institutions or credit card companies which management believes are of high credit quality. We invest our cash, cash equivalents, and customer accounts primarily in highly liquid, highly rated instruments which are uninsured. From time to time, we may also have corporate deposit balances with financial services institutions which exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limit of $250,000. As part of our cash management process, we perform periodic evaluations of the relative credit standing of these
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
financial institutions. Our accounts receivable are derived from revenue earned from customers located in the U.S. and internationally. Our loans and interest receivable are derived from consumermerchant and merchantconsumer financing activities for customers located in the U.S. and internationally. As of December 31, 2016, two customers respectively2018 and 2017, one customer accounted for 29%26% and 24%16% of net accounts receivables.receivables, respectively. No customer accounted for more than 10% of net loans receivable as of December 31, 2016. As of2018 and 2017. At December 31, 2015 three customers2018, one partner accounted for 19%, 15% and 13%our long-term notes receivable balance, which represents 53% of net accounts receivables. No customer accounted for more than 10% of net loans receivable as of December 31, 2015.other assets. During the years ended December 31, 2016, 20152018, 2017 and 2014,2016, no customer accounted for more than 10% of net revenues. During the years ended December 31, 2016, 20152018, 2017 and 2014,2016, we earned approximately 22%17%, 26%20%, and 29%22% of revenue from customers on eBay’s Marketplaces platform. No other source of revenue represented more than 10% of our revenue.
Revenue recognition
We earn net revenues primarily from fees charged to customers on the volume of activity processed through our Payments Platform. Net transaction revenues resulting from a payment processing transaction are recognized once the transaction is complete. Based on historical experience, specified credits are made at the time revenue is recognized and recorded as a reduction to revenue. In certain circumstances, we are required to record payments to a customer as a reduction to revenue. These payments to customers primarily originate from certain customer acquisition arrangements.
We also earn net revenues from other value added services, including interest and fees earned on our PayPal Credit loans receivable portfolio, subscription fees, gateway fees, gain on sale of participation interest in certain consumer loans receivable, 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 provideSee “Note 2—Revenue” for information related to our consumers and merchants. Net revenues earned from other value added services are recognized over the period services are performed and when amounts are deemed to be fixed or determinable. Interest and fees earned on the PayPal Credit portfolio of loans receivable are computed and recognized based on contractual interest and fee rates, and are net of any required reserves and amortization of deferred origination costs.revenue recognition.
Advertising expense
We expense the cost of producing advertisements at the time production occurs and expense the cost of communicating advertisements in the period during which the advertising space or airtime is used as sales and marketing expense. Online advertising expenses are recognized based on the terms of the individual agreements, which is generally over the greater of the ratio of the number of impressions delivered over the total number of contracted impressions, on a pay-per-click basis, or on a straight-line basis over the term of the contract. Advertising expense totaled $350$484 million, $303$438 million and $272$350 million for the years ended December 31, 2016, 2015,2018, 2017, and 2014,2016, respectively.
Internal use software and website development costs
Direct costs incurred to develop software for internal use and website development costs, including those costs incurred in expanding and enhancing our Payments Platform, are capitalized and amortized generally over an estimated useful life of one to three years and are recorded as depreciation and amortization. PayPal capitalized $341$301 million and $254$309 million of internally developed software and website development costs for the years ended December 31, 20162018 and 2015,2017, respectively. Amortization expense for these capitalized costs was $208$262 million, $166$262 million and $129$208 million for the years ended December 31, 2016, 20152018, 2017 and 2014,2016, respectively. Costs related to the maintenance of internal use software and website development costs are expensed as incurred.
Defined contribution savings plans
We have a defined contribution savings plan in the U.S. which qualifies under Section 401(k) of the Internal Revenue Code (the “Code”). Our non-U.S. employees are covered by other savings plans. Expenses related to our defined contribution savings plans are recorded when services are rendered by our employees.
Stock-based compensation
Prior to the separation, our employees participated in eBay’s equity incentive plans, including stock options, restricted stock units and performance-based restricted stock units and the employee stock purchases made under eBay's employee stock purchase plan.
All awards granted under these plans consisted of eBay common shares. Our consolidated statement of income reflected compensation expense for these stock-based plans associated with the portion of eBay's incentive plans in which our employees
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
participated as well as an allocation of stock-based compensation of certain employees of eBay who provided general and administrative services on our behalf.
Upon separation, outstanding awards granted to PayPal employees under eBay's equity incentive plans were converted into PayPal awards under PayPal's equity incentive plans based on a conversion ratio. This conversion ratio was determined as the closing per-share price of eBay shares on the last regular trading session prior to separation divided by the opening per-share price of PayPal shares on the first regular trading session after separation. There was no significant incremental stock-based compensation expense recorded as a result of the share conversions.
For periods up to separation, we determinedWe determine compensation expense associated with restricted stock units and performance based on the fair value of eBay’s common stock on the date of grant. Following separation, we determine compensation expense associated with restricted stock units based on the fair value of our common stock on the date of grant. We determine compensation expense associated with stock options based on the estimated grant date fair value method using the Black-Scholes valuation model. We generally recognize compensation expense using a straight-line amortization method over the respective vesting period for awards that are ultimately expected to vest. Accordingly, stock-based compensation expense for the years ended December 31, 2016, 20152018, 2017 and 20142016 has been reduced for estimated forfeitures. When estimating forfeitures, we consider voluntary termination behavior of our employees as well as trends of actual option forfeitures.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Foreign currency
MostMany of our foreign subsidiaries use the local currency of their respective countries as their functional currency. Assets and liabilities of our non-U.S. dollar functional currency subsidiaries are translated into U.S. dollars at exchange rates prevailing at the balance sheet dates. Gains and losses resulting from these translations are recorded as a component of accumulated other comprehensive income. Revenues, costs, and expenses of our non-U.S. subsidiaries with functional currencies other than the U.S. dollar are translated into U.S. dollars using daily exchange rates. Gains and losses resulting from the translationremeasurement of our consolidated balance sheet are recorded as a component of accumulated other comprehensive income. Gains and losses from foreign currency transactions into the functional currency are recognized as other income (expense), net.net in our consolidated statements of income.
Income taxes
We account for income taxes using an asset and liability approach which requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the financial statements or tax returns. The measurement of current and deferred tax assets and liabilities is based on provisions of enacted tax laws; the effects of future changes in tax laws or rates are not anticipated. If necessary, the measurement of deferred tax assets is reduced by the amount of any tax benefits that are not expected to be realized based on available evidence. We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
NetOther income per share(expense), net
Other income (expense), net includes interest income which consists of interest earned on corporate cash and cash equivalents in bank accounts and short-term and long-term investments, and interest expense which consists of interest expenses, fees and amortization of debt discount on our credit agreements. Other income (expense), net also includes observable price changes on our equity investments recorded using the Measurement Alternative and foreign exchange gains and losses.
Basic net income per share is computed by dividing net incomeRecent Accounting Guidance
In 2016, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance related to accounting for leases, which will require lessees to recognize lease assets and lease liabilities on the balance sheet for the periodrights and obligations created by all leases with terms greater than 12 months. As we are not a lessor, other changes in the weighted average numberguidance applicable to lessors do not apply. Additionally, in 2018, the FASB issued codification and targeted improvements to this guidance effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted. We will adopt the new guidance on January 1, 2019, using a modified retrospective basis and will apply the optional practical expedients related to the transition. We estimate an increase of common shares outstanding during the period. The weighted average number of common shares outstanding for basic and diluted earnings per shareapproximately $564 million for the year ended December 31,right of use lease assets and lease liabilities associated with our operating leases upon adoption. We do not believe the adoption of this guidance will have a significant impact to our consolidated statements of earnings, stockholders’ equity, and cash flows.
In 2016, was basedthe FASB issued new guidance on the weighted average numbermeasurement of common shares outstandingcredit losses on financial instruments. Credit losses on loans, trade and other receivables, held-to-maturity debt securities, and other instruments will reflect our current estimate of the expected credit losses and generally will result in the earlier recognition of allowances for losses. Credit losses on available-for-sale debt securities with unrealized losses will be recognized as allowances for credit losses limited to the period.amount by which fair value is below amortized cost. Additional disclosures will be required, including information used to track credit quality by year of origination for most financing receivables. The weighted average number of common shares outstandingnew guidance is effective for basicfiscal years, and diluted earnings per share for the year ended December 31, 2015 was based on the number of common shares distributed on July 17, 2015 for the period prior to distribution and the weighted average number of common shares outstanding for the periodinterim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We will adopt the distribution date. The weighted average numbernew guidance effective January 1, 2020. We are required to apply the provisions of common shares outstanding for basic and dilutedthis guidance as a cumulative effect adjustment to retained earnings per share for the years ended December 31, 2014 was based on the number of shares of PayPal common stock outstanding on the distribution date. On July 17, 2015, the distribution date, eBay stockholders of record as of the closebeginning of businessthe first reporting period in which the guidance is adopted with impairment of available-for-sale debt securities applied prospectively after adoption. We are evaluating the impact of and approach to adopting this new accounting guidance on July 8, 2015 received one share of PayPal common stockour consolidated financial statements.
In 2017, the FASB issued new guidance that requires certain premiums on callable debt securities to be amortized to the earliest call date. The amortization period for every share of eBay common stock heldcallable debt securities purchased at a discount will not be impacted. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. We will adopt the new guidance on January 1, 2019. Transition is on a modified retrospective basis with a cumulative effect adjustment to retained earnings as of the record date. Diluted net income per share is computed by dividing net income for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding for the period. The dilutive effect of outstanding options and equity incentive awards is reflected in diluted net income per share by applicationbeginning of the treasury stock method.first reporting period in which the guidance is adopted. The calculationadoption of diluted net income per share excludes all anti-dilutive common shares. The same number of shares was usedthis guidance is not expected to calculate diluted earnings per share for the year ended December 31, 2014 since the 1.2 billion shares that were distributedhave a material impact on the distribution date were not outstanding for those periods.our consolidated financial statements.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
RecentIn 2018, the FASB issued new guidance in response to tax reform that allows the option to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) from accumulated other comprehensive income to retained earnings. If such an option is elected, transition can be applied either retrospectively to each period in which the effect of tax reform is recognized or applied with a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. We will adopt the new guidance effective January 1, 2019. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
In 2018, the FASB issued amended guidance to remove, modify and add disclosure requirements for fair value measurements. This amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted for any removed or modified disclosure requirements. Transition is on a prospective basis for the new and modified disclosures, and on a retrospective basis for disclosures that have been eliminated. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
In 2018, the FASB issued amended guidance on the disclosure requirements for defined benefit pension or other post-retirement plans. The amended guidance removes certain disclosure requirements and adds others including requiring disclosure related to interest credit ratings and changes in benefit obligations. This amendment is effective for fiscal years beginning after December 15, 2020, with early adoption permitted, and requires retrospective adoption for all periods presented. We are evaluating the impact this amended disclosure guidance may have on the footnotes to our consolidated financial statements.
In 2018, the FASB issued new accounting guidance intended to align the requirements for capitalization of implementation costs incurred in a cloud computing arrangement that is a service contract with the existing guidance for internal-use software. Capitalized implementation costs should be amortized over the term of the hosting arrangement and recorded in the same financial statement line items as amounts for the hosting arrangement. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The guidance provides flexibility in adoption, allowing for either retrospective adjustment or prospective adjustment for all implementation costs incurred after the date of adoption. We are evaluating the impact this new accounting guidance will have on our consolidated financial statements.
Recently Adopted Accounting PronouncementsGuidance
In 2014, the Financial Accounting Standards Board (“FASB”)FASB issued new accounting guidance related to revenue recognition.recognition, which was further updated in 2016 for reporting revenue on a gross versus net basis. This new standard will replaceguidance replaced all currentexisting GAAP guidance on this topic and eliminateeliminated all industry-specific guidance. The new revenue recognition guidance provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. In 2015, the FASB deferred the effective date to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. In 2016, the FASB updatedWe adopted the guidance effective January 1, 2018 on a full retrospective basis. We performed an impact analysis for reporting revenue gross versus net to improve the implementation guidance on principal versus agent considerations,opening balance sheet as of January 1, 2016 as well as for the years ended December 31, 2016 and for identifying performance obligations and the accounting of intellectual property licenses. In addition, the FASB introduced2017. The impacts were deemed de minimis. No practical expedients and made narrow scope improvements toor exemptions were elected in conjunction with the new accounting guidance. We have evaluated the impactadoption of this new standard and have concluded that our financial statements will not be materially impacted upon adoption. We will adopt the guidance on January 1, 2018. Either of the following transition methods is permitted: (i) a full retrospective approach reflecting the application of the new standard in each prior reporting period, or (ii) a modified retrospective approach with a cumulative-effect adjustment to the opening balance of retained earnings in the year the new standard is first applied. We are continuing to evaluate the approach we will use when transitioning to this new guidance. For additional information, see “Note 2—Revenue.”
In 2016, the FASB issued new accounting guidance related to the classification and measurement of financial instruments. This new standard makes limited amendments to the guidance inamends GAAP by requiring equity investments to be measured at fair value with changes in fair value recognized in net income. This new standardguidance also amends the presentation of certain fair value changes for financial liabilities measured at fair value and it also amends certain disclosure requirements associated with the fair value of financial instruments. The new standard isAdditionally, in 2018, the FASB issued technical corrections and improvements to this guidance effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years beginning after DecemberJune 15, 2017. Early adoption is permitted in limited situations.2018. We are required to apply the new guidance on a modified retrospective basis to all outstanding instruments, with a cumulative effect adjustment as of the date of adoption. Basedadoption and on a prospective basis to all outstanding equity investments without a readily determinable fair value. We adopted the guidance, including early adoption of the technical corrections and improvements, effective January 1, 2018. Beginning in the first quarter of 2018, we applied the Measurement Alternative to substantially all our current portfolio ofequity investments, which required us to measure these equity investments at cost method investments,minus impairment, if any, and adjust for changes resulting from observable price changes in orderly transactions for an identical or similar investment in the same issuer. For additional information on the impact the adoption of this standard is not expected to have a material impactguidance had on our consolidated financial statements.statements during the year ended December 31, 2018, please refer to “Note 8—Investments.”
In 2016, the FASB issued new accounting guidance related to accounting for leases, which will require lessees to recognize lease assets and lease liabilities on the balance sheet for the rights and obligations created by all leases with terms greater than twelve months. As we are not a lessor, other changes in the standard applicable to lessors do not apply. The standard is effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted. We are required to adopt the guidance using a modified retrospective basis and can elect to apply optional practical expedients. We are evaluating the impact and approach to adopting this new accounting guidance on our financial statements.
In 2016, the FASB issued new accounting guidance to simplify the analysis for embedded derivatives. The new guidance clarifies that when assessing whether a contingent call or put option qualifies as a separate derivative from the host contract (e.g., the debt instrument), the nature of the exercise contingency would be excluded from the assessment. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. We are required to apply the new guidance on a modified retrospective basis to all existing debt instruments as of the beginning of the fiscal year for which the amendments are effective. The adoption of this standard is not expected to have a material impact on our financial statements.
In 2016, the FASB issued new accounting guidance on investments that qualify for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The new guidance eliminates the requirement for retrospective adjustment of the investment, results of operations and retained earnings as if the equity method had been in effect during all the previous periods that the investment had been held. Instead, under the new guidance, the cost of acquiring the additional interest in the investee would be added to the current basis of the previously held interest and equity method accounting would be adopted as of the date the investment becomes qualified for equity method accounting. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. The guidance should be applied prospectively after adoption. The adoption of this standard is not expected to have a material impact on our financial statements.
In 2016, the FASB issued new guidance on the accounting for share-based payment compensation. The new guidance makes amendments to the following areas: accounting for income taxes upon vesting or settlement of awards, presentation of excess tax benefits or tax deficiencies on the statement of cash flows, accounting for forfeitures, minimum statutory withholding requirements and presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet minimum statutory withholding requirements. The new standard is effective for fiscal years, and interim periods within those fiscal years,
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
beginning after December 15, 2016 with early adoption permitted. We will adopt the new guidance effective January 1, 2017. As a result of the adoption, stock-based compensation (“SBC”) excess tax benefits or tax deficiencies will be reflected in the consolidated statement of income within the provision for income taxes rather than in the consolidated balance sheet within additional paid-in capital. This change will be applied prospectively. The amount of the impact to the provision for income taxes will depend on the difference between the market value of share-based awards at vesting or settlement and the grant date fair value recognized through SBC. Additionally, we will present the cash flows related to the applicable SBC excess tax benefits or tax deficiencies in operating activities along with other income tax cash flows rather than in financing activities on a prospective basis. Finally, we will continue to utilize an estimate of forfeitures as our approach when determining SBC. The remaining amendments are not expected to have a material impact on our financial statements.
In 2016, the FASB issued new guidance on the measurement of credit losses on financial instruments. Credit losses on loans, trade and other receivables, held-to-maturity debt securities and other instruments will reflect our current estimate of the expected credit losses (CECL). CECL requires loss estimates for the remaining estimated life of the financial instrument using historical experience, current conditions, and reasonable and supportable forecasts. Generally we expect that CECL will result in the earlier recognition of allowances for losses compared to the current approach of estimating probable incurred losses. Credit losses on available-for-sale debt securities with unrealized losses will be recognized as allowances for credit losses limited to the amount by which fair value is below amortized cost. Additional disclosures will be required, including information used to track credit quality by year of origination for most financing receivables. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We are required to apply the standard’s provisions as a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted with impairment of available-for-sale debt securities applied prospectively after adoption. We are evaluating the impact and approach to adopting this new accounting guidance on our financial statements.
In 2016, the FASB issued new guidance on classifying certain cash receipts and cash payments on the statement of cash flows. The new guidance addresses the classification of cash flows related to: debt prepayment or extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, including bank-owned life insurance, distributions received from equity method investees, and beneficial interests in securitization transactions. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The guidance should be applied retrospectively after adoption. We adopted the guidance effective January 1, 2018. The adoption of this standard isguidance did not expected to have a material impact on our consolidated financial statements.
In 2016, the FASB issued new guidance on the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The new guidance requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, with early adoption permitted in the first interim period. A modified retrospective basis of application of the new guidance is required. We intend to adopt the new guidance effective January 1, 2017. As a result of the adoption, we will record a decrease of approximately $42 million in retained earnings as of the beginning of the period of adoption, with a corresponding decrease in prepaid taxes related to the unamortized tax expense attributed to intra-entity transfers of assets (other than inventory) previously deferred. Upon adoption, when any new intra-entity transfer of assets other than inventory occurs, we will recognize the income tax consequences associated with this activity in the consolidated statement of income in the period when the transaction takes place.
In 2016, the FASB issued new guidance on restricted cash on the statement of cash flows. The new guidance requires the classification and presentation of changes in restricted cash and cash equivalents in the statement of cash flows. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending balances shown on the statement of cash flows. The guidance had to be applied retrospectively after adoption. We adopted the guidance effective January 1, 2018 on a retrospective basis. The beginning and ending balances of cash and cash equivalents on the consolidated statement of cash flows now include restricted cash and restricted cash equivalents, such as cash and cash equivalents underlying customer accounts and restricted cash and restricted cash equivalents within short-term investments.
In 2017, the FASB issued new standardguidance clarifying the scope and application of the de-recognition of non-financial assets and the sale or transfer of non-financial assets, including partial sales. We adopted the guidance effective January 1, 2018 on a full retrospective basis. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In 2017, the FASB issued new guidance clarifying which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Specifically, an entity would apply modification accounting only if the fair value, vesting conditions, or classification of the awards changes as a result of changes in the terms or conditions. We adopted the guidance effective January 1, 2018 and applied it prospectively upon adoption. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In 2017, the FASB issued new guidance intended to better align the results of hedge accounting with an entity’s risk management activities. This guidance updates the designation and measurement guidance for qualifying hedging relationships by expanding hedge accounting for both non-financial and financial risk components and by refining the measurement of hedge results to better reflect an entity’s hedging strategies. The amendments also align the recognition and presentation of the effects of the hedge results in the financial statements to increase the understandability of the results of an entity’s intended hedging strategies. Additionally, the guidance includes certain targeted improvements to ease the operational burden of applying hedge accounting. We are required to apply the guidance with a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year in which the guidance is adopted and prospectively apply the presentation and disclosure guidance. We early adopted the guidance in the first quarter of 2018 using a modified retrospective approach to reflect application of the new guidance effective January 1, 2018. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In 2018, the FASB issued new guidance to provide clarity around application of income tax accounting in situations where the assessment of tax implications of the Tax Act might not be complete as of period end in which the Tax Act was enacted. This guidance prescribes that an entity must reflect the income tax impact of the Tax Act in the period in which the tax accounting is complete and allows an entity to report provisional amounts for those specific effects of the Tax Act for which the accounting is incomplete but a reasonable estimate can be determined. No provisional amounts should be reported for specific effects of the Tax Act for which a reasonable estimate cannot be determined, and the entity should continue to apply the provisions of the tax laws that were in effect prior to the enactment of the Tax Act. It further allows a measurement period of one year from the date of enactment within which to complete the accounting for all impacts of the Tax Act. Our consolidated financial statements reflect tax accounting in compliance with this guidance.
In 2018, the FASB amended existing guidance to include share-based payment transactions for acquiring goods and services from non-employees. This amendment prescribes that entities should apply the requirements for employee share-based payment compensation to non-employee awards used to acquire goods and services, except for specific guidance on inputs to an option pricing model and the attribution of cost (period of time that the awards vest and pattern of recognition). The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017,2018, with early adoption permitted. TheWe adopted the guidance should be applied retrospectively after adoption.effective April 1, 2018. The adoption of this standard isguidance did not expected to have a material impact on our consolidated financial statements.
In 2017, the FASB issued new guidance to clarify the definition of a business to assist companies with evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The new guidance requires a company to evaluate if substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of assets and activities is not a business. The guidance also requires a business to
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in the guidance for revenue from contracts with customers. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The guidance should be applied prospectively to any transactions occurring within the period of adoption. The adoption of this standard is not expected to have a material impact on our financial statements.
In 2017, the FASB issued new guidance to simplify the accounting for goodwill impairment. The guidance simplifies the measurement of goodwill impairment by removing step 2 of the goodwill impairment test, which requires the determination of the fair value of individual assets and liabilities of a reporting unit. The new guidance requires goodwill impairment to be measured as the amount by which a reporting unit’s carrying value exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments should be applied on a prospective basis. The new standard is effective for fiscal years beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017. We are evaluating the impact this new accounting guidance will have on our financial statements.
Note 2—Revenue
PayPal enables its customers to send and receive payments. We earn revenue primarily by completing payment transactions for our customers on our Payments Platforms and from other value added services. Our revenues are classified into two categories, transaction revenues and revenues from other value added services.
Transaction Revenues
We earn transaction revenues primarily from fees charged to merchants and consumers on a transaction basis. These fees may have a fixed and variable component. The variable component is generally a percentage of the value of the payment amount and is known at the time the transaction is processed. If the underlying transaction is approved for refund, we reimburse the variable component of the fee. We estimate the amount of fee refunds that will be processed during the quarter and record a provision against our net revenues. The volume of activity processed on our Payments Platform, which results in transaction revenue, is referred to as Total Payments Volume (“TPV”). We define TPV as 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. We earn additional fees on transactions where we perform a currency conversion and when we enable cross-border transactions (i.e., transactions where the merchant and consumer are in different countries).
Our contracts with our customers are usually open-ended and can be terminated by either party without a termination penalty after the notice period has lapsed. Therefore, our contracts are defined at the transaction level and do not extend beyond the service already provided. Our contracts generally renew automatically without significant material rights. Some of our contracts include tiered pricing, based primarily on volume. The fee charged per transaction is adjusted up or down if the volume processed for a specified period is different from prior period defined volumes. We have concluded that this volume-based pricing approach does not constitute a future material right since the discount is within a range typically offered to class of customers with similar volume. We do not have any capitalized contract costs, and do not carry any material contract balances.
Our service comprises a single performance obligation to complete payments on our Payments Platform for our customers. Using our risk assessment tools, we perform a transaction risk assessment on individual transactions to determine whether a transaction should be authorized for completion on our Payment Platform. When we authorize a transaction, we become obligated to our customer to complete the payment transaction.
We recognize fees charged to our customers primarily on a gross basis as transaction revenue when we are the principal in respect of completing a payment transaction. As a principal to the transaction, we control the service of completing payments on our Payments Platform. We bear primary responsibility for the fulfillment of the payment service, contract directly with our customers, control the product specifications, and define the value proposal from our services. Further, we have full discretion in determining the fee charged to our customers, which is independent of the costs we incur in instances where we may utilize payment processors or other financial institutions to perform services on our behalf. We therefore bear full margin risk when completing a payment transaction. These fees paid to payment processors and other financial institutions are recognized as transaction expense. We are also responsible for providing customer support.
We provide merchants and consumers with protection programs on most transactions completed on our Payments Platforms, except for transactions using our gateway products or where our customer agreements specifically do not provide for protections. These programs protect both merchants and consumers from loss primarily due to fraud and counterparty performance. Our buyer protection program provides protection to consumers for qualifying purchases by reimbursing the consumer for the full amount of the purchase if a purchased item does not arrive or does not match the seller’s description. Our seller protection programs provide protection to merchants against claims that a transaction was not authorized by the buyer or claims that an item was not received by covering the seller for the full amount of the payment on eligible sales. These protection programs do not provide a separate service to our customers and we estimate and record associated costs in transaction and loan losses during the period the payment transaction is completed.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Revenues fromOther Value Added Services
We earn revenues from other value added services which is comprised primarily of revenue earned through partnerships, subscription fees, gateway fees, and other services that we provide to our merchants and consumers. These contracts typically have one performance obligation which is provided and recognized over the term of the contract. The transaction price is generally fixed and known at the end of each reporting period; however, for some agreements, it may be necessary to estimate the transaction price using the expected value method. In our partnership agreement with Synchrony Bank, in addition to the revenue share we earn, we also recognize revenue for transition servicing activities performed on their behalf using a relative selling price determined through the adjusted market assessment approach. We record revenue earned in revenues from other value added services on a net basis when we are considered the agent with respect to processing transactions.
We also earn revenues from interest and fees earned primarily on our credit portfolio of loans receivable, gain on sale of participation interest in certain loans and advances, and interest earned on certain PayPal customer account balances. Interest and fees earned on the credit portfolio of loans receivable are computed and recognized based on the effective interest method and are presented net of any required reserves and amortization of deferred origination costs.
Disaggregation of Revenue
We determine operating segments based on how our Chief Operating Decision Maker (“CODM”) manages the business, makes operating decisions around the allocation of resources and evaluates operating performance. Our CODM is our Chief Executive Officer, who reviews our operating results on a consolidated basis. We operate in one segment and have one reportable segment. Based on the information provided to and reviewed by our CODM, we believe that the nature, amount, timing, and uncertainty of our revenue and cash flows and how they are affected by economic factors is most appropriately depicted through our primary geographical markets and type of revenue (transaction and other value added services) categories. Revenues recorded within these categories are earned from similar services for which the nature of associated fees and the related revenue recognition models are substantially the same.
The following table presents our revenues disaggregated by primary geographical markets and revenues by major products and services:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | |
| Primary geographical markets | | | | | |
| United States (“U.S.”) | $ | 8,324 |
| | $ | 7,084 |
| | $ | 5,760 |
|
| United Kingdom (“U.K.”) | 1,658 |
| | 1,402 |
| | 1,257 |
|
Other countries(1) | 5,469 |
| | 4,608 |
| | 3,825 |
|
Total revenues(2) | $ | 15,451 |
| | $ | 13,094 |
| | $ | 10,842 |
|
| | | | | | |
| Major products and services | | | | | |
| Transaction revenues | $ | 13,709 |
| | $ | 11,501 |
| | $ | 9,585 |
|
| Other value added services | 1,742 |
| | 1,593 |
| | 1,257 |
|
Total revenues(2) | $ | 15,451 |
| | $ | 13,094 |
| | $ | 10,842 |
|
(1) No single country included in the other countries category generated more than 10% of total revenue.
(2) Total revenues include interest, fees and gains earned on loan and interest receivables, net and held for sale portfolio, as well as hedging gains or losses and interest earned on certain PayPal customer balances of $1.2 billion, $1.3 billion and $1.0 billion for the years ended December 31, 2018, 2017, and 2016, respectively, which do not represent revenues recognized in the scope of ASC Topic 606, Revenue from contracts with customers.
Net revenues are attributed to the U.S., the U.K., and other countries primarily based upon the country in which the merchant is located, or in the case of a cross-border transaction, may be earned from the country in which the consumer and the merchant respectively reside. Net revenues earned from other value added services are typically attributed to the country in which either the customer or partner reside.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 3—Net Income Per Share
Basic net income per share is computed by dividing net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding for the period. The weighted average number of common shares outstanding for basic and diluted earnings per share for the years ended December 31, 2018, 2017, and 2016 was based on the weighted average number of common shares outstanding for the period. The dilutive effect of outstanding options and equity incentive awards is reflected in diluted net income per share by application of the treasury stock method. The calculation of diluted net income per share excludes all anti-dilutive common shares.
The following table sets forth the computation of basic and diluted net income per share for the periods indicated:
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2016 | | 2015(1) | | 2014(2) | 2018 | | 2017 | | 2016 |
| | (In millions, except per share amounts) | (In millions, except per share amounts) |
| Numerator: | | | | | | | | | | |
| Net income | $ | 1,401 |
| | $ | 1,228 |
| | $ | 419 |
| $ | 2,057 |
| | $ | 1,795 |
| | $ | 1,401 |
|
| Denominator: | | | | | | | | | | |
| Weighted average shares of common stock - basic | 1,210 |
| | 1,222 |
| | 1,218 |
| 1,184 |
| | 1,203 |
| | 1,210 |
|
| Dilutive effect of equity incentive awards | 8 |
| | 7 |
| | 6 |
| 19 |
| | 18 |
| | 8 |
|
| Weighted average shares of common stock - diluted | 1,218 |
| | 1,229 |
| | 1,224 |
| 1,203 |
| | 1,221 |
| | 1,218 |
|
| Net income per share: | | | | | | | | | | |
| Basic | $ | 1.16 |
| | $ | 1.00 |
| | $ | 0.34 |
| $ | 1.74 |
| | $ | 1.49 |
| | $ | 1.16 |
|
| Diluted | $ | 1.15 |
| | $ | 1.00 |
| | $ | 0.34 |
| $ | 1.71 |
| | $ | 1.47 |
| | $ | 1.15 |
|
| Common stock equivalents excluded from income per diluted share because their effect would have been anti-dilutive | 8 |
| | 12 |
| | 2 |
| 1 |
| | 2 |
| | 8 |
|
1 The weighted average number of common shares outstanding for basic and diluted earnings per share for the year ended December 31, 2015 was based on the number of common shares distributed on July 17, 2015 for the period prior to distribution and the weighted average number of common shares outstanding for the period beginning after the distribution date.
2 Basic and diluted net income per share for the year ended December 31, 2014 was calculated using the number of common shares distributed on July 17, 2015.
Note 3—4—Business Combinations
There were no acquisitions or divestitures completedAcquisitions Completed in 2016 and 2014.2018
During 2015,the year ended December 31, 2018, we completed four acquisitions reflecting 100% of the equity interests of the acquired companies, for an aggregate amountpurchase price of $1.4$2.7 billion. During 2016, we finalized the allocation of the purchase consideration for Xoom, Paydiant, CyActive and one other acquisition, which resulted in a $10 million adjustment to goodwill primarily related to Xoom.
XoomHyperwallet
We completed the acquisition of Xoom CorporationHWLT Holdings Inc. (“Xoom”Hyperwallet”) in November 20152018 by acquiring all of the outstanding shares of Xoom for $25 per share in cash. We acquired Xoom to offer a broader range of services to our global customer base, increase customer engagement and accelerate our entrance into the international remittances markets. The total purchase price of $1.1approximately $399 million, consisting of cash consideration. We acquired Hyperwallet to enhance our payout capabilities and improve our ability to provide an integrated suite of payment solutions to ecommerce platforms and marketplaces around the world. The allocation of purchase consideration resulted in approximately $100 million of customer-related intangible assets, approximately $30 million of developed technology intangible assets, and approximately $2 million of marketing related intangible assets with estimated useful lives ranging from 3 to 7 years, funds receivable and customer accounts of $412 million, funds payable and amounts due to customers of $412 million, net liabilities of approximately $32 million, and initial goodwill of approximately $299 million, which is attributable to the workforce of Hyperwallet and the synergies expected to arise from the acquisition. We do not expect goodwill to be deductible for income tax purposes. The allocation of the purchase price for this acquisition has been prepared on a preliminary basis and changes to the allocation to certain assets, liabilities, and tax estimates may occur as additional information becomes available.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
iZettle
We completed the acquisition of iZettle AB (publ) (“iZettle”) in September 2018 by acquiring all the outstanding shares for a total purchase price of $2.2 billion, includedconsisting of cash consideration paid of approximately $961 million, net$2.1 billion (net of cash acquired of $92 million,$103 million) and therestricted shares of PayPal with a fair value of assumed unvested equity totaling $7approximately $22 million. We acquired iZettle to expand our in-store presence and strengthen our Payments Platform to help small businesses around the world grow and thrive in an omnichannel retail environment.
The following table summarizes the finalpreliminary allocation of the purchase consideration to the fair value of the assets acquired and liabilities assumed:
| | | | (In millions) | (In millions) |
| Goodwill | $ | 645 |
| $ | 1,600 |
|
| Intangibles | 217 |
| |
| Customer lists and user base | | 426 |
|
| Marketing related | | 102 |
|
| Developed technology | | 121 |
|
| All other | | 1 |
|
| Total intangibles | | $ | 650 |
|
| Cash | 92 |
| 103 |
|
| Short-term investments | 72 |
| |
| Accounts receivable | 40 |
| |
| Funds receivable and customer accounts | | 47 |
|
| Funds payable and amounts due to customers | | (47 | ) |
| Deferred tax liabilities, net | | (118 | ) |
| Other net liabilities | (6 | ) | (53 | ) |
| Total purchase consideration | $ | 1,060 |
| $ | 2,182 |
|
The intangiblesintangible assets acquired consists primarily of partnermerchant relationships, trade name/trademarks, developed technology, trade name and customer-related intangible assets,existing acquirer relationships with an estimated useful life of 2lives ranging from 3 to 57 years. The excess of the purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill, which is attributable to the workforce of XoomiZettle and the synergies expected to arise from the acquisition. We do not expect goodwill to be deductible for income tax purposes. The allocation of the purchase price for this acquisition has been prepared on a preliminary basis and changes to the allocation to certain assets, liabilities, and tax estimates may occur as additional information becomes available.
PaydiantSimility
We completed the acquisition of Paydiant,Simility, Inc. (“Paydiant”Simility”) in April 2015July 2018 by acquiring all the outstanding shares for a total considerationpurchase price of approximately $230$107 million, netconsisting of cash acquired.consideration. We acquired PaydiantSimility to expandenhance our capabilities in mobile payments.ability to deliver fraud prevention and risk management solutions to merchants globally. The allocation of purchase consideration resulted in approximately $49$18 million of developed technology and customer-related intangible assets with an estimated useful life of 3 years, net liabilitiesassets of approximately $6$10 million, and initial goodwill of approximately $187 million.$79 million, which is attributable to the workforce of Simility and the synergies expected to arise from the acquisition. We do not expect goodwill to be deductible for income tax purposes. The allocation of the purchase price for this acquisition has been prepared on a preliminary basis and changes to the allocation to certain assets, liabilities, and tax estimates may occur as additional information becomes available.
CyActiveOther Acquisitions
WeIn May 2018, we completed thean acquisition of CyActive Security, Ltd. (“CyActive”) in April 2015which was accounted for as a business combination. The total consideration of approximately $43purchase price for this acquisition was $16 million, netconsisting of cash acquired. We acquired CyActive to further enhance our information security capabilities.consideration. The allocation of purchase consideration resulted in approximately $8$13 million of technology-relateddeveloped technology intangible assets net liabilitieswith an estimated useful life of approximately $2 million,2 years and initial goodwill of approximately $37 million.$3 million, which is attributable to the workforce of the acquired company and the synergies expected to arise from the acquisition. We do not expect goodwill to be deductible for income tax purposes. The allocation of the purchase price for this acquisition has been prepared on a preliminary basis and changes to the allocation to certain assets, liabilities, and tax estimates may occur as additional information becomes available.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We have included the financial results of thesethe acquired businesses in our consolidated financial statements from their respective datesthe date of acquisition. Revenues and expenses related to these acquisitions for the year ended December 31, 20152018 were not material. Pro forma results of operations have not been presented because the effecteffects of these acquisitions were not material to our financial results.
Acquisitions Completed in 2017
During 2017, we completed two acquisitions, reflecting 100% of the equity interests of the acquired companies, for an aggregate purchase price of $420 million:
TIO Networks Corp.
We completed the acquisition of TIO Networks Corp. (“TIO”) in July 2017 by acquiring all the outstanding shares of TIO for $2.64 per share in cash. We acquired TIO to expand our scale of operations, complement our product portfolio, and to help accelerate our entry into bill payments. The total purchase price of $238 million consisted of cash consideration. The allocation of purchase consideration resulted in approximately $66 million of technology and customer-related intangible assets with an estimated useful life of 1 to 5 years, net assets of approximately $6 million and goodwill of approximately $166 million, which is attributable to the workforce of TIO and the synergies expected to arise from the acquisition. We do not expect that all of the goodwill will be deductible for income tax purposes.
In November 2017, we suspended the operations of TIO to protect customer data as part of an ongoing investigation of security vulnerabilities of the TIO platform. In March 2018, our management decided to wind down TIO's operations. Refer to Note 5—“Goodwill and Intangible Assets” and Note 13—“Commitments and Contingencies—Litigation and Regulatory Matters” for further details.
Swift Financial Corporation
We completed the acquisition of Swift Financial Corporation (“Swift”) in September 2017 by acquiring all the outstanding shares of Swift for a total purchase price of $182 million. We acquired Swift to enable us to enhance our underwriting capabilities and strengthen our business financing offerings, helping us to deepen relationships with our existing merchants and expand services to new merchants. The allocation of purchase consideration resulted in approximately $44 million of technology and customer-related intangible assets with an estimated useful life of 1 to 3 years, $169 million of merchant receivables, net liabilities of approximately $129 million and goodwill of approximately $98 million, which is attributable to the workforce of Swift and the synergies expected to arise from the acquisition. We do not expect goodwill to be deductible for income tax purposes. The gross contractual merchant receivables acquired were approximately $213 million. Management estimates that the cash collected will approximate the contractual amounts of merchant receivables.
Acquisitions Completed in 2016
There were no acquisitions or divestitures completed in 2016.
Note 4—5—Goodwill and Intangible Assets
Goodwill
The following table presents goodwill balances and adjustments to those balances for the years ended December 31, 20162018 and 2015:
2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2014 | | Goodwill Acquired | | Adjustments | | December 31, 2015 | | Goodwill Acquired | | Adjustments | | December 31, 2016 |
| | (In millions) |
| Total goodwill | $ | 3,189 |
| | $ | 886 |
| | $ | (6 | ) | | $ | 4,069 |
| | $ | — |
| | $ | (10 | ) | | $ | 4,059 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 | | Goodwill Acquired | | Adjustments | | December 31, 2017 | | Goodwill Acquired | | Adjustments | | December 31, 2018 |
| | (In millions) |
| Total goodwill | $ | 4,059 |
| | $ | 276 |
| | $ | 4 |
| | $ | 4,339 |
| | $ | 1,981 |
| | $ | (36 | ) | | $ | 6,284 |
|
The goodwill acquired during 2018 was associated with the four acquisitions we completed in 2018. The adjustments to goodwill during 2018 pertain to foreign currency translation adjustments and measurement period adjustments related to our acquisitions of Swift and TIO completed in the third quarter of 2017. The goodwill acquired during 2017 was due primarily to the two acquisitions that we completed in 2017. The adjustments to goodwill during 2017 related to foreign currency translation adjustments.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The adjustments to goodwill during 2016 relate to measurement period adjustments related primarily to our acquisition of Xoom. The goodwill acquired in 2015 was due primarily to the four acquisitions that we completed in 2015. The adjustments to goodwill during 2015 relate to foreign exchange rate translations.
Intangible Assets
The components of identifiable intangible assets are as follows:
| | | | December 31, 2016 | | December 31, 2015 | December 31, 2018 | | December 31, 2017 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted Average Useful Life (Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted Average Useful Life (Years) | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted Average Useful Life (Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted Average Useful Life (Years) |
| | (In millions, except years) | (In millions, except years) |
| Intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Customer lists and user base | $ | 605 |
| | $ | (542 | ) | | $ | 63 |
| | 4 | | $ | 605 |
| | $ | (501 | ) | | $ | 104 |
| | 4 | $ | 1,134 |
| | $ | (623 | ) | | $ | 511 |
| | 7 | | $ | 613 |
| | $ | (563 | ) | | $ | 50 |
| | 3 |
| Marketing related | 197 |
| | (190 | ) | | 7 |
| | 2 | | 197 |
| | (150 | ) | | 47 |
| | 3 | 301 |
| | (207 | ) | | 94 |
| | 3 | | 198 |
| | (196 | ) | | 2 |
| | 1 |
| Developed technologies | 245 |
| | (206 | ) | | 39 |
| | 3 | | 245 |
| | (176 | ) | | 69 |
| | 3 | |
| Developed technology | | 453 |
| | (269 | ) | | 184 |
| | 3 | | 274 |
| | (215 | ) | | 59 |
| | 3 |
| All other | 245 |
| | (143 | ) | | 102 |
| | 5 | | 243 |
| | (105 | ) | | 138 |
| | 5 | 245 |
| | (209 | ) | | 36 |
| | 5 | | 245 |
| | (188 | ) | | 57 |
| | 5 |
| Intangible assets, net | $ | 1,292 |
| | $ | (1,081 | ) | | $ | 211 |
| | $ | 1,290 |
| | $ | (932 | ) | | $ | 358 |
| | $ | 2,133 |
| | $ | (1,308 | ) | | $ | 825 |
| | $ | 1,330 |
| | $ | (1,162 | ) | | $ | 168 |
| |
During the second and third quarters of 2015, eBay contributed intangible assets with a gross carrying amount of $37 million and a net book value of $18 million. All identifiable intangible assets are subject to amortization and no significant residual value is estimated for the intangible assets. Amortization expense for intangible assets was $150$149 million, $93$126 million and $84$150 million for the years ended December 31, 2018, 2017, and 2016, 2015respectively. We test intangible assets for recoverability when changes in circumstances indicate that the carrying value of an asset group may not be recoverable.
As a result of the suspension of TIO's operations announced in November 2017, we performed a test for recoverability of the customer-related intangible assets acquired in connection with our acquisition of TIO in July 2017. The test involved comparing the intangible assets' carrying values to their future net undiscounted cash flows that we expected would be generated by the intangible assets. Based on the results of this test, we recorded an impairment charge of approximately $30 million in depreciation and 2014, respectively.amortization in our consolidated statement of income for 2017, which was measured as the excess of carrying value over the estimated fair value of the assets. The calculation of the estimated fair value of these customer-related intangible assets is based on the income approach utilizing a discounted cash flow methodology. Following recognition of the impairment charge, we are amortizing the adjusted carrying amount of those assets over their remaining useful life. We also determined that the suspension of TIO's operations did not indicate that the fair value of the reporting unit to which the TIO goodwill was assigned would be below its carrying amount.
Expected future intangible asset amortization as of December 31, 20162018 is as follows (in millions):follows:
| | | Fiscal years: | | (In millions) |
| 2017 | $ | 103 |
| |
| 2018 | 68 |
| |
| 2019 | 23 |
| $ | 213 |
|
| 2020 | 17 |
| 194 |
|
| 2021 | | 140 |
|
| 2022 | | 74 |
|
| 2023 | | 74 |
|
| Thereafter | | 130 |
|
| | $ | 211 |
| $ | 825 |
|
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 6—Other Financial Statement Details
Property and Equipment, Net
|
| | | | | | | |
| | As of December 31, |
| 2018 | | 2017 |
| (In millions) |
| Property and equipment, net: | | | |
| Computer equipment and software | $ | 2,664 |
| | $ | 2,301 |
|
| Internal use software and website development costs | 2,149 |
| | 1,828 |
|
| Land and buildings | 408 |
| | 364 |
|
| Leasehold improvements | 420 |
| | 388 |
|
| Furniture and fixtures | 147 |
| | 129 |
|
| Development in progress and other | 119 |
| | 148 |
|
| Total property and equipment, gross | 5,907 |
| | 5,158 |
|
| Accumulated depreciation | (4,183 | ) | | (3,630 | ) |
| Total property and equipment, net | $ | 1,724 |
| | $ | 1,528 |
|
Depreciation expense was $627 million in 2018, $649 million in 2017, and $574 million in 2016.
The net change in purchases of property and equipment included in accounts payable was $10 million in 2018, not material in 2017, and $35 million in 2016.
Geographical Information
The following table summarizes long-lived assets based on geography:
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| | (In millions) |
| Long-lived assets: | | | |
| U.S. | $ | 1,566 |
| | $ | 1,432 |
|
| Other countries | 158 |
| | 96 |
|
| Total long-lived assets | $ | 1,724 |
| | $ | 1,528 |
|
Tangible long-lived assets for the years ended December 31, 2018 and 2017 consisted of property and equipment. Long-lived assets attributed to the U.S. and other countries are based upon the country in which the asset is located or owned.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the year ended December 31, 2018:
|
| | | | | | | | | | | | | | | | | | | |
| | Unrealized Gains (Losses) on Cash Flow Hedges | | Unrealized Gains (Losses) on Investments | | Foreign Currency Translation | | Estimated Tax (Expense) Benefit | | Total |
| | (In millions) |
| Beginning balance | $ | (111 | ) | | $ | (12 | ) | | $ | (25 | ) | | $ | 6 |
| | $ | (142 | ) |
| Other comprehensive income (loss) before reclassifications | 263 |
| | (1 | ) | | (68 | ) | | (4 | ) | | 190 |
|
| Less: Amount of gain (loss) reclassified from accumulated other comprehensive income | (30 | ) | | — |
| | — |
| | — |
| | (30 | ) |
| Net current period other comprehensive income (loss) | 293 |
| | (1 | ) | | (68 | ) | | (4 | ) | | 220 |
|
| Ending balance | $ | 182 |
| | $ | (13 | ) | | $ | (93 | ) | | $ | 2 |
| | $ | 78 |
|
The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the year ended December 31, 2017:
|
| | | | | | | | | | | | | | | | | | | |
| | Unrealized Gains (Losses) on Cash Flow Hedges | | Unrealized Gains (Losses) on Investments | | Foreign Currency Translation | | Estimated Tax
(Expense)
Benefit | | Total |
| | (In millions) |
| Beginning balance | $ | 131 |
| | $ | (5 | ) | | $ | (68 | ) | | $ | 1 |
| | $ | 59 |
|
| Other comprehensive income (loss) before reclassifications | (225 | ) | | (16 | ) | | 43 |
| | 5 |
| | (193 | ) |
| Less: Amount of gain (loss) reclassified from accumulated other comprehensive income | 17 |
| | (9 | ) | | — |
| | — |
| | 8 |
|
| Net current period other comprehensive income (loss) | (242 | ) | | (7 | ) | | 43 |
| | 5 |
| | (201 | ) |
| Ending balance | $ | (111 | ) | | $ | (12 | ) | | $ | (25 | ) | | $ | 6 |
| | $ | (142 | ) |
The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the year ended December 31, 2016:
|
| | | | | | | | | | | | | | | | | | | |
| | Unrealized Gains (Losses) on Cash Flow Hedges | | Unrealized Gains (Losses) on Investments | | Foreign Currency Translation | | Estimated Tax
(Expense)
Benefit | | Total |
| | (In millions) |
| Beginning balance | $ | 57 |
| | $ | (16 | ) | | $ | (53 | ) | | $ | 3 |
| | $ | (9 | ) |
| Other comprehensive income (loss) before reclassifications | 193 |
| | 7 |
| | (15 | ) | | (2 | ) | | 183 |
|
| Less: Amount of gain (loss) reclassified from accumulated other comprehensive income | 119 |
| | (4 | ) | | — |
| | — |
| | 115 |
|
| Net current period other comprehensive income (loss) | 74 |
| | 11 |
| | (15 | ) | | (2 | ) | | 68 |
|
| Ending balance | $ | 131 |
| | $ | (5 | ) | | $ | (68 | ) | | $ | 1 |
| | $ | 59 |
|
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table provides details about reclassifications out of accumulated other comprehensive income for the periods presented below:
|
| | | | | | | | | | | | | | |
Details about Accumulated Other Comprehensive
Income (Loss) Components | | Amount of Gains (Losses) Reclassified from Accumulated Other Comprehensive Income (Loss) | | Affected Line Item in the Statement of Income |
| | | Year Ended December 31, | | |
| | | 2018 | | 2017 | | 2016 | | |
| | | (In millions) | | |
Gains (losses) on cash flow hedges—foreign exchange contracts | | $ | (30 | ) | | $ | 17 |
| | $ | 119 |
| | Net revenues |
| Unrealized losses on investments | | — |
| | (9 | ) | | (4 | ) | | Other income (expense), net |
| | | $ | (30 | ) | | $ | 8 |
| | $ | 115 |
| | Income before income taxes |
| | | — |
| | — |
| | — |
| | Income tax expense |
| Total reclassifications for the period | | $ | (30 | ) | | $ | 8 |
| | $ | 115 |
| | Net income |
Other Income (Expense), Net
The following table reconciles the components of other income (expense), net for the periods presented below:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (In millions) |
| Interest income | $ | 168 |
| | $ | 85 |
| | $ | 59 |
|
| Interest expense | (77 | ) | | (7 | ) | | (3 | ) |
| Other | 91 |
| | (5 | ) | | (11 | ) |
| Other income (expense), net | $ | 182 |
| | $ | 73 |
| | $ | 45 |
|
Refer to Note 1—“Overview and Summary of Significant Accounting Policies” for details on the composition of these balances.
Note 5—7—Funds Receivable and Customer Accounts
The following table summarizes the assets underlying our funds receivable and customer accounts as of December 31, 20162018 and December 31, 2015.2017:
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| | (In millions) |
| Cash and cash equivalents | $ | 5,642 |
| | $ | 5,387 |
|
| Government and agency securities | 9,380 |
| | 6,651 |
|
| Time deposits | 389 |
| | 739 |
|
| Corporate debt securities | 1,560 |
| | 1,248 |
|
| Funds receivable | 3,091 |
| | 4,217 |
|
| Total funds receivable and customer accounts | $ | 20,062 |
| | $ | 18,242 |
|
|
| | | | | | | |
| | As of December 31, |
| | 2016 | | 2015 |
| | (In millions) |
| Cash and cash equivalents | $ | 4,319 |
| | $ | 5,245 |
|
| Government and agency securities | 5,625 |
| | 4,305 |
|
| Time deposits | 522 |
| | 830 |
|
| Corporate debt securities | 1,093 |
| | 180 |
|
| Funds receivable | 2,804 |
| | 1,701 |
|
| Total funds receivable and customer accounts | $ | 14,363 |
| | $ | 12,261 |
|
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
At
As of December 31, 20162018 and December 31, 2015,2017, the estimated fair value of our investments classified as available-for-sale included within funds receivable and customer accounts was as follows:
| | | | December 31, 2016 | December 31, 2018 |
| | Gross Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | Gross Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| | (In millions) | (In millions) |
| Government and agency securities | $ | 5,198 |
| | $ | — |
| | $ | (2 | ) | | $ | 5,196 |
| $ | 7,717 |
| | $ | 2 |
| | $ | (1 | ) | | $ | 7,718 |
|
| Time deposits | 522 |
| | — |
| | — |
| | 522 |
| |
| Corporate debt securities | 531 |
| | — |
| | — |
| | 531 |
| 883 |
| | — |
| | — |
| | 883 |
|
| Total | $ | 6,251 |
| | $ | — |
| | $ | (2 | ) | | $ | 6,249 |
| $ | 8,600 |
| | $ | 2 |
| | $ | (1 | ) | | $ | 8,601 |
|
| | | | December 31, 2015 | December 31, 2017 |
| | Gross Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | Gross Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| | (In millions) | (In millions) |
| Government and agency securities | $ | 3,299 |
| | $ | — |
| | $ | (1 | ) | | $ | 3,298 |
| $ | 5,946 |
| | $ | — |
| | $ | (5 | ) | | $ | 5,941 |
|
| Time deposits | 830 |
| | — |
| | — |
| | 830 |
| |
| Corporate debt securities | | 529 |
| | — |
| | — |
| | 529 |
|
| Total | $ | 4,129 |
| | $ | — |
| | $ | (1 | ) | | $ | 4,128 |
| $ | 6,475 |
| | $ | — |
| | $ | (5 | ) | | $ | 6,470 |
|
We elect to account for certain investments within customer accounts, including foreign-currency denominated available-for-sale investments, under the fair value option. As a result, any gains and losses from fair value changes on such investments are recognized in other income (expense), net on the consolidated statementstatements of income. Election of the fair value option allows us to significantly reduce the accounting asymmetry that would otherwise arise when recognizing the changes in the fair value of available-for-sale investments and the corresponding foreign exchange gains and losses relating to customer liabilities. At December 31, 20162018 and 2015,2017, the estimated fair value of our investments included within funds receivable and customer accounts under the fair value option was $1.0$2.3 billion and $1.2$1.4 billion, respectively. In the years ended December 31, 20162018 and 2015, $66 million and $652017, $117 million of net losses and $176 million of net gains from fair value changes, respectively, were recognized in other income (expense), net on the consolidated statementstatements of income.
The aggregate fair value of investments classified as available-for-sale included within funds receivable and customer accounts in an unrealized loss position was $4.1$3.1 billion and $6.0 billion as of December 31, 2016.2018 and 2017, respectively. As of December 31, 2018 and 2017, we had no material investments that had been in a continuous unrealized loss position for greater than 12 months. The aggregate gross unrealized loss on our short-term and long-term investments was not material as of December 31, 2016.2018 and 2017. We believe the decline in value is due to temporary market conditions and expect to recover the entire amortized cost basis of thesethe securities. We neither intend nor anticipate the need to sell thesethe securities before recovery. We will continue to monitor the performance of the investment portfolio and assess market and interest rate risk when evaluating whether other-than-temporary impairment exists.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of December 31, 2016, we had no investments that have been in a continuous unrealized loss position for greater than 12 months. Amounts reclassified to earnings from unrealized gains and losses were not material for the years ended December 31, 20162018 and 2015.2017.
The estimated fair values of our investments classified as available-for-sale included within funds receivable and customer accounts by date of contractual maturity at December 31, 2016 were as follows:
| | | | December 31,
2016 | December 31,
2018 |
| | (In millions) | (In millions) |
| One year or less | $ | 6,015 |
| $ | 8,565 |
|
| One year through two years | 234 |
| 36 |
|
| Total | $ | 6,249 |
| $ | 8,601 |
|
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 6—8—Investments
At December 31, 20162018 and 2015,2017, the estimated fair value of our short-term and long-term investments classified as available for saleavailable-for-sale was as follows:
| | | | December 31, 2016 | December 31, 2018 |
| | Gross
Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair Value | Gross
Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair Value |
| | (In millions) | (In millions) |
Short-term investments(1): | | | | | | | | |
Short-term investments(1)(2): | | | | | | | | |
| Corporate debt securities | | $ | 393 |
| | $ | — |
| | $ | (3 | ) | | $ | 390 |
|
Long-term investments(1): | | | | | | | | |
| Corporate debt securities | $ | 2,867 |
| | $ | 1 |
| | $ | (1 | ) | | $ | 2,867 |
| 639 |
| | — |
| | (11 | ) | | 628 |
|
| Government and agency securities | 32 |
| | — |
| | — |
| | 32 |
| 38 |
| | — |
| | — |
| | 38 |
|
| Time deposits | 122 |
| | — |
| | — |
| | 122 |
| |
| Long-term investments: | | | | | | | | |
| Corporate debt securities | 1,473 |
| | 1 |
| | (4 | ) | | 1,470 |
| |
| Government and agency securities | 10 |
| | — |
| | — |
| | 10 |
| |
Total(1) | $ | 4,504 |
| | $ | 2 |
| | $ | (5 | ) | | $ | 4,501 |
| |
Total(1)(2) | | $ | 1,070 |
| | $ | — |
| | $ | (14 | ) | | $ | 1,056 |
|
(1) Excludes short-term restricted cash of $17$75 million that we intend to use to support our global sabbatical program and a counterparty guarantee, and long-term restricted cash of $2 million.
(2) Excludes time deposits of $774 million, which are not considered available-for-sale securities.
| | | | December 31, 2015 | December 31, 2017 |
| | Gross
Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair Value | Gross
Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair Value |
| | (In millions) | (In millions) |
Short-term investments(1): | | | | | | | | |
Short-term investments(1)(2): | | | | | | | | |
| Corporate debt securities | $ | 2,000 |
| | $ | — |
| | $ | (2 | ) | | $ | 1,998 |
| $ | 2,092 |
| | $ | 1 |
| | $ | (1 | ) | | $ | 2,092 |
|
| Time deposits | 2 |
| | — |
| | — |
| | 2 |
| |
| Government and agency securities | | 210 |
| | — |
| | — |
| | 210 |
|
Long-term investments(1): | | | | | | | | | | | | | | |
| Corporate debt securities | 2,328 |
| | — |
| | (14 | ) | | 2,314 |
| 1,769 |
| | 2 |
| | (7 | ) | | 1,764 |
|
Total(1) | $ | 4,330 |
| | $ | — |
| | $ | (16 | ) | | $ | 4,314 |
| |
| Government and agency securities | | 98 |
| | — |
| | — |
| | 98 |
|
Total(1)(2) | | $ | 4,169 |
| | $ | 3 |
| | $ | (8 | ) | | $ | 4,164 |
|
(1) Excludes short-term restricted cash of $18$79 million that we intend to use to support our global sabbatical program and a counterparty guarantee, and long-term restricted cash of $8$2 million.
(2) Excludes time deposits of $163 million, which are not considered available-for-sale securities.
In the second quarter of 2016, weWe elected to account for foreign denominated available-for-sale investments held in our Luxembourg banking subsidiary under the fair value option. Election of the fair value option allows us to recognize any gains and losses from fair value changes on such investments in other income (expense), net on the consolidated statementstatements of income to offset certain foreign exchange gains and losses on our foreign denominated customer liabilities. As of December 31, 2016,2018 and 2017, the estimated fair value of our investments included within short-term investments and long-term investments under the fair value option was $356
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
million.$305 million and $277 million, respectively. In the yearyears ended December 31, 2016, $482018 and 2017, $15 million of net losses and $36 million of net gains, respectively, from fair value changes waswere recognized in other income (expense), net on the consolidated statementstatements of income.
We have short-term restricted cash that we intend to use to support our global sabbatical program. In addition, as of December 31, 2015, we had long-term restricted cash related to Xoom and required as collateral by payment processors and for licensing rules in India.
The aggregate fair value of short-term and long-term investments classified as available-for-sale in an unrealized loss position was $2.2$1.1 billion as of December 31, 2016.2018 and $2.8 billion as of December 31, 2017, of which $895 million and $207 million, respectively, was in a continuous unrealized loss position for greater than 12 months. The aggregate gross unrealized loss on our short-term and long-term investments was $5 millionnot material as of December 31, 2016.2018 and 2017. We believe the decline in value is due to temporary market conditions and expect to recover the entire amortized cost basis of the securities. We neither intend nor anticipate the need to sell thesethe securities before recovery. We will continue to monitor the performance of the investment portfolio and assess market and interest rate risk when evaluating whether other-than-temporary impairment exists.
We had no material short-term or long-term investments that have been in a continuous unrealized loss position for greater than 12 months as of December 31, 2016 and 2015. Amounts reclassified to earnings from unrealized gains and losses were not material for the years ended December 31, 20162018 and 2015.
The estimated fair values of our short-term and long-term investments classified as available for sale by date of contractual maturity at December 31, 2016 were as follows:
|
| | | |
| | December 31, 2016 |
| | (In millions) |
| One year or less | $ | 3,021 |
|
| One year through two years | 715 |
|
| Two years through three years | 608 |
|
| Three years through four years | 89 |
|
| Four years through five years | 68 |
|
Total(1) | $ | 4,501 |
|
(1) Excludes short-term restricted cash of $17 million.Cost Method Investments
We have made cost method investments which are reported in long-term investments on our consolidated balance sheet. As of December 31, 2016 and 2015, our cost method investments totaled $50 million and $26 million, respectively.
Note 7—Fair Value Measurement of Financial Assets and Liabilities
Our financial assets and liabilities are valued using market prices on both active markets (Level 1) and less active markets (Level 2). Refer to “Note 1—Overview and Summary of Significant Accounting Policies” for additional information on how Level 1 and Level 2 instrument valuations are obtained.2017.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The estimated fair values of our short-term and long-term investments classified as available-for-sale by date of contractual maturity were as follows:
|
| | | |
| | December 31, 2018 |
| | (In millions) |
| One year or less | $ | 390 |
|
| One year through two years | 492 |
|
| Two years through three years | 110 |
|
| Three years through four years | 57 |
|
| Four years through five years | — |
|
| Greater than five years | 7 |
|
| Total | $ | 1,056 |
|
Other Investments
We have equity investments which consist of minority equity interests in companies that are not publicly traded and are reported in long-term investments on our consolidated balance sheets. The carrying value of our equity investments accounted for using the Measurement Alternative totaled $293 million and $88 million as of December 31, 2018 and 2017, respectively.
Measurement Alternative Adjustments
The adjustments to the carrying value of our equity investments measured using the Measurement Alternative in the year ended December 31, 2018 were as follows:
|
| | | |
| | (In millions) |
| Carrying amount, beginning of period | $ | 88 |
|
| Adjustments related to equity investments: | |
| Additions, net of sales | 119 |
|
| Gross unrealized gains on equity investments | 91 |
|
| Gross unrealized losses on equity investments and impairments | (5 | ) |
| Carrying amount, end of period | $ | 293 |
|
Cumulative gross unrealized gains and cumulative gross unrealized losses and impairment for the year ended December 31, 2018 related to equity investments held at December 31, 2018 were approximately $91 million and $5 million, respectively. Net unrealized gains recognized in the year ended December 31, 2018 related to equity investments held at December 31, 2018 were approximately $86 million.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 9—Fair Value Measurement of Assets and Liabilities
Financial Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
The following table summarizestables summarize our financial assets and liabilities measured at fair value on a recurring basis as of December 31, 20162018 and 2015:2017:
| | | Description | | Balances at
December 31, 2016 | | Quoted Prices in
Active Markets for
Identical Assets
(Level 1) | | Significant Other
Observable Inputs
(Level 2) | |
| | | | Balances at
December 31, 2018 | | Significant Other
Observable Inputs
(Level 2) |
| | | (In millions) | | (In millions) |
| Assets: | | | | | | | | | | |
Cash and cash equivalents(1) | | $ | 268 |
| | $ | — |
| | $ | 268 |
| | $ | 3,678 |
| | $ | 3,678 |
|
| Short-term investments: | | | | | | | |
| Restricted Cash | | 17 |
| | 17 |
| | — |
| |
Short-term investments(2): | | | | | |
| Corporate debt securities | | 2,882 |
| | — |
| | 2,882 |
| | 450 |
| | 450 |
|
| Government and agency securities | | 364 |
| | — |
| | 364 |
| | 235 |
| | 235 |
|
| Time deposits | | 122 |
| | — |
| | 122 |
| |
| Total short-term investments | | $ | 3,385 |
| | $ | 17 |
| | $ | 3,368 |
| | $ | 685 |
| | $ | 685 |
|
| Funds receivable and customer accounts | | 7,420 |
| | — |
| | 7,420 |
| |
Funds receivable and customer accounts(3) | | | 11,545 |
| | 11,545 |
|
| Derivatives | | 223 |
| | — |
| | 223 |
| | 320 |
| | 320 |
|
| Long-term investments: | | | | | | | |
Long-term investments(2)(4): | | | | | |
| Corporate debt securities | | 1,479 |
| | — |
| | 1,479 |
| | 628 |
| | 628 |
|
| Government and agency securities | | 10 |
| | — |
| | 10 |
| | 48 |
| | 48 |
|
| Total long-term investments | | 1,489 |
| | — |
| | 1,489 |
| | 676 |
| | 676 |
|
| Total financial assets | | $ | 12,785 |
| | $ | 17 |
| | $ | 12,768 |
| | $ | 16,904 |
| | $ | 16,904 |
|
| Liabilities: | | | | | | | | | | |
| Derivatives | | $ | 59 |
| | $ | — |
| | $ | 59 |
| | $ | 67 |
| | $ | 67 |
|
(1) Excludes cash of $1.3 billion.$3.9 billion not measured and recorded at fair value.
|
| | | | | | | | | | | | |
| Description | | Balances at
December 31, 2015 | | Quoted Prices in
Active Markets for
Identical Assets
(Level 1) | | Significant Other
Observable Inputs
(Level 2) |
| | | (In millions) |
| Assets: | | | | | | |
Cash and cash equivalents(1) | | $ | 406 |
| | $ | — |
| | $ | 406 |
|
| Short-term investments: | | | | | | |
| Restricted Cash | | 18 |
| | 18 |
| | — |
|
| Corporate debt securities | | 1,998 |
| | — |
| | 1,998 |
|
| Time deposits | | 2 |
| | — |
| | 2 |
|
| Total short-term investments | | 2,018 |
| | 18 |
| | 2,000 |
|
| Funds receivable and customer accounts | | 6,978 |
| | — |
| | 6,978 |
|
| Derivatives | | 97 |
| | — |
| | 97 |
|
| Long-term investments: | | | | | | |
| Restricted Cash | | 8 |
| | 8 |
| | — |
|
| Corporate debt securities | | 2,314 |
| | — |
| | 2,314 |
|
| Total long-term investments | | 2,322 |
| | 8 |
| | 2,314 |
|
| Total financial assets | | $ | 11,821 |
| | $ | 26 |
| | $ | 11,795 |
|
| Liabilities: | | | | | | |
| Derivatives | | $ | 25 |
| | $ | — |
| | $ | 25 |
|
(1)(2) Excludes restricted cash of $987 million.$77 million and time deposits of $774 million not measured and recorded at fair value.
(3) Excludes cash, time deposits and funds receivable of $8.5 billion underlying funds receivable and customer accounts not measured and recorded at fair value.
(4) Excludes equity investments of $293 million primarily measured using the Measurement Alternative.
85
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
|
| | | | | | | | |
| | | Balances at
December 31, 2017 | | Significant Other
Observable Inputs
(Level 2) |
| | | (In millions) |
| Assets: | | | | |
Cash and cash equivalents(1) | | $ | 791 |
| | $ | 791 |
|
Short-term investments(2): | | | | |
| Corporate debt securities | | 2,219 |
| | 2,219 |
|
| Government and agency securities | | 351 |
| | 351 |
|
| Total short-term investments | | 2,570 |
| | 2,570 |
|
Funds receivable and customer accounts(3) | | 8,007 |
| | 8,007 |
|
| Derivatives | | 66 |
| | 66 |
|
Long-term investments(2): | | | | |
| Corporate debt securities | | 1,773 |
| | 1,773 |
|
| Government and agency securities | | 98 |
| | 98 |
|
| Total long-term investments | | 1,871 |
| | 1,871 |
|
| Total financial assets | | $ | 13,305 |
| | $ | 13,305 |
|
| Liabilities: | | | | |
| Derivatives | | $ | 218 |
| | $ | 218 |
|
(1) Excludes cash of $2.1 billion not measured and recorded at fair value.
(2) Excludes restricted cash of $81 million, time deposits of $163 million, and equity investments of $88 million not measured and recorded at fair value.
(3) Excludes cash, time deposits, and funds receivable of $10.2 billion underlying funds receivable and customer accounts not measured and recorded at fair value.
Our financial assets and liabilities are valued using market prices on both active markets (Level 1) and less active markets (Level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily available pricing sources for comparable instruments, identical instruments in less active markets, or models using market observable inputs.
TheCash and cash equivalents are short-term, highly liquid investments with original maturities of three months or less when purchased and are comprised primarily of bank deposits, government and agency securities, and commercial paper.
We elect to account for foreign currency denominated available-for-sale investments underlying funds receivable and customer accounts, short-term investments, and long-term investments under the fair value option as further discussed in “Note 7—Funds Receivable and Customer Accounts” and “Note 8—Investments.”
A majority of our derivative instruments are valued using pricing models that take into account the contract terms as well as multiple inputs where applicable, such as currency rates, interest rate yield curves, option volatility, and equity prices. Our derivative instruments are primarily short-term in nature, generally one month to one year in duration. Certain foreign currency contracts designated as cash flow hedges may have a duration of up to 18 months.
We did not have any transfers of financial instruments between valuation levels during the years ended December 31, 20162018 and 2015.2017. As of December 31, 2016,2018, we did not have any assets or liabilities requiring measurement at fair value without observable market values that would require a high level of judgment to determine fair value (Level 3).
Cash
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Financial Assets and cash equivalents are short-term, highly liquidLiabilities Measured and Recorded at Fair Value on a Non-Recurring Basis
The following table summarizes our financial assets and liabilities held as of December 31, 2018 for which a non-recurring fair value measurement was recorded during the year ended December 31, 2018:
|
| | | | | | | |
| | | Year Ended December 31, 2018 | | Significant Other
Observable Inputs
(Level 2) |
| | | (In millions) |
Equity investments measured using the Measurement Alternative(1) | | $ | 116 |
| | 116 |
|
(1) Excludes equity investments with original maturities of three months or less when purchased and are composed primarily of bank deposits, government and agency securities and commercial paper.$177 million for which no observable price changes occurred during the year ended December 31, 2018.
We elect to accountmeasured these equity investments at cost minus impairment, if any, plus adjustments resulting from observable price changes in orderly transactions for foreign currency denominated available-for-sale investments underlying fundsan identical or a similar investment in the same issuer.
None of our financial assets and liabilities were measured at fair value on a non-recurring basis as of December 31, 2017.
Financial Assets and Liabilities Not Measured and Recorded at Fair Value
Our financial instruments, including cash, restricted cash, time deposits, loans and interest receivable, net, loans and interest receivable, held for sale, certain customer accounts, notes receivable, and notes payable are carried at amortized cost, which approximates their fair value. If these financial instruments were measured at fair value in the financial statements, cash would be classified as Level 1; restricted cash, time deposits, loans and interest receivable, held for sale, certain customer accounts short-term investments and long-term investments undernotes payable would be classified as Level 2; and the remaining financial instruments would be classified as Level 3 in the fair value option as further discussed in “Note 5—Funds Receivable and Customer Accounts” and “Note 6—Investments.”hierarchy.
Note 8—10—Derivative Instruments
Summary of Derivative Instruments
Our primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. Our derivatives expose us to credit risk to the extent that our counterparties may be unable to meet the terms of the arrangement. We seek to mitigate such risk by limiting our counterparties to, and by spreading the risk across, major financial institutions.institutions and by entering into collateral security arrangements. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored on an ongoing basis.
Foreign Exchange Contracts
We transact business in various foreign currencies and have significant international revenues as well asand costs denominated in foreign currencies, which subjects us to foreign currency risk. We have a foreign currency exposure management program whereby we designate certain foreign currency exchange contracts, generally with maturities of 18 months or less, to reduce the volatility of cash flows primarily related to forecasted revenues and expenses denominated in foreign currencies. The objective of the foreign exchange contracts is to help mitigate the risk that the U.S. dollar-equivalent cash flows are adversely affected by changes in the applicable U.S. dollar/foreign currency exchange rate. These derivative instruments are designated as cash flow hedges and accordingly, the effective portion of the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into earningsrevenue in the same period the forecasted transaction affects earnings. The ineffective portionBeginning in 2018, we evaluate the effectiveness of our foreign currency exchange contracts on a quarterly basis by comparing the critical terms of the unrealized gainsderivative instruments with the critical terms of the forecasted cash flows of the hedged item; if the critical terms are the same we conclude the hedge will be perfectly effective. Prior to and losses on these contracts, if any, is recorded immediately in earnings. We evaluateduring 2018, we evaluated the effectiveness of some of our foreign exchange contracts on a quarterlymonthly basis by comparing the change in the fair value of the derivative instruments with the change in the fair value of the forecasted cash flows of the hedged item. We do not use any foreign exchange contracts for trading or speculative purposes.
For our derivative instruments designated as cash flow hedges, the amounts recognized in earnings related to the ineffective portion were not material in each of the periods presented, and we did not exclude any component of the changes in fair value of the derivative instruments from the assessment of hedge effectiveness. We do not use any foreign exchange contracts for trading or speculative purposes.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of December 31, 2018, we estimate that $171 million of net derivative gains related to our cash flow hedges included in accumulated other comprehensive income (loss) will be reclassified into earnings within the next 12 months. During the years ended December 31, 2016, 20152018, 2017 and 20142016, we did not discontinue any cash flow hedges because it was probable that the original forecasted transaction would not occur and as such, did not reclassify any gains or losses to earnings. Asearnings prior to the occurrence of December 31, 2016,the hedged transaction. If we estimated that $123 million of net derivative gains relatedelect to discontinue our cash flow hedges includedand it is probable that the original forecasted transaction will occur, we continue to report them in accumulated other comprehensive income will be reclassified(loss) until the forecasted transaction affects earnings, at which point we also reclassify the de-designated hedges into earnings withinearnings. Gains and losses on derivatives held after we discontinue our cash flow hedge and gains and losses on derivative instruments that are not designated as cash flow hedges are recorded in the next 12 months.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
same financial statement line item to which the derivative relates.
We have an additional foreign currency exposure management program whereby we use foreign exchange contracts to offset the foreign exchange risk on our assets and liabilities denominated in currencies other than the functional currency of our subsidiaries. These contracts are not designated as hedging instruments and reduce, but do not entirely eliminate, the impact of currency exchange rate movements on our assets and liabilities. The foreign currency gains and losses on our assets and liabilities are recorded in “Otherother income (expense), net,” which is offset by the gains and losses on the foreign exchange contracts.
Fair Value of Derivative Contracts
The fair value of our outstanding derivative instruments as of December 31, 20162018 and 20152017 was as follows:
| | | | Balance Sheet Location | | As of December 31, | Balance Sheet Location | | As of December 31, |
| | | 2016 | | 2015 | | 2018 | | 2017 |
| Derivative Assets: | | (In millions) | | (In millions) |
| Foreign exchange contracts designated as cash flow hedges | | Other current assets | | $ | 170 |
| | $ | — |
|
| Foreign exchange contracts designated as cash flow hedges | Other Current Assets | | $ | 135 |
| | $ | 59 |
| Other assets (non-current) | | 11 |
| | — |
|
| Foreign exchange contracts not designated as hedging instruments | Other Current Assets | | 88 |
| | 38 |
| Other current assets | | 139 |
| | 66 |
|
| Total derivative assets | | $ | 223 |
| | $ | 97 |
| | $ | 320 |
| | $ | 66 |
|
| | | | | | | | | |
| Derivative Liabilities: | | | | | | | | |
| Foreign exchange contracts designated as cash flow hedges | Other Current Liabilities | | $ | 4 |
| | $ | 2 |
| Other current liabilities | | $ | 3 |
| | $ | 94 |
|
| Foreign exchange contracts not designated as hedging instruments | Other Current Liabilities | | 55 |
| | 23 |
| Other current liabilities | | 64 |
| | 124 |
|
| Total derivative liabilities | | $ | 59 |
| | $ | 25 |
| | $ | 67 |
| | $ | 218 |
|
| | | | | | |
| Net fair value of derivative instruments | | $ | 164 |
| | $ | 72 |
| |
Master Netting Agreements - Rights of Setoff
Under the master netting agreements with the respective counterparties to our foreign exchange contracts, subject to applicable requirements, we are allowed to net settle transactions of the same type with a single net amount payable by one party to the other. However, we have elected to present the derivative assets and derivative liabilities on a gross basis in our consolidated balance sheet. As of December 31, 2016, the potential effect of rightssheets. Rights of setoff associated with our foreign exchange contracts would be anrepresented a potential offset to both assets and liabilities by $59$45 million resultingas of December 31, 2018 and $56 million as of December 31, 2017. During the years ended December 31, 2018 and 2017, we entered into collateral security arrangements that provide for collateral to be received or posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds. We posted no collateral related to our derivative liabilities as of December 31, 2018 and $38 million of collateral related to our derivative liabilities as of December 31, 2017, which is recognized in net derivativeother current assets of $164 million.on our consolidated balance sheets, and is related to the right to reclaim cash collateral. We are not required to pledge, nor are we entitled to receive,received $195 million in counterparty cash collateral related to theseour derivative transactions.assets as of December 31, 2018, which is recognized in other current liabilities on our consolidated balance sheets and is related to the obligation to return cash collateral. Additionally, as of December 31, 2018, we received $6 million in counterparty non-cash collateral in the form of debt securities. We did not receive any counterparty cash or non-cash collateral related to our derivative assets as of December 31, 2017.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Effect of Derivative Contracts on Accumulated Other Comprehensive Income (Loss)
The following tables summarize the activity of derivative contracts that qualify for hedge accounting as of December 31, 20162018 and December 31, 2015,2017, and the impact of designated derivative instruments on accumulated other comprehensive income (loss) for the twelve months ended December 31, 20162018 and 2015:2017:
|
| | | | | | | | | | | | | | | |
| | December 31, 2015 | | Amount of gain recognized in other comprehensive income (effective portion) | | Less: Amount of gain reclassified from accumulated other comprehensive income to net revenue (effective portion) | | December 31, 2016 |
| | (In millions) |
| Foreign exchange contracts designated as cash flow hedges | $ | 57 |
| | $ | 193 |
| | $ | 119 |
| | $ | 131 |
|
|
| | | | | | | | | | | | | | | |
| | December 31, 2017 | | Amount of gains (losses) recognized in other comprehensive income | | Less: Amount of gains (losses) reclassified from accumulated other comprehensive income to net revenue | | December 31, 2018 |
| | (In millions) |
| Foreign exchange contracts designated as cash flow hedges | $ | (111 | ) | | $ | 263 |
| | $ | (30 | ) | | $ | 182 |
|
|
| | | | | | | | | | | | | | | |
| | December 31, 2014 | | Amount of gain recognized in other comprehensive income (effective portion) | | Less: Amount of gain reclassified from accumulated other comprehensive income to net revenue (effective portion) | | December 31, 2015 |
| | (In millions) |
| Foreign exchange contracts designated as cash flow hedges | $ | 126 |
| | $ | 113 |
| | $ | 182 |
| | $ | 57 |
|
|
| | | | | | | | | | | | | | | |
| | December 31, 2016 | | Amount of gains (losses) recognized in other comprehensive income | | Less: Amount of gains (losses) reclassified from accumulated other comprehensive income to net revenue | | December 31, 2017 |
| | (In millions) |
| Foreign exchange contracts designated as cash flow hedges | $ | 131 |
| | $ | (225 | ) | | $ | 17 |
| | $ | (111 | ) |
Effect of Derivative Contracts on Consolidated Statements of Income
The following table provides the location in the financialconsolidated statements of theincome and amount of recognized gains or losses related to our derivative instruments designated as hedging instruments:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| | (In millions) |
| Foreign exchange contracts designated as cash flow hedges recognized in net revenues | $ | 119 |
| | $ | 182 |
| | $ | (36 | ) |
| Foreign exchange contracts not designated as cash flow hedges recognized in other income (expense), net | 76 |
| | 17 |
| | (2 | ) |
| Total gain (loss) recognized from derivative contracts in the consolidated statement of income | $ | 195 |
| | $ | 199 |
| | $ | (38 | ) |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (in millions) |
| | Net revenues |
| Total amounts presented in the consolidated statements of income in which the effects of cash flow hedges are recorded | $ | 15,451 |
| | $ | 13,094 |
| | $ | 10,842 |
|
| Gains (losses) on foreign exchange contracts designated as cash flow hedges reclassified from accumulated other comprehensive income | $ | (30 | ) | | $ | 17 |
| | $ | 119 |
|
The following table provides the location in the consolidated statements of income and amount of recognized gains or losses related to our derivative instruments not designated as hedging instruments:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (In millions) |
| Gains (losses) on foreign exchange contracts recognized in other income (expense), net | $ | 38 |
| | $ | (54 | ) | | $ | 76 |
|
| Gains (losses) on foreign exchange contracts recognized in net revenues | 7 |
| | — |
| | — |
|
| Total gains (losses) recognized from foreign exchange contracts not designated as hedging instruments | $ | 45 |
| | $ | (54 | ) | | $ | 76 |
|
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Notional Amounts of Derivative Contracts
Derivative transactions are measured in terms of the notional amount, butamount; however, this amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the derivative instruments. The notional amount is generally not exchanged but is used only as the underlying basis on which the value of foreign exchange payments under these contracts is determined. The following table provides the notional amounts of our outstanding derivatives:
|
| | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2.015 |
| | (In millions) |
| Foreign exchange contracts designated as cash flow hedges | $ | 1,865 |
| | $ | 1,688 |
|
| Foreign exchange contracts not designated as hedging instruments | 4,612 |
| | 2,802 |
|
| Total | $ | 6,477 |
| | $ | 4,490 |
|
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 9—Property and Equipment, Net
|
| | | | | | | |
| | As of December 31, |
| 2016 | | 2015 |
| (In millions) |
| Property and equipment, net: | | | |
| Computer equipment and software | $ | 2,049 |
| | $ | 1,818 |
|
| Internal use software and website development costs | 1,372 |
| | 1,150 |
|
| Land and buildings | 357 |
| | 352 |
|
| Leasehold improvements | 335 |
| | 297 |
|
| Furniture and fixtures | 119 |
| | 99 |
|
| Development in progress and other | 268 |
| | 133 |
|
| Total property and equipment, gross | 4,500 |
| | 3,849 |
|
| Accumulated depreciation | (3,018 | ) | | (2,505 | ) |
| Total property and equipment, net | $ | 1,482 |
| | $ | 1,344 |
|
During the second and third quarters of 2015, eBay contributed property and equipment to us with a gross carrying amount of $355 million and a net book value of $224 million. Additionally, we sold certain property and equipment to eBay with a gross carrying amount of $63 million and a net book value of $15 million for proceeds of approximately $26 million. The proceeds in excess of net book value were recorded as a contribution from eBay and resulted in an increase to net parent investment within stockholders' equity.
Depreciation expense was $574 million in 2016, $515 million in 2015 and $432 million in 2014.
The net change in purchase of property and equipment included in accounts payable was $35 million in 2016. The net change in purchase of property and equipment included in accounts payable was not material in 2015 and 2014. |
| | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
| | (In millions) |
| Foreign exchange contracts designated as cash flow hedges | $ | 3,831 |
| | $ | 2,639 |
|
| Foreign exchange contracts not designated as hedging instruments | 10,703 |
| | 5,669 |
|
| Total | $ | 14,534 |
| | $ | 8,308 |
|
Note 10—11—Loans and Interest Receivable Net
We offer credit products to consumers who choose PayPal Credit as their funding source at checkout and working capital advances to certain small and medium-sized PayPal merchants through our PayPal Working Capital product. In the U.S., wemerchants. We work with independent chartered financial institutions that extend credit to the consumer or merchant using our credit products.products in the U.S. For our consumer credit products outside the U.S., we extend credit through our Luxembourg banking subsidiary. For our merchant credit products outside the U.S., we extend working capital advances in the U.K. and loans in Germany through our Luxembourg banking subsidiary, and we extend working capital advancesloans in Australia through an Australian subsidiary. Prior to July 2018, we purchased receivables related to credit extended to U.S. consumers by independent chartered financial institutions and were responsible for servicing functions related to that portfolio. Following the completion of the sale of our U.S. consumer credit receivables portfolio to Synchrony Bank in July 2018, we no longer purchase receivables related to the U.S. consumer loans, but remain responsible for the servicing functions related to the sold portfolio through a transition period. We purchase thereceivables related receivablesto credit extended to U.S. merchants by an independent chartered financial institution in the U.S. and are responsible for servicing functions related to all our credit products.that portfolio. During the yearsyear ended December 31, 20162018 and 2015,2017, we purchased approximately $8.4$8.1 billion and $7.4$10.2 billion respectively, in credit receivables. receivables, respectively.
Loans and Interest Receivable, Held for Sale
As part of the arrangement with an independent chartered financial institution in the U.S.,December 31, 2018, we sell back a participation interest in the poolhad no outstanding balance of consumer receivables outstanding under PayPal Credit consumer accounts. For this arrangement, gains or losses on the sale of the participation interest are not material as the carrying amount of the participation interest sold approximates the fair value at time of transfer. However, we have a separate arrangement with certain investors under which we sell to these investors a participation interest in certain consumer loans receivable that we purchased, where the consideration received exceeded the carrying amount of the participation interest sold which results in a gain reflected as net revenues in our consolidated financial statements. Loans, advances and interest and fees receivable, areheld for sale as compared to $6.4 billion as of December 31, 2017. In November 2017, we reached an agreement to sell our U.S. consumer credit receivables portfolio to Synchrony Bank. Historically, this portfolio was reported at theiras outstanding principal balances, net of any participation interest sold and pro-ratapro rata allowances, including unamortized deferred origination costs and estimated collectible interest and fees.
Consumer Upon approval of our Board of Directors to sell these receivables,
As the portfolio was reclassified as held for sale and recorded at the lower of cost or fair value, determined on an aggregate basis. For the year ended December 31, 2016,2017, due to the total outstanding balancedesignation as held for sale, the associated allowance for this portfolio was reversed, resulting in an increase of approximately $39 million in revenue from other value added services and a decrease of approximately $283 million in transaction and loan losses in our poolconsolidated statements of income. See “Note 1—Overview and Summary of Significant Accounting Policies” for additional information. In July 2018, we completed the sale of this portfolio to Synchrony Bank, approximately at par, for total consideration of $6.9 billion, which includes cash consideration of $6.5 billion and a long-term note receivable in the amount of $426 million, which was recorded at its present value at the time of the completion of the sale in the amount of $261 million in other assets on our consolidated balance sheets. This amount will be subject to accretion over the term of the arrangement, and is not reflected as a cash item on our consolidated statements of cash flows. During the year ended December 31, 2018, additional expenses incurred due to this transaction resulted in a net loss of approximately $40 million recorded in restructuring and other expenses on our consolidated statements of income. The purchase price is subject to post-closing true-up and certain other adjustments under the terms of the purchase agreement. PayPal also earns a revenue share on the portfolio of consumer receivables owned by Synchrony Bank, which includes both the sold and newly generated receivables. The transaction was $5.1 billion, netaccounted for as a true sale based on our determination that it met all the necessary criteria for such accounting, including legal isolation for transferred assets, ability of the participation interest soldtransferee to pledge or exchange the independent chartered financial institutiontransferred assets without constraint, and other investorsthe transfer of $1.0 billion. As of December 31, 2015,control. We also concluded that our continuing involvement in the total outstanding balance in our pool of consumer receivables was $4.0 billion, net of the participation interest sold to the independent chartered financial institution and other investors of $1.0 billion. The independent chartered financial institution and other investors have no recourse against us related to their participation interests for failure of debtors to pay when due. The participation interestsrevenue share arrangement does not invalidate this determination.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
held by the chartered financial institution
Loans and other investors have the same priority to the interests held by us and are subject to the same credit, prepayment, and interest rate risk associated with this pool of consumer receivables. All risks of loss are shared equally based on participation interests held amongst all participating stakeholders.Interest Receivable, Net
Consumer Receivables
We use a consumer's FICO score, where available, among other measures, in evaluating theoffer credit quality of our U.S.products to consumers who choose PayPal Credit at checkout. As of December 31, 2018 and 2017, the outstanding balance of consumer receivables. A FICO score is a typereceivables primarily consisted of credit score that lenders use to assess an applicant's credit risk and whether to extend credit. Individual FICO scores generally are obtained each quarter in which the U.S. consumer has an outstanding consumer receivable owned by PayPal Credit. The weighted average U.S. consumer FICO scores related to our loans and interest receivable balance outstanding at December 31, 2016due from international consumer accounts and December 31, 2015 were 682was $704 million and 686,$326 million, respectively.
As of December 31, 2016 and December 31, 2015, approximately 52.1% and 53.6%, respectively, of the pool of U.S.We closely monitor credit quality for our consumer receivables to manage and interest receivable balance was dueevaluate our related exposure to credit risk. Credit risk management begins with initial underwriting and continues through to full repayment of a loan. To assess a consumer who requests a loan, we use, among other indicators, internally developed risk models using detailed information from U.S. consumersexternal sources such as credit bureaus where available and internal historical experience including the consumer’s prior repayment history with FICO scores greater than 680, which is generally considered “prime” by the consumerPayPal Credit products as well as other measures. We use delinquency status and trends to assist in making new and ongoing credit industry. Asdecisions, to adjust our models, to plan our collection practices and strategies and in our determination of December 31, 2016 and December 31, 2015, approximately 11.1% and 9.4%, respectively, of the pool of U.S. consumer receivables and interest receivable balance was due from U.S. customers with FICO scores below 599. As of December 31, 2016 and December 31, 2015, approximately 90.0% and 90.1%, respectively, of the portfolio of consumer receivables and interest receivable was current.
The following table presents the principal amount of U.S.our allowance for consumer loans and interest receivable segmented by a FICO score range:
|
| | | | | | | |
| | As of December 31, |
| 2016 | | 2015 |
| (In millions) |
| > 760 | $ | 665 |
| | $ | 569 |
|
| 680-759 | 1,938 |
| | 1,529 |
|
| 600-679 | 1,840 |
| | 1,449 |
|
| < 599 | 553 |
| | 369 |
|
| Total | $ | 4,996 |
| | $ | 3,916 |
|
The table above excludes certain outstanding consumer loans outside of the U.S., for which no FICO scores are available, with an outstanding balance of $117 million and $70 million at December 31, 2016 and 2015, respectively.receivable.
The following tables present the delinquency status of the principal amount of consumer loans and interest receivable. The amounts shown below are based on the number of days past the billing date to the consumer. Current represents balances that are within 30 days of the billing date. Amounts as of December 31, 2018 and 2017 represent loans and interest receivable due from consumer accounts, of which approximately 94.9% and 96.0%, respectively, were current.
| | | December 31, 2016 | |
| December 31, 2018 | | December 31, 2018 |
(In millions) | | Current | Current | | 30 - 59 Days | | 60 - 89 Days | | 90 - 180 Days | | Total Past 30 days | | Total | Current | | 30 - 59 Days | | 60 - 89 Days | | 90 - 180 Days | | Total Past 30 days | | Total |
| $ | 4,601 |
| | $ | 219 |
| | $ | 82 |
| | $ | 211 |
| | $ | 512 |
| | $ | 5,113 |
| 668 |
| | $ | 18 |
| | $ | 6 |
| | $ | 12 |
| | $ | 36 |
| | $ | 704 |
|
| | | December 31, 2015 | |
| December 31, 2017 | | December 31, 2017 |
(In millions) | | Current | Current | | 30 - 59 Days | | 60 - 89 Days | | 90 - 180 Days | | Total Past 30 days | | Total | Current | | 30 - 59 Days | | 60 - 89 Days | | 90 - 180 Days | | Total Past 30 days | | Total |
| $ | 3,593 |
| | $ | 172 |
| | $ | 66 |
| | $ | 155 |
| | $ | 393 |
| | $ | 3,986 |
| 313 |
| | $ | 7 |
| | $ | 2 |
| | $ | 4 |
| | $ | 13 |
| | $ | 326 |
|
We charge off consumer loan receivable balances in the month in which a customer balance becomes 180 days past the payment due date. Bankrupt accounts are charged off 60within 90 days after receipt of notification of bankruptcy. Loans receivable past the payment due date continue to accrue interest until such time they are charged off. We record an allowance for loss against the interest and fees receivable.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes the activity in the allowance for consumer loans and interest receivable net of participation interest sold for the years ended December 31, 20162018 and 2015:
2017:
| | | | December 31, 2016 | | December 31, 2015 | December 31, 2018 | | December 31, 2017(1) |
| | Consumer Loans Receivable | Interest Receivable | Total Allowance | | Consumer Loans Receivable | Interest Receivable | Total Allowance | Consumer Loans Receivable | Interest Receivable | Total Allowance(2) | | Consumer Loans Receivable | Interest Receivable | Total Allowance |
| | (In millions) | (In millions) |
| Beginning Balance | $ | 179 |
| $ | 32 |
| $ | 211 |
| | $ | 158 |
| $ | 30 |
| $ | 188 |
| $ | 57 |
| $ | 6 |
| $ | 63 |
| | $ | 265 |
| $ | 40 |
| $ | 305 |
|
| Reclassification from loans receivable to loans held for sale | — |
| — |
| — |
| | (22 | ) | — |
| (22 | ) | |
| Reversal of allowance related to loans and interest receivable, held for sale | | — |
| — |
| — |
| | (283 | ) | (39 | ) | (322 | ) |
| Provisions | 388 |
| 116 |
| 504 |
| | 270 |
| 86 |
| 356 |
| 53 |
| 8 |
| 61 |
| | 406 |
| 113 |
| 519 |
|
| Charge-offs | (330 | ) | (108 | ) | (438 | ) | | (251 | ) | (84 | ) | (335 | ) | (83 | ) | (11 | ) | (94 | ) | | (362 | ) | (108 | ) | (470 | ) |
| Recoveries | 28 |
| — |
| 28 |
| | 24 |
| — |
| 24 |
| — |
| — |
| — |
| | 31 |
| — |
| 31 |
|
| Ending Balance | $ | 265 |
| $ | 40 |
| $ | 305 |
| | $ | 179 |
| $ | 32 |
| $ | 211 |
| $ | 27 |
| $ | 3 |
| $ | 30 |
| | $ | 57 |
| $ | 6 |
| $ | 63 |
|
(1) Beginning balances, provisions and charge-offs include amounts related to loans and interest receivable, held for sale portfolio prior to its designation as held for sale.
(2) Beginning balance includes approximately $50 million of U.S. consumer credit receivables that were fully reserved and have been charged off as of December 31, 2018.
The tabletables above excludesexclude receivables from other consumer credit products of $16$96 million and $8$55 million at December 31, 20162018 and 2015,2017, respectively, and allowances of $3$12 million and $1$7 million at December 31, 20162018 and 2015,2017, respectively.
The provision for loan losses relating to our consumer loans receivable portfolio is recognized in transaction and loan losses and thelosses. The provision for interest receivable on thedue to interest and fees earned on our consumer loans receivable portfolio is recognized in net revenues from other value added services as a reduction in revenue. Charge-offs that are recovered are recorded as a reduction to our allowance for loans and interest receivable.
Merchant receivables
We offer credit productsbusiness financing solutions to certain existing small and medium-sized merchants through our PayPal Working Capital product. We closely monitor credit quality for all working capital advances that we extend or purchase through that product to manage(“PPWC”) and evaluate our related exposure to credit risk. To assess a merchant seeking a PayPal Working Capital advance, we use, among other indicators, a risk model that we have internally developed that we refer to as our PayPal Working Capital Risk ModelBusiness Loan (“PRM”PPBL”), as a credit quality indicator to help predict the merchant's ability to repay the principal balance and fixed fee related to the working capital advance. The PRM uses multiple variables as predictors products. As of the merchant's ability to repay a working capital advance. Drivers of the model include the merchant's annual payment volume and payment processing history with PayPal, prior repayment history with the PayPal Working Capital product, and other measures. Merchants are assigned a PRM credit score within the range of 350 to 750. We generally consider scores above 610 to be very good and to pose limited credit risk. We generally expect that merchants to which we extend a working capital advance will have PRM scores greater than 525. We assess a participating merchant’s PRM score on a recurring basis for all outstanding working capital advances owned by PayPal. At December 31, 20162018 and 2015,2017, the weighted average PRM score related tototal outstanding balance in our PayPal Working Capital balances outstanding was 625pool of merchant loans, advances, and 630, respectively.
The following table presents the principal amount of PayPal Working Capital advancesinterest and fees receivable segmented by our internal PRM score range:
|
| | | | | | | |
| | As of December 31, |
| | 2016 | | 2015 |
| | (In millions) |
| > 610 | $ | 378 |
| | $ | 291 |
|
| 526-609 | 108 |
| | 85 |
|
| <525 | 72 |
| | 45 |
|
| Total | $ | 558 |
| | $ | 421 |
|
Through our PayPal Working CapitalPPWC product, merchants can borrow a certain percentage of their annual payment volume processed by PayPal and are charged a fixed fee for the loan or advance, which approximatestargets an Annual Percentage Rate (“APR”)annual percentage rate based on the overall credit assessment of the merchant. AdvancesLoans and advances are repaid through a fixed percentage of the merchant's future payment volume that PayPal processes. Through our PPBL product, we provide merchants with access to short-term business financing for a fixed fee based on an evaluation of both the applying business as well as the business owner. PPBL repayments are collected by periodic payments until the balance has been satisfied.
The interest or fee is fixed at the time the loan or advance is extended and werecognized as deferred revenues included in other current liabilities in our consolidated balance sheets. The fixed interest or fee is amortized to net revenues from other value added services based on the amount repaid over the repayment period. We estimate the repayment period based on PayPal'sthe merchant's payment processing history with the merchant. There is no stated interest rate andPayPal, where available. For PPWC, there is a general requirement that at least 10%
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
of the original amount advancedof the loan or advance plus the fixed fee must be repaid every 90 days. We generally calculate the repayment rate of the merchant's future payment volume so that repayment of the loan or advance and fixed fee is expected to generally occur within 9 to 12 months from the date of the loan or advance. On a regularmonthly basis, we recalculate the repayment period based on the repayment activity on the receivable. As such, actual repayment periods are dependent on actual merchant payment processing volumes. For PPBL, we receive fixed periodic payments over the contractual term of the loan which generally ranges from 3 to 12 months. We actively monitor receivables with repayment periods greater than the original expected or contractual repayment period. We charge off the receivable when the updated repayment period is 180 days past the original expected repayment period and the merchant has not made a payment in the last 60 days. We also charge off the receivable when the updated repayment period is 360 days past the original expected repayment period regardless of whether or not the merchant has made a payment within the last 60 days.
The following tables present our estimate of the principal amount of PayPal Working Capital advances and fees receivable past their original expected repayment period. In the second quarter of 2016, we refined our estimate of the original expected repayment period to take into account the variability in repayment patterns. Prior period amounts have been updated to reflect this change.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| (In millions) |
| Within Original Expected Repayment Period | | 30 - 59 Days Greater | | 60 - 89 Days Greater | | 90 - 180 Days Greater | | 180+ Days | | Total Past Original Expected Repayment Period | | Total |
| $ | 462 |
| | $ | 35 |
| | $ | 19 |
| | $ | 30 |
| | $ | 12 |
| | $ | 96 |
| | $ | 558 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2015 |
| (In millions) |
| Within Original Expected Repayment Period | | 30 - 59 Days Greater | | 60 - 89 Days Greater | | 90 - 180 Days Greater | | 180+ Days | | Total Past Original Expected Repayment Period | | Total |
| $ | 367 |
| | $ | 24 |
| | $ | 13 |
| | $ | 15 |
| | $ | 2 |
| | $ | 54 |
| | $ | 421 |
|
The following table summarizes the activity in the allowance for PayPal Working Capital advances and fees receivable, for the years ended December 31, 2016 and 2015:
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 | | December 31, 2015 |
| | PayPal Working Capital Advances | Fees Receivable | Total Allowance | | PayPal Working Capital Advances | Fees Receivable | Total Allowance |
| | (In millions) |
| Beginning Balance | $ | 19 |
| $ | 3 |
| $ | 22 |
| | $ | 5 |
| $ | 2 |
| $ | 7 |
|
| Provisions | 45 |
| 6 |
| 51 |
| | 28 |
| 1 |
| 29 |
|
| Charge-offs | (41 | ) | (6 | ) | (47 | ) | | (16 | ) | — |
| (16 | ) |
| Recoveries | 5 |
| — |
| 5 |
| | 2 |
| — |
| 2 |
|
| Ending Balance | $ | 28 |
| $ | 3 |
| $ | 31 |
| | $ | 19 |
| $ | 3 |
| $ | 22 |
|
The provision for loan losses relating to our PayPal Working Capital advances is recognized in transaction and loan losses and the provision for fees receivable is recognized in deferred revenues in our consolidated balance sheet as a reduction in deferred revenue.
Note 11—Segment and Geographical Information
We determine operating segments based on how our chief operating decision maker manages the business, including making operating decisions, deciding how to allocate resources and evaluating operating performance. Our chief operating decision-maker is our Chief Executive Officer who reviews our operating results on a consolidated basis. We operate in one segment and have one reportable segment.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We closely monitor credit quality for our merchant loans and advances that we extend or purchase, so that we can evaluate, quantify, and manage our credit risk exposure. To assess a merchant seeking a business financing loan or advance, we use, among other indicators, risk models developed internally which utilize information obtained from multiple data sources, both external and internal data to predict the likelihood of timely and satisfactory repayment by the merchant of the loan or advance amount and the related interest or fee. Primary drivers of the models include the merchant's annual payment volume, payment processing history with PayPal and prior repayment history with the PayPal products where available, elements sourced from consumer credit bureau and business credit bureau reports, and other information obtained during the application process. We use delinquency status and trends to assist in making ongoing credit decisions, to adjust our internal models, to plan our collection practices and strategies, and in our determination of our allowance for these loans and advances.
Merchant Receivables Delinquency and Allowance
The following tables summarizepresent our estimate of the allocationprincipal amount of net revenuesmerchant loans, advances, and long-lived assets based on geography:interest and fees receivable past their original expected or contractual repayment period.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| | (In millions) |
| Net revenues: | | | | | |
| U.S. | $ | 5,760 |
| | $ | 4,640 |
| | $ | 3,877 |
|
| U.K. | 1,257 |
| | 1,191 |
| | 1,155 |
|
| Other countries | 3,825 |
| | 3,417 |
| | 2,993 |
|
| Total net revenues | $ | 10,842 |
| | $ | 9,248 |
| | $ | 8,025 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2018(1) |
| (In millions) |
| Within Original Expected Repayment Period | | 30 - 59 Days Greater | | 60 - 89 Days Greater | | 90 - 180 Days Greater | | 180+ Days | | Total Past Original Expected Repayment Period | | Total |
| $ | 1,706 |
| | $ | 66 |
| | $ | 32 |
| | $ | 57 |
| | $ | 13 |
| | $ | 168 |
| | $ | 1,874 |
|
(1) Excludes $30 million of loan receivables related to iZettle merchant receivables.
|
| | | | | | | |
| | As of December 31, |
| | 2016 | | 2015 |
| | (In millions) |
| Long-lived assets: | | | |
| U.S. | $ | 1,391 |
| | $ | 1,256 |
|
| Other countries | 91 |
| | 88 |
|
| Total long-lived assets | $ | 1,482 |
| | $ | 1,344 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 |
| (In millions) |
| Within Original Expected Repayment Period | | 30 - 59 Days Greater | | 60 - 89 Days Greater | | 90 - 180 Days Greater | | 180+ Days | | Total Past Original Expected Repayment Period | | Total |
| $ | 884 |
| | $ | 44 |
| | $ | 28 |
| | $ | 43 |
| | $ | 13 |
| | $ | 128 |
| | $ | 1,012 |
|
Net revenues earned from transaction revenues are attributed to U.S., U.K. and other countries primarily based uponThe following table summarizes the country in which the merchant is located, oractivity in the case of a cross-border transaction, may be earned from the country in which the consumerallowance for merchant loans, advances, and the merchant respectively reside. Net revenues earned from value added services are typically attributed to the country in which either the customer or partner reside. Tangible long-lived assetsinterest and fees receivable, for the years ended December 31, 20162018 and 2015 consisted of property and equipment. Long-lived assets attributed2017:
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2018(1) | | December 31, 2017 |
| | Merchant Loans and Advances | Interest & Fees Receivable | Total Allowance | | Merchant Loans and Advances | Interest & Fees Receivable | Total Allowance |
| | (In millions) |
| Beginning Balance | $ | 52 |
| $ | 7 |
| $ | 59 |
| | $ | 28 |
| $ | 3 |
| $ | 31 |
|
| Provisions | 162 |
| 20 |
| 182 |
| | 65 |
| 12 |
| 77 |
|
| Charge-offs | (113 | ) | (12 | ) | (125 | ) | | (46 | ) | (8 | ) | (54 | ) |
| Recoveries | 10 |
| — |
| 10 |
| | 5 |
| — |
| 5 |
|
| Ending Balance | $ | 111 |
| $ | 15 |
| $ | 126 |
| | $ | 52 |
| $ | 7 |
| $ | 59 |
|
(1) Excludes allowance related to the U.S. and other countries are based upon the country in which the asset is located or owned.iZettle merchant receivables.
Information regarding net revenues by major productsFor merchant loans and services foradvances, the years ended December 31, 2016, 2015determination of delinquency, from current to 180 days past due, is based on the current expected or contractual repayment period of the loan or advance and 2014 wasfixed interest or fee payment as follows: |
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| | (In millions) |
| Transaction revenues | $ | 9,490 |
| | $ | 8,128 |
| | $ | 7,107 |
|
| Other value added services: | 1,352 |
| | 1,120 |
| | 918 |
|
| Total net revenues | $ | 10,842 |
| | $ | 9,248 |
| | $ | 8,025 |
|
Note 12—Commitments and Contingencies
Commitments
As of December 31, 2016, approximately $28.8 billion of unused credit was available to PayPal Credit account holders compared to $24.8 billionthe original expected or contractual repayment period. We charge off receivables outstanding under our PPBL product when the repayments are 180 days past due. We charge off the receivables outstanding under our PPWC product when the repayments are 180 days past our expectation of unused credit as of December 31, 2015. While this amount representsrepayments and the total unused credit available, we havemerchant has not experienced, and do not anticipate, that all of our PayPal Credit account holders will access their entire available credit at any given point in time. In addition, the individual lines of credit that make up this unused credit are subject to periodic review and termination by the chartered financial institution that is the issuer of PayPal Credit products based on, among other things, account usage and customer creditworthiness. Whenmade a consumer funds a purchasepayment in the U.S. usinglast 60 days or when the repayments are 360 days past due regardless of whether the merchant has made a PayPal Credit product issued by a chartered financial institution,payment within the chartered financial institution extends credit tolast 60 days. Bankrupt accounts are charged off within 60 days of receiving notification of bankruptcy. The provision for loan losses is recognized in transaction and loan losses, and the consumer, funds the extension of credit at the point of saleprovisions for interest and advances funds to the merchant. We subsequently purchase the receivables related to the consumer loans extended by the chartered financial institution and,fees receivable is recognized in deferred revenues included in other current liabilities in our consolidated balance sheets. Charge-offs that are recovered are recorded as a result of such purchase, bear the risk of loss in the event of loan defaults. Although the chartered financial institution continuesreduction to own each customer account, we own the related receivable (excluding participation interests sold)our allowance for loans and are responsible for all servicing functions related to the account.interest receivable.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 12—Notes Payable
Amended Credit Agreement
In the fourth quarter of 2017, we entered into a credit agreement (“2017 Credit Agreement”) that provided for an unsecured $3.0 billion, 364-day delayed-draw term loan credit facility, which was available in up to three borrowings. In the fourth quarter of 2018, we entered into an amended credit agreement (“Amended Credit Agreement”) which amends and restates in its entirety the existing 2017 Credit Agreement. The Amended Credit Agreement provides for an unsecured $5.0 billion, 364-day delayed-draw term loan credit facility, which is available in up to four separate borrowings. Borrowings and other amounts payable under the Amended Credit Agreement are guaranteed by PayPal, Inc. Subject to specified conditions, we may designate one or more of our subsidiaries as additional borrowers under the Amended Credit Agreement provided that we and PayPal, Inc. guarantee all borrowings and other obligations of any such subsidiaries under the Amended Credit Agreement. As of December 31, 2018, no subsidiaries were designated as additional borrowers. Funds borrowed under the Amended Credit Agreement may be used to repurchase equity securities from shareholders, to repay intercompany debt, and for other general corporate purposes of the Company and our subsidiaries.
Loans under the Amended Credit Agreement bear interest at either (i) the London Interbank Offered Rate (“LIBOR”) plus a margin (based on our public debt ratings) ranging from 1.00 percent to 1.25 percent or (ii) a formula based on the agent bank's prime rate, the New York Federal Reserve Bank rate (the greater of the federal funds effective rate and the overnight bank funding rate), or LIBOR plus a margin (based on our public debt ratings) ranging from zero percent to 0.25 percent. The Amended Credit Agreement will terminate and all amounts owed thereunder will be due and payable in November 2019, unless the commitments are terminated earlier, either at our request or, if an event of default occurs, by the lenders (or automatically in the case of certain bankruptcy-related events). Subject to certain exceptions, if we were to issue debt securities or enter into a credit facility, a corresponding portion of the aggregate commitments and outstanding loans under the Amended Credit Agreement will be terminated and be required to be paid, as applicable. The Amended Credit Agreement contains customary representations, warranties, affirmative and negative covenants, including financial covenants, events of default, and indemnification provisions in favor of the lenders. The negative covenants include restrictions regarding the incurrence of liens, subject to certain exceptions. The financial covenants require us to meet a quarterly financial test with respect to a minimum consolidated interest coverage ratio, which will be applicable under certain conditions based on our public debt ratings, and a maximum consolidated leverage ratio.
In the first quarter of 2018, we effected two drawdowns aggregating to $2.0 billion under the 2017 Credit Agreement, which were in addition to the outstanding balance of $1.0 billion as of December 31, 2017. In the second quarter of 2018, we repaid $1.0 billion of the borrowings outstanding under the 2017 Credit Agreement. The borrowings outstanding as of December 31, 2018 and 2017 bore interest at one-month LIBOR plus a margin of 1.125% resulting in a weighted average interest rate of 3.34% and 2.78%, respectively. As of December 31, 2018, $2.0 billion was outstanding under the Amended Credit Agreement. The total interest expense and fees we recorded related to the Amended Credit Agreement was $72 million for the year ended December 31, 2018. At December 31, 2018, $3.0 billion of borrowing capacity was available for the purposes permitted by the Amended Credit Agreement, subject to customary conditions to borrowing.
2015 Credit Agreement
In the third quarter of 2015, we entered into a credit agreement (“2015 Credit Agreement”) that provides for an unsecured $2.0 billion, five-year revolving credit facility that includes a $150 million letter of credit sub-facility and a $150 million swingline sub-facility, with available borrowings under the revolving credit facility reduced by the amount of any letters of credit and swingline borrowings outstanding.outstanding from time to time. Borrowings and other amounts payable under the 2015 Credit Agreement are guaranteed by our PayPal, Inc. (the “Guarantor”).subsidiary. We may, also, subject to the agreement of the applicable lenders, increase the commitments under the revolving credit facility by up to $500 million. Subject to specified conditions, we may designate one or more of our subsidiaries as additional borrowers under the 2015 Credit Agreement provided that we and the GuarantorPayPal, Inc. guarantee all borrowings and other obligations of any such subsidiaries under the 2015 Credit Agreement. As of December 31, 2016,2018, no subsidiaries were designated as additional borrowers. Funds borrowed under the 2015 Credit Agreement may be used for working capital, capital expenditures, acquisitions and other general corporate purposes.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Loans under the 2015 Credit Agreement will bear interest at either (i) LIBOR plus a margin (based on our public debt ratings) ranging from 1.00 percent to 1.625 percent or (ii) a formula based on the agent bank’s prime rate, the federal funds effective rate, or LIBOR plus a margin (based on our public debt ratings) ranging from zero percent to 0.625 percent. Subject to specified conditions, we may designate one or more of our subsidiaries as additional borrowers under the 2015 Credit Agreement provided that we and PayPal, Inc. guarantee all borrowings and other obligations of any such subsidiaries under the 2015 Credit Agreement. The 2015 Credit Agreement will terminate and all amounts owed thereunder will be due and payable on July 17, 2020, unless (a) the commitments are terminated earlier, either at our request or, if an event of default occurs, by the lenders (or automatically in the case of certain bankruptcy-related events), or (b) the maturity date is extended upon our request, subject to the agreement of the lenders. The 2015 Credit Agreement contains customary representations, warranties, affirmative and negative covenants, including financial covenants, events of default, and indemnification provisions in favor of the banks. The negative covenants include restrictions regarding the incurrence of liens, subject to certain exceptions. The financial covenants require us to meet a quarterly financial test with respect to a minimum consolidated interest coverage ratio, which will be applicable under certain conditions based on our public debt ratings, and a maximum consolidated leverage ratio.
During the third quarter of 2017, we drew down $800 million under the 2015 Credit Agreement, which was repaid during the fourth quarter of 2017. The borrowing bore interest at one-month LIBOR plus a margin of 1.125% resulting in a weighted average interest rate of 2.36%. As of December 31, 2016,2018, no borrowings or letters of credit were outstanding under the 2015 Credit Agreement. Accordingly, at December 31, 2016,2018, $2.0 billion of borrowing capacity was available for the purposes permitted by the 2015 Credit Agreement subject to customary conditions to borrowing.
Other Available Facilities
We maintain uncommitted credit facilities in various regions throughout the world, with borrowing capacity of approximately $300 million in the aggregate. Interest rate terms for these facilities vary by region and reflect prevailing market rates for companies with strong credit ratings. As of December 31, 2018, no amounts were outstanding under those facilities, and therefore, approximately $300 million of borrowing capacity was available, subject to customary conditions to borrowing.
Note 13—Commitments and Contingencies
Commitments
As of December 31, 2018, approximately $1.8 billion of unused credit was available to PayPal Credit account holders compared to $26.4 billion of unused credit as of December 31, 2017. While this amount represents the total unused credit available, we have not experienced, and do not anticipate, that all our PayPal Credit account holders will access their entire available credit at any given point in time. In addition, the individual lines of credit that make up this unused credit are subject to periodic review and termination based on, among other things, account usage and customer creditworthiness. The decrease in unused credit in 2018 as compared to 2017 was due to the sale of our U.S. consumer credit portfolio.
Prior to the completion of the sale of our U.S. consumer credit receivables portfolio in July 2018, when a consumer funded a purchase in the U.S. using a PayPal Credit product issued by a chartered financial institution, the chartered financial institution extended credit to the consumer, funded the extension of credit at the point of sale and advanced funds to the merchant. We purchased the receivables related to the consumer loans extended by the chartered financial institution and, as a result of such purchase, bore the risk of loss in the event of loan defaults. Although the chartered financial institution continued to own each customer account, we owned the related receivable (excluding participation interests sold) and were responsible for all servicing functions related to the account. Subsequent to the completion of the sale of our U.S. consumer credit receivables portfolio, we no longer purchase the receivables related to consumer loans extended by the chartered financial institution. See “Note 1—Overview and Summary of Significant Accounting Policies” for additional information.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Lease Arrangements
We have lease obligations under certain non-cancelable operating leases. Our non-cancelable operating lease agreements typically have terms between 3-10 years and generally contain multi-year renewal options. We recognize rent expense under such agreements on a straight-line basis.
Future minimum rental payments under non-cancelable operating leases at December 31, 2016,2018, are as follows:
| | | | Operating Leases | Operating Leases |
| | (In millions) | (In millions) |
| 2017 | $ | 102 |
| |
| 2018 | 106 |
| |
| 2019 | 93 |
| $ | 124 |
|
| 2020 | 63 |
| 111 |
|
| 2021 | 47 |
| 96 |
|
| 2022 | | 81 |
|
| 2023 | | 63 |
|
| Thereafter | 141 |
| 189 |
|
| Total minimum lease payments | $ | 552 |
| $ | 664 |
|
Rent expense for the years ended December 31, 2018, 2017, and 2016 2015 and 2014 totaled $76$94 million, $59$69 million, and $43$76 million, respectively. The future minimum lease payments include the minimum commitments for our facilities.
Litigation and Regulatory Matters
Overview
We are involved in legal and regulatory proceedings on an ongoing basis. Many of these proceedings are in early stages and may seek an indeterminate amount of damages. If we believe that a loss arising from such matters is probable and can be reasonably estimated, we accrue the estimated liability in our financial statements. If only a range of estimated losses can be determined, we accrue an amount within the range that, in our judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, we accrue at the low end of the range. For those proceedings in which an unfavorable outcome is reasonably possible but not probable, we have disclosed an estimate of the reasonably possible loss or range of losses or we have concluded that an estimate of the reasonably possible loss or range of losses arising directly from the proceeding (i.e., monetary damages or amounts paid in judgment or settlement) are not material. If we cannot estimate the probable or reasonably possible loss or range of losses arising from a legal proceeding, we have disclosed that fact. In assessing the materiality of a legal proceeding, we evaluate, among other factors, the amount of monetary damages claimed, as well as the potential impact of non-monetary remedies sought by plaintiffs (e.g., injunctive relief) that may require us to change our business practices in a manner that could have a material adverse impact on our business. With respect to the matters disclosed in this Note 12,13, we are unable to estimate the possible loss or range of losses that could potentially result from the application of such non-monetary remedies.
Amounts accrued for legal and regulatory proceedings for which we believe a loss is probable were not material for the year ended December 31, 2016.2018. Except as otherwise noted for the proceedings described in this Note 12,13, we have concluded, based on currently
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
available information, that reasonably possible losses arising directly from thesethe proceedings (i.e., monetary damages or amounts paid in judgment or settlement) in excess of our recorded accruals are also not material. However, legal and regulatory proceedings are inherently unpredictable and subject to significant uncertainties. If one or more matters were resolved against us in a reporting period for amounts in excess of management’s expectations, the impact on our operating results or financial condition for that reporting period could be material.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Regulatory Proceedings
We are subjectrequired to comply with U.S. economic and trade sanctions administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”). We have self-reported to OFAC certain transactions that were inadvertently processed but subsequently identified as possible violations of U.S. economic and trade sanctions. In March 2015, we reached a settlement with OFAC regarding possible violations arising from our sanctions compliance practices between 2009 and 2013, prior to the implementation of our real-time transaction scanning program. Subsequently, we have self-reported additional transactions as possible violations, and we have received new subpoenas from OFAC seeking additional information about certain of these transactions. Such self-reported transactions could result in claims or actions against us, including litigation, injunctions, damage awards, fines or penalties, or require us to change our business practices in a manner that could result in a material loss, require significant management time, result in the diversion of significant operational resources, or otherwise harm our business.
On March 28, 2016, we received a Civil Investigative Demand (“CID”) from the Federal Trade Commission (“FTC”) as part of its investigation to determine whether we, through our Venmo service, have been or are engaged in deceptive or unfair practices in violation of the Federal Trade Commission Act. The CID requestsrequested the production of documents and answers to written questions related to our Venmo service. We are cooperatinghave cooperated with the FTC in connection with the CID. The CID could lead to an enforcement action and/or one or more consent orders, which may result in substantial costs, including legal fees, fines, penalties, and remediation expenses and actions, and could require us to changeOn February 27, 2018, we entered into a Consent Order with the mannerFTC in which we operate Venmo.settled potential allegations arising from our Venmo services between 2013 and 2017. The Consent Order does not contain a monetary penalty, but requires PayPal to make various changes to Venmo’s disclosures and business practices. The FTC approved the final Consent Order on May 24, 2018. As required by the Consent Order, we are cooperating with the FTC’s requirements and working to ensure compliance with the Consent Order. Any failure to comply with the Consent Order may increase the possibility of additional adverse consequences, including litigation, additional regulatory actions, injunctions, or monetary penalties, or require further changes to our business practices, significant management time, or the diversion of significant operational resources, all of which could result in a material loss or otherwise harm our business.
Legal Proceedings
On December 28, 2016,January 12, 2017, a putative securities classshareholder derivative action captioned ChoSilverman v. PayPal Holdings, Inc.,Schulman, et al., Case No. 3:16-cv-07371,5:17-cv-00162 (the “California Derivative Case”) was filed in the U.S. District Court for the Northern District of California (the “Securities“Court”). On March 24, 2017, a second derivative action substantially similar to the California Derivative Case captioned Seeman v. Schulman, et al., Case No. 1:17-cv-00318-UNA, was filed in the U.S. District Court for the District of Delaware (the “Delaware Derivative Case”). On April 19, 2017, the Delaware court in the Delaware Derivative Case issued an order adopting a stipulation filed by the parties transferring the Delaware Derivative Case to the Court so that the Delaware Derivative Case could be consolidated with the pending California Derivative Case. On April 27 and 28, 2017, two additional shareholder derivative lawsuits substantially similar to the California Derivative Case and Delaware Derivative Case were filed in the Court. These cases are captioned Sims v. Schulman, et al., Case No. 1:17-cv-02428, and Liss v. Schulman, et al., Case No. 1:17-cv-02446-NC (together with the California Derivative Case and the Delaware Derivative Case, the “Derivative Cases”). The Securities Case assertsDerivative Cases are purportedly brought on behalf of the Company and assert claimsallegedly relating to our disclosure in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016, that on March 28, 2016, we received a Civil Investigative DemandCID from the FTC as part of its investigation to determine whether we, through our Venmo service, have been or are engaged in deceptive or unfair practices in violation of the Federal Trade Commission Act. The Securities Case purports to be brought on behalf of purchasers of eBay’s stock on or after December 19, 2013 who subsequently received the Company’s stock pursuant to eBay’s spin-off of the Company, effective as of July 17, 2015, and/or purchasers of the Company’s stock between July 20, 2015 and April 28, 2016, and asserts claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) against the Company, its Chief Executive Officer, Chief Financial Officer, and former interim Chief Financial Officer, and eBay and certain of its former officers, including the Chairman of our Board of Directors. The Securities Case alleges that defendants made materially false and misleading statements or omissions regarding our compliance with applicable laws and regulations, including the failure to disclose that we were purportedly engaging in unfair trade practices through our Venmo service and that as a result of alleged false and misleading statements or omissions, our stock traded at artificially inflated prices. The Securities Case seeks unspecified compensatory damages on behalf of the putative class members. We believe the claims and allegations in the Securities Case are without merit and intend to defend the action vigorously.
On January 12, 2017, a putative shareholder derivative action captioned Silverman v. Schulman, et al., Case No. 5:17-cv-00162, was filed in the U.S. District Court for the Northern District of California based on substantially similar allegations underlying the Securities Case described above (the “Derivative Case”). The Derivative Case is purportedly brought on behalf of the Company and allegesCases allege that the Company’s Chief Executive Officer, Chief Financial Officer, former interim Chief Financial Officer, and certain members of its Board of Directors (the “Individual Defendants”) breached their fiduciary duties to the Company, violated Section 14(a) of the Securities Exchange Act of 1934, and were unjustly enriched by, among other things, causing or permitting the Company to issue materially false and misleading statements or omissions regarding the Company’s compliance with applicable laws and regulationregulations with respect to its Venmo service, as alleged in the Securities Case, andand/or by permitting or causing the Company to engage in unfair trade practices through its Venmo service. The Derivative Case seeks,Cases seek, among other things, to recover unspecified compensatory damages on behalf of the Company arising out of the individual defendants’ alleged wrongful conduct. Although plaintiffplaintiffs in this action doesthe Derivative Cases do not seek relief against the Company, we have certain indemnification obligations to the individual defendants. On June 30, 2017, the Court issued an order approving a stipulation filed by the parties in the Derivative Cases that consolidated these cases and appointed co-lead plaintiffs’ counsel for the consolidated case, captioned In re PayPal Holdings, Inc. Shareholder Derivative Litigation, Lead Case No. 5:17-cv-00162-RS (the “Consolidated Derivative Case”). The Court’s order states that it applies to each purported derivative action that is subsequently filed in, removed to, or transferred to the Court, arising out of the same or substantially the same transactions or events as the Derivative Cases. On July 31, 2017, plaintiffs’ counsel designated the complaint filed in the Liss action as the operative complaint for the Consolidated Derivative Case. On October 5, 2017, another putative shareholder derivative suit was filed in the Court captioned Iron Workers Local No. 25 Pension Fund v. John J. Donahoe, et al., Case No. 5:17-cv-05741-NC, that makes similar allegations and advances similar claims against the same Individual Defendants as those at issue in the Consolidated Derivative Case. Pursuant to the Court’s consolidation order, this shareholder derivative suit is part of the Consolidated Derivative Case. On September 28, 2017, we filed
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Wea motion to dismiss the operative complaint on grounds that plaintiffs lack standing to pursue claims on behalf of the Company because they did not make a pre-suit demand on the Company’s Board of Directors prior to filing the Derivative Cases and failed to establish that making such a demand would have received subpoenasbeen futile. On January 18, 2018, the Court granted our motion to dismiss with leave to amend and gave plaintiffs 30 days from that date to file an amended complaint. On February 16, 2018, plaintiffs in the Consolidated Derivative Case filed an amended complaint. Plaintiffs’ counsel also sent a letter dated February 15, 2018 to the Chairman of the Company’s Board of Directors, demanding on behalf of plaintiffs that the Board take action to remedy the violations of law allegedly committed by the Individual Defendants in the Consolidated Derivative Case. In April 2018, the Individual Defendants in the Consolidated Derivative Case entered into a tolling agreement with plaintiffs that tolls the running of any statute of limitations applicable to the claims at issue in the lawsuit and the demand plaintiffs made on the Company's Board of Directors until 30 days from the U.S. Departmenttime the Board issues a final response to the demand or three years elapse from the date of Justice (“DOJ”) seeking the productiontolling agreement, whichever comes first. Pursuant to that agreement, plaintiffs in the Consolidated Derivative Case have voluntarily dismissed the lawsuit without prejudice. On October 1, 2018, the Board issued its final response to the demand, which informed plaintiffs’ counsel that the Board had determined that it is not in the best interests of certain information relatedthe Company and its shareholders to our historical anti-money laundering program. We are cooperating withpursue the DOJclaims alleged in providing informationthe demand or to undertake any further action in response to the subpoenas. We are unable to predictdemand.
In November 2017, we announced that we had suspended the outcomeoperations of TIO Networks (“TIO”) as part of an ongoing investigation of security vulnerabilities of the government's investigation.TIO platform. On December 1, 2017 we announced that we had identified evidence of unauthorized access to TIO’s network, including locations that stored personal information of some of TIO’s customers and customers of TIO billers and the potential compromise of personally identifiable information for approximately 1.6 million customers. We have received a number of governmental inquiries, including from state attorneys general, and we may be subject to additional governmental inquiries and investigations in the future. In addition, on December 6, 2017, a putative class action lawsuit captioned Sgarlata v. PayPal Holdings, Inc., et al., Case No. 3:17-cv-06956 was filed in the Court against the Company, its Chief Executive Officer, its Chief Financial Officer and Hamed Shahbazi, the former chief executive officer of TIO (the “Defendants”) alleging violations of federal securities laws. Specifically, the lawsuit alleges that Defendants made false or misleading statements or failed to disclose that TIO’s data security program was inadequate to safeguard the personally identifiable information of its users, those vulnerabilities threatened continued operation of TIO’s platform, the Company’s revenues derived from TIO services were thus unsustainable, and consequently, the Company overstated the benefits of the TIO acquisition, and, as a result, the Company’s public statements were materially false and misleading at all relevant times. The plaintiff who initiated the lawsuit sought to represent a class of shareholders who acquired shares of the Company’s common stock between February 14, 2017 through December 1, 2017 and sought damages and attorneys’ fees, among other relief. On March 16, 2018, the Court appointed two new plaintiffs, not the original plaintiff who filed the case, as interim co-lead plaintiffs in the case and appointed two law firms as interim co-lead counsel. On June 13, 2018, the interim co-lead plaintiffs filed an amended complaint, which named TIO Networks ULC, TIO Networks USA, Inc., and John Kunze (the Company’s Vice President, Global Consumer Products and Xoom) as additional defendants. The amended complaint is purportedly brought on behalf of all persons other than the Defendants who acquired the Company’s securities between November 10, 2017 and December 1, 2017. The amended complaint alleges that the Company’s and TIO’s November 10, 2017 announcement of the suspension of TIO’s operations was false and misleading because the announcement only disclosed security vulnerabilities on TIO’s platform, rather than an actual security breach that Defendants were allegedly aware of at the time of the announcement. Defendants’ filed their motion to dismiss the amended complaint on July 13, 2018 and the Court heard oral argument on the motion to dismiss on September 20, 2018. On December 13, 2018, the Court dismissed Plaintiff's amended complaint without prejudice. Plaintiffs filed a second amended complaint on January 14, 2019.We may be subject to additional litigation relating to TIO’s data security platform or the suspension of TIO’s operations in the future. See Note 4—“Business Combinations” and Note 5—“Goodwill and Intangible Assets” to our consolidated financial statements for additional disclosure relating to the suspension of operations of TIO.
General Matters
Other third parties have from time to time claimed, and others may claim in the future, that we have infringed their intellectual property rights. We are subject to patent disputes and expect that we will increasingly be subject to additional patent infringement claims involving various aspects of our business as our products and services continue to expand in scope and complexity. Such claims may be brought directly or indirectly against our companies and/or against our customers (who may be entitled to contractual indemnification under their contracts with us), and we are subject to increased exposure to such claims as a result of our acquisitions, particularly in cases where we are entering intointroducing new lines of businessproducts or services in connection with such acquisitions. We have in the past been forced to litigate such claims, and we believe that additional lawsuits alleging such claims will be filed against us. Intellectual property claims, whether meritorious or not, are time consuming and costly to defend and resolve, could require expensive changes in our methods of doing business, or could require us to enter into costly royalty or licensing agreements on unfavorable terms or make substantial payments to settle claims or to satisfy damages awarded by courts.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
From time to time, we are involved in other disputes or regulatory inquiries that arise in the ordinary course of business, including suits by our customers (individually or as class actions) alleging, among other things, improper disclosure of our prices, rules or policies, that our practices, prices, rules, policies, or customer/user agreements violate applicable law or that we have acted unfairly and/or not acted in conformity with such prices, rules, policies, or agreements. In addition to these types of disputes and regulatory inquiries, our operations are also subject to regulatory and/or legal review and/or challenges that tend to reflect the increasing global regulatory focus to which the payments industry is subject and, when taken as a whole with other regulatory and legislative action, such actions could result in the imposition of costly new compliance burdens on our business and customers and may lead to increased costs and decreased transaction volume and revenue. Further, the number and significance of these disputes and inquiries are increasing as our Company haswe have grown larger, our business has expanded in scope (both in terms of the range of products and services that we offer and our geographical operations), and our products and services have increased in complexity. Any claims or regulatory actions against us, whether meritorious or not, could be time consuming, result in costly litigation, settlement payments, damage awards (including statutory damages for certain causes of action in certain jurisdictions), fines, penalties, injunctive relief, or increased costs of doing business through adverse judgment or settlement, require us to change our business practices in expensive ways, require significant amounts of management time, result in the diversion of significant operational resources, or otherwise harm our business.
Indemnification Provisions
We entered into a separation and distribution agreement, a tax matters agreement, an operating agreement and various other agreements with eBay Inc. (“eBay”) to govern the separation of the two companies in 2015 and the relationship of the two companies going forward. These agreements provide for specific indemnity and liability obligations for both eBay and us. Disputes between eBay and us have arisen and others may arise in the future, and an adverse outcome in such matters could lead to disputes between usmaterially and eBay, which may be significant.adversely impact our business, results of operations, and financial condition. In addition, the indemnity rights we have against eBay under the agreements may not be sufficient to protect us, and our indemnity obligations to eBay may be significant.
In the ordinary course of business, we include limited indemnification provisions in certain of our agreements with parties with whom we have commercial relationships, including our standard marketing, promotions, and application-programming-interface license (API) agreements.relationships. Under these contracts, we generally indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with claims by any third-partythird party with respect to our domain names, trademarks, logos, and other branding elements to the extent that such marks are related to the subject agreement. In a limited number of agreements, weWe have provided an indemnity for other types of third-party claims, which are indemnities mainly related to intellectual property rights.rights, confidentiality, willful misconduct, data privacy obligations, and certain breach of contract claims. We have also provided an indemnity to our payments processors in the event of certain third-party claims or card association fines against the processor arising out of conduct by us or our customers. It is not possible to determine the maximum potential loss under these indemnification provisions due to our limited history of prior indemnification claims and the unique facts and circumstances involved in each particular situation. To date, no significant costs have been incurred, either individually or collectively, in connection with our indemnification provisions.
Off-Balance Sheet Arrangements
As of December 31, 20162018 and 2015,2017, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures, or capital resources.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Protection Programs
We provide merchants and consumers with protection programs on substantially allmost transactions completed throughon our Payments Platform, except for transactions using our gateway and Paydiant products.products or where our customer agreements specifically do not provide for protections. These programs protect both merchants and consumers from loss primarily due to fraud and counterparty performance. Our Buyer Protection Program provides protection to consumers for qualifying purchases by reimbursing the consumer for the full amount of the purchase if a purchased item does not arrive or does not match the seller’s description. Our Seller Protection Programs provide protection to merchants against claims that a transaction was not authorized by the buyer or claims that an item was not received by covering the seller for the full amount of the payment on eligible sales. These protection programs are considered assurance-type warranties for which we estimate and record associated costs in transaction and loan losses during the period the payment transaction is completed.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The maximum potential exposure under our protection programs is estimated to be the portion of total eligible transaction volume (TPV) for which buyer or seller protection claims may be raised under our existing user agreements. Since eligible transactions are typically completed in a period significantly shorter than the period under which disputes may be opened, and based on our historical losses to date, we do not believe that the maximum potential exposure is representative of our actual potential exposure. The actual amount of potential exposure cannot be quantified as we are unable to determine total eligible transactions where performance by a merchant or customerconsumer is incomplete or completed transactions that may result in a claim under our protection programs. We record a liability with respect to losses under these protection programs when they are probable and the amount can be reasonably estimated.
The following table provides management's estimate ofshows changes in the maximum potential exposure related to our protection programs as of December 31, 2016 and December 31, 2015:
|
| | | | | | | |
| | As of December 31, |
| | 2016 | | 2015 |
| | (In millions) |
| Maximum potential exposure | $ | 131,739 |
| | $ | 109,496 |
|
The following table provides the amount of allowance for transaction losses and negative customer balances related to our protection programs as offor the year end December 31, 20162018 and December 31, 2015:2017:
|
| | | | | | | |
| | As of December 31, |
| | 2016 | | 2015 |
| | (In millions) |
| Allowance for transaction losses | $ | 222 |
| | $ | 185 |
|
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| | (In millions) |
| Beginning balance | $ | 266 |
| | $ | 222 |
|
| Provisions, net of recoveries | 1,059 |
| | 823 |
|
| Realized losses | (981 | ) | | (779 | ) |
| Ending balance | $ | 344 |
| | $ | 266 |
|
Note 13—Related Party Transactions
As of December 31, 2016, there were no material amounts payable to or amounts receivable from related parties. All contracts with related parties are at rates and terms that we believe are comparable with those that could be entered into with independent third parties. For all periods subsequent to the distribution, there were no material related party transactions.
Prior to the distribution, our business comprised the Payments segment of eBay and thus our transactions with eBay were considered related party transactions. In connection with the separation, we entered into a separation and distribution agreement as well as various other agreements that govern our relationships with eBay going forward, including an operating agreement, transition services agreement, tax matters agreement, employee matters agreement, intellectual property matters agreement and colocation services agreements. Information included in this Note 13 with respect to eBay is strictly limited to our related party transactions with eBay prior to the separation (i.e., periods up to July 17, 2015). Following separation, transactions with eBay represent third-party transactions on an arms-length basis.
We earned net revenues of $59 million and $113 million from eBay and its subsidiaries during the years ended December 31, 2015 and 2014, respectively. Prior to the distribution, we recovered certain amounts from eBay related to customer protection programs offered on eligible eBay purchases made with PayPal. These costs included the actual transaction losses associated with customer-filed claims as well as an allocation of salary-related expenses for our customer support teams working on customer claims and
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
disputes related to eligible eBay purchases. Recoveries associated with transaction losses incurred on eligible eBay purchases during the years ended December 31, 2015 and 2014 were $27 million and $43 million, respectively, which were recorded as a reduction to transaction and loan loss. Other costs recovered from eBay related to the customer protection programs during the years ended December 31, 2015 and 2014 were $12 million and $22 million, respectively, and were included as a reduction to customer support and operations and general and administrative expenses in our consolidated statement of income. Following the distribution, eBay's customer protection programs are no longer administered by us, and therefore these costs are no longer reimbursed by eBay.
Prior to the distribution, we incurred user acquisition fees from eBay on payment volume which we processed from purchases made on eBay’s platform. User acquisition fees during the years ended December 31, 2015 and 2014 were $64 million and $119 million, respectively. Following the distribution, pursuant to the operating agreement, we incur referral services fees from eBay based on a fixed rate per new user.
Prior to the distribution, these consolidated financial statements include expenses associated with workplace resources and information technology that were previously allocated to the Payments segment of eBay, and additional expenses related to certain corporate functions, including senior management, legal, human resources and finance. These expenses also include allocations related to share based compensation. These expenses allocated to us by eBay are based on direct usage or benefit where identifiable, with the remainder allocated on a pro rata basis of revenue, headcount, or other systematic measure. We consider the expense allocation methodology and results to be reasonable for all periods presented. The corporate costs and allocation of expenses to us from eBay included within customer support and operations, sales and marketing, product development, and general and administrative expenses were $303 million and $443 million for the years ended December 31, 2015 and 2014, respectively.
In the second and third quarter of 2015, pursuant to the Separation and Distribution Agreement between eBay and us, eBay transferred substantially all of the assets and liabilities and operations of eBay's payments business to PayPal, which was completed in June 2015 (the “capitalization”). As part of the capitalization, we received from eBay a contribution of cash of approximately $3.8 billion, as well as a related estimated deferred tax liability of $236 million associated with the foreign earnings that are not considered indefinitely reinvested. In the fourth quarter of 2015, we reassessed the measurement of the deferred tax liability and, based on updated valuation information, reduced the deferred tax liability balance to $172 million as of December 31, 2015. The adjustment to deferred tax liability was recorded as a contribution from eBay and resulted in an increase to net parent investment within stockholders' equity. During the second and third quarter of 2015, eBay also contributed property and equipment with a net book value of approximately $224 million and intangible assets with a net book value of approximately $18 million. Additionally, we sold certain property and equipment to eBay with a gross carrying amount of $63 million and a net book value of $15 million for proceeds of approximately $26 million. The proceeds in excess of net book value were recorded as a contribution from eBay and resulted in an increase to net parent investment within stockholders' equity.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 14—Stock Repurchase ProgramPrograms
In January 2016, our Board of Directors authorized a stock repurchase program that providesprovided for the repurchase of up to $2 billion of our common stock, with no expiration from the date of authorization. ThisIn April 2017, our Board of Directors authorized an additional stock repurchase program isthat provides for the repurchase of up to $5 billion of our common stock, with no expiration from the date of authorization. This program became effective upon completion of the January 2016 stock repurchase program in December 2017. In July 2018, our Board of Directors authorized an additional stock repurchase program that provides for the repurchase of up to $10 billion of our common stock, with no expiration from the date of authorization. This program will become effective upon completion of the April 2017 stock repurchase program. Our stock repurchase programs are intended to offset the impact of dilution from our equity compensation programs and, subject to market conditions and other factors, may also be used to make opportunistic repurchases of our common stock to reduce outstanding share count. Any share repurchases under our stock repurchase programprograms may be made through open market transactions, block trades, privately negotiated transactions including accelerated share repurchase agreements, or other means at times and in such amounts as management deems appropriate and will be funded from our working capitalcash from operations or other financing alternatives. However,Moreover, any stock repurchases are subject to market conditions and other uncertainties and we cannot predict if or when any stock repurchases will be made. Moreover, weWe may terminate our stock repurchase programprograms at any time without notice.
In February 2018, we entered into an accelerated share repurchase (“ASR”) agreement with an unrelated third party financial institution to repurchase shares of our common stock. Under the terms of the ASR agreement, we made an upfront payment of approximately $1.0 billion to the third party financial institution and received approximately 12.8 million shares of our common stock during the term of the transaction, which ended in March 2018. The total number of shares of our common stock repurchased was based on the volume-weighted average share price of our common stock during the term of the transaction, less a discount and subject to adjustments pursuant to the terms of the ASR agreement. We recorded the initial payment of $1.0 billion as a reduction to stockholders' equity on our consolidated balance sheets. All common stock received was recorded as treasury stock and the forward contract indexed to our own common stock met all applicable criteria for equity classification.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The stock repurchase activity under our stock repurchase programprograms during the year ended December 31, 20162018 is summarized as follows:
|
| | | | | | | | | | | | | | |
| | Shares Repurchased | | Average Price
Paid per Share(1) | | Value of Shares Repurchased | | Remaining Amount Authorized |
| | (In millions, except per share amounts) |
| Authorization of plan in January 2016 | | | | | | | $ | 2,000 |
|
| Repurchases of shares of common stock for three months ended: | | | | | | | |
| March 31, 2016 | 16.9 |
| | $ | 35.27 |
| | $ | 596 |
| | $ | 1,404 |
|
| June 30, 2016 | 7.8 |
| | $ | 38.67 |
| | $ | 300 |
| | $ | 1,104 |
|
| September 30, 2016 | 1.3 |
| | $ | 36.80 |
| | $ | 49 |
| | $ | 1,055 |
|
| December 31, 2016 | 1.3 |
| | $ | 38.92 |
| | $ | 50 |
| | $ | 1,005 |
|
| Balance as of December 31, 2016 | 27.3 |
| | | | $ | 995 |
| | $ | 1,005 |
|
|
| | | | | | | | | | | | | | |
| | Shares Repurchased | | Average Price
Paid per Share(1)(2) | | Value of Shares Repurchased | | Remaining Amount Authorized |
| | (In millions, except per share amounts) |
| Balance as of January 2018 | | | | | | | $ | 4,999 |
|
| Repurchases of shares of common stock in the open market for the three months ended March 31, 2018 | 10.8 |
| | $ | 76.82 |
| | $ | 825 |
| | $ | 4,174 |
|
| Repurchases of shares of common stock under the ASR agreement for the three months ended March 31, 2018 | 12.8 |
| | $ | 78.03 |
| | $ | 1,000 |
| | $ | 3,174 |
|
| Repurchases of shares of common stock in the open market for the three months ended June 30, 2018 | 6.1 |
| | $ | 81.33 |
| | $ | 500 |
| | $ | 2,674 |
|
| Additional authorization of $10 billion under July 2018 stock repurchase program | — |
| | $ | — |
| | $ | — |
| | $ | 12,674 |
|
| Repurchases of shares of common stock in the open market for the three months ended September 30, 2018 | 6.9 |
| | $ | 87.42 |
| | $ | 600 |
| | $ | 12,074 |
|
| Repurchases of shares of common stock in the open market for the three months ended December 31, 2018 | 7.1 |
| | $ | 84.19 |
| | $ | 600 |
| | $ | 11,474 |
|
| Balance as of December 31, 2018 | 43.7 |
| | | | $ | 3,525 |
| | $ | 11,474 |
|
(1)Average price paid per share for open market purchases includes broker commissions.
(2) Average price paid per share under the ASR agreement represents the volume-weighted average share price, less a discount and adjustments pursuant to the terms of the agreement. Treasury stock recorded for repurchases under the ASR agreement amounts to $985 million.
These repurchased shares of common stock were recorded as treasury stock for the purposes of calculating earnings per share and were accounted for under the cost method. No repurchased shares of common stock have been retired.
No activity has occurred under the July 2018 stock repurchase program.
Note 15—Stock-Based and Employee Savings Plans
Prior to the separation (i.e., periods up to July 17, 2015), PayPal employees participated in eBay's equity incentive plans, including stock options, restricted stock units (“RSUs”) and performance-based restricted stock units (“PBRSUs”). In addition, certain PayPal employees participated in eBay's employee stock purchase plan. All awards granted under these plans consisted of eBay common shares. PayPal's consolidated statement of income reflected compensation expense for these stock-based plans associated with the portion of eBay's equity incentive plans in which PayPal employees participated.Equity Incentive Plan
Following separation, outstanding awards granted to PayPal employees under eBay's equity incentive plans were converted into PayPal awards under PayPal's equity incentive plans based on a conversion ratio. This conversion ratio was determined asUnder the closing per-share price of eBay shares on the last regular trading session prior to separation divided by the opening per-share price of PayPal shares on the first regular trading session after separation. There was no significant incremental stock-based compensation expense recorded as a resultterms of the share conversions.
Equity Incentive Plans
The Board of Directors adopted theAmended and Restated PayPal Holdings, Inc. 2015 Equity Incentive Award Plan (the “Plan”) on June 16, 2015. Under the terms of the Plan,, equity awards, including stock options, RSUs,restricted stock units (“RSUs”), restricted stock awards PBRSUs,(“RSAs”), performance based restricted stock units (“PBRSUs”), deferred stock units (“DSUs”), and stock payments may be granted to our directors, officers, and employees. In May 2018, our stockholders approved increasing the number of shares reserved for issuance under the Plan by an additional 37 million shares . At December 31, 2016, we had 922018, there were 97 million shares authorized under our equity incentive plansthe Plan and 6171 million shares were available for future grant. Shares issued as a result of stock option exercises and the release of stock awards were funded primarily with the issuance of new shares of common stock.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
All stock options granted under these plansthe Plan generally vest 12.5% six months from the date of grant (or 25% one year from the date of hire for grants to new employees) with the remainder vesting at a rate of 2.08% per month thereafter, and generally expire seven to ten years from the date of grant. The cost of stock options is determined using the Black-Scholes option pricing model on the date of grant. We discontinued granting stock options in January 2016.
RSUs are granted to eligible employees under our equity incentive plans.the Plan. In general, RSUs vest in equal annual installments over a period of three to four years, are subject to an employee's continuing service to us, and do not have an expiration date. The cost of RSUs granted prior to the separation wasis determined using the fair value of eBay's common stock on the date of grant. For RSUs granted following separation, the cost of RSUs was determined using the fairmarket value of PayPal's common stock on the date of grant.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Certain of our executives and non-executives are eligible to receive performance-based restricted stock units (“PBRSUs”). PBRSUs, which are equity awards that may be earned based on an initial target number with the final number of PBRSUs that may be vested and settled determined based on the Company’s performance against pre-established performance metrics over a predefined performance period. PBRSUs granted under eBay's equity incentive plansthe Plan generally have two-year performance periods with one-half of the grant vesting in March following the end of the performance period and the remaining one-half vesting more than one year following the completion of the performance period. In the first quarter of 2016, the Compensation Committee approved a revised structure for PBRSUs granted under PayPal's 2015 Equity Incentive Award Plan to officers and certain employees providing services to the Company. PBRSUs granted under PayPal's 2015 Equity Incentive Award Plan have three-year performance periods with cliff vesting following the completion of the performance period, subject to the Compensation Committee's approval of the level of achievement against the pre-established performance targets. Over the performance period, the number of PBRSUs that may be issued and related stock-based compensation expense that is recognized is adjusted upward or downward based upon the probability of achieving the approved performance targets against the performance metrics. Depending on the probability of achieving the pre-established performance targets, the number of PBRSUs issued could range from 0% to 200% of the target amount.
Employee Stock Purchase Plan
Prior to separation, eligible employees participated in eBay’s employee stock purchase plan. Effective July 17, 2015,In May 2018, our stockholders approved increasing the Boardnumber of Directors adoptedshares reserved for issuance under the Amended and Restated PayPal Holdings, Inc. Employee Stock Purchase Plan (“ESPP”). by an additional 50 million shares. Under the terms of this plan,the ESPP, shares of our common stock may be purchased over an offering period with a maximum duration of two years at 85% of the lower of the fair market value on the first day of the applicable offering period or on the last business day of each six-month purchase period within the offering period. Employees may purchase sharescontribute between 2% and 10% of their gross compensation during an offering period to purchase shares, but not more than the statutory limitation of $25,000 per year. The company stock purchased through the ESPP is considered outstanding and is included in the weighted-average outstanding shares for purposes of computing basic and diluted earnings per share. For the yearyears ended December 31, 2018, 2017, and 2016, our employees purchased 2.4 million, 2.7 million, and 2.7 million shares of PayPal common stockunder the ESPP at an average per share price of $29.49. For the year ended December 31, 2015, our employees purchased 0.9 million shares of eBay common stock at an average price of $44.37$43.09, $34.06, and 1.2 million shares of PayPal common stock at an average price of $28.12. Under eBay's employee stock purchase plan for the year ended December 31, 2014 our employees purchased approximately 1.5 million shares of eBay common stock at an average price of $42.16.$29.49, respectively. As of December 31, 2016,2018, approximately 8.153 million shares were reserved for future issuance under the Purchase Plan.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
ESPP.
Stock Option Activity
The following table summarizes stock option activity of our employees under our equity incentive plansthe Plan for the year ended December 31, 2016:2018:
| | | | Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value | Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
| | (In thousands, except per share amounts and years) | (In thousands, except per share amounts and years) |
| Outstanding at January 1, 2016 | 6,008 |
| | $ | 25.94 |
| | | |
| Granted | 124 |
| | $ | 36.32 |
| | | |
| Outstanding at January 1, 2018 | | 2,440 |
| | $ | 28.94 |
| | |
| Assumed | | 160 |
| | $ | 20.24 |
| | |
| Exercised | (1,557 | ) | | $ | 18.39 |
| | | (1,370 | ) | | $ | 29.28 |
| | |
| Forfeited/expired/canceled | (287 | ) | | $ | 30.82 |
| | | (47 | ) | | $ | 28.07 |
| | |
| Outstanding at December 31, 2016 | 4,288 |
| | $ | 28.65 |
| | 4.14 | | $ | 47,510 |
| |
| Outstanding at December 31, 2018 | | 1,183 |
| | $ | 27.39 |
| | 4.45 | | $ | 67,311 |
|
| Expected to vest | 1,424 |
| | $ | 29.17 |
| | 5.27 | | $ | 15,059 |
| 293 |
| | $ | 24.78 |
| | 5.30 | | $ | 17,414 |
|
| Options exercisable | 2,727 |
| | $ | 28.30 |
| | 3.47 | | $ | 31,166 |
| 863 |
| | $ | 28.47 |
| | 4.11 | | $ | 48,203 |
|
The weighted average grant date fair value of options granted to our employeesassumed from acquisitions during the years ended December 31, 2018, 2017, and 2016 2015was $72.02, $49.47 and 2014 was $8.79, $11.20 and $13.38, respectively. The aggregate intrinsic value was calculated as the difference between the exercise price of the underlying awards and the quoted price of our common stock at December 31, 2016.2018. During the years 2016, 2015ended December 31, 2018, 2017, and 2014,2016, the aggregate intrinsic value of options exercised under eBay's and PayPal's equity incentive plansthe Plan was $31$71 million, $72$53 million, and $57$31 million, respectively, determined as of the date of option exercise. At December 31, 2016, 4.22018, 1.2 million options were in-the-money.
Restricted Stock Unit Activity
The following table summarizes the restricted stock units (including performance-based restricted stock units) granted under our equity incentive plans as of December 31, 2016 and changes during the year ended December 31, 2016:
|
| | | | | | |
| | Units | | Weighted Average Grant-Date Fair Value (per share) |
| | (In thousands, except per share amounts) |
| Outstanding at January 1, 2016 | 28,761 |
| | $ | 34.63 |
|
| Awarded | 14,120 |
| | $ | 39.13 |
|
| Vested | (9,784 | ) | | $ | 33.28 |
|
| Forfeited | (3,912 | ) | | $ | 36.13 |
|
| Outstanding at December 31, 2016 | 29,185 |
| | $ | 37.06 |
|
| Expected to vest | 25,565 |
| | |
During the years 2016, 2015 and 2014, the aggregate intrinsic value of restricted stock units vested under eBay's and PayPal's equity incentive plans were $378 million, $315 million and $292 million, respectively.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
RSU, PBRSU, and Restricted Stock Activity
The following table summarizes the RSUs, PBRSUs, and restricted stock activity under the Plan as of December 31, 2018 and changes during the year ended December 31, 2018:
|
| | | | | | |
| | Units | | Weighted Average Grant-Date Fair Value (per share) |
| | (In thousands, except per share amounts) |
| Outstanding at January 1, 2018 | 33,875 |
| | $ | 41.14 |
|
Awarded(1)(2) | 15,131 |
| | $ | 73.69 |
|
Vested(1) | (17,903 | ) | | $ | 40.92 |
|
| Forfeited | (3,141 | ) | | $ | 52.56 |
|
| Outstanding at December 31, 2018 | 27,962 |
| | $ | 57.81 |
|
| Expected to vest | 25,177 |
| | |
(1) Includes approximately 2.1 million additional PBRSUs issued in respect of company performance in connection with the Company's 2017 annual incentive plan.
(2) Includes 742,335 shares of restricted common stock issued as a part of the iZettle acquisition.
During the years ended December 31, 2018, 2017, and 2016, the aggregate intrinsic value of RSUs and PBRSUs vested under the Plan was $1.4 billion, $519 million, and $378 million, respectively.
In the year ended December 31, 2018, the Company granted 1.6 million PBRSUs with a one-year performance period (fiscal 2018) and cliff vesting following the completion of the performance period in February 2019 (one year from the annual incentive award cycle grant date) and 0.8 million PBRSUs with a three-year performance period. Additionally, in the year ended December 31, 2018, the Company granted 0.4 million PBRSUs with a five-year performance period based on market conditions; the number of PBRSUs that may be issued under this award is fixed.
In the year ended December 31, 2017, the Company granted 2.9 million PBRSUs with a one-year performance period and cliff vesting following the completion of the performance period in February 2018 (one year from the annual incentive award cycle grant date) and 1.3 million PBRSUs with a three-year performance period.
Stock-Based Compensation Expense
We record stock-based compensation expense for the Plan in accordance with U.S. GAAP, which requires the measurement and recognition of compensation expense based on estimated fair values.
The impact on our results of operations of recording stock-based compensation expense under eBay's and PayPal's equity incentive plansthe Plan for the years ended December 31, 2016, 20152018, 2017, and 20142016 was as follows:
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| | (In millions) | (In millions) |
| Customer support and operations | $ | 85 |
| | $ | 62 |
| | $ | 52 |
| $ | 164 |
| | $ | 142 |
| | $ | 85 |
|
| Sales and marketing | 84 |
| | 52 |
| | 59 |
| 165 |
| | 140 |
| | 84 |
|
| Product development | 139 |
| | 132 |
| | 108 |
| 266 |
| | 240 |
| | 139 |
|
| General and administrative | 130 |
| | 94 |
| | 75 |
| 256 |
| | 210 |
| | 130 |
|
| Depreciation and amortization | 6 |
| | 7 |
| | 4 |
| 20 |
| | 12 |
| | 6 |
|
| Total stock-based compensation expense | $ | 444 |
| | $ | 347 |
| | $ | 298 |
| $ | 871 |
| | $ | 744 |
| | $ | 444 |
|
| | | | | | | | | | | |
| Capitalized as part of internal use software and website development costs | $ | 13 |
| | $ | 7 |
| | $ | 10 |
| $ | 38 |
| | $ | 24 |
| | $ | 13 |
|
| Income tax benefit recognized for stock-based compensation arrangements | $ | 127 |
| | $ | 98 |
| | $ | 77 |
| $ | 154 |
| | $ | 218 |
| | $ | 127 |
|
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of December 31, 2016,2018, there was approximately $707$883 million of unearned stock-based compensation estimated to be expensed from 20172019 through 2019.2020. If there are any modifications or cancellations of the underlying unvested awards, we may be required to accelerate, increase, or cancel all or a portion of the remaining unearned stock-based compensation expense. Future unearned stock-based compensation will increase to the extent we grant additional equity awards, change the mix of grants between stock options and RSUs, or assume unvested equity awards in connection with acquisitions.
Stock Option Valuation AssumptionsEmployee Saving Plan
We calculated
Under the fair value of each option award on the date of grant using the Black-Scholes option pricing model. The following weighted average assumptions were used for the years ended December 31, 2016, 2015 and 2014:
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Risk-free interest rate | 1.5 | % | | 1.4 | % | | 1.2 | % |
| Expected life (in years) | 4.6 |
| | 4.3 |
| | 4.1 |
|
| Dividend yield | — |
| | — |
| | — |
|
| Expected volatility | 25 | % | | 26 | % | | 29 | % |
For periods prior to separation, our computation of expected volatility was based on a combination of historical and market-based implied volatility from traded options on eBay’s stock. The computation of expected life was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules, and expectations of future employee behavior. The interest rate for periods within the contractual life of the award was based on the U.S. Treasury yield curve in effect at the time of grant.
For periods subsequent to the separation, the risk-free interest rate for periods within the contractual life of the award was based upon the U.S. Treasury yield curve in effect at the time of the grant. Due to our limited history of stock option exercises, we estimated the expected term of options granted based on the midpoint between the vesting date and the end of the contractual term using the “simplified” method under the SEC guidance. The computation of expected volatility for our employee stock option awards was based on the historical volatility of selected peer companies.
Employee Saving Plans
Prior to separation, eligible U.S. employees participated in eBay's savings plan,PayPal Holdings, Inc. Deferred Compensation Plan, which also qualifies under Section 401(k) of the Code. Effective July 17, 2015, the Board of Directors adopted the PayPal Holdings, Inc. Deferred Compensation Plan. Under the terms of this plan,Code, participating U.S. employees may contribute up to 50% of their eligible compensation, but not more than statutory limits. In the years ended December 31, 2018, 2017, and 2016, 2015 and 2014, under PayPal's and eBay's savings plans,the PayPal plan, eligible employees received one dollar for each dollar
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
contributed, up to 4% of each employee’s eligible salary, subject to a maximum employer contribution of $10,600, $10,600$11,200, $10,800, and $10,400,$10,600, respectively, per employee. Our non-U.S. employees are covered by other savings plans. For the years ended December 31, 2016, 20152018, 2017, and 2014,2016, the matching contribution expense for our U.S. and international savings plans werewas approximately $42$51 million, $42$47 million, and $37$42 million, respectively.
Note 16—Income Taxes
For periods endedOn December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act included significant changes to the U.S. corporate income tax system including: a federal corporate rate reduction from 35% to 21%; limitations on or prior to July 17, 2015, we were a memberthe deductibility of interest expense and executive compensation; creation of the eBay consolidated groupbase erosion anti-abuse tax (“BEAT”), a new minimum tax; and ourthe transition of U.S. taxable income was includedinternational taxation from a worldwide tax system to a modified territorial tax system. The change to a modified territorial tax system resulted in a one-time U.S. tax liability on those earnings which had not previously been repatriated to the consolidatedU.S. (the “Transition Tax”), with future distributions not subject to U.S. federal income tax returnwhen repatriated. A majority of eBay as well asthe provisions in returns filed by eBaythe Tax Act were effective January 1, 2018.
In response to the Tax Act, the SEC staff issued guidance on accounting for the tax effects of the Tax Act. The guidance provided a one-year measurement period for companies to complete the accounting.
In connection with certain stateour initial analysis of the impact of the Tax Act, we recorded a provisional estimate of discrete net tax expense of $180 million for the period ended December 31, 2017. This discrete expense consisted of provisional estimates of $1,468 million net expense for the Transition Tax payable in installments over eight years, $1,295 million net benefit for the decrease in our deferred tax liability on unremitted foreign earnings, and local taxing jurisdictions. Our foreign$7 million net expense for remeasurement of our deferred tax assets and liabilities for the corporate rate reduction and changes in our valuation allowance.
During the year ended December 31, 2018, we completed our accounting for the income tax returns were filed oneffects of the Tax Act. We recognized additional discrete net tax expense of $20 million to the provisional amounts recorded at December 31, 2017 for the enactment-date effects of the Tax Act, for a separate company basis. For periods ended on or prior to July 17, 2015,total of $200 million of discrete net tax expense which consists of $1,490 million of net federal and state Transition Tax, the majority of which is payable in installments over eight years, $1,295 million net benefit for the decrease in our incomedeferred tax liability has been computedon unremitted foreign earnings, and presented herein under$5 million net expense for remeasurement of our deferred tax assets/liabilities for the “separate return method”corporate rate reduction and changes in our valuation allowance.
We elected to account for Global Intangible Low-Taxed Income (“GILTI”) as if we were a separate tax paying entity, as modified by the benefits-for-loss approach. Accordingly, our operating losses and other tax attributes are characterized as utilizedcurrent-period expense when those attributes have been utilized by other members of the eBay consolidated group; however, the benefits-for-loss approach does not impact our tax expense. Federal and unitary state income taxes incurred for periods ended on or prior to July 17, 2015 are remitted to eBay pursuant to a tax sharing agreement between the companies.
incurred.
In connection with the distribution, eBay and PayPal entered into various agreements that govern the relationship between the parties going forward, including a tax matters agreement. The tax matters agreement was entered into on the distribution date. Under the tax matters agreement, eBay is generally is responsible for all additional taxes (and will be entitled to all related refunds of taxes) imposed on eBay and its subsidiaries (including subsidiaries that were transferred to PayPal pursuant to the separation) arising after the distribution date with respect to the taxable periods (or portions thereof) ended on or prior to July 17, 2015, except for those taxes for which PayPal has reflected an unrecognized tax benefit in its financial statements on the distribution date.
The components of income (loss) before income taxes are as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| | (In millions) |
| United States | $ | (342 | ) | | $ | (253 | ) | | $ | (111 | ) |
| International | 1,973 |
| | 1,741 |
| | 1,372 |
|
| Income before income taxes | $ | 1,631 |
| | $ | 1,488 |
| | $ | 1,261 |
|
The income tax expense is composed of the following:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| | (In millions) |
| Current: | | | | | |
| Federal | $ | 44 |
| | $ | 34 |
| | $ | 90 |
|
| State and local | 19 |
| | (5 | ) | | 13 |
|
| Foreign | 115 |
| | 104 |
| | 59 |
|
| | $ | 178 |
| | $ | 133 |
| | $ | 162 |
|
| Deferred: | | | | | |
| Federal | $ | 90 |
| | $ | 126 |
| | $ | 699 |
|
| State and local | (35 | ) | | 1 |
| | (3 | ) |
| Foreign | (3 | ) | | — |
| | (16 | ) |
| | 52 |
| | 127 |
| | 680 |
|
| Income tax expense | $ | 230 |
| | $ | 260 |
| | $ | 842 |
|
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The components of income (loss) before income taxes are as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (In millions) |
| United States | $ | (474 | ) | | $ | (593 | ) | | $ | (342 | ) |
| International | 2,850 |
| | 2,793 |
| | 1,973 |
|
| Income before income taxes | $ | 2,376 |
| | $ | 2,200 |
| | $ | 1,631 |
|
The income tax expense is composed of the following:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (In millions) |
| Current: | | | | | |
| Federal | $ | 180 |
| | $ | 1,522 |
| | $ | 44 |
|
| State and local | 32 |
| | 36 |
| | 19 |
|
| Foreign | 278 |
| | 146 |
| | 115 |
|
| | $ | 490 |
| | $ | 1,704 |
| | $ | 178 |
|
| Deferred: | | | | | |
| Federal | $ | (115 | ) | | $ | (1,304 | ) | | $ | 90 |
|
| State and local | (35 | ) | | (3 | ) | | (35 | ) |
| Foreign | (21 | ) | | 8 |
| | (3 | ) |
| | (171 | ) | | (1,299 | ) | | 52 |
|
| Income tax expense | $ | 319 |
| | $ | 405 |
| | $ | 230 |
|
The following is a reconciliation of the difference between the effective income tax rate and the federal statutory rate.rate:
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| Federal statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % | 21.0 | % | | 35.0 | % | | 35.0 | % |
| State taxes, net of federal benefit | (1.0 | )% | | (0.3 | )% | | 0.8 | % | (0.1 | )% | | 0.8 | % | | (1.0 | )% |
| Foreign income taxed at different rates | (23.2 | )% | | (20.9 | )% | | (22.2 | )% | (3.1 | )% | | (25.7 | )% | | (23.2 | )% |
| Prior year foreign earnings no longer considered indefinitely reinvested | — |
| | — | % | | 50.8 | % | |
| Stock-based compensation expense | 1.6 | % | | 1.5 | % | | 1.5 | % | (4.1 | )% | | (0.8 | )% | | 1.6 | % |
| Tax credits | (1.0 | )% | | (0.7 | )% | | (0.8 | )% | (2.1 | )% | | (1.4 | )% | | (1.0 | )% |
| Change in valuation allowances | 0.5 | % | | 0.3 |
| | — | % | — | % | | 1.4 | % | | 0.5 | % |
| U.S. tax reform (the Tax Act) | | 0.9 | % | | 8.2 | % | | — | % |
| Other | 2.2 | % | | 2.6 | % | | 1.7 | % | 0.9 | % | | 0.9 | % | | 2.2 | % |
| Effective income tax rate | 14.1 | % | | 17.5 | % | | 66.8 | % | 13.4 | % | | 18.4 | % | | 14.1 | % |
TheFor the year ended December 31, 2018, the difference between the effective income tax rate and the federal statutory rate of 35.0%21% to income before income taxes is primarily the result of foreign income taxed at different rates and stock based compensation deductions. For the years ended December 31, 2017 and 2016, the difference between the effective income tax rate and the federal statutory rate of 35% to income before income taxes is primarily the result of foreign income taxed at different rates and, for the year ended December 31, 2014,2017, the accrual of U.S. income tax on undistributed foreign profits for 2013 and prior years previously indefinitely reinvested outsideeffects of the U.S.Tax Act discussed above.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax basis using enacted tax rates in effect for the year in which the differences are expected to reverse. Significant deferred tax assets and liabilities consist of the following:
| | | | As of December 31, | As of December 31, |
| | 2016 | | 2015 | 2018 | | 2017 |
| | (In millions) | (In millions) |
| Deferred tax assets: | | | | | | |
| Net operating loss and credit carryforwards | $ | 84 |
| | $ | 90 |
| $ | 196 |
| | $ | 153 |
|
| Accruals and allowances | 187 |
| | 153 |
| 179 |
| | 118 |
|
| Partnership investment | 15 |
| | 14 |
| 9 |
| | 7 |
|
| Stock-based compensation | 99 |
| | 82 |
| 136 |
| | 124 |
|
| Net unrealized (gains) losses | 14 |
| | 16 |
| |
| Net unrealized losses | | 8 |
| | 10 |
|
| Total deferred tax assets | 399 |
| | 355 |
| 528 |
| | 412 |
|
| Valuation allowance | (24 | ) | | (13 | ) | (132 | ) | | (93 | ) |
| Net deferred tax assets | $ | 375 |
| | $ | 342 |
| $ | 396 |
| | $ | 319 |
|
| Deferred tax liabilities: | | | | | | |
| Unremitted foreign earnings | $ | (1,246 | ) | | $ | (1,156 | ) | $ | (35 | ) | | $ | (39 | ) |
| Fixed assets and other intangibles | (226 | ) | | (191 | ) | (58 | ) | | (145 | ) |
| Acquired intangibles | (95 | ) | | (131 | ) | (167 | ) | | (49 | ) |
| Net unrealized losses (gains) | (2 | ) | | (1 | ) | (21 | ) | | — |
|
| Total deferred tax liabilities | (1,569 | ) | | (1,479 | ) | (281 | ) | | (233 | ) |
| Net deferred tax assets (liabilities) | $ | (1,194 | ) | | $ | (1,137 | ) | |
| Net deferred tax assets | | $ | 115 |
| | $ | 86 |
|
The following table shows the deferred tax assets and liabilities within our consolidated balance sheet.sheets: |
| | | | | | | | | |
| | Balance Sheet Location | | As of December 31, |
| | | | 2016 | | 2015 |
| | | | (In millions) |
| Total deferred tax assets (non-current) | Other assets | | $ | 21 |
| | $ | 38 |
|
| Total deferred tax liabilities (non-current) | Long-term liabilities | | (1,215 | ) | | (1,175 | ) |
| Total net deferred tax assets (liabilities) | | | $ | (1,194 | ) | | $ | (1,137 | ) |
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-17, “Balance Sheet Classification of Deferred Taxes”, which simplifies the presentation of deferred income taxes. This guidance requires that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. We early adopted the FASB's new accounting guidance effective for the year ended December 31, 2015.
In 2015, pursuant to the Separation and Distribution Agreement between eBay and us, we received from eBay a contribution of cash of approximately $3.8 billion, as well as a related estimated deferred tax liability of $172 million associated with foreign earnings that are not considered indefinitely reinvested. The adjustment to deferred tax liability was recorded as a contribution from eBay and resulted in an increase to net parent investment within stockholders' equity. |
| | | | | | | | | |
| | | | As of December 31, |
| | | | 2018 | | 2017 |
| | Balance Sheet Location | | (In millions) |
| Total deferred tax assets (non-current) | Other assets | | $ | 224 |
| | $ | 95 |
|
| Total deferred tax liabilities (non-current) | Deferred tax liability and other long-term liabilities | | (109 | ) | | (9 | ) |
| Total net deferred tax assets (liabilities) | | | $ | 115 |
| | $ | 86 |
|
As of December 31, 2016,2018, our federal, state and foreign net operating loss carryforwards for income tax purposes were approximately $110$72 million, $281$393 million, and $54$391 million, respectively. The federal and state net operating loss carryforwards are subject to various limitations under Section 382 of the Code. If not utilized, the federal net operating loss carryforwards will begin to expire in 2019,2022, and the state net operating loss carryforwards will begin to expire in 2017. The majority2019. Approximately $10 million of the foreign net operating loss carryforwards havewill begin to expire in 2021, $24 million will expire in 2034 and $357 million has no expiration date and may be carried forward indefinitely. As of December 31, 2016,2018, our federal and state tax credit carryforwards for income tax purposes were approximately $5$29 million and $60$137 million, respectively. The federal tax credits will begin to expire in 2032.2028. Most of the state tax credits carrymay be carried forward indefinitely.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. We have elected the tax law ordering approach to assess the realizability of our net operating losses. During the years ended December 31, 2018, 2017, and 2016, we increased our valuation allowance by $39 million, $50 million, and $11 million, respectively. At December 31, 2018, 2017, and 2016, we maintained a valuation allowance with respect to certain of our deferred tax assets relating to operating losses in certain states and foreign jurisdictions and tax credits in certain states that we believe are not likely to be realized. At December 31, 2015, we maintained a valuation allowance related to deferred tax assets for operating losses in certain states and foreign jurisdictions that we believe are not likely to be realized.
At December 31, 2013, we had approximately $3.4 billion of indefinitely reinvested foreign earnings for which we had not provided U.S. income or applicable foreign withholding taxes. During 2014, we altered our capital allocation strategy, which included changing our intent with regard to the indefinite reinvestment of foreign earnings from certain2018, none of our foreign subsidiaries for 2013 and prior years. As a result, we provided taxes and recorded a deferred tax liability of approximately $650 million on $1.9 billion of undistributedunremitted foreign earnings of certain of our foreign subsidiaries for 2013 and prior years.
approximately $6.9 billion, are considered to be indefinitely reinvested. We have not provided foraccrued $35 million of deferred U.S. federal incomestate and foreign withholding taxes on $4.6the $6.9 billion of our non-U.S. subsidiaries’ undistributed earnings asforeign earnings.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We benefit from tax rulings concluded in several different jurisdictions, most significantly Singapore and Luxembourg. These rulings result in significantly lower rates of taxation on certain classes of income and require various thresholds of investment and employment in those jurisdictions. We review our compliance on an annual basis to ensure we continue to meet our obligations under these tax rulings. These rulings resulted in tax savings of approximately $465 million, $443 million and $310 million $285 millionin 2018, 2017, and $217 million in 2016, 2015 and 2014, respectively. The benefit of these tax rulings on our net income per share (diluted) was approximately $0.39, $0.36 and $0.25 $0.23in 2018, 2017 and $0.18 in 2016, 2015 and 2014, respectively. These tax rulings are currently in effect and expire over periods ranging from 2020 to 2021.
On July 27, 2015, the U.S. Tax Court, in Altera Corp. v. Commissioner, invalidated part of a Treasury Regulation requiring stock-based compensation to be included in a qualified intercompany cost sharing arrangement. A final decision was entered by the U.S. Tax Court on December 1, 2015. On February 19, 2016, the Internal Revenue Service filed a notice of appeal to the Ninth Circuit Court of Appeals, with follow up briefs filed by both Altera and the Internal Revenue Service to the appeals court during the second half of 2016. We have reviewed this case and its impact on PayPal and concluded that no adjustment to the consolidated financial statements is appropriate at this time. We will continue to monitor ongoing developments and potential impacts to our consolidated financial statements.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2020.
The following table reflects changes in unrecognized tax benefits since January 1, 2014:for the periods presented below:
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| | (In millions) | (In millions) |
| Gross amounts of unrecognized tax benefits as of the beginning of the period | $ | 267 |
| | $ | 165 |
| | $ | 134 |
| $ | 424 |
| | $ | 312 |
| | $ | 267 |
|
| Increases related to prior period tax positions | 14 |
| | 39 |
| | 7 |
| 120 |
| | 61 |
| | 14 |
|
| Decreases related to prior period tax positions | (18 | ) | | (4 | ) | | (2 | ) | (6 | ) | | (23 | ) | | (18 | ) |
| Increases related to current period tax positions | 51 |
| | 68 |
| | 31 |
| 287 |
| | 112 |
| | 51 |
|
| Settlements | (1 | ) | | (1 | ) | | (5 | ) | (20 | ) | | (35 | ) | | (1 | ) |
| Statute of limitation expirations | (1 | ) | | — |
| | — |
| (5 | ) | | (3 | ) | | (1 | ) |
| Gross amounts of unrecognized tax benefits as of the end of the period | $ | 312 |
| | $ | 267 |
| | $ | 165 |
| $ | 800 |
| | $ | 424 |
| | $ | 312 |
|
If the remaining balance of unrecognized tax benefits were realized in a future period, it would result in a tax benefit of $271$757 million.
During the year ended December 31, 2018, we increased our unrecognized tax benefits by $194 million due to uncertainties related to the impacts of the Tax Act.
During all years presented, we recognized interestIn December 31, 2018, 2017, and penalties related to uncertain tax positions in income tax expense. In 2016, we recognized net interest and penalties of $57 million, $13 million, and $13 million, respectively, related to uncertain tax positions in income tax expense. The amount of interest and penalties accrued as of December 31, 20162018 and 20152017 was approximately $67$124 million and $54$75 million, respectively.
We are subject to taxation in the U.S. and various state and foreign jurisdictions. We are currently under examination by certain tax authorities for the 2003 to 20152017 tax years. The material jurisdictions in which we are subject to examination by tax authorities for tax years after 2002 primarily include the U.S. (Federal and California), France, Germany, India, Israel, Italy, Singapore and United Kingdom.Singapore. During 2018, we settled our audit with Italy. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from theseour open examinations.
Although the timing of the resolution of these audits is uncertain, we do not expect the total amount of unrecognized tax benefits as of December 31, 20162018 will materially change in the next 12 months. However, given the number of years remaining subject to examination and the number of matters being examined, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.
Note 17—Restructuring
In January 2015, at a regular meetingthe first quarter of 2018 and 2017, management approved strategic reductions of the eBay board of directors (the “eBay Board”), the eBay Board approved a plan to implement a strategic reduction of its existing global workforce.workforce, which resulted in restructuring charges of $25 million and $40 million, respectively. The reduction wasapproved in the first quarter of 2018 also included restructuring charges related to the decision to wind down TIO operations. We incurred employee and severance benefits expenses under both the 2018 and 2017 strategic reductions, which were substantially completed by the end of 2015. We recognized $48 million of restructuring expenses during the year ended December 31, 2015, all of which were paid by the end of 2015.2018 and 2017, respectively.
No restructuring expenses were recognized during the yearsyear ended December 31, 2016 and 2014.2016.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 18—Accumulated Other Comprehensive (Loss) Income
The following table summarizes the changes in accumulated balances of other comprehensive income for the year ended December 31, 2016:
|
| | | | | | | | | | | | | | | | | | | |
| | Unrealized Gains (Losses) on Cash Flow Hedges | | Unrealized Gains (Losses) on Investments | | Foreign Currency Translation | | Estimated Tax (Expense) Benefit | | Total |
| | (In millions) |
| Beginning balance | $ | 57 |
| | $ | (16 | ) | | $ | (53 | ) | | $ | 3 |
| | $ | (9 | ) |
| Other comprehensive income (loss) before reclassifications | 193 |
| | 7 |
| | (15 | ) | | (2 | ) | | 183 |
|
| Less: Amount of gain (loss) reclassified from accumulated other comprehensive income | 119 |
| | (4 | ) | | — |
| | — |
| | 115 |
|
| Net current period other comprehensive income | 74 |
| | 11 |
| | (15 | ) | | (2 | ) | | 68 |
|
| Ending balance | $ | 131 |
| | $ | (5 | ) | | $ | (68 | ) | | $ | 1 |
| | $ | 59 |
|
The following table summarizes the changes in accumulated balances of other comprehensive income for the year ended December 31, 2015:
|
| | | | | | | | | | | | | | | | | | | |
| | Unrealized Gains (Losses) on Cash Flow Hedges | | Unrealized Gains (Losses) on Investments | | Foreign Currency Translation | | Estimated Tax
(Expense)
Benefit | | Total |
| | (In millions) |
| Beginning balance | $ | 126 |
| | $ | — |
| | $ | (16 | ) | | $ | — |
| | $ | 110 |
|
| Other comprehensive income (loss) before reclassifications | 113 |
| | (16 | ) | | (37 | ) | | 3 |
| | 63 |
|
| Less: Amount of gain reclassified from accumulated other comprehensive income | 182 |
| | — |
| | — |
| | — |
| | 182 |
|
| Net current period other comprehensive income (loss) | (69 | ) | | (16 | ) | | (37 | ) | | 3 |
| | (119 | ) |
| Ending balance | $ | 57 |
| | $ | (16 | ) | | $ | (53 | ) | | $ | 3 |
| | $ | (9 | ) |
The following table provides details about reclassifications out of accumulated other comprehensive income for the years ended December 31, 2016 and 2015:
|
| | | | | | | | | | |
Details about Accumulated Other Comprehensive
Income Components | | Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income | | Affected Line Item in the Statement of Income |
| | | Year Ended December 31, | | |
| | | 2016 | | 2015 | | |
| | | (In millions) | | |
| Gains on cash flow hedges-foreign exchange contracts | | $ | 119 |
| | $ | 182 |
| | Net revenues |
| Unrealized losses on investments | | (4 | ) | | — |
| | Other income (expense), net |
| | | $ | 115 |
| | $ | 182 |
| | Income before income taxes |
| | | — |
| | — |
| | Income tax expense |
| Total reclassifications for the period | | $ | 115 |
| | $ | 182 |
| | Net income |
Supplementary Data — Quarterly Unaudited Financial Data
The following tables present certain unaudited consolidated quarterly financial information for the years ended December 31, 20162018 and 2015. The fourth quarter of 2015 was the first full quarter post separation and represents our actual results as an independent public company. Results for the first three quarters of 2015 include allocations from eBay and may not be indicative of our results had we been a separate stand-alone entity during those periods.2017.
| | | | 2016 Quarter Ended | 2018 Quarter Ended |
| | March 31 | | June 30 | | September 30 | | December 31 | March 31 | | June 30 | | September 30 | | December 31 |
| | (Unaudited, in millions, except per share amounts) | (Unaudited, in millions, except per share amounts) |
| Net revenues | $ | 2,544 |
| | $ | 2,650 |
| | $ | 2,667 |
| | $ | 2,981 |
| $ | 3,685 |
| | $ | 3,857 |
| | $ | 3,683 |
| | $ | 4,226 |
|
| Net income | $ | 365 |
| | $ | 323 |
| | $ | 323 |
| | $ | 390 |
| $ | 511 |
| | $ | 526 |
| | $ | 436 |
| | $ | 584 |
|
| Net income per share-basic | $ | 0.30 |
| | $ | 0.27 |
| | $ | 0.27 |
| | $ | 0.32 |
| |
| Net income per share-diluted | $ | 0.30 |
| | $ | 0.27 |
| | $ | 0.27 |
| | $ | 0.32 |
| |
| Weighted-average shares: | | | | | | | | |
| Net income per share - basic | | $ | 0.43 |
| | $ | 0.44 |
| | $ | 0.37 |
| | $ | 0.50 |
|
| Net income per share - diluted | | $ | 0.42 |
| | $ | 0.44 |
| | $ | 0.36 |
| | $ | 0.49 |
|
| Weighted average shares: | | | | | | | | |
| Basic | 1,216 |
| | 1,210 |
| | 1,207 |
| | 1,207 |
| 1,192 |
| | 1,187 |
| | 1,181 |
| | 1,177 |
|
| Diluted | 1,225 |
| | 1,215 |
| | 1,214 |
| | 1,216 |
| 1,217 |
| | 1,202 |
| | 1,199 |
| | 1,196 |
|
|
| | | | | | | | | | | | | | | |
| | 2015 Quarter Ended |
| | (Unaudited, in millions, except per share amounts) |
| | March 31(1) | | June 30(1) | | September 30(2) | | December 31(2) |
| Net revenues | $ | 2,137 |
| | $ | 2,297 |
| | $ | 2,258 |
| | $ | 2,556 |
|
| Net income | $ | 255 |
| | $ | 305 |
| | $ | 301 |
| | $ | 367 |
|
| Net income per share-basic | $ | 0.21 |
| | $ | 0.25 |
| | $ | 0.25 |
| | $ | 0.30 |
|
| Net income per share-diluted | $ | 0.21 |
| | $ | 0.25 |
| | $ | 0.25 |
| | $ | 0.30 |
|
Weighted-average shares:(1)(2) | | | | | | | |
| Basic | 1,218 |
| | 1,218 |
| | 1,221 |
| | 1,223 |
|
| Diluted | 1,224 |
| | 1,224 |
| | 1,227 |
| | 1,230 |
|
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 first two quarters of 2015 is calculated using the number of common shares distributed on July 17, 2015. Refer to Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for information regarding net income per share.
2 Basic and diluted net income per share for the third and fourth quarters of 2015 is calculated using the weighted average number of common shares outstanding for the period beginning after the distribution date. Refer to Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for information regarding net income per share. |
| | | | | | | | | | | | | | | |
| | 2017 Quarter Ended |
| | March 31 | | June 30 | | September 30 | | December 31 |
| | (Unaudited, in millions, except per share amounts) |
| Net revenues | $ | 2,975 |
| | $ | 3,136 |
| | $ | 3,239 |
| | $ | 3,744 |
|
| Net income | $ | 384 |
| | $ | 411 |
| | $ | 380 |
| | $ | 620 |
|
| Net income per share - basic | $ | 0.32 |
| | $ | 0.34 |
| | $ | 0.32 |
| | $ | 0.52 |
|
| Net income per share - diluted | $ | 0.32 |
| | $ | 0.34 |
| | $ | 0.31 |
| | $ | 0.50 |
|
| Weighted average shares: | | | | | | | |
| Basic | 1,203 |
| | 1,202 |
| | 1,202 |
| | 1,203 |
|
| Diluted | 1,216 |
| | 1,215 |
| | 1,223 |
| | 1,228 |
|
FINANCIAL STATEMENT SCHEDULE
The Financial Statement Schedule II—VALUATION AND QUALIFYING ACCOUNTS is filed as part of this Annual Report on Form 10-K.
|
| | | | | | | | | | | | | | | |
| | Balance at Beginning of Period | | Charged/ (Credited) to Net Income | | Charges Utilized/ (Write-offs) | | Balance at End of Period |
| | (In millions) |
| Allowance for Transaction Losses | | | | | | | |
| Year Ended December 31, 2014 | $ | 137 |
| | $ | 408 |
| | $ | (379 | ) | | $ | 166 |
|
| Year Ended December 31, 2015 | 166 |
| | 511 |
| | (492 | ) | | 185 |
|
| Year Ended December 31, 2016 | $ | 185 |
| | $ | 655 |
| | $ | (618 | ) | | $ | 222 |
|
| Allowance for Loans and Interest Receivable | | | | | | |
|
|
| Year Ended December 31, 2014 | $ | 146 |
| | $ | 333 |
| | $ | (284 | ) | | $ | 195 |
|
| Year Ended December 31, 2015 | 195 |
| | 385 |
| | (347 | ) | | 233 |
|
| Year Ended December 31, 2016 | $ | 233 |
| | $ | 555 |
| | $ | (449 | ) | | $ | 339 |
|
|
| | | | | | | | | | | | | | | |
| | Balance at Beginning of Period | | Charged/ (Credited) to Net Income | | Charges Utilized/ (Write-offs) | | Balance at End of Period |
| | (In millions) |
| Allowance for Transaction Losses and Negative Customer Balances | | | | | | | |
| Year Ended December 31, 2016 | $ | 185 |
| | $ | 655 |
| | $ | (618 | ) | | $ | 222 |
|
| Year Ended December 31, 2017 | 222 |
| | 823 |
| | (779 | ) | | 266 |
|
| Year Ended December 31, 2018 | $ | 266 |
| | $ | 1,059 |
| | $ | (981 | ) | | $ | 344 |
|
| Allowance for Loans and Interest Receivable | | | | | | |
|
|
| Year Ended December 31, 2016 | $ | 233 |
| | $ | 555 |
| | $ | (449 | ) | | $ | 339 |
|
| Year Ended December 31, 2017 | 339 |
| | 274 |
| | (484 | ) | | 129 |
|
| Year Ended December 31, 2018 | $ | 129 |
| | $ | 243 |
| | $ | (200 | ) | | $ | 172 |
|
ITEM 16. FORM 10-K SUMMARY
None.
|
| | | | | |
| | | | | Incorporated by Reference |
Exhibit Number | | Exhibit Description | Filed with this Form 10-K | Form | Date Filed |
| | Separation and Distribution Agreement by and between eBay Inc. and PayPal Holdings, Inc. | | 10-12B/A | 6/26/2015 |
| | Purchase and Sale Agreement, dated as of November 10, 2017, by and between Synchrony Bank and Bill Me Later, Inc. | | 8-K | 11/16/2017 |
| | Purchase and Sale Agreement, dated as of November 10, 2017, by and between Synchrony Bank and PayPal (Europe) SÀ R.L. et CIE, S.C.A. | | 8-K | 11/16/2017 |
| | Amendment No. 1 to the Purchase and Sale Agreement, dated as of April 12, 2018, by and between Synchrony Bank and Bill Me Later, Inc. | | 10-Q | 7/26/2018 |
| | Amendment No. 1 to the Purchase and Sale Agreement, dated as of April 12, 2018, by and between Synchrony Bank and PayPal (Europe) S.À R.L. et CIE, S.C.A. | | 10-Q | 7/26/2018 |
| | PayPal Holdings, Inc.’s Amended and Restated Certificate of Incorporation.Incorporation | | 8-K10-Q | 7/20/201527/2017 |
| | PayPal Holdings, Inc.’s Amended and Restated Bylaws.Bylaws effective January 17, 2019. | | 8-K | 7/20/20151/18/2019 |
| | Operating Agreement by and among eBay Inc., eBay International AG, PayPal Holdings, Inc., PayPal, Inc., PayPal Pte. Ltd. and PayPal Payments Pte. Holdings S.C.S., dated July 17, 2015. | | 8-K | 7/20/2015 |
| | Amendment, dated June 30, 2016, to the Operating Agreement by and among Registrant,eBay Inc., eBay International AG, PayPal Holdings, Inc., PayPal, Inc., PayPal Pte. Ltd. and PayPal Payments Pte. Holdings S.C.S, dated July 17, 2015. | | 10-Q | 7/26/2016 |
| | Transition Services Agreement by and between eBay Inc. and PayPal Holdings, Inc., dated July 17, 2015. | | 8-K | 7/20/2015 |
10.04 | | Tax Matters Agreement by and between eBay Inc. and PayPal Holdings, Inc., dated July 17, 2015. | | 8-K | 7/20/2015 |
10.05 | | Employee Matters Agreement by and between eBay Inc. and PayPal Holdings, Inc., dated July 17, 2015. | | 8-K | 7/20/2015 |
10.06 | | Intellectual Property Matters Agreement by and among eBay Inc., eBay International AG, PayPal Holdings, Inc., PayPal, Inc., PayPal Pte. Ltd. and PayPal Payments Pte. Holdings S.C.S., dated July 17, 2015. | | 8-K | 7/20/2015 |
10.07 | | Credit and Guarantee Agreement, dated as of July 17, 2015, by and among PayPal Holdings, Inc., PayPal, Inc., JPMorgan Chase Bank, N.A., as Administrative Agent, and the other parties thereto. | | 8-K | 7/20/2015 |
10.08+ | | 364-Day Credit and Guarantee Agreement, dated as of December 5, 2017, by and among PayPal Holdings, Inc., PayPal, Inc., the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent. | | 8-K | 12/6/2017 |
| | Amended and Restated 364-Day Credit and Guarantee Agreement, dated as of November 26, 2018, among PayPal Holdings, Inc., PayPal, Inc., the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent | | 8-K | 11/27/2018 |
| | PayPal Employee Incentive Plan, as amended and restated. | | DEF 14A | 4/14/2016 |
10.09+ | | PayPal Holdings, Inc. Amended and Restated 2015 Equity Incentive Award Plan as amended and restated. | | DEF 14A8-K | 4/14/20165/25/2018 |
10.10+ | | PayPal Holdings, Inc. Amended and Restated Deferred Compensation Plan.Plan effective November 6, 2018 | X | | 8-K | 7/20/2015 |
10.11+ | | PayPal Holdings, Inc. Change in Control Severance Plan for Key Employees, dated June 16, 2015. | | 10-12B/A | 6/18/2015 |
10.12+ | | PayPal Holdings, Inc. SVP and Above Standard Severance Plan, dated June 16, 2015. | | 10-12B/A | 6/18/2015 |
10.13+ | | Letter Agreement dated July 29, 2015 between John Rainey and PayPal Holdings, Inc. | | 10-Q | 10/29/2015 |
10.14+ | | Offer Letter dated September 29, 2014 between eBay Inc. and Daniel Schulman. | | 10-12B/A | 5/14/2015 |
10.15+ | | Amendment dated December 31, 2014 to Offer Letter between eBay Inc. and Daniel Schulman. | | 10-12B/A | 5/14/2015 |
10.16 | | Form of Indemnity Agreement between PayPal Holdings, Inc. and individual directors and officers. | | 10-12B/A | 5/14/2015 |
10.17+ | | Form of Global Restricted Stock Unit Award Agreement (and Performance-Based Restricted Stock Unit Agreement) under the PayPal Holdings, Inc. 2015 Equity Incentive Award Plan. | | 10-12B/A | 5/14/2015 |
10.18+ | | Form of Global Performance Based Restricted Stock Unit Award Grant Notice and Agreement under the PayPal Holdings, Inc. 2015 Equity Incentive Award Plan. | | 10-Q | 4/28/2016 |
10.19+ | | Form of Global Stock Option Agreement under the PayPal Holdings, Inc. 2015 Equity Incentive Award Plan. | | 10-12B/A | 5/14/2015 |
|
| | | | | |
| | | | | Incorporated by Reference |
Exhibit Number | | Exhibit Description | Filed with this Form 10-K | Form | Date Filed |
10.20+ | | PayPal Holdings, Inc. Change in Control Severance Plan for Key Employees, dated June 16, 2015. | | 10-12B/A | 6/18/2015 |
| | PayPal Holdings, Inc. SVP and Above Standard Severance Plan, dated June 16, 2015. | | 10-12B/A | 6/18/2015 |
| | Form of Indemnity Agreement between PayPal Holdings, Inc. and individual directors and officers. | | 10-12B/A | 5/14/2015 |
| | Form of Global Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement under the PayPal Holdings, Inc. 2015 Equity Incentive Award Plan. | | 10-12B/A | 5/14/2015 |
| | Form of Global Performance Based Restricted Stock Unit Award Grant Notice and Performance Based Restricted Stock Unite Award Agreement under the PayPal Holdings, Inc. 2015 Equity Incentive Award Plan, as amended and restated. | | 10-Q | 4/27/2017 |
| | Form of Global Notice of Grant of Stock Option and Stock Option Agreement under the PayPal Holdings, Inc. 2015 Equity Incentive Award Plan. | | 10-12B/A | 5/14/2015 |
| | Form of Director Annual Award Agreement under the PayPal Holdings, Inc. 2015 Equity Incentive Award Plan. | | 10-12B/A | 5/14/2015 |
10.21+ | | Form of Electing Director Quarterly Award Agreement under the PayPal Holdings, Inc. 2015 Equity Incentive Award Plan. | | 10-12B/A | 5/14/2015 |
10.22+ | | Form of PayPal Holdings, Inc. Amended and Restated Employee Stock Purchase Plan.Plan | | 8-K | 5/25/2018 |
| | Offer Letter dated September 29, 2014 between eBay Inc. and Daniel Schulman. | | 10-12B/A | 5/14/2015 |
| | Amendment dated December 31, 2014 to Offer Letter between eBay Inc. and Daniel Schulman. | | 10-12B/A | 5/14/2015 |
| | Letter dated April 7, 2015 from eBay Inc. to Louise Pentland. | | 10-K | 2/11/2016 |
| | Letter dated April 13, 2015 from eBay Inc. to Jonathan Auerbach. | | 10-K | 2/11/2016 |
| | Letter dated May 19, 2015 from eBay Inc. to William Ready. | | 10-12B/A | 6/2/2015 |
10.24+ | | Letter Agreement dated April 7,July 29, 2015 from eBaybetween John Rainey and PayPal Holdings, Inc. to Louise Pentland. | | 10-K10-Q | 2/11/201610/29/2015 |
10.25+ | | Letter Agreement, dated April 13, 2015 from eBay17, 2016, between Aaron Karczmer and PayPal Holdings, Inc. to Jonathan Auerbach. | | 10-K10-Q | 2/11/20164/27/2017 |
10.26+ | | Independent Director Compensation Policy | X | | |
| | Letter dated May 5, 2013 from eBay, Inc. to Tomer Barel.Barel | | 10-K | 2/11/2016 |
10.27+ | | Independent Director Compensation Policy.Letter Agreement dated August 22, 2017 between Tomer Barel and PayPal Holdings, Inc. | | 8-K10-Q | 1/17/10/24/2017 |
| | List of Subsidiaries. | X | | |
| | PricewaterhouseCoopers LLP consent. | X | | |
| | Power of Attorney (see signature page). | X | | |
| | Certification of PayPal Holdings, Inc.’s Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002. | X | | |
| | Certification of PayPal Holdings, Inc.’s Chief Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002. | X | | |
| | Certification of PayPal Holdings, Inc.’s Chief Executive Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002. | X | | |
| | Certification of PayPal Holdings, Inc.’s Chief Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002. | X | | |
| 101.INS | | XBRL Instance Document | X | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document | X | | |
|
| | | | | |
| | | | Incorporated by Reference |
Exhibit Number | | Exhibit Description | Filed with this Form 10-K | Form | Date Filed |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | X | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | X | | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | X | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | X | | |
+ Indicates a management contract or compensatory plan or arrangement
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California, on February 8, 2017.7, 2019.
|
| | | | |
| | PayPal Holdings, Inc. |
| | | | |
| | By: | | /s/ Daniel H. Schulman |
| | | | Name: Title: | Daniel H. Schulman Title: President, Chief Executive Officer and Director
|
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Daniel H. Schulman, John D. Rainey, A. Louise Pentland, Wanji Walcott, Brian Y. Yamasaki and Aaron A. Anderson, and each or any one of them, each with the power of substitution, his or her attorney-in-fact, to sign any amendments to this report, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on February 8, 2017.7, 2019.
|
| | | | |
| Principal Executive Officer: | | Principal Financial Officer: |
| | | | | |
| By: | /s/ Daniel H. Schulman | | By: | /s/ John D. Rainey |
| | Daniel H. Schulman | | | John D. Rainey |
| | President, Chief Executive Officer and Director | | | Chief Financial Officer and Executive Vice President, Chief Financial OfficerGlobal Customer Operations |
| | | | | |
| | | | Principal Accounting Officer: |
| | | | | |
| | | | By: | /s/ Aaron A. Anderson |
| | | | | Aaron A. Anderson |
| | | | | Vice President, Chief Accounting Officer |
Additional Directors
|
| | | | |
| By: | /s/ Rodney C. Adkins | | By: | /s/ Wences Casares |
| Rodney C. Adkins | | | Wences Casares |
| Director | | | Director |
| | | | |
| By: | /s/ Jonathan Christodoro | | By: | /s/ John J. Donahoe |
| | Wences CasaresJonathan Christodoro | | | John J. Donahoe |
| | Director | | | Director |
| | | | | |
| By: | /s/ John J. DonahoeDavid W. Dorman | | By: | /s/ David W. DormanBelinda Johnson |
| John J. Donahoe | | | David W. Dorman | | | Belinda Johnson |
| | Director | | | Director |
| | | | | |
| By: | /s/ Belinda JohnsonGail J. McGovern | | By: | /s/ Gail J. McGovernDeborah M. Messemer |
| Belinda Johnson | | | Gail J. McGovern | | | Deborah M. Messemer |
| | Director | | | Director |
| | | | | |
| By: | /s/ David M. Moffett | | By: | /s/ PierreAnn M. OmidyarSarnoff |
| | David M. Moffett | | | PierreAnn M. OmidyarSarnoff |
| | Director | | | Director |
| | | | | |
| By: | /s/ Frank D. Yeary | | | |
| | Frank D. Yeary | | | |
| | Director | | | |
| | | | | |
| | | | |
