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, 2017.2022.
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 Periodtransition 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)
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Identification No.)
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2211 North First Street | San Jose, California | 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 | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock,stock, $0.0001 par value per share | The PYPL | NASDAQ StockGlobal Select Market LLC |
Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:Act:
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. Yes [x] No [ ]
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act. (Check one):
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| Non-accelerated Filer | ☐ | Smaller reporting company | ☐ |
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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)
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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
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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. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).☐
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, 2017,2022, the aggregate market value of the registrant'sregistrant’s common stock held by non-affiliates of the registrant was approximately $64.5$80.7 billion based on the closing sale price as reported on the NASDAQ Global Select Market.
As of February 2, 2018,3, 2023, there were 1,200,160,4051,131,373,298 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its 20182023 Annual Meeting of Stockholders are 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 filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2017.2022.
TABLE OF CONTENTS
TABLE OF CONTENTS
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Part I | | Page |
| 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 IIIItem 9C. | | |
| 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 (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” 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 Paydiant 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, Zettle, Hyperwallet, Honey, and Xoom,Paidy, 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,This report contains additional trade namenames and trademarks of other companies. The use or service markdisplay of any other company appearing in this Annual Report on Form 10-K is, to PayPal’s knowledge, owned by such other company.companies’ trade names or trademarks does not imply our endorsement or sponsorship of, or a relationship with these companies.
PART I
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (“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, mergers or acquisitions, 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”"continue," “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 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, new information, 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
OverviewOVERVIEW
PayPal Holdings, Inc. was incorporated in Delaware in January 2015 and is a leading technology platform and digital payments company that enables digital payments and mobile paymentssimplifies commerce experiences on behalf of merchants and consumers and merchants worldwide. Our visionPayPal is committed to democratizedemocratizing financial services as we believe that managingto help improve the financial health of individuals and moving money is a rightto increase economic opportunity for entrepreneurs and businesses of all people, not justsizes around the affluent.world. Our goal is to increaseenable our relevance formerchants and consumers and merchants to manage and move their money anywhere in the world in the markets we serve, anytime, on any platform, and using any device.device when sending payments or getting paid, including person-to-person (“P2P”) payments. Our combinedcore values of Inclusion, Innovation, Collaboration, and Wellness, reflected in our leadership principles, are the driving forces behind our mission and form the foundation of our operating philosophy. We believe that our core values help stimulate the creativity and engagement of our global workforce to deliver products and services designed to meet the diverse needs of our customers. We also believe that effective management of environmental, social, and governance (“ESG”) risks and opportunities is essential to deliver on our mission and strategy. Unless otherwise expressly stated or the context otherwise requires, references to “we,” “our,” “us,” “the Company,” or “PayPal” refer to PayPal Holdings, Inc. and its consolidated subsidiaries.
PayPal’s payment solutions includingenable our PayPal, PayPal Credit, Braintree, Venmo, Xoom,customers to connect, transact, and Paydiant products, composesend and receive payments, whether they are online or in person. We provide proprietary payment solutions accepted by merchants that enable the completion of payments on our proprietary Payments Platform.
platform on behalf of our customers. We operate a global, two-sided proprietary global technology platformnetwork at scale that links our customers, which consist of bothconnects merchants and consumers around the globe to facilitate the processingwith 435 million active accounts (consisting of payment transactions, allowing us to connect millions400 million consumer active accounts and 35 million merchant active accounts) across more than 200 markets as of merchants and consumers worldwide. December 31, 2022.
We offer our customers the flexibility to use their accountPayPal or Venmo accounts to both purchase and receive paymentpayments for goods and services, as well as the ability 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 or Venmo account balance, a PayPal Credit account,and Venmo branded credit products including our installment products, a credit orcard, a debit card, certain cryptocurrencies, or other stored value products such as couponsgift cards, and gift cards.eligible rewards. 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.funds and payouts. We also help merchants connect with their customers, process exchanges and returns, and manage risk. We enable consumers to engagehelp reduce the friction typically involved in cross-border shoppingcommerce by offering consumers a simple payment experience and by enabling merchants to extend their reach to consumers in the global reach while reducing the complexity and friction involvedmarkets in enabling overseas and cross-border trade.which our services are available.
We generateearn revenues primarily by charging fees for providing transaction processingcompleting payment transactions for our customers and other payment-related services, which are typically based primarily on the volume of activity processed throughon our Payments Platform.payments platform. We also generate revenue from customers on fees charged for foreign currency conversion, for instant transfers from their PayPal or Venmo account to their bank account or debit card, and to facilitate the purchase and sale of cryptocurrencies; however, we generally do not charge consumerscustomers to fund or draw from their accounts; however, we generate revenue from consumers on fees charged for foreign currency exchange.accounts. We also earn revenue by providing other value added services, which are comprised primarily of revenue earned through partnerships, interest and fees from our merchant and consumer credit products, interest earned on certain assets underlying customer balances, referral fees, subscription fees, and gateway services.
KEY PERFORMANCE METRICS
We measure the scale of our platform and the relevance of our products and services to our customers through certain metrics, including total payment volume, payment transactions, and active accounts:
Total payment volume (“TPV”)is the value 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.
Number of payment transactions are the total number of payments, net of payment reversals, successfully completed on our payments platform or enabled by PayPal via a partner payment solution, not including gateway-exclusive transactions.
An active accountis an account registered directly with PayPal or a platform access partner that has completed a transaction on our platform, not including gateway-exclusive transactions, within the past 12 months. A platform access partner is a third party whose customers are provided access to PayPal’s platform or services through such third-party’s login credentials, including individuals and entities that utilize Hyperwallet’s payout capabilities. A user may register on our platform to access different products and may register more than one account to access a product. Accordingly, a user may have more than one active account. The number of active accounts provides management with additional perspective on the overall scale of our platform, but may not have a direct relationship to our operating results.
OUR STRENGTHS
Our business is built on a strong foundation designed to drive growth and differentiate us from our competitors. A critical element of our overall growth strategy involves increasing the engagement of our active accounts, which we expect will contribute to growth in payment transactions, total payment volume, and net revenues. We believe that our competitive strengths include the following:
•Two-sided network—our payments platform connecting merchants and consumers enables PayPal to offer unique end-to-end product experiences while gaining valuable insights into how our customers use our platform. Our payments platform provides for digital and in-store (at the point of sale) transactions while being both technology and platform agnostic.
•Merchant and consumer choice—our branded and unbranded card processing payment solutions support an open ecosystem that provides choice to both merchants and consumers, enabling flexibility to make and receive payments using a wide variety of different funding options and digital wallet solutions.
•Scale—our global scale helps us to drive organic growth. As of December 31, 2022, we had 435 million active accounts, consisting of 400 million consumer active accounts and 35 million merchant active accounts in more than 200 markets around the world. 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 products and services. A country, territory, or protectorate is identified by a distinct set of laws and regulations. In 2022, we processed $1.36 trillion of TPV.
•Trusted brands—we have built and strengthened well-recognized and trusted brands, including PayPal, Braintree, Venmo, Xoom, Hyperwallet, PayPal Zettle, PayPal Honey, and Paidy. Our communications and marketing efforts across multiple geographies and demographic groups play an important role in building brand visibility, usage, and overall preference among customers.
•Risk and compliance management—our enterprise risk and compliance management program is designed to help secure customer information and to help ensure we process legitimate transactions around the world, while identifying and minimizing illegal, high-risk, or fraudulent transactions.
•Regulatory licenses—we believe that our regulatory licenses, which enable us to operate in markets around the world, are a distinct advantage and help support business growth.
MERCHANT AND CONSUMER PAYMENT SOLUTIONS
During 2022, we reorganized our product organization to better align with merchants and consumers to help simplify decision making and enable our teams to innovate and launch new products and features more quickly and efficiently.
Merchant value proposition
We partner with our merchants to help grow and expand their businesses by providing global reach and powering all aspects of digital checkout. We offer alternative payment methods (including access to credit solutions), provide fraud prevention and risk management solutions, reduce merchant losses through proprietary protection programs, and offer tools and insights for utilizing data analytics to attract and engage customers and improve sales conversion. We employ a technology and platform agnostic approach intended to enable merchants of all sizes to quickly and easily provide digital checkout online, including through PayPal-branded checkout and unbranded card processing (primarily consisting of Braintree), as well as in-store at the point of sale, across all platforms and devices, and to securely and simply receive payments from their customers.
PayPal’s payments platform enables merchants to accept all types of online and offline payments, including those made with the PayPal and Venmo digital wallets, our consumer credit products, credit cards and debit cards, and competing digital wallets, as well as other popular local payment methods. Our diversified suite of products and services is tailored to meet the needs of merchants regardless of their size or business complexity. We have expanded our merchant value proposition to enable payment acceptance at the point of sale through our PayPal and Venmo digital wallets and our PayPal Zettle point of sale solutions. We aim to offer a seamless, omni-channel solution that helps merchants manage and grow their business. Through our consumer-focused offerings, we provide simplified and personalized shopping experiences for consumers, including easier exchanges and returns, to help merchants drive increased conversion through higher consumer engagement.
We offer access to merchant finance products for certain small and medium-sized businesses through the PayPal Working Capital and PayPal Business Loan products, which we collectively refer to as our merchant finance offerings. The PayPal Working Capital product allows businesses to access a loan or cash advance for a fixed fee and based on their annual payment volume processed by PayPal. The 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. In the United States (“U.S.”), these products are provided under a program agreement with an independent chartered financial institution. We believe that our merchant finance offerings enable us to deepen our engagement with our existing small and medium-sized merchants and expand services to new merchants by providing access to capital that may not be available from traditional banks or other lending providers.
We generate revenues from merchants primarily by charging fees for completing their payment transactions and other payment-related services. We also earn revenues from interest and fees earned on our merchant loans receivables.
Consumer value proposition
We focus on providing affordable, convenient, and secure consumer financial products and services intended to democratize the management and movement of money. We provide consumers with a digital wallet that enables them to send payments to merchants more safely using a variety of funding sources, which may include a bank account, a PayPal or Venmo account balance, our consumer credit products, a credit card, a debit card, certain cryptocurrencies, or other stored value products such as gift cards, and eligible rewards. Our goal is to create the simplest checkout experience possible for consumers both online and on mobile devices.
We also offer consumers P2P payment solutions through our PayPal, Venmo, and Xoom products and services. We enable both domestic and international P2P transfers across our payments platform. Our Venmo digital wallet in the U.S. is a leading mobile application used to move money between our customers and to make purchases at select merchants. Our Xoom international money transfer service enables our customers to send money to people around the world in a secure, fast, and cost-effective way. P2P is an important source of customer engagement and also serves as a customer acquisition channel that facilitates organic growth by enabling potential users to establish active accounts with PayPal or Venmo at the time they make or receive a P2P payment. We also focus on simplifying and personalizing shopping experiences for our consumers by offering tools for product discovery, price tracking, offers, convenient tracking and redemption options for their shopping rewards, and easier exchanges and returns, which help our merchants to increase consumer engagement and sales conversion.
We offer credit products to consumers in certain markets as a funding source at checkout, subject to approval of credit for the account holder. Our consumer credit offerings include our buy now, pay later products in the U.S., United Kingdom (“U.K.”), France, and Germany, among others, and in Japan through Paidy. A key attribute of our buy now, pay later products is the absence of interest or consumer late fees for missed payments in most of the geographies where we offer them. Further, we offer consumer interest-bearing installment products for consumers in the U.S., issued by an independent chartered financial institution, and in Germany. In the U.S., consumers may apply for our PayPal- and Venmo-branded consumer credit cards and our PayPal Credit revolving consumer credit product, which are offered through a partnership with an independent chartered financial institution. We offer a PayPal-issued PayPal Credit product in the U.K. We believe that our consumer credit products help enable us to increase engagement with consumers and merchants on our two-sided network.
We have expanded our consumer value proposition through enhancements to the PayPal and Venmo digital wallets, which provide functionality to enable consumers to more easily checkout, explore deals and offers, track and redeem rewards, and to transact with cryptocurrencies, including buying, holding, selling, sending, and receiving them in certain markets. Our goal is to drive increased consumer engagement by providing consumers with a comprehensive set of services to manage their finances and enhance their ability to shop online and in person.
We generate revenue from consumers on: fees charged for foreign currency conversion, instant transfers from their PayPal or Venmo account to their bank account or debit card, and to facilitate the purchase and sale of cryptocurrencies; interest, fees, or other revenue from our credit products; and other miscellaneous fees.
PROTECTING MERCHANTS AND CONSUMERS
Protecting merchants and consumers on our payments platform from financial and fraud loss is important to successfully competing and sustainably growing our business. Fraudulent activities, such as account takeover, identity theft (including stolen financial information), and malicious activities by counterparties, represent a significant risk to merchants and consumers, as well as their payment partners. We provide merchants and consumers with protection programs for certain purchase transactions completed on our payments platform. We believe that these programs, which help protect both merchants and consumers from financial loss resulting from fraud and counterparty non-performance, are generally consistent with or broader than protections provided by other participants in the payments industry. Our protection programs are designed to promote confidence on both the part of consumers, who will only be required to pay in certain circumstances, such as receiving their purchased item in the condition significantly as described, and merchants, who will receive payment for delivering an item to the customer.
Our ability to help protect both merchants and consumers is based largely on our proprietary, end-to-end payments platform and our ability to utilize the data from both sides of transactions on our two-sided network, specifically from buyers and sellers and from senders and receivers of payments. Our ongoing investment in systems and processes is designed to enhance the safety and security of our products and reflects our goal of having PayPal Creditrecognized as one of the world’s most trusted payments brands.
COMPETITION
The global payments industry is highly competitive, dynamic, highly innovative, and gatewayincreasingly subject to regulatory scrutiny and oversight. Many of the areas in which we compete evolve rapidly with innovative and disruptive technologies, shifting user preferences and needs, price sensitivity of merchants and consumers, and frequent introductions of new products and services. Competition also may intensify as new competitors emerge, businesses enter into business combinations and partnerships, and established companies in other segments expand to become competitive with various aspects of our business.
We compete with a wide range of businesses. Some of our current and potential competitors are or may be larger than we are, have larger customer bases, greater brand recognition, longer operating histories, a dominant or more secure position, broader geographic scope, volume, scale, resources, and market share than we do, or offer products and services that we do not offer. Other competitors are or may be smaller or younger companies that may be more agile in responding to regulatory and technological changes and customer preferences.
We differentiate ourselves to merchants through our ability to innovate and develop products and services that offer new payment experiences for our merchants, demonstrate that they may achieve incremental sales by using and offering our services to consumers, support transactions on our payments platform across varied technologies and payment methods, through the simplicity and transparency of our fee structure, our seller protection programs, analytics, and risk management, as well as other merchant services. In addition, we differentiate ourselves to consumers through the ability to use our products and services across multiple commerce channels, including e-commerce, mobile, and payments at the point of sale, and without sharing their financial information with the merchant or any other party they are paying; our customer service, dispute resolution, and purchase protection programs; and our ability to simplify and personalize shopping experiences. We invest resources towards improving our products and services, offering choice in payment options, providing excellent customer service, and building brands that merchants and consumers trust.
Our gatewaybusiness faces competition from a wide range of businesses and from all forms of physical and electronic payments. We face competition from banks and financial institutions, which provide traditional payment methods (particularly credit cards and debit cards (collectively, “payment cards”), electronic bank transfers, and credit), payment networks that facilitate payments for payment cards or proprietary retail networks, payment card processors, and “card on file” services. We also face competition from providers offering a variety of payment products and services, including tokenized and contactless payment cards, digital wallets and mobile payments solutions, credit, installment or other buy now pay later methods, real-time payment systems, P2P payments and money remittance services, card readers and other devices or technologies for payment at point of sale, virtual currencies and distributed ledger technologies, and tools that simplify and personalize shopping experiences for consumers and merchants. Our products and services face competition from all forms of payments, which include paper-based payments (primarily cash and checks), credit cards, debit cards, electronic bank transfers, account-to-account payments, credit, installment methods, digital wallets and mobile payment solutions, contactless payments (including contactless cards, tokenized cards, Near Field Communication (NFC) based solutions, and Quick Response (QR) code-based solutions), and virtual currencies, such as cryptocurrencies and stablecoins.
In addition to the discussion in this section, see “Item 1A. Risk Factors” under the caption “We face substantial and increasingly intense competition worldwide in the global payments industry” for further discussion of the potential impact of competition on our Payflow Gateway services and Braintree Gateway services, provide the technology that links a merchant’s website to its processing network and merchant account and enable merchants to accept payments online with credit or debit cards.business.
StrategySTRATEGY
Our ability to grow revenue is affected by, among other things, the macroeconomic environment and its impact on consumer spending patterns, merchant and consumer adoption of digital payment methods, 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 introduce new methods of paymentproducts, services, and features 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 customers'customers’ engagement and use of our products and services by better addressing their everyday needs related to accessing, managingaccess, manage, and movingmove money, creating seamless checkout experiences, and expanding the adoption of our solutions by new merchants and consumers;
•Expanding our value proposition for customers: by focusing on trustmerchants and simplicity, providing risk management and insights from our two-sided Payments Platform andconsumers:by being technology and platform agnostic;
agnostic, partnering with our merchants to grow and expand their business online and in-store, and providing consumers with simple, secure, and flexible ways to manage and move money across different markets, merchants, and platforms, and simplifying their shopping experiences;
Extending through•Forming and expanding strategic partnerships:by building new strategic partnerships and deepening existing ones to provide better experiences for our customers, offeringoffer greater choice and flexibility, acquiringacquire new customers, and reinforcingreinforce our role in the payments ecosystem; and
•Seeking new areas of growth: organically and through acquisitions and strategic investments in our existing and new international markets around the world and focusing on innovation in both in the digital and the physical world.
Key Performance MetricsESG MANAGEMENT
PayPal is committed to creating a more inclusive global economy and advancing our core values of Inclusion, Innovation, Collaboration, and Wellness across our communities, workforce, and strategies. We measuremanage priority ESG risks and opportunities organized across four key pillars: (1) employees and culture, (2) social innovation, (3) environmental sustainability, and (4) responsible business practices. We believe this integrated, enterprise-wide approach to managing our global business responsibly helps to enable us to create value for all our stakeholders, including our stockholders, employees, partners, and communities. We continue to advance and prioritize efforts to manage key non-financial factors critical to our long-term business, including progress on our science-based approach to reducing our climate change impacts, targeted investments and partnerships to address the relevanceracial wealth gap and empower underserved communities and businesses, ongoing programmatic development intended to foster an inclusive culture across the employee experience, and further enhancements to support the safety and security of our products and platform. We take this commitment seriously and endeavor to provide transparent disclosures on our customers, and therefore the success of our business, through active customer accounts, payment volume and payment transactions:
Active Customer Accounts: An active customer account is a registered account that successfully sent or received at least one payment or payment reversalprogress through our Payments Platform, excluding transactions processed through our gatewayannual Global Impact Report and Paydiant products, in the past 12 months. Asother communications.
TECHNOLOGY
Number of Payment Transactions:Number of 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.
Total Payment Volume (“TPV”): TPV is the value of payments, net of payment reversals, successfully completed through our Payments Platform, excluding transactions processed through our gateway and Paydiant products.
Our Strengths
Our business is built on a strong foundation designed to drive growth and differentiate us from our competitors. We believe that our competitive strengths include the following:
Two-sided Platform - ourpayments 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 brand and technology agnostic.
Scale - our global scale allows us to drive organic growth. As of December 31, 2017, we had 227 million active customer accounts, which included 18 million active merchant accounts. In 2017, we processed $451 billion of TPV in more than 200 markets around the world.
Brand - we have built a well-recognized and trusted brand. Our marketing efforts play an important role in building brand visibility, usage and overall preference among customers.
Risk Management - our risk management system and tokenization usage are designed to keep our customers safe and to ensure we process legitimate transactions around the world, while reducing illegal, high-risk, or fraudulent transactions.
Regulatory - we believe that our regulatory licenses, which enable us to operate in markets around the world, are a distinct 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 partiesintended to facilitate transactions efficiently and securely facilitate transactions between millions of merchants and consumers worldwide across different channels, markets, and networks. Our Payments Platformpayments platform connects with financial institutionsservice providers around the world and allows consumers to make purchases using a wide range of payment methods, regardless of where a merchant is located. Consumers who use our Payments Platformpayments platform can send payments in more than 200 markets acrossaround the globeworld and in more than 100nearly 150 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 including a merchant, a consumer and the consumer’s funding source provider. We have developed intuitive user interfaces, customer tools, transaction management databases, and payment network integrations on our Payments Platform, transaction processing, and database and network applications that helpplatform designed to enable our customers to utilize our suite of products and services. Our Payments Platform,payments platform, open application programming interfaces, and developer tools are designed to enable developers to innovate with ease and offer robust applicationssolutions to our global ecosystem of merchants and consumers, while at the same time maintaininghelping to maintain the security of our customers’ financial information.
The technology infrastructure supporting our Payments Platform simplifiespayments platform is designed to simplify the storage and processing of large amounts of data and facilitatesfacilitate the deployment and operation of large-scale global products and services in both our own data centers and automates much of the administration of large-scale clusters of computers.when hosted by third-party cloud service providers. Our technology infrastructure has beenis designed around industry-standard architecturesindustry best practices intended to reduce downtime and help ensure the resiliency of our payments platform in the event of outages or catastrophic occurrences. Our Payments Platformpayments platform incorporates multiple layers of protection both for business continuity and system redundancy purposes and to help addressmitigate cybersecurity challenges.risks. We engage in multiple effortshave a comprehensive cybersecurity program designed to protect our technology infrastructure and Payments Platformpayments platform against these challenges, includingcybersecurity threats, which includes regularly testing our systems to identify and address potential vulnerabilities. We strive to continually improve our technology infrastructure and Payments Platformpayments platform to enhance the customer experience and to increase efficiency, scalability, and security.
MerchantFor additional information regarding risks relating to our technology infrastructure and Consumer Payment Solutions
Our combined payment solution capabilities offer our merchants and consumers a broad range of products and services, enabling our merchants to safely and simply receive payments from their customers while allowing our consumers to make seamless transactions across different markets and networks.
We partner with our merchants to help grow and expand their businesses by improving sales conversion, providing global reach, offering alternative payment methods, reducing losses through proprietary protection programs and leveraging data analytics. Merchants can onboard quickly with PayPal and are not required to investcybersecurity, see the information in new or specialized hardware. For our standard service, we do not charge merchants setup or recurring fees. We offer access to credit products for certain small and medium-sized merchants through PayPal Working Capital and, with the recent acquisition of Swift Financial Corporation ("Swift"), other business loan products. Our PayPal Working Capital product allows businesses to borrow a certain percentage of their annual payment volume
processed by PayPal for a fee. Our Swift business loan products provide businesses with access to short-term business financing based on an evaluation of both the applying business as well as the business owner. We believe that our business financing offerings allow us to deepen our engagement with our small and medium-sized business merchants by providing them with access to capital to grow their business that they may not otherwise be able to effectively or efficiently access from traditional banks or other lending providers. Our recent acquisition of Swift also enables 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.
PayPal is a popular form of payment for mobile commerce, and our business has grown with the increased adoption of mobile devices. We 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, Android Pay, Apple Pay, Samsung Pay and other payment solutions. We also offer gateway services, including our Payflow Gateway services and Braintree Gateway services, that 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 enable merchants to accept payments online with credit and debit cards.
We focus on providing affordable consumer products intended to democratize the management and movement of money. We offer our customers the flexibility to use their account to both purchase and receive payment for goods and services, 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. We generate revenue from consumers on fees charged for foreign currency exchange and on interest and fees from our PayPal Credit 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 available as a funding source in their 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 as differentiate ourselves from rival 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., credit originated through our PayPal Credit, PayPal Working Capital and Swift business loan products is currently extended through third-party financial institutions, 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 strategic consumer credit relationship with Synchrony Financial ("Synchrony") and agreed to sell our U.S. consumer credit receivables portfolio to Synchrony Bank. Following the closing of this transaction, which is expected to occur in the third quarter of 2018, Synchrony Bank will become the exclusive issuer of the PayPal Credit online consumer financing program in the U.S. and we will no longer hold any participation interest in the receivables generated through the program (other than charged off receivables).
We offer consumers person-to-person (“P2P”) payment solutions through our PayPal, Venmo and Xoom products. PayPal continues to drive the majority 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 friends and family. 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 friends around the world in a secure, fast and cost-effective way, using their mobile device or personal computers. P2P is a significant customer acquisition channel with network effects that helps us to establish relationships with potential PayPal users by allowing them to join our Payments Platform at the time of making or receiving P2P payments, which drives organic growth.
Protecting Merchants and Consumers
Protecting merchants and consumers on our Payments Platform from financial and data loss is imperative to successfully competing in the payments industry and sustainably growing our business. Fraudulent activities, such as account takeover, identity theft and counterparty malicious activities, represent a significant and growing risk to merchants and consumers, as well as their payment partners. We provide merchants and consumers with protection programs on most purchase transactions completed through our Payments Platform, except for transactions using our gateway and Paydiant products. We believe that these programs, which protect both merchants and consumers from financial and data loss due primarily to fraud and counterparty non-performance, are generally much broader than similar protections provided by other participants in the payments industry. Many payment providers do not offer merchant protection in general, and those that do 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 they would not incur if they used our payments services. We also provide consumer protection against losses on qualifying purchases and accept claims for 180 days post transaction in the markets that we serve. We believe that this protection is generally consistent with, or better than, that offered by other payments providers. We believe that as a result of these
programs, consumers can be confident that they will only be required to pay if they receive the product in the condition as described, and merchants can be confident that they will receive payment for the product that they are delivering to the customer.
Our ability to protect both consumers and merchants is based largely on our proprietary end-to-end payments platform and our ability to leverage the data we collect on both sides of the transactions on our two-sided network (i.e., from buyers and sellers, and from senders and receivers of payments). We believe mobile devices will continue to play a significant and increasing role in 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 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. We compete against a wide range of businesses, including banks, credit card providers, technology and ecommerce companies and traditional retailers, many of which are larger than we are, have a dominant and secure position, or offer other products and services to consumers and merchants which we do not offer. 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 show merchants that they may achieve incremental sales by offering our end-to-end services;
consumer confidence in 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 the party they are paying;
simplicity 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;
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;
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 “Substantialcaptions “Cyberattacks and increasingly intense competition worldwidesecurity vulnerabilities could result in serious harm to our reputation, business, and financial condition” and “Business interruptions or systems failures may impair the global payments industry mayavailability of our websites, applications, products or services, or otherwise harm our business” for further discussion of the potential impact of competition on our business.business.”
Research and DevelopmentRESEARCH AND DEVELOPMENT
TotalOur total research and development expense was $953 million, $834 million$1.7 billion, $1.6 billion, and $792 million$1.4 billion in 2017, 20162022, 2021, and 2015,2020, respectively.
Intellectual PropertyINTELLECTUAL PROPERTY
The protection of our intellectual property, including our trademarks, (particularly those covering the PayPal name), patents, copyrights, domain names, trade dress, patents, and trade secrets, is important to the success of our business. We seek to protect our intellectual property rights by relying on applicable laws, regulations, and regulationsadministrative procedures in the U.S. and internationally,internationally. We have registered our core brands as welldomain names and as a varietytrademarks in the U.S. and many international jurisdictions. We also have an active program to secure and enforce trademarks and domain names that correspond to our brands in markets of administrative procedures.interest. We have filed and continue to file patent applications in the U.S. and in international jurisdictions covering certain aspects of our proprietary technology and new innovations. We also rely on contractual restrictions to protect our proprietary rights when offering or procuring products and services. We have routinely enteredenter into confidentiality and invention assignment agreements with our employees and contractors, and non-disclosure agreements with parties with whom we conduct business to control access to, and limituse and 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 U.S. and international patent applications covering certain aspects of our proprietary technology. We have registered our core brands as trademarks and domain names in the U.S. and a large number of other jurisdictions and have in place an active program to continue to secure trademarks and domain names that correspond 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 are subject to patent litigation” and “We may be unable to adequately protect or enforce our intellectual property rights, or third“Third parties may allege that we are infringing their patents and other intellectual property rights.rights” and “We may be unable to protect or enforce our intellectual property.”
GOVERNMENT REGULATION
We operate globally and in a rapidly evolving regulatory environment characterized by a heightened regulatory focus by regulators globally 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 asindustry, including 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 theThe laws and regulations applicable to us, including those enacted prior to the advent of digital and mobile payments, are continuingcontinue to evolve through legislative and regulatory action and judicial interpretation. Non-compliance withNew or changing laws and regulations, including changes to their interpretation and implementation, 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, weWe monitor these areas closely to designand are focused on designing compliant solutions for our customers who depend on us.customers.
Government regulation impacts key aspects of our business. We are subject to the laws and regulations that affectapplicable to the payments industry in the markets we operate.operate, which are subject to interpretation and change.
Payments Regulation.regulation.Various laws and regulations govern the payments industry in the U.S. and internationally. In the U.S., PayPal, Inc. (a wholly-owned subsidiary) holds licenses to operate as a money transmitter (or its equivalent), which, in the states where such licenses are required, as well as in the District of Columbia and certain territories. These licenses include not only the PayPal-branded products and services offered in these locations, but also our Venmo, Hyperwallet, and Xoom products and services to the extent offered in these locations. As a licensed money transmitter, PayPal is subject to, among other things, subjects PayPal, Inc.requirements, restrictions with respect to reporting requirements, bonding requirements, limitations on the investment of customer funds, reporting requirements, bonding requirements, and inspection by state regulatory agencies. In certain cases, these licenses also generally cover PayPal’s service enabling customers to buy, hold, transfer, and sell cryptocurrency directly from their PayPal or Venmo account. In the State of New York, PayPal holds a full Bitlicense issued by the New York Department of Financial Services to offer cryptocurrency services in the state.
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 U.K. Financial Conduct Authority (“FCA”), the Australian Securities and Investment Commission,Prudential Regulation Authority, the People’s Bank of China, the Monetary Authority of Singapore, the Reserve Bank of India, the Central Bank of Russia, and the Central Bank of RussiaBrazil 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 thatwhich have asserted or may assert jurisdiction over our activities. The laws
In addition, financial services regulators in various jurisdictions, including the U.S. and regulations applicablethe European Union (“EU”), have implemented authentication requirements for banks and payment processors intended to reduce online fraud, which could impose significant costs, make it more difficult for new customers to open PayPal accounts, and reduce the payments industry in any given jurisdiction are subject to interpretation and change.ease of use of our products.
Banking Agency Supervisionagency supervision.We serve our customers in the European UnionEU and U.K. through PayPal (Europe) S.à.r.l. et Cie, SCA,S.C.A. (“PayPal (Europe)”), a wholly-owned subsidiary that is licensed and subject to regulation as a bankcredit institution in Luxembourg by the CSSF. Under the U.K.’s Temporary Permissions Regime, PayPal is deemed to be authorized and regulated by the U.K. FCA as a result of Brexit. 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, we are, or may be, subject to indirect regulation and examination by the regulators of these partner financial institutions’ regulators.institutions.
Consumer Financial Protection BureauLending regulation. Our U.S. consumer short-term, interest-free, installment product is subject to federal and state laws governing consumer credit and debt collection. PayPal holds multiple state licenses as the lender of this product. Paidy, Inc. holds multiple licenses for the issuance of its consumer installment products in Japan and is registered with the Ministry of Economy, Trade and Industry as a Comprehensive Credit Purchase Intermediary. In Australia, PayPal Credit Pty Limited offers a consumer short-term, interest-free, installment product that is exempt from regulation by the primary consumer credit legislation, but is subject to other laws which cover the provision of financial services, credit reporting, debt collection, and privacy. PayPal’s consumer short-term, interest-free, installment products in the U.K., France, Germany, Spain, and Italy are generally exempt from primary consumer credit legislation; however, certain consumer lending laws, consumer protection, and banking transparency regulations apply to this activity.
Our U.S. consumer interest-bearing installment product is subject to federal and state laws and is offered by an independent chartered financial institution. PayPal’s interest-bearing installment product for consumers in Germany is subject to applicable local laws such as consumer (lending) laws, consumer protection, or banking transparency regulations. These loans are originated by PayPal (Europe).
PayPal and Venmo co-branded consumer credit cards and the PayPal Credit revolving consumer credit product are issued by an independent chartered financial institution in the U.S., and are subject to laws and regulations governing these programs. PayPal Credit in the U.K. is a regulated, revolving consumer credit product subject to applicable local laws and regulations.
Our U.S. merchant lending products are subject to federal and state regulations and are offered by an independent chartered financial institution. Our merchant lending products offered in Germany, France and the Netherlands are subject to the laws of Luxembourg and certain local laws, and our merchant lending product offered in the U.K. is subject to U.K. regulation. The loans offered to European and U.K. merchants are originated by PayPal (Europe). Our merchant lending product in Australia is subject to the laws of Australia and originated by PayPal Credit Pty Limited.
Consumer Financial Protection Bureau (the “CFPB”(“CFPB”).The CFPB has significant authority to regulate consumer financial products in the United States,U.S., including consumer credit, deposit, payment,deposits, payments, 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 LaunderingAnti-money laundering, counter-terrorist financing, and Counter-Terrorist Financing.sanctions.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. Our AML program is designed to prevent our payment networkpayments platform 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 AML/Bank Secrecy Act Officer, isare composed of policies, procedures, and internal controls, and isare designed to address these legal and regulatory requirements and assist in managing money laundering and terrorist financing risks.
Interchange Fees.fees.Interchange fees associated with four-party payments systems are being reviewed or challenged in various jurisdictions. For example, in the European Union ("EU"),EU, the Multilateral Interchange Fee (“MIF”) Regulation caps interchange fees for credit and debit interchange fees for cardscard payments and provides for business rules to be complied with by any company dealing with payment card
transactions, including PayPal. As a result, the fees that we collect in certain jurisdictions may become the subject of regulatory challenge.
Data Protectionprotection and Information Security. Aspects of our operations or businessprivacy.We are subject to a number of laws, rules, directives, and regulations (“privacy and data protection regulationlaws”) relating to the collection, use, retention, security, processing, and transfer (collectively, “processing”) of personally identifiable information about our customers, our merchants’ customers, and employees (“personal data”) in the United States ("U.S."),countries where we operate. Our business relies on the EUprocessing of personal data in many jurisdictions and elsewhere. For example, the EU has adoptedmovement of data across national borders. As a comprehensive General Data Protection Regulation (the "GDPR"), which comes into effect in May 2018 and expands the scoperesult, much of the EUpersonal data that we process, which may include certain financial information associated with individuals, is subject to one or more privacy and data protection lawlaws in one or more jurisdictions. In many cases, these laws apply not only to all foreign companiesthird-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, cybersecurity practices, and the processing of personal data of EU residents, imposes a strict data protection compliance regime, and includes new rights. Inis increasing around the United States, we are subject to 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 information safeguarding requirements under the Luxembourg Banking Act, among other laws.world. Regulatory authorities around the world are continuously considering numerous legislative and regulatory proposals concerningand interpretive guidelines that may contain additional privacy and data protection.protection obligations. Many jurisdictions in which we operate have adopted, or are in the process of adopting, or amending data privacy legislation or regulation aimed at creating and enhancing individual privacy rights. In addition, the interpretation and application of these privacy and data protection laws in the United States,U.S., Europe, and elsewhere are often uncertainsubject to change and in a state of flux.may subject us to increased regulatory scrutiny and business costs.
Anti-Corruption. 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.regulatory developments.Various regulatory agencies continue to examine and implement laws governing a wide variety of issues, including virtual currencies, identity theft, account management guidelines, privacy, disclosure rules, securitycybersecurity, competition, and marketing, thatwhich may impact PayPal'sPayPal’s business. Certain governments around the world are adopting laws and regulations pertaining to ESG performance, transparency, and reporting, including those related to general corporate ESG disclosures (e.g., the EU Corporate Sustainability Reporting Directive) as well as topical reporting and risk management requirements, such as obligations related to the management of climate-related risks.
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 Factors That May Affect Our Business, Results of Operations and Financial Condition” and “Item 3. Legal Proceedings” included elsewhere in this Annual Report on Form 10-K.
SeasonalityHUMAN CAPITAL
The Company does not experience meaningful seasonality with respectAt PayPal, we consider the management of our global talent (human capital) to net revenues. No individual quarter in 2017, 2016 or 2015 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”be essential to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information including certain financial information aboutongoing success of our operations in the U.S. and internationally. 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
business. As of December 31, 2017,2022, we employed approximately 18,70029,900 people globally, of whomwith 44% in the Americas, 43% in Asia-Pacific, and 13% in Europe and the Middle East. Our global employees work predominantly full-time and represent nearly 150 nationalities, across 27 countries, including approximately 10,600 were11,800 located in the U.S.
Attracting, recruiting, developing, and retaining diverse talent enables us to provide our customers with products and services that help them to thrive in the global economy, and serve our other stakeholders. In 2022, we developed 12 leadership principles based on our four core values that establish a common set of expectations for all employees. We considerbegan integrating these principles across our relationship withglobal talent strategy to help shape our programs throughout the employee lifecycle and achieve key business priorities. We also remain focused on promoting the physical, mental, and financial wellness of our employees, particularly as our workforce continues to be good.navigate changes in where and how we work.
Separation
Employee engagement
We use employee feedback to directly inform the ongoing development of our employee programs. In addition to administering an annual survey to gather input from eBay Inc.
our global workforce, we also conducted specific surveys to gather direct employee feedback on our internal communications approach and evolving workplace preferences. For our 2022 annual employee survey, we heard from 83% of our global employees. Our engagement score, which reflects employees that would recommend PayPal Holdings, Inc.to their peers and/or are happy at PayPal was incorporated in Delaware in January 2015 for the purpose of owning and operating eBay’s Payments business in connection79%. Our score measuring intent to stay was 78%, which reflects an employee’s expectation to remain employed with the separationcompany in two years. Additionally, we observed improvements in employee scores regarding collaboration and distribution described below. Priormanager support. In 2022, we enhanced our survey to incorporate viewpoints on the employee experience, diversity, inclusion, equity, and belonging (“DIE&B”) efforts, and our leadership principles, including specific questions on working style and strategic direction. The detailed scores are shared across the organization and analyzed to understand differences by geography, demographics, business function, and job level, and to help identify opportunities for further improvement.
Talent acquisition, development, and retention
As a leading technology platform that enables digital payments and simplifies commerce experiences, we compete for top global talent around the world. We believe that a strong culture focused on employee experiences that enables advancement, learning, and individual career insights is essential to the contributionsuccessful acquisition, development, and retention of this businessdiverse talent. Accordingly, we have implemented programs focused on inclusive hiring practices and extending our talent pipeline through targeted partnerships, reimagined our career development program for individuals and managers, extended individual coaching and mentorship programs (particularly for underrepresented and technical talent), and advanced efforts for employees to PayPal Holdings, Inc., which occurred priorgrow through self-paced and community learning experiences.
Employee wellness
We remain focused on promoting the holistic well-being of our employees, including resources, programs, and services to support our employees’ physical, mental, and financial wellness. In 2022, our initiatives included extending our Global Wellness Days for all employees to take time to rest and recharge, providing resources, trainings, and workshops to foster emotional well-being, preserving workplace flexibility through Crisis Leave and other programs, and strategically extending employee benefits to additional global markets. We also continued our efforts to strengthen employee financial wellness, including offering individual employee financial coaching, promoting the distribution in July 2015, PayPal Holdings, Inc. had no operations. On July 17, 2015 (the “distribution date”), PayPal became an independent publicly traded companyprioritization of employee financial health across the private sector through the pro rata distributionWorker Financial Wellness Initiative, and improving our internal measurement and evaluation approaches to identify targeted opportunities for further enhancements. Through our global community impact program, we support our employees’ individual passions and communities by eBaymatching eligible employee donations and volunteer time with non-profit organizations up to $2,500 annually per employee.
Diversity, inclusion, equity, and belonging
We believe that fostering DIE&B is critical to our global talent strategy and pivotal to building a culture that embraces individual characteristics, values diversity, minimizes barriers, and enhances feelings of 100%security and support across the workplace. We are committed to equal pay for equal work, promoting enterprise-wide inclusive learning opportunities, and partnering with leading organizations to embed DIE&B considerations into our talent strategy. We believe that our strong commitment to DIE&B is evident at all levels of the outstanding common stockorganization from our Board of PayPalDirectors to eBay stockholders (whichour executive leadership team to our global workforce. As of December 31, 2022, 50% of our Board and 64% of our senior leadership team identified as women and/or from a diverse ethnic group. Across our workforce, we refer to as the “separation” or the “distribution”). Each eBay stockholderreached 56% overall diverse workforce representation, including 44% global gender diversity (inclusive of recordself-identified women and non-binary employees), and 54% U.S. ethnic diversity, as of December 31, 2022. Additional U.S. workforce diversity metrics can be found in our public EEO-1 reports and annual Global Impact Report available at https://about.pypl.com/values-in-action/reporting/default.aspx.
Workforce representation is only one aspect of our broader DIE&B strategy. Through the closeleadership of businessour Global Head of DIE&B and dedicated DIE&B team, along with functional collaboration and accountability, we are focused on July 8, 2015 received one share of PayPal common stockstrengthening existing efforts and piloting new initiatives to promote an inclusive culture. In 2022, we continued our support for every share of eBay common stock held onunderrepresented communities and employees through activities such as enhanced strategic partnerships, new learning modules to promote effective sponsorship and inclusive performance management, and new tools and resources to incorporate DIE&B considerations across the record date. Approximately 1.2 billion shares of PayPal common stock were distributed on July 17, 2015business. We continue to eBay stockholders. PayPal’s common stock began “regular way” trading underevaluate DIE&B progress across the ticker symbol “PYPL” on
the NASDAQ Stock Market on July 20, 2015. Prior to the separation, eBay transferred substantially allcompany and as part of the assetsindividual performance assessment under our 2022 annual incentive plan for our senior executives. In addition, we empower eight employee resource groups to promote community and liabilitiesbelonging for employees that identify as Black, Latinx/Hispanic, women, interfaith, veterans, LGBTQ+, Asian, and operationsdisabled persons and their allies. These groups drive ongoing employee engagement around the world for all employees, regardless of eBay’s paymentsbackground, to support and champion their peers and related causes.
Our evolving workplace
We remain focused on creating a culture of flexibility and community by designing ways to collaborate across diverse workplace models, whether working virtually, on-site, or using a hybrid approach. We empower functional leadership to determine the most appropriate workplace strategy for their teams to optimize employee productivity and engagement and deliver on business priorities. Across PayPal, we are focused on providing tools and resources to PayPal, which was completedsupport our diverse and distributed teams. We believe this flexible approach has broadened our potential global talent pools.
As part of our annual ESG reporting, we provide additional information on our global talent strategy, including detailed representation metrics, in June 2015.our Global Impact Report.
Available InformationAVAILABLE 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:https://investor.paypal-corp.com.investor.pypl.com. From time to time, we may use our investor relations site and other online and social media channels, including ourthe PayPal Stories BlogNewsroom (https://www.paypal.com/stories/us)newsroom.paypal-corp.com/), Twitter handle (@PayPal)handles (@PayPal and @PayPalNews), LinkedIn page (https://www.linkedin.com/company/paypal), Facebook page (https://www.facebook.com/PayPalUSA/), YouTube channel (https://www.youtube.com/paypal), Dan Schulman'sSchulman’s LinkedIn profile (https://www.linkedin.com/in/dan-schulman/) and, Gabrielle Rabinovitch’s LinkedIn profile (https://www.linkedin.com/in/gabriellerabinovitch/), Dan Schulman'sSchulman’s Facebook profilepage (https://www.facebook.com/DanSchulmanPayPal/), and Dan Schulman’s Instagram page (https://www.instagram.com/dan_schulman/) as a means of disclosing information about the Company, including information which could be deemed to disclosebe material non-public information and comply with our disclosure obligations under Regulation Fair Disclosure.to investors. 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 SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The content of our websites and information that we may post on, or provide to, or accessible through 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 isare 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 the Separation and Our Operation as an Independent Publicly Traded Company,” discusses some of the risks relating to our separation 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 regardingconsider the risks and uncertainties that affect us,described below, in addition to the other information appearing in this Annual Report on Form 10-K, including our consolidated financial statements and related notes. Thenotes, for important information regarding risks and uncertainties described below arethat could affect us. These risk factors do not the only onesidentify all risks we face. Additionalface, and 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, and the trading price of our common stock could be materially and adversely affected.
Risk Factors That May Affect Our Business, Results of OperationsCYBERSECURITY AND TECHNOLOGY RISKS
Cyberattacks and Financial Condition
Substantial and increasingly intense competition worldwidesecurity vulnerabilities could result in the global payments industry mayserious harm our business.
The global payments industry is highly competitive, and we compete against a wide range of businesses, some of which are larger than we are, have a dominant and secure position, or offer other products and services to consumers and merchants that we do not offer. The global payments industry is rapidly changing, highly innovative and increasingly subject to regulatory scrutiny. 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 segments expand to become competitive with our business.
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 in-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 ("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 to 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 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:
service 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 targeted at online payments;
other global online and mobile payment-services providers;
other providers of online and mobile account-based payments;
services targeting users of social networks and online gaming, including those offering social commerce and peer-to-peer payments;
mobile payment services between bank accounts;
payment services enabling banking customers to send and receive payments through their bank 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.
Some of these competitors have larger customer bases, volume, scale, resources, and market share than we do, which may provide 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 demonstrate that merchants will achieve incremental sales by offering PayPal services;
consumer confidence in safety and security of transactions on our Payments Platform, including the ability for consumers to use 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, speed, availability, and dependability;
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 products 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 of the foregoing competitive threats could materially and adversely harm our business.
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 ourreputation, 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 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 the level or source of our revenues or earnings accurately. 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 may decline significantly as a result of the factors described in this paragraph.condition.
Global and regional economic conditions could harm our business.
Our operations and performance depend significantly on global and regional economic conditions. Uncertainty about global and regional economic events and conditions may result in consumers and businesses postponing or lowering spending in response to tighter credit, higher unemployment, financial market volatility, fluctuations in foreign currency exchange rates and interest rates, government austerity programs, negative financial news, declines in income or asset values, and other factors. These and other global and regional economic events and conditions 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.
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 impact the industries in which we operate, including developments in payment card tokenization, mobile, social commerce (i.e., ecommerce through social networks), authentication, virtual currencies (including distributed ledger technologies), and NFC and other proximity payment devices, such as contactless payments. 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 technologies. 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 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 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 and results of operations.
Our business is subject to cyberattacks and security and privacy breaches.
Our business involves the collection, storage, processing and transmission of customers’ personal data, including financial 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 card 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, financial institutions, and government institutions, have disclosed breaches of their information security systems, some of which have involved sophisticated and highly targeted attacks, including on their websites and infrastructure.
The techniques used to attempt to obtain unauthorized improper or illegal access to our systems our data or customers' data,and information (including customers’ personal data), disable or degrade service, exploit vulnerabilities, or sabotage systems are constantly evolving,evolving. In some circumstances, these attempts may not be difficult to detect quickly, and often are not recognized or detected until after they have been launched against a target. Unauthorized parties maywill continue to attempt to gain access to our systems or facilities through various means, including through hacking into our systems or facilities or those of our customers, partners, or vendors, orand attempting to fraudulently induce (often through spear phishing attacks) our employees, customers, partners, vendors or other users of our systems (including employees, vendor and partner personnel and customers) into disclosing user names, passwords, payment card information, multi-factor authentication application access or other sensitive information whichused to gain access to such systems or facilities. This information may, in turn, be used to access our customers’ confidential personal or proprietary information and financial instrument data that are stored on or accessible through our information technology systems. Certain effortssystems and those of third parties with whom we partner. This information may also be used to execute fraudulent transactions or otherwise engage in fraudulent actions. Numerous and evolving cybersecurity threats, including advanced and persisting cyberattacks, cyberextortion, distributed denial-of-service attacks, ransomware, spear phishing and social engineering schemes, the introduction of computer viruses or other malware, and the physical destruction of all or portions of our information technology and infrastructure and those of third parties with whom we partner, are becoming increasingly sophisticated and complex, may be state-sponsored and supported by significant financial and technological resources, making them even more sophisticated and difficult to detect. detect, and could compromise the confidentiality, availability, and integrity of the data in our systems, as well as the systems themselves.
We believe that PayPal is a particularly attractivecybercriminals may target for such breaches and attacksPayPal due to our name, and brand recognition, types of data (including sensitive payments- and identity-related data) that customers provide to us, and the widespread adoption and use of our products and services. Although weWe have developed systemsexperienced from time to time, and processes designed to protectmay experience in the future, breaches of our data and customer data and to prevent data loss and other security breaches, and expect to continue to expend significant resources to bolster these protections, 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. Our security measures may also be breached due to human error, deception, malfeasance, insider threats, system errors, ordefects, vulnerabilities, or other irregularities. ActualFor example, in November 2017, we suspended the operations of TIO Networks (“TIO”) (acquired in July 2017) as part of an investigation of security vulnerabilities of the TIO platform, and in December 2017, we announced that we had identified evidence of unauthorized access to TIO’s network and the potential compromise of personally identifiable information for approximately 1.6 million TIO customers.
Any cyberattacks or perceiveddata security breaches affecting the information technology or infrastructure of companies we acquire or of our customers, partners, or vendors (including data center and cloud computing providers) could have similar negative effects.
Under payment card network rules and our contracts with our payment processors, if there is a breach of payment card information stored by us or our direct payment card processing vendors, we could be liable to the payment card issuing banks, including for their cost of issuing new cards and related expenses. Cybersecurity breaches and other exploited security vulnerabilities could interrupt our operations, result in our systems or services being unavailable,subject us to significant costs and third-party liabilities, result in improper disclosure of data materially harmand violations of applicable privacy and other laws, require us to change our reputation and brands, result in significant regulatory scrutiny and legal and financial exposure,business practices, cause us to incur significant remediation costs, lead to loss of customer confidence in, or decreased use of, our products and services, damage our reputation and brands, 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 cyberattacks or data security breaches 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 3—"Business Combinations," Note 4—"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 ongoing 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, 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. Financial services regulators in various jurisdictions, including the U.S. and the EU, have implemented authentication requirements for banks and payment processors intended to reduce online fraud, which could impose significant costs, requireexpose us to change our business practices, make it more difficult for new customers to join PayPal,litigation, regulatory investigations, and reduce the ease of use of our products, which could harm our business. Additionally, whilesignificant fines and penalties. While we maintain insurance policies theyintended to help offset the financial impact we may notexperience from these risks, our coverage may be adequateinsufficient to reimbursecompensate us for all losses caused by security breaches.breaches and other damage to or unavailability of our systems.
SystemsBusiness interruptions or systems failures and resulting interruptions inmay impair the availability of our websites, applications, products or services, couldor otherwise harm our business.
Our systems and operations and those of our servicesservice providers and partners have experienced from time to time, and may experience servicein the future, business interruptions or degradation of service because of distributed denial-of-service and other
cyberattacks, insider threats, hardware and software defects or malfunctions, computer denial-of-service and other cyberattacks, human error, earthquakes, hurricanes, floods, fires, and other natural disasters, public health crises (including pandemics), power losses, disruptions in telecommunications services, fraud, military or political conflicts, terrorist attacks, computer viruses or other malware, or other events. The frequency and intensity of weather events related to climate change are increasing, which could increase the likelihood and severity of such disasters as well as related damage and business interruption. Our systems also may be subjectcorporate headquarters are located in the San Francisco Bay Area, a seismically active region in California. A catastrophic event that could lead to break-ins, sabotage, and intentional acts of vandalism. Somea disruption or failure of our systems or operations could result in significant losses and require substantial recovery time and significant expenditures to resume or maintain operations. Further, some of our systems, including those of companies that we have acquired, are not fully redundant and ourany failure of these acquired systems, including due to a catastrophic event, may lead to operational outages or delays.While we engage in disaster recovery planning and testing intended to mitigate risks from outages or delays, our planning and testing may not be sufficient for all eventualities. In addition, aspossible outcomes or events. As a provider of payments solutions, we are also 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 to implement, and may divert our resources from other business priorities. Any of the foregoing risks could have a material adverse impact on our business, financial condition, and results of operations.
We have experienced, and expect to continue to experience, system failures, denial of service attacks,cyberattacks, unplanned outages, and other events or conditions from time to time that have and may interrupt the availability, or reduce or adversely affect the speed or functionality, of our products and services. These events have resultedservices and likely will result in loss of revenue. A prolonged interruption in the availabilityof, or reduction in, the availability, speed, or 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 reputationrelationship with our customers and brands. Moreover, ifpartners and our reputation. If any system failure or similar event results in damagesdamage to our customers or their business partners, these customers or partnersthey could seek significant compensation or contractual penalties from us for their losses, and thoselosses. These 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 subjectaddress.
We continue to cyberattacks and security and privacy breaches.”
Our Payments Platform has experienced and may in the future experience intermittent unavailability. The 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 certainundertake system upgrades and re-platforming efforts designed to improve the availability, reliability, resiliency, and speed of our reliability and speed.payments platform. These efforts are costly and time-consuming, involve significant technical complexity and risk, and may divert our resources from new features and products, and there canmay ultimately not be no guarantee that these efforts will succeed. Because we are a regulated financial institution in certain jurisdictions, frequenteffective. 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 may be required for our business.
We also rely on facilities, components, applications, software, and services supplied by third parties, including data center facilities and cloud data storage and processing services. From time to time, we have experienced interruptions in the provision of such facilities and services provided by these third parties. If these third parties cease to provide the facilities or services, experience operational interference or disruptions breach their agreements with us, or(including a cybersecurity incident), fail to perform their obligations, and meet our expectations,or breach their agreements with us, our operations could be disrupted or otherwise negatively affected, which could result in customer dissatisfaction, regulatory scrutiny, and damage to our reputation and brands, and materially and adversely affect our business. We do not carry business interruptionWhile we maintain insurance sufficientpolicies intended to help offset the financial impact we may experience from these risks, our coverage may be insufficient to compensate us for all losses that may result fromcaused by interruptions in our service as a result ofdue to 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 failany failure 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, thisin a timely manner could have an adverseadversely impact on our business, internal controls, (including internal controls over financial reporting), results of operations, and financial condition.
ChangesIf 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 impact the industries in which we operate, including payment technologies (including real-time payments, payment card networkstokenization, virtual currencies, distributed ledger and blockchain technologies, and proximity payment technology such as Near Field Communication and other contactless payments); internet browser technologies, that enable users to easily store their payment card information for use on any retail or bank fees, rules, or practices could harme-commerce website; artificial intelligence and machine learning; developments in technologies supporting our business.regulatory and compliance obligations; and in-store, digital, and social commerce.
We expect that new 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. We cannot predict the effects of technological changes on our business, which technological developments or innovations will become widely adopted, and how
those technologies may be regulated. Developing and incorporating new technologies into new and existing products and services may require significant investment, take considerable time, and may not ultimately be successful. We rely in part on banks or other payment processors to process transactions and pay feesthird parties, including some of our competitors, for the services. From timedevelopment of and access to time, payment card networks have increased, andnew or evolving technologies. These third parties may increase in the future, the interchange fees and assessments that they charge for each transaction that accesses their networks. Payment card networks haverestrict or may impose special feesprevent our access to, or assessments for transactions that are executed through a “digital wallet” such as PayPal’s, which 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 usutilization of, those technologies, as well as increase their own fees for processing. Any changes in interchange feesplatforms or products. Our ability to develop, provide or incorporate new technologies and assessments could increaseadapt our operating costsexisting products and reduce our operating income. We have entered into strategic partnerships with Visaservices or develop future and Mastercard to further expand our relationships in a way that will make it easier for merchants to acceptnew products and consumers to choose to pay with Visa and Mastercard credit and debit cards. During the terms of these agreements, Visa and Mastercard have each agreed to not enact or impose any fees or rules that solely target PayPal. Upon termination of the agreements, PayPal could become subject to special digital wallet fees or other special assessments.
In addition, in some jurisdictions, governmental regulations have required payment card networks to reduce interchange 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 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. 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. The payment card networks set and interpret the card operating rules. 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 significant fines and penalties or require changes in our business practices thatservices using new technologies may be costly. The payment cardlimited or restricted by industry-wide standards, platform providers, payments networks, could adopt new operating rules or interpret or re-interpret existing rules that we or our processors might find difficult or even impossiblechanges 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.laws and regulations, changing customer expectations, third-party intellectual property rights, and other factors. If we are unable to accept payment cards or are limited in our abilitydevelop and incorporate new technologies and adapt to do so, our business would be adversely affected.
Wetechnological changes 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,” including the sale of certain types of digital content. For “high risk” merchants, we must either prevent such merchants from using 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 significant and could resultevolving industry standards in a termination of our ability to accept payment cardstimely or require changes in our process for registering new customers, which would adversely 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.
In the event that merchants do not fulfill their obligations to consumers or a merchant's goods or services do not match the merchant’s 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 reserves based on assumptions and estimates that we believe are reasonable to cover such eventualities, these reserves may be insufficient.
We also incur substantial losses from claims that the consumer did not authorize the purchase, from customer fraud, from erroneous transactions, and as a result of customers who have closed bank accounts or have insufficient funds in their 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,cost-effective manner, our business could be harmed.
We are exposed to fluctuations in foreign currency exchange rates.LEGAL, REGULATORY AND COMPLIANCE RISKS
We have significant operations internationally that are denominated in foreign currencies, including the British Pound, Euro, Australian Dollar and Canadian Dollar, subjecting 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. In connection with providing our services in multiple currencies, 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 remeasurement 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 materially and adversely 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 and 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 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 and restrictions, impose conflicting obligations, 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 lower our revenues and profits and could harm our business.
The United Kingdom’s departure from the EU could adversely affect us.
The United Kingdom (“U.K.”) held a referendum in June 2016 in which a majority of voters approved an exit from the EU (“Brexit”). In March 2017, the U.K. invoked Article 50 of the Treaty on European Union, which triggered a two-year period, with extension subject to unanimous consent by the other EU member states, during which the U.K. government will negotiate its withdrawal agreement with the EU. 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 our customers and companies with which we do business, particularly in the U.K. In addition, Brexit could lead to legal uncertainty and see national laws and regulations in the U.K. diverge from EU laws and regulations, as the U.K. determines which EU laws to replace or replicate. In particular, depending on the terms of Brexit, we may face new regulatory costs and challenges, including the following:
we could lose our ability for our EU operations to offer services on a cross-border basis into the U.K. market utilizing regulatory permissions of PayPal (Europe) S.à r.l. et Cie, SCA (“PayPal (Europe)”), our wholly-owned subsidiary that is licensed and subject to regulation as a credit institution in Luxembourg, and our corresponding ability to work with the Luxembourg regulators as the lead authority for various aspects of our U.K. operations;
we could be required to obtain additional regulatory permissions to operate in the U.K. market, adding costs and potential inconsistency to our 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 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; 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 the effects of Brexit described above and others that we cannot anticipate could adversely affect our business, results of operations, financial condition and cash flows.
Our business is subject to extensive government regulation and oversight, as well asoversight. Our failure to comply with extensive, complex, overlapping, and frequently changing rules, regulations, and legal interpretations.interpretations could materially harm our business.
Our business is subject to complex and changing laws, rules, regulations, policies, and legal interpretations in the markets in which we operate,offer services directly or through partners, including but not limited to, those governinggoverning: banking, credit, deposit taking, cross-border and domestic money transmission, prepaid access, foreign currency exchange, privacy, data protection, data governance, cybersecurity, banking secrecy, digital payments, cryptocurrency, payment services (including payment processing and settlement services), fraud detection, consumer protection, antitrust and competition, economic and trade sanctions, anti-money laundering, and counter-terrorist financing. The legal
Regulators globally are increasingly exercising regulatory authority, oversight, 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 andenforcement in a manner adverse tothat impacts our business.
Our success Further, as we introduce new products and increased visibility may result in increased regulatory oversightservices and tighter enforcement of rulesexpand into new markets (including through acquisitions) and regulations that may apply to our business.
As we expand and localize our international activities, we are increasingly becoming obligatedexpect to comply with the laws of the countries or markets in which we operate.become subject to additional regulations, restrictions, and licensing requirements. 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, mobile and related technologies outside of the U.S. oftenlaws, which may 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 perceivedalleged failure to comply with existing or new laws, regulations, or orders of any governmentalgovernment authority (including changes to or expansion of the interpretation of those laws, regulations or orders), including those discussed in this risk factor,their interpretation) may subject us to significant fines and penalties, criminal and civil lawsuits, forfeiture of significant assets, and enforcement actions in one or more jurisdictions,actions; result in additional compliance and licensure requirements,requirements; cause us to lose existing licenses or prevent or delay us from obtaining additional licenses that may be required for our business; increase regulatory scrutiny of our business,business; restrict or cease our operations, andoperations; force us to changemake changes to our business practices, make productproducts or operational changes oroperations; lead to increased friction for customers; require us to engage in remediation activities; delay planned transactions, product launches or improvements. Any of the foregoing could, individuallyother activities, or in the aggregate, damagedivert management’s time and attention from our brands and business, and adversely affect our results of operations and financial condition.business. The complexity of United States (“U.S.”) federal and state and international 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 toone or more events prompting a large number of overlapping investigations and legal and regulatory proceedings by multiple government authorities in different jurisdictions. WeWhile 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, orand agents will not violate such laws and regulations. Any of the foregoing could, individually or in the aggregate, harm our reputation, damage our brands and business, and adversely affect our results of operations and financial condition.
Payments Regulation
In the U.S., PayPal, Inc. has obtained(a wholly-owned subsidiary) holds 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, Xoom and TIO branded products and services. As a licensed money transmitter, PayPal is subjectcertain territories. If we fail to restrictionscomply with respect to the investment of customer funds, reporting requirements, bonding requirements and inspection by state regulatory agencies. Accordingly, if we violate theseapplicable laws or regulations required to maintain our licenses, we could be subject to liability and/or additional restrictions, forced to cease doing business with residents of certain states or territories, forced to change our business practices, or required to obtain additional licenses or regulatory approvals, which could impose substantial costs.costs and harm our business.
While we currently allow our customers with payment 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 hold balances or withdraw funds. These limitationsrestrictions may adversely affectlimit our ability to grow our business in these markets.business.
WeOutside of the U.S., we principally provide our services to customers in the EUEuropean Economic Area (“EEA”) and the United Kingdom (“U.K.”) through PayPal (Europe), our wholly-owned subsidiary that is licensed and subject to regulation as a credit
institution in Luxembourg. Accordingly, PayPal (Europe) ismay be subject to enforcement actions and significant fines or other enforcement action if it violates the disclosure, reporting, 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, EUapplicable requirements. Additionally, compliance with applicable laws and regulations are typically subject to different and potentially inconsistent interpretations by the countries that are members of the EU, which can make compliancecould become more costly and operationally difficult to manage. Moreover, the countries that are EU members may each have different andmanage due to potentially inconsistent interpretations and domestic 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 isby various countries in the processregion. Applicable regulation relating to payments, anti-money laundering and digital services, which are key focus areas of being implemented into national legislation, with certain requirements effective January 13, 2018. The implementation of the PSD2 may negatively affect our business. PSD2 seeksregulators and subject to enableextensive 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 accessregulation, could subject us to data securityadditional and other legal and financialcomplex obligations, 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 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.
Finally, ifassociated costs. 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 or that some activityand certain activities of PayPal (Europe) is deemed subject to oversightwould become directly supervised by the ECB, PayPal (Europe) could become directly regulatedrather than by the ECB in addition to 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”)(Europe) is also subject to regulation by the ECB under the oversight framework for electronic payment instruments, schemes and arrangements (PISA), which is licensed by the Australian Securitiesmay also lead to increased compliance obligations 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.costs.
In Hong Kong, we serve our customers through PayPal Hong Kong Limited (“PayPal Hong Kong”), which is licensed by the Hong Kong Monetary Authority as an issuer of stored value facility (“SVF Licensee”). Accordingly, PayPal Hong Kong is subject to significant fines or other enforcement action if it violates the reporting, anti-money laundering, capital requirements, privacy, corporate governance, risk management, float management, and/or any other requirements imposed on SVF Licensees.
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 based in Singapore. PayPal Pte. Ltd. is supervised by the Monetary Authority of Singapore and designated as a holder of a stored value facility, but does not hold a remittance license. As a result,(“MAS”). The Payment Services Act came into effect in Singapore in January 2020. PayPal Pte. Ltd. has submitted an application for a Major Payment Institution license to the MAS to continue to provide payments services, and is not ableoperating under an exemption from holding a license within a statutory transition period while the application is pending. Upon PayPal Pte. Ltd. obtaining this license, we will be required to offer outbound remittance payments (including donations to charities) fromcomply with new regulatory requirements, which will result in increased operational complexity and costs for our Singapore and can only offer payments for the purchase of goods and services in Singapore. international operations.
In many of the markets outside the U.S. (other than Singapore) served by PayPal Pte. Ltd., it is unclear and uncertain or by local branches or subsidiaries subject to local regulatory supervision or oversight, as the case may be, there may be uncertainty whether our Singapore-based service is subject only to Singapore law or if it is subjectalso to the application ofother local laws, and whether such local laws wouldmight require a payment processor like us to be licensed as a payments service, bank, financial institution, or otherwise.
WeThere are also subject to regulationsubstantial costs and potential product and operational changes involved in other markets in which we do business,maintaining and we have been and expect to continue to be required to apply for variousrenewing licenses, certifications, and regulatory approvals, in a numberand we could be subject to enforcement actions, fines, and litigation if we are found to violate any of the countries where we provide our services.these requirements. There can be no assurance that we will be able to (or decide to) continue to apply for or obtain any such licenses, certifications, and approvals. In addition, there are substantial costs and potential product changes involved in maintaining such licenses,renewals, 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 our products or services in a given market.
any jurisdiction. In many countries, it may not be clear whether we are required to be licensed as a payment services provider, bank, financial institution or otherwise. In suchcertain markets, we may need to rely on local banks or other partners to process payments and conduct foreign currency exchange transactions in local currency. Localcurrency, and local regulators may use their powerauthority over such local partners to slowprohibit, restrict, or halt payments to local merchants conducted through local banks or otherwise prohibitlimit us from doing businessbusiness. Any of the foregoing could, individually or in a country. Such regulatory actionsthe aggregate, result in substantial additional costs, delay or the need to obtain licenses, certificationspreclude planned transactions, product launches or other regulatory approvals could impose substantial costs, involve considerable delay to the provision or development of our services,improvements, require significant and costly operational changes, impose restrictions, limitations, or additional requirements on our business, products and services, or prevent or limit us from providing anyour products or services in a given market.
Consumer ProtectionCryptocurrency Regulation and Related Risks
The financial services sector isOur current and planned customer cryptocurrency offerings could subject us to significant regulation and we are subject to consumer protection laws andadditional regulations, in the countries in which we operate. Inlicensing requirements, or other obligations. Within the U.S., we are regulated by the New York Department of Financial Services as a virtual currency business, which does not qualify us to engage in securities brokerage or dealing activities. The regulatory status of particular cryptocurrencies is unclear under existing law. For example, if the SEC were to assert that any of the cryptocurrencies we support are securities, the SEC could assert that our activities involving that cryptocurrency require securities broker-dealer registration or other obligations under the federal securities laws. The rapidly evolving regulatory landscape with respect to cryptocurrency may subject us to additional licensing and regulatory obligations or to inquiries or investigations from the SEC, other regulators and governmental authorities, and require us to make product changes, restrict or discontinue product offerings, implement additional and potentially costly controls, or take other actions. If we fail to comply with regulations, requirements, prohibitions or other obligations applicable to us, we could face regulatory or other enforcement actions, potential fines, and other consequences.
We hold our customers’ cryptocurrency assets through a third-party custodian. Financial and third-party risks related to our customer cryptocurrency offerings, such as inappropriate access to, theft, or destruction of cryptocurrency assets held by our custodian, insufficient insurance coverage by the custodian to reimburse us for all such losses, the custodian’s failure to maintain effective controls over the custody and settlement services provided to us, the custodian’s inability to purchase or liquidate cryptocurrency holdings, and defaults on financial or performance obligations by the custodian, or counterparty financial institutions, could expose our customers and us to loss, and therefore significantly harm our business, financial performance, and reputation.
We have selected a custodian partner, and may in the future select additional custodian partners, that are subject to regulatory oversight, capital requirements, maintenance of audit and compliance industry certifications, and cybersecurity procedures and policies. Nevertheless, operational disruptions at any such custodian, or such custodian’s failure to safeguard cryptocurrency holdings could result in losses of customer assets, expose us to customer claims, reduce consumer confidence and materially impact our operating results and our cryptocurrency product offerings.
Custodial arrangements to safeguard cryptocurrency assets involve unique risks and uncertainties in the event of the custodian’s bankruptcy. While other types of assets and some custodied cryptocurrencies have been deemed not to be part of the custodian’s bankruptcy estate under various regulatory regimes, bankruptcy courts have not yet definitively determined the appropriate treatment of custodial holdings of digital assets in a bankruptcy proceeding. In the event of our custodian’s bankruptcy, the lack of precedent and the highly fact-dependent nature of the determination could delay or preclude the return of custodied cryptocurrency assets to us or to our customers. Although, we contractually require our custodian to segregate our customer assets and not commingle them with proprietary or other assets, we cannot be certain that these contractual obligations, even if duly observed by the custodian, will be effective in preventing such assets from being treated as part of the custodian’s estate under bankruptcy or other insolvency law. In that event, our claim on behalf of such customers against the custodian’s estate for our customers’ cryptocurrency assets could be treated as a general unsecured claim against the custodian, in which case our customers could seek to hold us liable for any resulting losses.
In addition, our cryptocurrency product offerings could have the effect of heightening or exacerbating many of the risk factors described in this “Risk Factors” section.
Lending Regulation
We hold a number of U.S. state lending licenses for our U.S. consumer short-term installment loan product, which is subject to federal and state laws governing consumer credit and debt collection. While the consumer short-term installment loan products that we offer outside the U.S. are generally exempt from primary consumer credit legislation, certain consumer lending laws, consumer protection or banking transparency regulations continue to apply to these products. Increased global regulatory focus on short-term installment products and consumer credit more broadly could result in laws or regulations requiring changes to our policies, procedures, operations, and product offerings, and restrict or limit our ability to offer credit products, and we could be subject to enforcement action, fines, and litigation if we are found to violate any aspects of applicable law or regulations.
Consumer Protection
Violations of 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”). These regulations require 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 significant 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(including treble damages in some instances; we could also be liable forinstances) and plaintiffs’ attorneys’ fees in such cases.fees. 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,addition, the CFPB, issued a final rule on prepaid accounts. The rule’s definition of prepaid account includes certain 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 Regulation 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. In 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 capable of storing funds. In June 2017, the CFPB released proposed changespursuant to its final rule, and in January 2018, the CFPB issued its final rule,with an effective date of April 1, 2019. We are evaluating the final rule and its requirements. Implementation of the rule couldmarket-monitoring authority, may require us to make substantial changesprovide extensive information on our products and offerings from time to our business practices and the design of certain products, allocate additional resources, and increase our costs, which could negatively affect our business.
time. In May 2015,2021, we entered into a Stipulated Final Judgment and Consent Order (“Consent Order”) withreceived separate orders from the CFPB in which we settled regulatory claims arising from PayPal Credit practices between 2011pursuant to such market-monitoring authority requiring us to provide, among other items, extensive information on our payment products, including with respect to the collection, use of, and 2015. The Consent Order included obligations on PayPalaccess to pay $15 million in redress to consumersdata 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.consumer protections, as well as our Buy Now, Pay Later offerings.
PayPal (Europe) principally offers its services in EUthe EEA countries through a “passport” notification process through thePayPal (Europe)’s Luxembourg regulator to regulators in other EUEEA member states pursuant to EU regulation.in accordance with European Union (“EU”) regulations, as well as in the U.K. through the Temporary Permissions Regime. Regulators in these countries could notify PayPal (Europe)us of and seek to enforce local consumer protection laws that apply to itsour business, in addition to Luxembourg consumer protection law, and could alsolaws, or seek to persuade the Luxembourglocal 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,impose additional obligations and costs and impact our plansability to expand our business in EU countries.Europe and the U.K.
Economic and Trade Sanctions
We are required to comply with U.S. economic and trade sanctions administered by 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. Furthermore, compliance with economic and trade sanctions in force in one jurisdiction may conflict with the laws and regulations of other jurisdictions in which we operate and can expose us to the risk of fines, sanctions and penalties.
Anti-Money Laundering and Counter-Terrorist FinancingFinancing; Economic and Trade Sanctions
We are subjectRegulators globally continue to variousincrease standards and expectations regarding anti-money laundering and counter-terrorist financing, and to expand the scope of existing laws and regulations around the world that prohibit, among other things, our involvement in transferring the proceeds of criminal activities. U.S.to emerging products and other regulators globally continue to increase their scrutiny of compliance with these obligations,markets, which may require us to further revise or expand our compliance program globally and/or in specific jurisdictions, 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 alsoSuch changes could 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 identitieseffect 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) are expected to makemaking compliance more costly and operationally difficult to manage, lead to increased friction for customers, and result in a decrease in business. AsRegulators regularly re-examine the transaction volume thresholds at which we must obtain and keep applicable records or the circumstances in which we must verify identities of December 2017, PayPal (Europe)’s home state, Luxembourg, had not yet implemented all of the provisions of the Fourth Anti-Money Laundering Directivecustomers, and there is uncertainty asany change to the exact requirements with which PayPal (Europe) will besuch obligations could result in greater compliance costs and impact our business. We are also required to comply. Penalties for non-compliancecomply with economic and trade sanctions administered by the Fourth Anti-Money Laundering Directive could includeU.S., the EU and its member states, the U.K., and other jurisdictions in which we operate. Non-compliance with anti-money laundering laws and regulations or economic and trade sanctions may subject us to significant fines, penalties, lawsuits, and enforcement actions, result in regulatory sanctions and additional compliance requirements, increase regulatory scrutiny of up to 10%our business, restrict our operations, and damage our reputation and brands. Our compliance history may be considered by OFAC and other regulators as part of PayPal (Europe)’s total annual turnover. EU institutions are also proposing changes to the Fourth Anti-Money Laundering Directive which could be even more stringent.any potential future investigation of our sanctions regulation.
Privacy and Protection of UserCustomer Data
We are subject to a number of laws, rules, directives and regulations (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. 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, use and sharing of data is increasing around the world. There is uncertainty associated with theThe legal and regulatory environment relating to privacy and data protection laws which continuecontinues to develop and evolve in ways we cannot predict, including with respect to evolving technologies such as cloud computing. Privacycomputing, artificial intelligence, machine learning, cryptocurrency, and blockchain technology. Any failure or alleged failure by us to comply with our privacy policies as communicated to customers or with privacy and data protection laws may be interpretedcould result in proceedings or actions against us by data protection authorities, other government agencies, or others, which could subject us to significant fines, penalties, judgments, and applied inconsistently from countrynegative publicity, require us to country and impose inconsistent or conflicting requirements. Complying with varying jurisdictional requirements couldchange our business practices, increase the costs and complexity of compliance, or require us to changeresult in reputational harm, and materially harm our business practices in a manner adverse to our business, and violations ofbusiness. Compliance with inconsistent privacy and data protection-relatedprotection laws may expose us to significant damage awards, fines and other penalties that could, individuallyalso restrict or in the aggregate, materially harm our business and reputation. In addition, compliance with inconsistent privacy laws may restrictlimit our ability to provide products and services to our customers.
PayPal relies on a variety of compliance methods to transfer personal data of EU citizensEEA individuals 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. In June 2021, the European Commission imposed new SCC requirements which impose certain contract and operational requirements on PayPal, must alsoits merchants, and vendors to adhere to certain affirmative duties, including requirements related to government access transparency, enhanced data subject rights, and broader third-party assessments to ensure that third parties processingsafeguards necessary to protect personal data ofexported from PayPal’s EUEEA customers and/or employees to countries outside of the EU have compliant transfer mechanisms. In October 2015, the European Court of Justice invalidated U.S.-EU Safe Harbor framework clauses that were previously relied upon by some PayPal vendors to lawfully transfer personal data of EU citizens to U.S. companies, and PayPal entered into SCCs with those third parties who had previously relied on the U.S.-EU Safe Harbor framework. In July 2016, the U.S. and EU authorities agreed on a replacement for Safe Harbor known as “Privacy Shield.” Both the Privacy Shield framework and SCCs are facing legal challenges in the European justice system.EEA. To the extent thatwe rely on SCCs, we will potentially need to enter into new contractual arrangements reflecting the Privacy Shield or SCCs are invalidated,updated SCC requirements to avoid limitations on PayPal’s ability to process EU personalEEA data with third partiesin countries outside of the EUEEA.
Many jurisdictions in which we operate globally have enacted, or are in the process of enacting, data privacy legislation or regulations aimed at creating and enhancing individual privacy rights. For example, numerous U.S. states have enacted or are in the process of enacting state level data privacy laws and regulations governing the collection, use, and retention of their residents’ personal information. The continued proliferation of privacy laws in the jurisdictions in which we operate is likely to result in a disparate array of privacy rules with unaligned or conflicting provisions, accountability requirements, individual rights, and national or local enforcement powers, which may subject us to increased regulatory scrutiny and business costs, and could lead to unintended consumer confusion.
We are subject to regulatory scrutiny and may be subject to legal proceedings under antitrust and competition laws.
We are subject to scrutiny by various government agencies regarding antitrust and competition laws and regulations in the U.S. and internationally, including in connection with proposed or implemented business combinations, acquisitions, investments, partnerships, commercial agreements and business practices. Some jurisdictions also provide private rights of action for competitors or consumers to assert claims of anticompetitive conduct. Companies and government agencies have in the past alleged, and may in the future allege, that our actions violate the antitrust or competition laws in the U.S. or other jurisdictions in which we operate or otherwise constitute unfair competition, or that our products and services are used so broadly that otherwise uncontroversial business practices could be jeopardized.deemed anticompetitive. Any claims or investigations, even if without merit, may be costly to defend or respond to, involve negative publicity, and cause substantial diversion of management’s time and effort, and could result in reputational harm, significant judgments, fines and other remedial actions against us, require us to change our business practices, make product or operational changes, or delay or preclude planned transactions, product launches or improvements.
In 2016, the EU adopted a comprehensive overhaulWe are regularly subject to general litigation, regulatory scrutiny, and government inquiries.
We are regularly subject to claims, individual and class action lawsuits, arbitration proceedings, government and regulatory investigations, inquiries, actions or requests, and other proceedings alleging violations of itslaws, rules, and regulations with
respect to competition, antitrust, intellectual property, privacy, data protection, regimeinformation security, anti-money laundering, counter-terrorist financing, sanctions, anti-bribery, anti-corruption, consumer protection (including unfair, deceptive, or abusive acts or practices), fraud, accessibility, securities, tax, labor and employment, commercial disputes, services, charitable fundraising, contract disputes, escheatment of unclaimed or abandoned property, product liability, use of our services for illegal purposes, the matters described in “Note 13—Commitments and Contingencies—Litigation and Regulatory Matters—General Matters” to our consolidated financial statements, and other matters. The number and significance of these disputes and inquiries is expected to continue to increase as our products, services, and business expand in complexity, scale, scope, and geographic reach, including through acquisitions of businesses and technology. Investigations and legal proceedings are inherently uncertain, expensive and disruptive to our operations, and could result in substantial judgments, fines, penalties or settlements, negative publicity, substantial diversion of management’s time and effort, reputational harm, criminal sanctions, or orders that prevent or limit us from offering certain products or services; require us to change our business practices in costly ways, develop non-infringing or otherwise altered products or technologies, or pay substantial royalty or licensing fees; or delay or preclude planned transactions or product launches or improvements. Determining legal reserves or possible losses from such matters involves significant estimates and judgments and may not reflect the current national legislative approachfull range of uncertainties and unpredictable outcomes. We may be exposed to a single European Economic Area Privacy Regulation, the General Data Protection Regulation (“GDPR”), which comes into effectlosses in May 2018. The proposed EU data protection regime expands the scopeexcess of the EU dataamount recorded, and such amounts could be material. If any of our estimates and assumptions change or prove to have been incorrect, this could have a material adverse effect on our business, financial position, results of operations, or cash flows.
Third parties may allege that we are infringing their patents and other intellectual property rights.
We are frequently subject to litigation based on allegations of infringement or other violations of intellectual property rights. Intellectual property infringement claims against us may result from, among other things, our expansion into new business areas, including through acquisitions of businesses and technology, or new or expanded products and services and their convergence with technologies not previously associated with areas related to our business, products, and services. The ultimate outcome of any allegation or claim is often uncertain and any such claim, with or without merit, may be time-consuming to defend, result in costly litigation, divert management’s time and attention from our business, result in reputational harm, and require us to, among other things, redesign or stop providing our products or services, pay substantial amounts to settle claims or lawsuits, satisfy judgments, or pay substantial royalty or licensing fees.
We may be unable to protect or enforce our intellectual property.
The protection law to all foreign companies processing personal data of EU residents, imposes a strict data protection compliance regime with severe penalties of upour proprietary rights, including our trademarks, copyrights, domain names, trade dress, patents and trade secrets, is important to the greatersuccess of 4%our business. Effective protection of worldwide turnoverour proprietary rights may not be available in every jurisdiction in which we offer our products and €20 million,services. Although we have generally taken measures to protect our intellectual property, there can be no assurance that we will be successful in protecting or enforcing our rights in every jurisdiction, that our contractual arrangements will prevent or deter third parties from infringing or misappropriating our intellectual property, or that third parties will not independently develop equivalent or superior intellectual property rights. We may be required to expend significant time and includes newresources to prevent infringement and enforce our rights, and we may be unable to discover or determine the extent of any unauthorized use of our proprietary rights. If we are unable to prevent third parties from infringing or otherwise violating our proprietary rights, the uniqueness and value of our products and services could be adversely affected, the value of our brands could be diminished, and our business could be adversely affected. We expect to continue 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 “portability”value of personal data. Althoughour proprietary rights or harm our reputation. Any failure to adequately protect or enforce our proprietary rights, or significant costs incurred in doing so, could diminish the GDPR will apply acrossvalue of our intangible assets and materially harm our business.
BUSINESS AND OPERATIONS RISKS
We face substantial and increasingly intense competition worldwide in the EU withoutglobal payments industry.
The global payments industry is highly competitive, dynamic, highly innovative, and increasingly subject to regulatory scrutiny and oversight. Many of the areas in which we compete evolve rapidly with innovative and disruptive technologies, shifting user preferences and needs, price sensitivity of merchants and consumers, and frequent introductions of new products and services. Competition also may intensify as new competitors emerge, businesses enter into business combinations and partnerships, and established companies in other segments expand to become competitive with various aspects of our business.
We compete with a need for local implementing legislation, local data protection authorities (“DPAs”) will stillwide range of businesses in every aspect of our business. Some of our current and potential competitors are or may be larger than we are, have larger customer bases, greater brand recognition, longer operating histories, a dominant or more secure position, broader geographic scope, volume, scale, resources, and market share than we do, or offer products and
services that we do not offer. Other competitors are or may be smaller or younger companies that may be more agile in responding to regulatory and technological changes and customer preferences. Our competitors may devote greater resources to the development, promotion, and sale of products and services, and/or offer lower prices or more effectively offer their own innovative programs, products, and services. We often partner with other businesses, and the ability to interpretcontinue establishing these partnerships is important to our business. Competition for relationships with these partners is intense, and there can be no assurance that we will be able to continue to establish, grow, or maintain these partner relationships. If we are unable to differentiate our products and services from those of our competitors, drive value for our customers, or effectively and efficiently align our resources with our goals and objectives, we may not be able to compete effectively. See “Item 1. Business—Competition” of this Form 10-K for further discussion of the GDPRcompetitive environment in the markets where we operate.
Changes to payment card networks or bank fees, rules, or practices could harm our business.
To process certain transactions, we must comply with applicable payment card, bank or other network (collectively, “network”) rules. The rules govern all aspects of a transaction on the networks, including fees and other practices. From time to time, the networks have increased the fees and assessments that they charge for transactions that access their networks. Certain networks have also imposed special fees or assessments for transactions that are executed through so-called opening clauses, which permit region-specific data protection legislation anda digital wallet such as the one that PayPal offers. Our payment processors may have the potentialright to create inconsistenciespass any increases in fees and assessments on a country-by-country basis. We are evaluatingto us and to increase their own fees for processing. Any increase in interchange fees, special fees, or assessments for transactions that we pay to the rulenetworks or our payment processors could make our pricing less competitive, increase our operating costs, and its requirements. Implementationreduce our operating income, which could materially harm our business, financial condition, and results of operations.
In some jurisdictions, government regulations have required payment card networks to reduce or cap interchange fees. Any changes in interchange fee rates or limitations, or their applicability to PayPal, could adversely affect our competitive position against payment card service providers and the GDPR couldrevenue we earn from our branded card programs, require us to change our business practices, and increase the costs and complexity of compliance.harm our business.
PayPalWe may also faces additional potential challenges from local 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 2015 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 may conflict with, 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 treble the damage award for willful or knowing violations. We have been, and may continue to be subject to lawsuits (including class-action lawsuits) containing allegationsfines and other penalties assessed by networks resulting from any rule violations by us or our merchants. The networks set and interpret their rules and have alleged from time to time that various aspects of 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.
Data protection, privacy and information security have become the subject of increasing public, media, regulatory and legislative concern. 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, with any applicable regulatory requirements or orders, or with privacy, data protection, information security or consumer protection-related laws and regulations in one or more jurisdictions couldmodel violate these rules. Such allegations may 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,damages, or other liabilities or require us to changechanges in our business practices increase the costs and complexity of compliance,that may be costly and adversely affect our business. As noted above, we are also subject to the possibility of security and privacy breaches, which themselves may result in a violation of 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 credit 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 ourbusiness, results of operations and financial condition. The network rules may also increase the cost of, impose restrictions on, or otherwise impact the development of, our products which may negatively affect product deployment and adoption. The networks could adopt new operating rules or interpret or re-interpret existing rules that we or our payment processors might find difficult or impractical to follow, or costly to implement, which could require us to make significant changes to our products, increase our operational costs, and negatively impact our business. If we become unable or limited in our ability to accept certain payment types such as debit or credit cards, our business would be materially and adversely affected.
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, from an existing PayPal account balance or Venmo account balance, or through our PayPal branded consumer credit products. Our financial performance is not a bank or licensed lendersensitive to changes in the U.S.rate at which our consumers fund payments using payment cards, which can significantly increase our costs. Although we provide consumers in certain markets with the opportunity to use their existing PayPal account balance or Venmo account balance to fund payment transactions, some of our consumers may prefer to use payment cards, which may offer features and relies upon third parties to make loans and provide other products critical to our business.
Asbenefits not provided as part of their PayPal is neither a chartered financial institution nor licensed to make loans in any stateaccounts. Any increase in the U.S., we rely on a third-party chartered financial institutionportion 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 issue the PayPal Credit consumer product in the U.S., and different chartered financial institutions to issue the PayPal Working Capital product and other business loan products in the U.S. These chartered financial institutions are state chartered industrial banks. Any termination or interruption in a partner bank’s ability to lend could result in us being unable or unwilling to offer our consumer and business loan products, whichfund transactions with lower-cost funding options, could materially and adversely affect our financial performance and significantly harm our business.
Our ability to issue ourreceive the benefit of U.S. merchant financing offerings and certain U.S. installment loan products inmay be subject to challenge.
Merchant loans under our U.S. PayPal Working Capital (“PPWC”) and PayPal Business Loan (“PPBL”) products and certain U.S. installment loan products are provided by a state-chartered industrial bank under a program agreement with us, and we acquire the U.S. and our business.receivables generated by those loans from the state-chartered bank after origination. In June 2020, the eventFederal Deposit Insurance Corporation (“FDIC”) approved a final rule clarifying that loans validly originated by state-chartered banks or insured branches of a partner bank’s inability or unwillingness to lend, we may need to reachforeign banks remain valid throughout the lifetime of the loan, reflecting a similar agreement with anotherrule finalized by the Office of the Comptroller of Currency (“OCC”) in May 2020 for nationally chartered financial institutionbanks. The final rule reaffirms and
codifies the so-called “valid-when-made doctrine,” which provides that the permissibility of an interest rate for a loan is determined when the loan is made and will not be affected by subsequent events such as sale, assignment, or obtain our own bank charter or lending licenses. We may be unable to reachother transfer. While a similar agreement with another partner on favorable terms or at all,number of state attorneys general have unsuccessfully challenged these FDIC and obtaining a bank charter or lending licenses would be a costly, time-consuming and uncertain process, subject us to additional laws and regulatory requirements, which could be burdensome, increase our costs and require us to change our business practices. In addition, as a service provider to these bank partners, which are federally supervised U.S. financial institutions, we are subject from time to time to examination by their federal banking regulators.
A case decided in the U.S. Court of Appeals for the Second Circuit, Madden v. Midland Funding, LLC (786 F.3d 246 (2d Cir. 2015)), resulted inOCC rules, there remains some uncertainty as to whether non-bank entities purchasing loansloan receivables originated by a bankFDIC-insured, state-chartered banks 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 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 on to issue our loan products in the U.S. After the Madden decision, there continue to be a number of U.S. state and federal court legal actions challenging the viability of business models where a non-bank entity relies on a third party chartered financial institution in connection with the issuance of credit products. While we believe the manner in which we offer our credit products can be distinguished from Madden, there can be no assurance as to thelaws. An adverse outcome of any potential litigation, whichthese or similar challenges, or changes to applicable laws and regulations or regulatory policy, could materially and adversely impact our ability to issue our loanU.S. PPWC, PPBL, certain installment products, in the U.S. and our business.
On November 16, 2017, we announced an arrangement under which Synchrony Bank will acquire the U.S. consumer credit receivables portfolio held by us and certain of our affiliates, which totaled approximately $6.4 billion in receivables as of December 31, 2017. The purchase price is subject to a post-closing true-up and certain adjustments. The transaction is expected to be completed during the third quarter of 2018, subject to certain closing conditions. The transaction may not close within the expected timeframe or at all. Even if the transaction is consummated, 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. Under our expanded program agreement with Synchrony Bank, at the closing of the
consumer credit receivables portfolio sale, Synchrony Bank will become the exclusive issuer of the PayPal Credit online consumer financing program in the U.S. for a 10-year term, and we retain an option to designate a purchaser of the portfolio at the end of that term, Our increased reliance on Synchrony will subject 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."
Our credit products expose us to additional risks.
We offer our PayPal Credit consumer product and PayPal Working Capital and other business loancredit products to a wide range of consumers and merchants in the U.S. and various markets, and theinternational markets. The financial success of these products depends largely on the effective management of related risk. The credit decisioningdecision-making process for our PayPal Credit consumer productcredit products uses proprietary segmentationmethodologies and credit algorithms and other analytical techniques designed to analyze the credit risk of specific consumers based on, among other factors, their past purchasingpurchase and paymenttransaction history with PayPal as well asor Venmo and their credit scores. Similarly, proprietary risk models and other indicators are applied to assess merchants who wishdesire to use our business loan productsmerchant financing offerings to help predict their ability to repay. These risk models may not accurately predict the creditworthiness of a consumer or merchant due to factors such as inaccurate assumptions, including assumptionsthose related to the particular consumer or merchant, market conditions, economic environment, or limited transaction history or other data, among other factors.data. The accuracy of these risk models and the ability to manage credit risk related to our credit products may also be affected by legal or regulatory requirements, competitors’ actions, changes in consumer behavior, changes in the economic environment, issuing bank policies, and other factors. Our international expansion
We generally rely on the activities and charters of unaffiliated financial institutions to provide PayPal and Venmo branded consumer credit and merchant financing offerings to our U.S. customers. As a service provider to these unaffiliated financial institutions, which are federally supervised U.S. financial institutions, we are subject from time to time to examination by their federal banking regulators. In the event of any termination or interruption in a partner bank’s ability or willingness to lend, our ability to offer consumer credit product offerings also exposesand merchant financing products could be interrupted or limited, which could materially and adversely affect our business. We may be unable to reach a similar arrangement with another unaffiliated financial institution on favorable terms or at all. Obtaining and maintaining the lending licenses required for us to originate such loans ourselves would be a costly, time-consuming and uncertain process, and would subject us to additional risks, including those discussed below under the risk factor titled “Our international operationslaws and regulatory requirements, which could significantly increase our costs and compliance obligations and require us to change our business practices.
We are subject 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 account holders who use our credit products will default on their payment obligations, creating the risk of potential charge-offs.charge-offs or negatively impacting the revenue share arrangement with an independent chartered financial institution with respect to our U.S. consumer credit product. The non-payment rate among account holders may increase due to, among other things,factors, changes to underwriting standards, risk models not accurately predicting the creditworthiness of a user, worsening economic conditions, such as a recession or government austerity 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 our U.S. PayPal-branded merchant financing offerings and certain U.S. consumer installment loan products and extend credit for our consumer and merchant products inoutside the U.S. through our international subsidiaries. If we are unable to fund our credit products or the purchase of thesethe receivables related to our credit products and offerings adequately or in a cost-effective manner, orthe growth of our credit products could be negatively impacted.
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 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 originate our U.S. credit products to consumers, U.S. merchant financing, and branded credit card products; branded debit card and savings products issued by unaffiliated banks; cryptocurrency custodial service providers; and external business partners and contractors who provide key functions (e.g., outsourced customer support and product development functions; facilities; information technology, data center facilities and cloud computing). We are subject to additional risks inherent in engaging and relying upon third-party providers, including legal, regulatory, information security, reputational and operational risks. We are undertaking efforts to diversify our reliance on a small number of third-party payment processors in various markets. We are working with our primary payment processor in the U.S. to facilitate the migration of our arrangements to other payment processors over a transition period in connection with the wind-down of our agreement; however, if we are unable to timely and efficiently manage the cash resources utilized for these purposes,migrate our business to other payment processors or experience disruptions in connection with this transition, our business could be harmed. If we are unable to effectively manage our third-party relationships, these third parties are unable to
meet their obligations to us, or we experience substantial disruptions in these relationships, our operations, results of operations, and financial results could be impacted by political events, war, terrorism, public health issues, natural disasters and other business interruptions.
War, terrorism, geopolitical uncertainties, public health issues, natural disasters and other business interruptions have caused and could cause damage or disruption to the economy and commerce onadversely impacted. Additionally, our relationships with third parties inherently involve a global or regional basis, which could have a material adverse effect on our business, our customers, and companies with which we do business. Ourlesser degree of control over business operations, are subject to interruption by, among others, natural disasters, fire, power shortages, earthquakes, floods, nuclear power plant accidentsgovernance, and other industrial accidents, terrorist attackscompliance, which potentially increases our financial, legal, reputational, 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. In the event of a natural disaster, we could incur significant losses, 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.operational risk.
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, and consumers if they do not receive the item ordered or if the item received is significantly different from its description. In 2015, we increased the scope of our buyer protection program to cover digital goods and intangible goods and services. 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 in July 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 to increased risks, which could harm our business.
Our international operations have generated approximately one-half of our net revenues in recent years. There are risks inherent in doing business internationally on both a domestic (i.e., in-country) and cross-border basis, including:
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 “AnyAny factors that reduce cross-border trade or make such trade more difficult could harm our business”;business.
risks related
Cross-border trade (i.e., transactions where the merchant and consumer are in different countries) is an important source of our revenues and profits. Cross-border transactions generally provide higher revenues and operating income than similar transactions that take place within a single country or market. In certain markets, cross-border trade represents our primary (and in some instances our only) presence.
Cross-border trade may be negatively impacted by various factors including foreign currency exchange rate fluctuations, tariffs, trade barriers or restrictions, sanctions, import or export controls, and the interpretation and application of laws of multiple jurisdictions in the context of cross-border trade and foreign exchange. 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 could reduce our cross-border transactions and volume, negatively impact our revenues and profits, and harm our business.
Failure to deal effectively with fraud, abusive behaviors, bad transactions, and negative customer experiences may increase our loss rate and could negatively impact our business and severely diminish merchant and consumer confidence in and use of our services.
We expect that third parties will continue to attempt to abuse access to and misuse our payments services to commit fraud by, among other government regulationthings, creating fictitious PayPal accounts using stolen or required compliancesynthetic identities or personal information, making transactions with local laws;
local licensingstolen financial instruments, abusing or misusing our services for financial gain, or fraudulently inducing users of our systems into engaging in fraudulent transactions. Due to the nature of PayPal’s digital payments services, third parties may seek to engage in abusive schemes or fraud attacks that are often difficult to detect and reporting obligations (e.g., data localization requirements);
expenses associatedmay be deployed at a scale that would otherwise not be possible in physical transactions. Measures to detect and reduce the risk of fraud and abusive behavior are complex, require continuous improvement, and may not be effective in detecting and preventing fraud, particularly new and continually evolving forms of fraud or in connection with localizingnew or expanded product offerings. If these measures are not effective, our business could be negatively impacted. We also incur substantial losses from erroneous transactions and situations where funding instruments used for legitimate transactions are closed or have insufficient funds to satisfy payments, or the payment is initiated to an unintended recipient in error. Numerous and evolving fraud schemes and misuse of our payments services could subject us to significant costs and liabilities, require us to change our business practices, cause us to incur significant remediation costs, lead to loss of customer confidence in, or decreased use of, our products and services, including offeringdamage our reputation and brands, divert the attention of management from the operation of our business, and result in significant compensation or contractual penalties from us to our customers and their business partners as a result of losses or claims.
Our Purchase and Seller Protection Programs (“protection programs”) are intended to reduce the likelihood of losses for consumers and merchants from unauthorized and fraudulent transactions. The Purchase Protection Program also protects consumers who do not receive the item ordered or who receive an item that is significantly different from its description. We incur substantial losses from our protection programs as a result of disputes filed by our customers. We seek to recover losses from our protection programs from the merchant, but may not be able to fully recover our losses (for example, if the merchant is unwilling or unable to pay, the transaction involves a fraudulent merchant, or the merchant provides sufficient evidence that the item was delivered).
In addition, consumers who pay through PayPal or Venmo may have reimbursement rights from their payment card issuer, which in turn will seek recovery from us. If losses incurred by us related to payment card transactions become excessive, we could lose the ability to transactaccept payment cards for payment, which would negatively impact our business. Regulators and card networks may also adapt error resolution and chargeback requirements to account for evolving forms of fraud, which could increase PayPal’s exposure to fraud losses and impact the scope of coverage of our protection programs. Increases in our loss rate, including as a result of changes to the scope of transactions covered by our protection programs, could negatively impact our business. See “Note 13—Commitments and Contingencies—Protection Programs” to our consolidated financial statements.
Failure to effectively monitor and evaluate the financial condition of our merchants may expose PayPal to losses. In the event of the bankruptcy, insolvency, business failure, 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, including through our Purchase Protection Program or through chargebacks on
payment cards used by customers to fund their purchase. Allowances for transaction losses that we have established may be insufficient to cover incurred losses.
Use of our payments services for illegal activities or improper purposes could harm our business.
We expect that users will continue to attempt to use our payments platform for illegal activities or improper uses, including money laundering, terrorist financing, sanctions evasion, illegal online gambling, fraudulent sales of goods or services, illegal telemarketing activities, illegal sales of prescription medications or controlled substances, piracy of software, movies, music, and other copyrighted, trademarked or digital goods, bank fraud, child pornography, human trafficking, prohibited sales of alcoholic beverages or tobacco products, securities fraud, pyramid or Ponzi schemes, or the facilitation of other illegal or improper activity. Moreover, certain activity that may be legal in one jurisdiction may be illegal in another jurisdiction, and a merchant may be found responsible for intentionally or inadvertently importing or exporting illegal goods, resulting in liability for us. Owners of intellectual property rights or government authorities may seek to bring legal action against providers of payments solutions, including PayPal, that are peripherally involved in the local currency,sale of infringing or allegedly infringing items by a user. While we invest in measures intended to prevent and adaptingdetect illegal activities that may occur on our payments platform, these measures require continuous improvement and may not be effective in detecting and preventing illegal activity or improper uses.
Any illegal or improper uses of our payments platform or failure by us to detect or prevent illegal or improper activity by our users may subject us to claims, individual and class action lawsuits, and government and regulatory requests, inquiries, or investigations that could result in liability, restrict our operations, impose additional restrictions or limitations on our business or require us to change our business practices, harm our reputation, increase our costs, and negatively impact our business.
Acquisitions, strategic investments, and other strategic transactions could result in operating difficulties and could harm our business.
We expect to continue to consider and evaluate 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 servicesother assets; strategic investments; and commercial and strategic partnerships (collectively, “strategic transactions”). At any given time, we may be engaged in discussions or negotiations with respect to local preferences (e.g., payment methods)one or more strategic 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, consummating and integrating favorable transaction opportunities. Strategic transactions may involve additional significant challenges, uncertainties, and risks, including challenges of integrating new employees, products, systems, technologies, operations, and business cultures; challenges associated with operating acquired businesses in markets or business areas in which we may have limited or no experience; disruption of our ongoing operations and diversion of our management’s attention; inadequate data security, cybersecurity, or operational and information technology resilience; failure to identify, or our underestimation of, commitments, liabilities, deficiencies and other risks associated with acquired businesses or assets; potential exposure to new or incremental risks associated with acquired businesses and entities, strategic investments and other strategic transactions, including potential new or increased regulatory oversight and uncertain or evolving legal, regulatory, and compliance requirements, particularly with respect to companies in new or developing businesses or industries; failure of the transaction to advance our business strategy or for its anticipated benefits to materialize; potential impairment of goodwill or other acquisition-related intangible assets; and the potential for our acquisitions to result in dilutive issuances of our equity securities or the incurrence of significant additional debt. Strategic transactions are inherently risky, may not be successful, and may harm our business, results of operations, and financial condition.
trade barriers
Strategic investments in which we have a minority ownership stake inherently involve a lesser degree of influence over business operations. The success of our strategic investments may be dependent on controlling shareholders, management, or other persons or entities that may have business interests, strategies, or goals that are inconsistent with ours. Business decisions or other actions or omissions of the controlling shareholders, management, or other persons or entities who control companies in which we invest may adversely affect the value of our investment, result in litigation or regulatory action against us, and changesdamage our reputation.
Our international operations subject us to increased risks, which could harm our business.
Our international operations generate roughly one-half of our net revenues. Our international operations subject us to significant challenges, uncertainties, and risks, including local regulatory, licensing, reporting, and legal obligations; costs and challenges associated with operating in trade regulations;
markets in which we may have limited or no experience, including effectively localizing our products and services and adapting them to local preferences; 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 labordifferences and in light of varying laws, regulations, and regulations;
credit riskcustoms; differing employment practices and higher levelsthe existence of payment fraud;
profit repatriation restrictions, foreign currency exchange restrictions or extremeworks councils; difficulties in recruiting and retaining qualified employees and maintaining our company culture; fluctuations in foreign currency exchange rates for a particular currency;
politicalrates; exchange control regulations; profit repatriation restrictions; potential tariffs, sanctions, fines, or social unrest, economic instability, repression,other trade barriers or human rights issues;
geopolitical events, including natural disasters, public health issues, acts of war, and terrorism;
restrictions; 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 moneyanti-bribery, anti-corruption, sanctions, anti-money laundering and counter-terrorist financing laws and regulations; the financinginterpretation and application of terrorist activities;
antitrustlaws of multiple jurisdictions; and competition regulations;
potentially adverse tax developments and consequences;
economic uncertainties relating to sovereign and other debt;
national or regional differencespolitical, economic, or social instability.
Our international operations also may heighten many of the other risks described in macroeconomic growth rates;
different, uncertain, overlapping, or more stringent user protection, data protection, privacy, and other laws and regulations; and
increased difficulties in collecting accounts receivable.
Violationsthis “Risk Factors” section. Any violations of the complex foreign and U.S. laws, rules and regulations that may apply to our international operations may result in fines,lawsuits, enforcement actions, criminal actions, or sanctions against us and, our directors, officers, and employees; prohibit or require us to change our employees; prohibitions on the conduct of our business;business practices; and damage to our reputation. Although we have implemented policies and procedures designed to promote compliance with these laws, there can be no assurance that our employees, contractors, or agents 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 materially and adversely affect our business.
Global and regional economic conditions could harm our business.
We are exposedAdverse global and regional economic conditions such as turmoil affecting the banking system or financial markets, including, but not limited to, tightening in the credit markets, extreme volatility or distress in the financial markets (including the fixed income, credit, currency, equity, and commodity markets), higher unemployment, high consumer debt levels, recessionary or inflationary pressures, supply chain issues, reduced consumer confidence or economic activity, government fiscal and tax policies, U.S. and international trade relationships, agreements, treaties, tariffs and restrictive actions, the inability of a government to enact a budget in a fiscal year, government shutdowns, government austerity programs, and other negative financial news or macroeconomic developments 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. Additionally, any inability to access the capital markets when needed due to volatility or illiquidity in the markets or increased regulatory liquidity and capital requirements may strain our liquidity position. Such conditions may also expose us to fluctuations in foreign currency exchange rates or interest rates.rates that could materially and adversely affect our financial results.
If our reputation or our brands are damaged, our business and operating results may be harmed.
Our reputation and brands are globally recognized, important to our business, and affect our ability to attract and retain our customers. There are numerous ways our reputation or brands could be damaged. We may experience scrutiny or backlash from customers, partners, employees, government entities, media, advocacy groups, and other influencers or stakeholders that disagree with, among other things, our product offering decisions or public policy positions. Damage to our reputation or our brands may result from, among other things, new features, products, services, operational efforts, or terms of service (or changes to the same), or our decisions regarding user privacy, data practices, or information security. The proliferation of social media may increase and compound the likelihood, speed, magnitude, and unpredictability of negative brand events. If our brands or reputation are damaged, our business and operating results may be adversely impacted.
Brexit: The U.K.’s departure from the EU could harm our business, financial condition, and results of operations.
Following the departure of the U.K. from the EU and the EEA on January 31, 2020 (commonly referred to as “Brexit”) and the expiration of the transition period on December 31, 2020, there continues to be uncertainty over the practical consequences of Brexit, including the potential for greater restrictions on the supply and availability of goods and services between the U.K. and EEA region, and a general deterioration in consumer sentiment and credit conditions leading to overall negative economic growth and increased risk of merchant default.
The consequences of Brexit have brought legal uncertainty and increased complexity for financial services firms, which could continue as national laws and regulations in the U.K. differ from EU laws and regulations and additional authorization requirements come into effect. These developments have led and could lead in the future to additional regulatory costs and challenges for us. Specifically, PayPal (Europe) currently operates in the U.K. within the scope of its passport permissions (as they existed at the end of the transition period) pursuant to the Temporary Permissions Regime pending the grant of new authorizations by the U.K. financial regulators. If we are unable to obtain the required authorizations before the expiry of the longstop dates set by the U.K. regulators under the Temporary Permissions Regime, our European operations could lose their ability to offer services within the U.K. market, or into the U.K. market on a cross-border basis.Our European operations may
also be required to comply with legal and regulatory requirements in the U.K. that may be in addition to, or inconsistent with, those of the EEA, in each case, leading to increased complexity and costs.
Real or perceived inaccuracies in our key metrics may harm our reputation and negatively affect our business.
Our key metrics are calculated using internal company data based on the activity we measure on our payments platform and compiled from multiple systems, including systems that are internally developed or acquired through business combinations. While the measurement of our key metrics is based on what we believe to be reasonable methodologies and estimates, there are inherent challenges and limitations in measuring our key metrics globally at scale. The methodologies used to calculate our key metrics require judgment.
We are exposedregularly review our processes for calculating these key metrics, and from time to interest rate risktime we may make adjustments to improve the accuracy or relevance of our metrics. For example, we continuously apply models, processes and practices designed to detect and prevent fraudulent account creation on our platforms, and work to improve and enhance those capabilities. When we detect a significant volume of illegitimate activity, we generally remove the activity identified from our investment portfolio and from interest-rate sensitive assets underlyingkey metrics. Although such adjustments may impact key metrics reported in prior periods, we generally do not update previously reported key metrics to reflect these subsequent adjustments unless the customer balancesretrospective impact of process improvements or enhancements is determined by management to be material. Further, as our business develops, we hold onmay revise or cease reporting metrics if we determine that such metrics are no longer appropriate measures of our balance sheet as customer accounts. A low interest rate environmentperformance. If investors, analysts, or reductions in interest ratescustomers do not consider our reported measures to be sufficient or to accurately reflect our business, we may negatively impactreceive negative publicity, our investment incomereputation may be harmed, and our net income. In addition, fluctuations in interest ratesbusiness may be adversely impact our customers’ spending levelsimpacted.
Environmental, social 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, whichgovernance (“ESG”) issues 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.business, financial condition and results of operations and damage our reputation.
We have entered into a revolving credit facility and a 364-day delayed-draw term loan credit facility. We have borrowed under these credit facilities from time to time, and any borrowings under these credit facilities bear interest at a floating rate, exposing 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, illegal sales of prescription medications or controlled substances, piracy of software, movies, music,Customers, investors, employees and other copyrighted or trademarked goods (in particular, digital goods), bank fraud, child pornography trafficking, prohibited sales of alcoholic beverages or tobacco products, online securities fraud, orstakeholders are increasingly focused on ESG practices, including with respect to facilitate other illegal activity. Any use of our payment system for illegal or improper uses could subject usglobal talent, cybersecurity, data privacy and protection and climate change. If we do not adapt 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 country may be illegal in another country, 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 from time to time. Owners of intellectual property rights 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 deposits in customer accounts and funds being remitted to sellers of goods and services. 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. PayPal (Europe), with the permission of the CSSF, utilizes certain European customer balances held by our Luxembourg banking subsidiary to fund credit balances relating to our 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 foreignnew laws and regulations including antitrustor changes to legal or regulatory requirements concerning ESG matters, or fail to meet rapidly evolving investor, industry or stakeholder expectations and competition laws. An increasing number of jurisdictions also provide private rights of action for competitors or consumersstandards, our reputation may be harmed, customers may choose to assert claims of anti-competitive 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 and increasing their scrutiny of competition law activities. 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 thatrefrain from using our products and services, are used so broadly that otherwise uncontroversialand our business practices could be deemed anticompetitive. Any claims or investigations, even if without merit,financial condition may be very expensiveadversely affected. Further, we may experience additional scrutiny or backlash from customers, partners, media, government entities, and other stakeholders that disagree if they perceive PayPal to defendnot have responded appropriately with respect to ESG matters.
We specifically recognize the inherent physical climate-related risks wherever business is conducted. Our primary locations may be vulnerable to the adverse effects of climate change. For example, California, where our headquarters are located, has historically experienced, and is projected to continue to experience, climate-related events more frequently, including drought, water scarcity, flooding, heat waves, wildfires and resultant air quality impacts, and power shutoffs associated with wildfire prevention. These extreme weather conditions may disrupt our business and may cause us to experience additional costs to maintain or respondresume operations and higher attrition. In addition, current and emerging legal and regulatory requirements with respect to involve negative publicityclimate change (e.g., carbon pricing) and substantial diversionother aspects of management time and effort, and couldESG (e.g., disclosure requirements) may result in reputational harm, significant judgments againstincreased compliance requirements on our business and supply chain, which may increase our operating costs and cause disruptions in our operations.
If one or more of our counterparty financial institutions default on their financial or performance obligations to us or require us to change our business practices.fail, we may incur significant losses.
We are subject to patent litigation.
We have repeatedly been sued for allegedly infringing other parties’ patents. At any given time, we are typically a defendant in a numbersignificant amounts of patent lawsuits and have been notified of several other potential patent disputes. We expect that we will continue to be subject to patent infringement claims because, among other reasons:
our products and services continue to expand in scope and complexity;
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 customers whom we may indemnify because we are contractually obligated to do so or we choose to do so as a business matter. We believe that many of the claims against uscash, cash equivalents, receivables outstanding, and other technology companies have been, and continue to be, initiated by third parties whose soleinvestments on deposit 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 meritoriousaccounts with banks or not, are time-consuming and costly to 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 regulationsother financial institutions in the U.S. and internationally, as wellinternational jurisdictions. As part of our foreign currency hedging activities, we regularly enter into transactions involving derivative financial instruments with various financial institutions. Certain banks and other financial institutions are also lenders under our credit 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 on obligations by, or deteriorating operating results or financial condition or failure of, these counterparty financial institutions. If one of our counterparty financial institutions were to become insolvent, placed into receivership, or file for bankruptcy, our ability to recover losses incurred as a varietyresult of administrative procedures. We also rely on contractual restrictionsdefault or to protectaccess or recover our proprietary rights when offeringassets that are deposited, held in accounts with, 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. Weotherwise due from, such counterparty may be requiredlimited due 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 scopeinsufficiency 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 our products or services, pay substantial amountsfailed institutions’ estate to satisfy judgmentsall claims in full or settle claimsthe applicable laws or lawsuits, pay substantial royaltyregulations governing the insolvency, bankruptcy, or licensing fees,resolution proceedings. In the event of default on obligations by, or satisfy indemnification obligations that we have with certain parties with whom we have commercial relationships. Ourthe failure to obtain necessary license or other rights, or litigation or claims arising out of, intellectual property matters, may harm our business.
We are regularly subject to general litigation, regulatory disputes, and government inquiries.
We are regularly subject to claims, individual and class action lawsuits, government and regulatory investigations, inquiries or requests, and other proceedings alleging violations of laws, rules and regulations with respect to competition, antitrust, intellectual property, privacy, data protection, information security, anti-money laundering, counter-terrorist financing, sanctions, anti-corruption, consumer protection, fraud, accessibility, securities, tax, labor and employment, commercial disputes, services, charitable fundraising, contract disputes, escheatment of unclaimed or abandoned property, 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 increased as our business has expanded in scale, scope and geographic reach, and our products and services have increased in complexity. In addition, the laws, rules and regulations affecting our business, including those pertaining to Internet and mobile commerce, 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.
The scope, outcome and impact of claims, lawsuits, government investigations, and proceedings to which we are subject cannot be predicted with certainty. Regardless of the outcome, such investigations and proceedings can have an adverse impact on us 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 involves a high degree of judgment. Resolving one or more such legal and regulatory proceedingsof these counterparties, we could potentially require us to make substantial payments to satisfy
judgments, fines or penalties or to settle claims or proceedings, any ofincur significant losses, which could materially and adversely affectnegatively impact our business. These proceedings could also result in reputational harm, criminal sanctions, consent decrees, or orders that prevent us from offering certain products or services, require us to change our business practices in costly ways or develop non-infringing or otherwise altered products or technologies. Any of these consequences could materially and adversely affect our business, results of operations and financial condition.
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. Our outstanding indebtedness and any additional indebtedness we incur may have significant consequences, including the need to use a significant portion of our cash flow from operations and other available cash to service our indebtedness, thereby reducing the funds available for other purposes, including capital expenditures, acquisitions, strategic investments, and share repurchases; the reduction of our flexibility in planning for or reacting to changes in our business, competitive pressures and market conditions; and limits on our ability to obtain additional financing for working capital, capital expenditures, acquisitions, strategic investments, share repurchases, or other general corporate purposes.
Our revolving credit facilities and the indentures for our senior unsecured notes pursuant to which certain of our customer agreementsoutstanding debt securities were issued contain arbitration provisions with classfinancial and other covenants that restrict or could restrict, among other things, our business and operations. If we fail to pay amounts due under a debt instrument or breach any of its covenants, the lenders or noteholders would typically have the right to demand immediate repayment of all borrowings thereunder (subject in certain cases to a grace or cure period). Moreover, any such acceleration and required repayment of, or default in respect of, our indebtedness could, in turn, constitute an event of default under other debt instruments, thereby resulting in the acceleration and required repayment of our indebtedness. Any of these events could materially adversely affect our liquidity and financial condition.
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 waiver provisions thatis taken, the interest rates payable by us under our indebtedness may limitincrease, and our exposureability to consumer class action litigation, there can be no assurance that we will be successful in enforcing these arbitration provisions, including the class action waiver provisions,obtain additional financing in the future on favorable terms 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 provisionsat all could subject us to additional lawsuits, including additional consumer class action litigation, and significantly limit our ability to avoid exposure from consumer class action litigation.be adversely affected.
Changes in U.S. tax laws, exposure to unanticipated additional tax liabilities, or implementation of reporting or record-keeping obligations could have a material adverse effect on our business, cash flow, resultsbusiness.
An increasing number of operations and financial conditions.
On December 22, 2017,U.S. states, the U.S. federal government, enacted comprehensive Federal tax legislation commonly referred toand governments of foreign jurisdictions, such as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The Tax Act makes changes to the corporate tax rate, business-related deductions and taxation of foreign earnings, among others, that will generally be effective for taxable years beginning after December 31, 2017. These changes could have a material adverse impact on the value of our U.S. deferred tax assets, result in significant one-time charges in the current or future taxable years and increase our future U.S. tax expense. We are continuing to evaluate the Tax Act and its requirements,EU Commission, as well as its applicationinternational organizations, such as the Organization for Economic Co-operation and Development, are focused on tax reform and other legislative or regulatory action to our business and its impact onincrease tax revenue. For example, various countries have proposed or enacted digital services taxes. These actions may materially affect our effective tax rate. At this stage, it is unclear how many U.S. states will 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 wherefor which the ultimate tax determination is uncertain. 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 weWe are currently undergoing a number of investigations, audits, and reviews by taxingtax authorities throughout the world.in multiple U.S. and foreign tax jurisdictions. Any adverse outcome of any such audit or review could have a negative effect on our business, and the ultimate tax outcome mayresult in unforeseen tax-related liabilities that differ from the amounts recorded in our financial statements, andwhich may, individually or in the aggregate, 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 the incurrence of losses or earnings being lower than anticipated or by the incurrence of losses, in jurisdictions that have lower statutory tax rates, and earnings being higher than anticipated in jurisdictions that have higher statutory tax rates,rates; by changes in the valuation of our deferred tax assets and liabilities, including as a result of gains on our foreign currency exchange risk management program, orprogram; by changes in tax laws, regulations, or accounting principles, as well asprinciples; or by 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 countriesjurisdictions have implemented or are in the process of implementingand may impose reporting or record-keeping obligations on companies that engage in or facilitate ecommercee-commerce to improve tax compliance. Additionally, aA number of jurisdictions are also 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 systems to meet knownapplicable requirements and expect that further modifications will be required to comply with future requirements, which may negatively 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.
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 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;
diversion of management time and focus;
the need to and difficulty of integrating the operations, systems (including accounting, compliance, management, information, human resource and other administrative systems), technologies, products and personnel of each acquired company, which is an inherently risky and potentially lengthy and costly process;
the need to and difficulty of implementing and/or enhancing controls, procedures and policies appropriate for a larger public company at acquired companies 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 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;
risks associated with the complexity of entering into and effectively managing joint ventures, strategic investments, and other strategic partnerships;
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 legal and regulatory claims or disputes, violations of laws and regulations, commercial disputes, tax liabilities and other known and unknown liabilities;
the acquisition of new customer and employee personal information, which in and of itself may require regulatory approval 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 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 investment inherently involve a lesser degree of control 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 them and who 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, generate sufficient cash flows to service such debt and the other factors discussed in this “Risk Factors” section. There can be no assurance that we will be able to manage any of these risks successfully. 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 the interest amounts we pay on outstanding or future debt. These risks 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 originate loans in the U.S. for our PayPal Credit consumer product. PayPal Working Capital and other 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.
Because we rely on third parties to provide services to us and our customers and to facilitate certain of our business activities, we face increased operational risk. These third parties may be subject to financial, legal, regulatory, labor or other issues, such as service terminations, disruptions or interruptions, that prevent them from providing services to us or our customers. Moreover, these third parties are themselves subject to the risks discussed earlier in the "Risk Factors" section under the caption "Our business is subject to cyberattacks and security and privacy breaches." 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, take actions that degrade the functionality of our services, impose additional costs or requirements on us, or give preferential treatment to competitive services. There can be no assurance that third parties who provide services directly to us or our customers will continue to do so on acceptable terms, or at all. If any third parties were to stop providing services to us or our customers on acceptable terms, we may be unable to procure alternatives from other third parties in a timely and efficient manner, and on acceptable terms or at all. If third parties we rely on do not adequately or appropriately provide their services or perform their responsibilities, we may be 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 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, 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 major payment card networks to further expand our relationship 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. Those
agreements provide 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. 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 , 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
Competition for key personnel could harm our business.
Our future performance depends substantially on 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 locatedfor executive talent, software engineers, 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, 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.talent. We may be limited in our ability to recruit or hire internationally, byincluding due to restrictive domestic immigration laws or policies. In addition, we do not have long-term employment agreements with anypolicies on immigration, travel, or availability of our key personnel and do not maintain any “key person” life insurance policies.visas for skilled workers. The loss of the services of any of our key personnel, or our inability to attract, hire, develop, motivate and retain key and other highly qualified key personnel,and diverse talent, whether in a remote or in-office environment, or protect the safety, health and productivity of our workforce could harm our business.overall business and results of operations.
We are subject to risks associated with information disseminated through our products and services.
Companies providing online servicesWe may be subject to claims relating to information disseminated through them,our online services, 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 relatingWe invest in measures intended to the liability of companies providing online services for information disseminated through their services are subject to frequent challenges. We are also subject to potential liability to third parties for the customer-provided contentdetect and block activities that may occur on our productspayments platform in violation of our policies and services, particularlyapplicable laws. These measures require continuous improvement and may not be sufficiently effective in jurisdictions outsidedetecting and preventing the U.S. whereexchange of information in violation of our policies and applicable laws. If these measures are not sufficiently effective, our business could be negatively impacted. If the applicable laws or regulations that provide protections for online dissemination of information are unsettled. Ifinvalidated or are modified to reduce protections available to us and 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 the Separation from 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.
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.
There are risks associated with certain agreements that we entered into with eBay at the separation.
In connection with the separation, we entered into a separation and distribution agreement with eBay as well as various other agreements, including an operating agreement, 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 determine the allocation of assets and liabilities (including by means of licensing) between the companies following the separation for those respective areas and include associated indemnification obligations. The operating agreement, the data sharing addendum and the product development agreement establish certain commercial relationships between eBay and us related to payment processing, credit and data sharing. If we or eBay is unable to satisfy its performance, payment or indemnification obligations under these agreements, 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. This operating agreement defines a number of important elements of our commercial relationship with eBay, as well as certain obligations and limitations 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. If our operating agreement with eBay expires or 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 alternative payment options, it could lead to customer dissatisfaction, reputational damage, and other adverse consequences, and our business, financial condition and results of operations could be materially harmed.
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 by securities analysts;
changes in our capital structure;
speculation, coverage or sentiment in the media or the investment community;
the operating and stock price performance of comparable companies;
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.
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 board of directors 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 board to issue preferred stock and to determine the voting, dividend and other rights of preferred stock without stockholder approval;
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.
These provisions are not intended to make us immune from takeovers. However, these provisions will apply even if the offer may be considered beneficial by some stockholders and may delay or prevent an acquisition that our board of directors 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We own and lease various properties in the United States (“U.S.”) and other countries around the world. We use thethese properties for executive and administrative offices, datacustomer services and operations centers, product development offices, warehouses, and customer service offices.data centers. As of December 31, 2017,2022, 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 |
| Owned facilities | 1.0 | | | 0.1 | | | 1.1 | |
| Leased facilities | 1.1 |
| | 1.6 |
| | 2.7 |
| Leased facilities | 2.2 | | | 2.0 | | | 4.2 | |
| Total facilities | 2.3 |
| | 1.6 |
| | 3.9 |
| Total facilities | 3.2 | | | 2.1 | | | 5.3 | |
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 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'SREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Price Range of Common StockCOMMON STOCK
PayPal common stock is quoted on the NASDAQ StockGlobal Select Market under the ticker symbol “PYPL.” The following table sets forth the range of high and low per share market prices as reported for each period indicated:
|
| | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | High | | Low | | High | | Low |
| First Quarter | $ | 43.80 |
| | $ | 39.02 |
| | $ | 41.75 |
| | $ | 30.52 |
|
| Second Quarter | $ | 55.14 |
| | $ | 42.06 |
| | $ | 41.49 |
| | $ | 34.00 |
|
| Third Quarter | $ | 65.24 |
| | $ | 52.83 |
| | $ | 41.30 |
| | $ | 35.72 |
|
| Fourth Quarter | $ | 79.39 |
| | $ | 63.69 |
| | $ | 44.52 |
| | $ | 38.06 |
|
As of February 2, 2018,3, 2023, there were approximately 3,9054,123 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 PolicyDIVIDEND POLICY
We have never paid any cash dividends and we currently do not anticipate paying any cash dividends in the foreseeable future.
Stock Repurchase ActivitySTOCK REPURCHASE ACTIVITY
We did not repurchase any shares of our common stock in 2015. In January 2016,July 2018, our Board of Directors authorized a stock repurchase program that providedprovides for the repurchase of up to $2$10 billion of our common stock, with no expiration from the date of authorization. In April 2017,June 2022, our Board of Directors authorized an additional stock repurchase program that provides for the repurchase of up to $5$15 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. TheOur 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 programs 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 capital 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 programs at any time without prior notice.
The stock repurchase activity under our stock repurchase programs during the three months ended December 31, 20172022 is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 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) |
| Balance as of September 30, 2022 | | | | | | | | | $ | 16,871 | |
| October 1, 2022 through October 31, 2022 | 8.2 | | | $ | 85.81 | | | 8.2 | | | | | 16,167 | |
| November 1, 2022 through November 30, 2022 | 3.6 | | | $ | 85.42 | | | 3.6 | | | | | 15,861 | |
| December 1, 2022 through December 31, 2022 | — | | | $ | — | | | — | | | | | 15,861 | |
| Balance as of December 31, 2022 | 11.8 | | | | | 11.8 | | | | | $ | 15,861 | |
|
| | | | | | | | | | | | | | |
| | 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, 2017 | — |
| | — |
| | — |
| | $ | 5,299 |
|
| Period ended November 30, 2017 | — |
| | — |
| | — |
| | $ | 5,299 |
|
| Period ended December 31, 2017 | 4.0 |
| | $ | 74.30 |
| | $ | 300 |
| | $ | 4,999 |
|
| | 4.0 |
| | | | $ | 300 |
| | |
(1)Average price paid per share for open market purchases includes broker commissions.
ITEM 6. SELECTED FINANCIAL DATAREMOVED AND RESERVED
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, 2017, 2016 and 2015 and the selected consolidated balance sheet data as of December 31, 2017 and 2016 as set forth below, from its audited consolidated financial statements, which are included in “Item 15. Exhibits, Financial Statement Schedules” of this Annual Report on Form 10-K. PayPal derived the selected consolidated income statement data for the years ended December 31, 2014 and 2013 and selected consolidated balance sheet data as of December 31, 2015 and 2014 from audited consolidated financial statements not included in this Annual Report on Form 10-K. PayPal derived the selected consolidated balance sheet data as of December 31, 2013 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, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | (In millions, except per share amounts) |
| Consolidated Statement of Income Data: | | | | | | | | | |
| Net revenues | $ | 13,094 |
| | $ | 10,842 |
| | $ | 9,248 |
| | $ | 8,025 |
| | $ | 6,727 |
|
| Operating income | 2,127 |
| | 1,586 |
| | 1,461 |
| | 1,268 |
| | 1,091 |
|
| Net income | 1,795 |
| | 1,401 |
| | 1,228 |
| | 419 |
| | 955 |
|
| Net income per share: | | | | | | | | | |
| Basic | $ | 1.49 |
| | $ | 1.16 |
| | $ | 1.00 |
| | $ | 0.34 |
| | $ | 0.78 |
|
| Diluted | $ | 1.47 |
| | $ | 1.15 |
| | $ | 1.00 |
| | $ | 0.34 |
| | $ | 0.78 |
|
Weighted average shares(1)(2): | | | | | | | | | |
| Basic | 1,203 |
| | 1,210 |
| | 1,222 |
| | 1,218 |
| | 1,218 |
|
| Diluted | 1,221 |
| | 1,218 |
| | 1,229 |
| | 1,224 |
| | 1,224 |
|
| Consolidated Balance Sheet Data: | | | | | | | | | |
| Total assets | $ | 40,774 |
| | $ | 33,103 |
| | $ | 28,881 |
| | $ | 21,917 |
| | $ | 19,160 |
|
| Total long-term liabilities | 1,917 |
| | 1,513 |
| | 1,505 |
| | 386 |
| | 509 |
|
(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 were calculated using the number of common shares distributed on July 17, 2015.
(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, mergers or acquisitions, or management strategies). These forward-looking statements can be identified by words such as “may,” “will,” “would,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan”"continue," “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, new information, 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“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”Company,” and “PayPal” refer to PayPal Holdings, Inc. and its consolidated subsidiaries or, insubsidiaries.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations focuses on a discussion of 2022 results as compared to 2021 results. For a discussion of 2021 results as compared to 2020 results, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” within our Form 10-K for the case of information as of dates or for periods prior toyear ended December 31, 2021 filed with 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.SEC on February 3, 2022.
Business Environment
BUSINESS ENVIRONMENT
THE COMPANY
We are a leading technology platform and digital payments company that enables digital payments and mobile paymentssimplifies commerce experiences on behalf of merchants and consumers and merchants worldwide. Our visionPayPal is committed to democratizedemocratizing financial services as we believe that managingto help improve the financial health of individuals and moving money is a rightto increase economic opportunity for entrepreneurs and businesses of all people, not justsizes around the affluent.world. Our goal is to increaseenable our relevance formerchants and consumers and merchants to manage and move their money anywhere in the world in the markets we serve, anytime, on any platform, and using any device. Our combined payment solutions,device when sending payments or getting paid, including our PayPal, PayPal Credit, Braintree, Venmo, Xoom, and Paydiant products, compose our proprietary Payments Platform.person-to-person payments.
Regulatory environment
We operate globally and in a rapidly evolving regulatory environment characterized by a heightened regulatory focus by regulators globally 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 asindustry, including 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 theThe laws and regulations applicable to us, including those enacted prior to the advent of digital and mobile payments, are continuingcontinue to evolve through legislative and regulatory action and judicial interpretation. Non-compliance withNew or changing laws and regulations, including changes to their interpretation and implementation, 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, weWe monitor these areas closely to ensureand are focused on designing compliant solutions for our customers who depend on us.customers.
Information security
Information security risks for global payments and technology companies like us have increased significantly in recent years. Although we have developed systems and processes designed to protect the data we manage, prevent data loss and other security incidents, and effectively respond to known and potential risks, and expect to continue to expend significant resources to bolster these protections, we remain subject to these risks and there can be no assurance that our security measures will provide sufficient security or prevent breaches or attacks. For additional information regarding our information security risks, see “Item 1A. Risk Factors—Cyberattacks and security vulnerabilities could result in serious harm to our reputation, business, and financial condition.”
RUSSIA AND UKRAINE CONFLICT
With respect to the military hostilities commenced by Russia in Ukraine in February 2022, our priority is the safety and well-being of our PayPal employee community impacted by these events. We continue to take actions to comply with all applicable restrictions and sanctions that may impact our operations. In March 2022, we suspended our transactional services in Russia. We are unable to reasonably estimate the total potential financial impact that may ultimately result from this situation. In the years ended December 31, 2022 and 2021, our total net revenues related to Russia and Ukraine were not material.
BREXIT
The United Kingdom ("(“U.K."”) held a referendum in June 2016 in which a majority of voters approved an exit fromformally exited the European Union ("EU"(“EU”) and the European Economic Area (“Brexit”EEA”). In March 2017, on January 31, 2020 (commonly referred to as “Brexit”) with the expiration of the transition period on December 31, 2020. PayPal (Europe) S.à.r.l. et Cie, SCA (“PayPal (Europe)”) operates in the U.K. government gave formal noticewithin the scope of its intention to leavepassport permissions (as they stood at the EU and started the process of negotiating the future termsend of the U.K.'s relationship withtransition period) under the EU.Temporary Permissions Regime pending the grant of new U.K. authorizations by the U.K. financial regulators. We are currently unable to determine the longer-term impact that Brexit could adversely affectwill have on our business, which will depend, in part, on the implications of new tariff, trade, and regulatory frameworks that now govern the provision of cross-border goods and services between the U.K., regional (including European) and worldwide economic and market conditions and could contribute to instability in globalthe EEA, as well as the financial and foreign exchange markets, including volatility in the valueoperational consequences of the British Pound and Euro.
We have foreign exchange exposure management programs designedrequirement for PayPal (Europe) to help reduceobtain new U.K. authorizations to operate its business longer-term within the impact from foreign currency rate movements. In 2017, 2016 and 2015, net revenues generated from our U.K. operations constituted 11%, 12% and 13%, respectively, of total net revenues. In 2017, 2016 and 2015, net revenues generated from the EU (excluding the U.K.) constituted approximately 20% of total net revenues.market. For additional information on how Brexit could affect our business, see “Item 1A. Risk Factors” under the caption—“Factors—Brexit: The United Kingdom’sU.K.'s departure from the EU could adversely affect us.harm our business, financial condition, and results of operations.”
Information security risksBrexit may contribute to instability in financial, stock, and foreign currency exchange markets, including volatility in the value of the British Pound and Euro. We have foreign currency exchange exposure management programs designed to help reduce the impact from foreign currency exchange rate movements. The tables below provide the percentage of our total net revenues and gross loans and interest receivable from the U.K. and EU for the periods presented:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Net revenues generated from the U.K. | 8 | % | | 9 | % | | 11 | % |
| Net revenues generated from the EU | 17 | % | | 19 | % | | 19 | % |
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Gross loans and interest receivable due from customers in the U.K. | 29 | % | | 40 | % |
| Gross loans and interest receivable due from customers in the EU | 28 | % | | 21 | % |
The change in the percentage of gross loans and interest receivable due from customers in the U.K. and EU year over year was primarily attributable to expansion of our installment credit products in the EU, particularly in Germany where we have increased our product offerings.
MACROECONOMIC ENVIRONMENT
The broader implications of the macroeconomic environment, including uncertainty around the duration and severity of the coronavirus pandemic (“COVID-19”), the Russia and Ukraine conflict, supply chain shortages, a recession globally or in markets in which we operate, higher inflation rates, higher interest rates, and other related global paymentseconomic conditions, remain unknown. A deterioration in macroeconomic conditions could increase the risk of lower consumer spending, merchant and technology companies have significantly increased in recent years. Although we are not aware of any material impacts relating to cyberattacksconsumer bankruptcy, insolvency, business failure, higher credit losses, foreign currency exchange fluctuations, or other information security breaches onbusiness interruption, which may adversely impact our Payments Platform, we are not immune tobusiness. If these risks and there can be no assurance that we 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.”conditions continue or worsen, they could adversely impact our future operating results.
OVERVIEW OF RESULTS OF OPERATIONS
The following table provides a summary of our consolidated operatingfinancial results for the years ended December 31, 2017, 20162022, 2021, and 2015:2020:
| | | | Year Ended December 31, | | Percent Increase/(Decrease) | | Year Ended December 31, | | Percent Increase/(Decrease) |
| | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 |
| | (In millions, except percentages and per share amounts) | | (In millions, except percentages and per share amounts) |
| Net revenues | $ | 13,094 |
| | $ | 10,842 |
| | $ | 9,248 |
| | 21 | % | | 17 | % | Net revenues | $ | 27,518 | | | $ | 25,371 | | | $ | 21,454 | | | 8 | % | | 18 | % |
| Operating expenses | 10,967 |
| | 9,256 |
| | 7,787 |
| | 18 | % | | 19 | % | Operating expenses | 23,681 | | | 21,109 | | | 18,165 | | | 12 | % | | 16 | % |
| Operating income | 2,127 |
| | 1,586 |
| | 1,461 |
| | 34 | % | | 9 | % | Operating income | 3,837 | | | 4,262 | | | 3,289 | | | (10) | % | | 30 | % |
| Operating margin | 16 | % | | 15 | % | | 16 | % | | ** |
| | ** |
| Operating margin | 14 | % | | 17 | % | | 15 | % | | ** | | ** |
| Income tax expense | 405 |
| | 230 |
| | 260 |
| | 76 | % | | (12 | )% | |
| Other income (expense), net | | Other income (expense), net | (471) | | | (163) | | | 1,776 | | | 189 | % | | (109) | % |
| Income tax expense (benefit) | | Income tax expense (benefit) | 947 | | | (70) | | | 863 | | | ** | | (108) | % |
| Effective tax rate | 18 | % | | 14 | % | | 17 | % | | ** |
| | ** |
| Effective tax rate | 28 | % | | (2) | % | | 17 | % | | ** | | ** |
| Net income | $ | 1,795 |
| | $ | 1,401 |
| | $ | 1,228 |
| | 28 | % | | 14 | % | |
Net income per diluted share(1)(2) | $ | 1.47 |
| | $ | 1.15 |
| | $ | 1.00 |
| | 28 | % | | 15 | % | |
| Net income (loss) | | Net income (loss) | $ | 2,419 | | | $ | 4,169 | | | $ | 4,202 | | | (42) | % | | (1) | % |
| Net income (loss) per diluted share | | Net income (loss) per diluted share | $ | 2.09 | | | $ | 3.52 | | | $ | 3.54 | | | (41) | % | | (1) | % |
Net cash provided by operating activities | $ | 2,531 |
| | $ | 3,158 |
| | $ | 2,546 |
| | (20 | )% | | 24 | % | $ | 5,813 | | | $ | 5,797 | | | $ | 6,219 | | | — | % | | (7) | % |
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,Prior period amounts have been revised to conform to the distribution date, eBay stockholderscurrent period presentation. Refer to “Note 1—Overview and Summary of record as of the close of business on July 8, 2015 received one share of PayPal common stockSignificant Accounting Policies” to our consolidated financial statements included in this Form 10-K for every share of eBay common stock held as of the record date.
(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.additional information.
** Not Meaningfulmeaningful.
Net revenues increased $2.3$2.1 billion, or 21%8%, in 2017 and $1.6 billion, or 17%, in 2016. The increases were2022 compared to 2021 driven primarily driven by growth in TPV (astotal payment volume (“TPV”, as defined below under “Net Revenues”“Key Metrics”) of 27% in 2017 and 26% in 2016. Net revenues from our recent acquisitions of TIO and Swift were not material. Net revenues from Xoom (acquired in November 2015) contributed two percentage points to the 2016 growth rate.9%.
Total operating expenses increased $1.7$2.6 billion, or 18%12%, in 2017 and $1.5 billion or 19% in 2016. The increase in 2017 was due primarily2022 compared to an increase in transaction expense, sales and marketing, general and administrative, product development, and restructuring and other charges. Operating expenses related to TIO and Swift collectively contributed one percentage point to the 2017 growth rate. The increase in total operating expense in 2016 was2021 due primarily to an increase in transaction expense, and to a lesser extent, increases in transaction and loancredit losses, which increase with TPVtechnology and higher customer support and operations, general and administrativedevelopment expenses, and depreciationrestructuring and amortization incurred to operate as an independent public company,other charges, partially offset by a decreasedecline in restructuring expense. Xoom operating expenses contributed three percentage points to the 2016 growth rate.sales and marketing expenses.
Operating income increased $541decreased $425 million, or 34%10%, in 2017 and $125 million, or 9% in 2016. Operating income increased in 2017 and 20162022 compared to 2021 due primarily to the increase in net revenues, partially offset by the growth in operating expenses. TIO and Swift collectively had a negative impact our 2017expenses exceeding growth rate of four percentage points. Xoom negatively impacted our 2016 growth rate by four percentage points.in net revenues. Our operating margin was 16%, 15%14% and 16%17% in 2017, 20162022 and 2015,2021, respectively. Operating margin in 2017for 2022 was negatively impacted primarily by growthincreases in our transaction expense which increased 32% in 2017 compared to 2016, compared to net revenues which increased 21% in the same period, as well as restructuring expense of $40 million incurred in 2017. These impacts 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. Operating margin decreased in 2016 due primarily to growth in our transaction expense and transaction and loan losses, which together increased 30% in 2016 compared to 2015.credit losses.
Net income increaseddecreased by $394 million,$1.8 billion, or 28%42%, in 2017 and $173 million, or 14%, in 2016. The increase in net income in 2017 was attributable2022 as compared to an increase2021 due to the previously discussed decrease in operating income of $541$425 million, and an increasehigher expense of $308 million in other income (expense), net, of $28 million, partially offsetdriven primarily by losses on strategic investments, and an increase in income tax expense of $175 million. The increase in net income in 2016 was attributable$1.0 billion primarily related to an increase in operating incomelower benefits associated with stock-based compensation deductions, and higher expense related to intra-group transfers of $125 million, a decrease in income tax expense of $30 million and an increase in other income (expense), net of $18 million.intellectual property.
Non-GAAP financial measuresIMPACT OF FOREIGN CURRENCY EXCHANGE RATES
The following table provides a summary of our consolidated non-GAAP financial measures for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Percent Increase/(Decrease) |
| | 2017 | | 2016 | | 2015 | | 2017 | | 2016 |
| | (In millions, except percentages and per share amounts) |
| Non-GAAP net revenues | $ | 13,055 |
| | $ | 10,842 |
| | $ | 9,248 |
| | 20 | % | | 17 | % |
| Non-GAAP operating income | $ | 2,755 |
| | $ | 2,174 |
| | $ | 1,975 |
| | 27 | % | | 10 | % |
| Non-GAAP operating margin | 21 | % | | 20 | % | | 21 | % | | ** |
| | ** |
|
| Non-GAAP income tax expense | $ | 510 |
| | $ | 394 |
| | $ | 402 |
| | 29 | % | | (2 | )% |
| Non-GAAP net income | $ | 2,318 |
| | $ | 1,825 |
| | $ | 1,588 |
| | 27 | % | | 15 | % |
Non-GAAP net income per diluted share(1)(2) | $ | 1.90 |
| | $ | 1.50 |
| | $ | 1.29 |
| | 27 | % | | 16 | % |
| Free Cash Flow | $ | 1,864 |
| | $ | 2,489 |
| | $ | 1,824 |
| | (25 | )% | | 36 | % |
All amounts in tables are rounded to the nearest millions, 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.
(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
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,pound, Euro, Australian Dollardollar, and Canadian Dollar,dollar, subjecting us to foreign currency exchange risk which may adversely impact our financial results. The strengthening or weakening of the United States (“U.S.”) dollar versus the British Pound,pound, Euro, Australian Dollardollar, and Canadian Dollar,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 2017, 20162022, 2021, and 2015,2020, we generated approximately 43%, 46%, 47% and 50%49% of our net revenues from customers domiciled outside of the United States,U.S., respectively. During each of these periods, U.K. was the only country, other than the United States, where we generated more than 10% of total net revenues in. In 2017, 2016 and 2015, net revenues generated from the EU (excluding the U.K.) constituted approximately 20% of total net revenues. Because we have generatedgenerate 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, including those discussed under “Item 1A. Risk Factors—Risk Factors That May Affect Our Business, Results of Operations and Financial Condition.Factors.”
We calculate the year-over-year impact of foreign currency exchange 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 wherebyin which we designate certainuse foreign currency exchange contracts, designated as cash flow hedges, designedintended to reduce the impact on earnings from foreign currency exchange rate movements. 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,
20172022 and
2016,2021, the year-over-year foreign currency
exchange rate movements relative to the U.S. dollar had the following impact on our reported results:
|
| | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 |
| | (In millions) |
| Favorable (Unfavorable) impact to net revenues (exclusive of hedging impact) | $ | 10 |
| | $ | (196 | ) |
| Hedging impact | 17 |
| | 119 |
|
| Favorable (Unfavorable) impact to net revenues | 27 |
| | (77 | ) |
| (Unfavorable) Favorable impact to operating expense | (21 | ) | | 86 |
|
| Net impact to operating income | $ | 6 |
| | $ | 9 |
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| (In millions) |
| (Unfavorable) favorable impact to net revenues (exclusive of hedging impact) | $ | (949) | | | $ | 440 | |
| Hedging impact | 462 | | | (190) | |
| (Unfavorable) favorable impact to net revenues | (487) | | | 250 | |
| Favorable (unfavorable) impact to operating expense | 492 | | | (181) | |
| Net favorable impact to operating income | $ | 5 | | | $ | 69 | |
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 in multiple currencies, we generally set our
We also use foreign currency exchange rates twice per day, and may face financial exposure if we incorrectly set ourcontracts, designated as net investment hedges, to reduce the foreign currency exchange ratesrisk related to our investment in certain foreign subsidiaries. Gains and losses associated with these instruments will remain in accumulated other comprehensive income (loss) until the underlying foreign subsidiaries are sold or as a result of fluctuations in foreign currency exchange rates between the times that we set our foreign currency exchange rates. substantially liquidated.
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 wherebyin which 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 other income (expense), net, 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 customerAdditionally, in connection with transactions occurring in multiple currencies on our Payments Platformpayments platform, we generally set our foreign currency exchange rates daily and from other value added services. Our revenuesmay 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 and when transactions occur.
KEY METRICS AND FINANCIAL RESULTS
KEY METRICS
TPV, number of payment transactions, active accounts, and number of payment transactions per active account are classified intokey non-financial performance metrics (“key metrics”) that management uses to measure the following two categories:scale of our platform and the relevance of our products and services to our customers, and are defined as follows:
Transaction revenues: Net transaction fees charged to consumers and merchants primarily based on the volume of activity, or Total Payments Volume (“TPV”), processed through our Payments Platform. We define •TPV as is the value 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.
•Number of payment transactions are the total number of payments, net of payment reversals, successfully completed on our payments platform or enabled by PayPal via a partner payment solution, not including gateway-exclusive transactions.
•Anactive accountis an account registered directly with PayPal or a platform access partner that has completed a transaction on our platform, not including gateway-exclusive transactions, within the past 12 months. A platform access partner is a third party whose customers are provided access to PayPal’s platform or services through such third-party’s login credentials, including individuals and entities that utilize Hyperwallet’s payout capabilities. A user may register on our Payments Platform, excludingplatform to access different products and may register more than one account to access a product. Accordingly, a user may have more than one active account. The number of active accounts provides management with additional perspective on the overall scale of our platform, but may not have a direct relationship to our operating results.
•Number of payment transactions processedper active accountreflects the total number of payment transactions within the previous 12-month period, divided by active accounts at the end of the period. The number of payment transactions per active account provides management with insight into the average number of times an account engages in payments activity on our payments platform in a given period. The number of times a consumer account or a merchant account transacts on our platform may vary significantly from the average number of payment transactions per active account.
As our transaction revenue is typically correlated with TPV growth and the number of payment transactions completed on our payments platform, management uses these metrics to gain insights into the scale and strength of our payments platform, the engagement level of our customers, and underlying activity and trends which may be indicators of current and future performance. We present these key metrics to enhance investors’ evaluation of the performance of our business and operating results.
Our key metrics are calculated using internal company data based on the activity we measure on our payments platform and compiled from multiple systems, including systems that are internally developed or acquired through business combinations. While the measurement of our gatewaykey metrics is based on what we believe to be reasonable methodologies and Paydiant products.estimates, there are inherent challenges and limitations in measuring our key metrics globally at our scale. The methodologies used to calculate our key metrics require judgment.
We regularly review our processes for calculating these key metrics, and from time to time we may make adjustments to improve the accuracy or relevance of our metrics. For example, we continuously apply models, processes, and practices designed to detect and prevent fraudulent account creation on our platforms, and work to improve and enhance those capabilities. When we detect a significant volume of illegitimate activity, we generally remove the activity identified from our key metrics. Although such adjustments may impact key metrics reported in prior periods, we generally do not update previously reported key metrics to reflect these subsequent adjustments unless the retrospective impact of process improvements or enhancements is determined by management to be material.
NET REVENUES
Our revenues are classified into the following two categories:
•Transaction revenues: Net transaction fees charged to merchants and consumers on a transaction basis based on the TPV completed on our payments platform. 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.platform. We earn additional fees from merchants and consumers: on transactions settled in foreign currencieswhere we perform currency conversion, when we enable cross-border transactions (i.e., transactions where the merchant orand consumer are in different countries).
, to facilitate the instant transfer of funds for our customers from their PayPal or Venmo account to their bank account or debit card, to facilitate the purchase and sale of cryptocurrencies, as contractual compensation from sellers that violate our contractual terms (for example, through fraud or counterfeiting), and other miscellaneous fees.
Other•Revenues from other value added services: services: Net revenues derived principallyprimarily from revenue earned through partnerships, referral fees, subscription fees, gateway fees, and other services we provide to our merchants and consumers. We also earn revenues from interest and fees earned on our loans and interest receivable, net and held for sale portfolio subscription fees, gateway fees, gains on sale of participation interests in certain consumer loans receivable, and working capital loans and advances, revenue share we earn through partnerships, interest earned on certain PayPalassets underlying 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 a number of factors, including the following:
•The mix of merchants, products, and services;
•The mix between domestic and cross-border transactions;
•The geographic region or country in which a transaction occurs; and
•The amount of PayPal creditour loans receivable outstanding with consumersmerchants and merchants.consumers.
Refer to “Part I, Item 1A, Risk Factors” in this Form 10-K for further discussion on factors that may impact our revenue.
Net revenuesrevenue analysis
The components of our net revenuerevenues for the years ended December 31, 2017, 20162022, 2021, and 20152020 were as follows:follows (in millions):
|
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Percent Increase/ (Decrease) |
| | 2017 | | 2016 | | 2015 | | 2017 | | 2016 |
| | (In millions, except percentages) |
| Transaction revenues | $ | 11,402 |
| | $ | 9,490 |
| | $ | 8,128 |
| | 20 | % | | 17 | % |
| Other value added services | 1,692 |
| | 1,352 |
| | 1,120 |
| | 25 | % | | 21 | % |
| Net revenues | $ | 13,094 |
| | $ | 10,842 |
| | $ | 9,248 |
| | 21 | % | | 17 | % |
Transaction revenues
Transaction revenues increasedgrew by $1.9$1.8 billion, or 20%8%, in 20172022 compared to 2016,2021 driven primarily by growth in our unbranded card processing volume, which consists primarily of our Braintree products and by $1.4 billion, or 17%,services, and to a lesser extent, Venmo products and services, in 2016 compared to 2015. The increase in transaction revenues in 2017 and 2016 was due primarily to theeach case driven by growth in TPV mainly from our PayPal and Braintree products, and in the number of payment transactions both of which wereon our payments platform. This growth in transaction revenues was partially offset by a decline in TPV and revenue generated from our core PayPal products and services, including foreign currency exchange fees revenue, due primarily to an increasea decrease in our active customer accounts and increased engagement from our customers (measured by payment transactions per active account). Xoomrevenue earned on eBay’s marketplace platform. Additionally, for the year ended December 31, 2022, transaction revenues contributed two percentage points to the 2016 growth rate. Net gainsincluded $190 million in contractual compensation from sellers that violated our foreign currency exchange contracts recognized as a component of transaction revenues in 2017 were $17 million,contractual terms, compared to $119$82 million in 2016. Referthe year ended December 31, 2021. This contractual compensation and the year-over-year increase are predominantly attributable to “Note 8—Derivative Instruments” to our consolidated financial statements included elsewhereactivity in this Annual Reportinternational markets.
The graphs below present the respective key metrics (in millions) for the years ended December 31, 2022, 2021, and 2020:
*Reflects active accounts at the end of the applicable period. Active accounts as of December 31, 2021 include 3.2 million active accounts contributed by Paidy, Inc. (“Paidy”) on Form 10-K for additional information on our foreign currency exposure management program.the date of acquisition in October 2021.
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) |
| | 2022 | | 2021 | | 2020 | | 2022 | | 2021 |
| |
| | | | | | | | | |
| | | | | | | | | |
| Number of payment transactions per active account | 51.4 | | | 45.4 | | | 40.9 | | | 13 | % | | 11 | % |
| | | | | | | | | |
| Percent of cross-border TPV | 13 | % | | 16 | % | | 17 | % | | ** | | ** |
|
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Percent Increase/ (Decrease) |
| | 2017 | | 2016 | | 2015 | | 2017 | | 2016 |
| | (In millions, except percentages) |
Active customer accounts(1) | 227 |
| | 197 |
| | 179 |
| | 15 | % | | 10 | % |
Number of payment transactions(2) | 7,606 |
| | 6,129 |
| | 4,928 |
| | 24 | % | | 24 | % |
Payment transactions per active account(3) | 33.6 |
| | 31.1 |
| | 27.5 |
| | 8 | % | | 13 | % |
Total TPV(4) | $ | 451,265 |
| | $ | 354,014 |
| | $ | 281,764 |
| | 27 | % | | 26 | % |
| Percent of cross-border TPV | 21 | % | | 22 | % | | 22 | % | | ** |
| | ** |
|
All amounts in tables are rounded to the nearest millions except
We had active accounts of 435 million and 426 million as otherwise noted. As a result, certain amounts may not recalculate using the rounded amounts provided.
(1) An active customer account is a registered account that successfully sent or received at least one payment or payment reversal through our Payments Platform, excluding transactions processed through our gatewayof December 31, 2022 and Paydiant products, in the past 12 months.
(2) Payment transactions are the total number2021, respectively, an increase of payments, net of payment reversals, successfully completed through our Payments Platform, excluding transactions processed through our gateway and Paydiant products.
(3)2%. Number of payment transactions per active customer account reflects the total numberwas 22.3 billion and 19.3 billion as of payment transactions within the previous 12 month period, divided by active customer accounts at the endDecember 31, 2022 and 2021, respectively, an increase of the period.16%. TPV was $1.36 trillion and $1.25 trillion as of December 31, 2022 and 2021, respectively, an increase of 9%.
** Not meaningful
Transaction revenues grew more slowly than both TPV and the number of payment transactions in 20172022 due primarily to declines in foreign currency exchange fees, TPV attributable to eBay’s marketplace (where we had historically earned higher rates), and a higher proportion of person-to-person (“P2P”) transactions, primarilydecline in revenues from core PayPal products and services, partially offset by a favorable impact from hedging and an increase in revenue from our PayPal and Venmo products and services.
Revenues from which we earn lower rates and foreign exchange hedging losses. The percentage growth in transaction revenues was lower than the percentage growth in TPV and payment transactions in 2016 primarily due to a higher proportion of P2P transactions (including our 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 impact of increases or decreases in prices charged to our customers did not significantly impact transaction revenue growth in 2017 or 2016.
Otherother value added services
Net revenuesRevenues from other value added services increased by $340$343 million, or 25%17%, in 20172022 compared to 2016, and by $232 million, or 21%, in 2016 compared to 2015. Growth in net revenues from other value-added services in 2017 was2021 due primarily to an increase in interest earned on certain assets underlying customer account balances resulting from higher interest rates, our revenue share earned from an independent chartered financial institution (“partner institution”), and interest and fee income earnedrevenue on our PayPal creditmerchant loans receivable portfolio. Swift revenues contributed approximately three percentage points to the 2017 growth rate. The total consumer and merchant loans receivable balance, including loans and receivables, held for sale, as of December 31, 2017 and December 31, 2016 was $7.8 billion and $5.7 billion, respectively, reflecting a year-over-year increase of 37%.
In November 2017, we reached an agreement to sell our U.S. consumer credit receivables portfolio to Synchrony Bank, which we believe will enable us, at closing, 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 of the decision to sell these receivables from our Board of Directors, 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. This transaction will be accounted for as a sale, and the receivables will no longer be reported in our consolidated financial statements
Following the closing of this transaction, which is expected to occur in the third quarter of 2018, Synchrony Bank will become the exclusive issuer of the PayPal Credit online consumer financing program in the U.S., and we will no longer hold an ownership interest in the receivables generated through the program (other than charged off receivables). In addition, we will earn a profit share on the portfolio of consumer receivables owned by Synchrony Bank.
Growth in net revenues from other value added services in 2016the current period was due primarily to interest and fee income earned on our PayPal Credit loans receivable portfolio. The total consumer and merchant loans receivable balance as of December 31, 2016 and December 31, 2015 was $5.7 billion and $4.4 billion, respectively, reflecting a year-over-year increase of 29%.
Inpartially offset by the third quarter of 2015, we amended the terms of our credit program agreement with Synchrony Bank. As a result of the amendment, we recognized $78 millionimpact of revenue earned from the servicing of loans facilitated under the agreement during 2015. In addition, as partU.S. Government’s Paycheck Protection Program in 2021 of $157 million, for which revenue was de minimis in 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 Bank was terminated. The amended credit program agreement will, upon closing of the sale of our U.S. consumer credit receivable portfolio to Synchrony Bank, be superseded by the new program agreement signed in November 2017.current period.
In the second quarter of 2015, we completed an arrangement with certain investors under which we sold participation interests in certain consumerConsumers that have outstanding loans and interest receivables relatedreceivable due to our PayPal Credit product with a gross book value of approximately $708 million. In connection with its purchase of our U.S. consumer credit receivable portfolio, Synchrony Bank has also agreed to acquire the participation interests heldpartner institution may experience hardships that result in losses recognized by the investors.
Operating Expenses
Beginning with the first quarter of 2016, we reclassified certain operating expensespartner institution, which may result in a decrease 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 ofrevenue share earned in future periods. In the business and has therefore discontinued this allocation for external financial reporting purposes. As a result, starting withevent the first quarter of 2016 these operating expenses were reported as part of general and administrative expenses. These changes have no impactoverall return on the previously reported consolidated net incomePayPal branded credit programs funded by the partner institution does not meet a minimum rate of return (“minimum return threshold”) in a particular quarter, our revenue share for prior periods, including total operating expenses, financial position or cash flows for any periods presented,that period would be zero. Further, in the event the overall return on the PayPal branded credit programs managed by the partner institution does not meet the minimum return threshold as measured over four consecutive quarters and do not eliminate any ofin the costs allocatedfollowing quarter, we would be required to us by eBay for any periods priormake a payment to the separation. Prior period amounts have been reclassifiedpartner institution, subject to conform tocertain limitations. Through December 31, 2022, 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 informationoverall return on the effectsPayPal branded credit programs funded by the partner institution exceeded the minimum return threshold.
Seasonality
The Company does not experience meaningful seasonality with respect to net revenues. No individual quarter in 2022, 2021, or 2020 accounted for more than 30% 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.annual net revenue.
OPERATING EXPENSES
The following table summarizes our operating expenses and related metrics we use to assess the trendtrends in each:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Percent Increase/
(Decrease) |
| | 2022 | | 2021 | | 2020 | | 2022 | | 2021 |
| | (In millions, except percentages) |
| Transaction expense | $ | 12,173 | | | $ | 10,315 | | | $ | 7,934 | | | 18 | % | | 30 | % |
| Transaction and credit losses | 1,572 | | | 1,060 | | | 1,741 | | | 48 | % | | (39) | % |
| Customer support and operations | 2,120 | | | 2,075 | | | 1,778 | | | 2 | % | | 17 | % |
| Sales and marketing | 2,257 | | | 2,445 | | | 1,861 | | | (8) | % | | 31 | % |
| Technology and development | 3,253 | | | 3,038 | | | 2,642 | | | 7 | % | | 15 | % |
| General and administrative | 2,099 | | | 2,114 | | | 2,070 | | | (1) | % | | 2 | % |
| Restructuring and other charges | 207 | | | 62 | | | 139 | | | 234 | % | | (55) | % |
| Total operating expenses | $ | 23,681 | | | $ | 21,109 | | | $ | 18,165 | | | 12 | % | | 16 | % |
Transaction expense rate(1) | 0.90 | % | | 0.83 | % | | 0.85 | % | | ** | | ** |
Transaction and credit loss rate(2) | 0.12 | % | | 0.09 | % | | 0.19 | % | | ** | | ** |
|
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Percent Increase/ (Decrease) |
| | 2017 | | 2016 | | 2015 | | 2017 | | 2016 |
| | (In millions, except percentages) |
| Transaction expense | $ | 4,419 |
| | $ | 3,346 |
| | $ | 2,610 |
| | 32 | % | | 28 | % |
| Transaction and loan losses | 1,011 |
| | 1,088 |
| | 809 |
| | (7 | )% | | 34 | % |
| Customer support and operations | 1,364 |
| | 1,267 |
| | 1,110 |
| | 8 | % | | 14 | % |
| Sales and marketing | 1,128 |
| | 969 |
| | 937 |
| | 16 | % | | 3 | % |
| Product development | 953 |
| | 834 |
| | 792 |
| | 14 | % | | 5 | % |
| General and administrative | 1,155 |
| | 1,028 |
| | 873 |
| | 12 | % | | 18 | % |
| Depreciation and amortization | 805 |
| | 724 |
| | 608 |
| | 11 | % | | 19 | % |
| Restructuring and other charges | 132 |
| | — |
| | 48 |
| | ** |
| | ** |
|
| Total operating expenses | $ | 10,967 |
| | $ | 9,256 |
| | $ | 7,787 |
| | 18 | % | | 19 | % |
Transaction expense rate(1) | 0.98 | % | | 0.95 | % | | 0.93 | % | | | | |
Transaction and loan loss rate(2) | 0.22 | % | | 0.31 | % | | 0.29 | % | | | | |
TPVTPV.(2) Transaction and loancredit loss rate is calculated by dividing transaction and loancredit losses by TPVTPV.
** Not Meaningfulmeaningful.
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 towhen we 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. 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 or Venmo account balance or PayPal Credit.our consumer credit products. 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. The cost of funding a transaction is also impacted by the geographic region or country in which a transaction occurs, becauseas we generally pay lower rates for transactions funded with credit or debit cards outside the U.S. thanOur transaction expense rate is impacted by changes in product mix, merchant mix, regional mix, funding mix, and fees paid to payment processors and other financial institutions. Macroeconomic environment changes may also result in behavioral shifts in consumer spending patterns affecting the U.S.type of funding source they use, which could also impact the funding mix.
Transaction expense increased by $1.1$1.9 billion, or 32%18%, in 20172022 compared to 2016, and increased by $736 million, or 28%, in 2016 compared to 2015. The increase in transaction expense in 2017 was2021 due primarily attributable to an increase in TPV of 27%9% and higher assessments charged by payment processors and other financial institutions.unfavorable changes in product mix. The increase in transaction expense rate in 20162022 compared to 2021 was primarilyalso attributable to an increase in TPV of 26%.
The increase in our transaction expense rate in 2017 compared to 2016 was due primarily to higher assessments charged by payment processors and other financial institutions. Our transaction expense rate in 2016 increased compared to 2015 due primarily tounfavorable changes in funding mix.product mix with a higher proportion of TPV from unbranded card processing volume, which generally has higher expense rates than other products and services. For the years ended December 31, 2017, 20162022, 2021, and 2015,2020, approximately 2% of TPV was funded with PayPal Credit. For the years ended December 31, 2017, 2016 and 2015, approximately 44%35%, 45%39%, and 45%40% of TPV, respectively, was generated outside of the U.S. 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, 2017, 2016 and 2015.
Transaction and loancredit losses
Transaction losses include the expense associated with our customer protection programs, fraud, and chargebacks. LoanCredit losses include the current expected credit losses associated with our consumermerchant and merchantconsumer loans receivable portfolio, except loans and interest receivable, held for sale.portfolio. Our transaction and loancredit losses fluctuate depending on many factors, including TPV, product mix, current and projected macroeconomic conditions such as unemployment rates, retail e-commerce sales and household disposable income, merchant insolvency events, changes to and usage of our customer protection programs, the impact of regulatory changes, and the credit quality of loans receivable arising from transactions funded with our credit products for consumers and loans and advances to merchant sellers. Additionally, prior tomerchants. Estimating our current expected credit loss allowances for our loans receivable portfolios is an inherently uncertain process and the distributionultimate losses we recovered certain amountsincur may vary from eBay related to customer protection programs offered on eligible eBay purchases made with PayPal. These costs included the actual amountcurrent estimates. We regularly update our allowance estimates as new facts become known and events occur that may impact the ultimate losses incurred. A deterioration in macroeconomic conditions or other factors beyond those considered in our estimates could result in credit losses that exceed our current estimated credit losses and adversely impact our future operating results.
The components of our transaction and loancredit losses for the years ended December 31, 2017, 20162022, 2021, and 20152020 were as follows:follows (in millions):
|
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Percent Increase/(Decrease) |
| | 2017 | | 2016 | | 2015 | | 2017 | | 2016 |
| | (In millions, except percentages) |
| Transaction losses | $ | 823 |
| | $ | 655 |
| | $ | 511 |
| | 26 | % | | 28 | % |
| Loan losses | 188 |
| | 433 |
| | 298 |
| | (57 | )% | | 45 | % |
| Transaction and loan losses | $ | 1,011 |
| | $ | 1,088 |
| | $ | 809 |
| | (7 | )% | | 34 | % |
Transaction and loancredit losses decreasedincreased by $77$512 million, or 7%48%, in 20172022 compared to 2016, and increased by $279 million, or 34%, in 2016 compared to 2015.2021.
Transaction losses increased by $168were approximately $1.2 billion for both 2022 and 2021, reflecting an increase of $17 million, or 26%, in 2017 compared to 2016, and increased by $144 million, or 28%, in 2016 compared to 2015, due primarily to higher TPV. Our transaction1%. Transaction loss rate calculated(transaction losses divided by dividing transaction loss by TPV, in 2017TPV) was 0.09%, 0.09%, and 2016 was roughly flat compared to 20160.12% for the years ended December 31, 2022, 2021, and 2015,2020, respectively. The growthincrease in transaction losses in 20162022 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.
Loan losses decreased by $245 million, or 57%, in 2017 compared to 2016 and increased by $135 million, or 45%, in 2016 compared to 2015. The decrease in loan losses in 2017 was due primarily to the reversal of approximately $283 million of allowance on loans receivable due to the designation of our U.S. consumer credit portfolio as held for sale. The increase in loan losses in 2016 was due primarilyattributable to an increase in losses related to our Venmo products and services resulting from fraud schemes, an increase in goods and services transactions which are now eligible for coverage by our protection programs, and a loss related to a merchant insolvency proceeding, which was offset by recoveries attributable to enhancements in our fraud recoupment capabilities and benefits from continued risk mitigation strategies. In the second quarter of 2022, we recorded a $114 million estimated loss related to the above mentioned merchant insolvency proceeding, and in the fourth quarter of 2022, this estimated loss was reduced by approximately $75 million to account for recoveries and changes in our estimated loss reserve.
Credit losses increased by $495 million in 2022 compared to 2021. The components of credit losses for the years ended December 31, 2022, 2021, and 2020 were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Net charge-offs(1) | $ | 267 | | | $ | 219 | | | $ | 310 | |
Reserve build (release)(2) | 135 | | | (312) | | | 296 | |
| Credit losses | $ | 402 | | | $ | (93) | | | $ | 606 | |
(1) Net charge-offs includes principal charge-offs partially offset by recoveries for consumer and merchant receivables.
(2) Reserve build (release) represents change in allowance for principal receivables excluding foreign currency remeasurement and, for 2020, impact of adoption of the current expected credit loss accounting standard.
The provision for the year ended December 31, 2022 was primarily attributable to loan originations during the period and a slight deterioration in the credit quality of loans outstanding. The benefit for the year ended December 31, 2021 was attributable to a reduction of our allowance for loans and interest receivable balance year over yeardue primarily to improvements in both current and additional reserves recordedprojected macroeconomic conditions at that point in that periodtime and the credit quality of loans outstanding, partially offset by an increase in the allowance due to increasesoriginations. During 2022 and 2021, allowances for our merchant and consumer portfolios included qualitative adjustments that took into account uncertainty with respect to forecasted principal balance delinquency rates. macroeconomic conditions, and uncertainty around the financial health of our borrowers and effectiveness of loan modification programs made available to merchants.
The total consumer loans and interest receivable balance as of December 31, 2017, 20162022 and 20152021 was $326 million, $5.1$5.9 billion and $4.0$3.8 billion, respectively, reflectingnet of participation interest sold, representing a year-over-year decrease of 94% from 2016 to 2017 and an increase of 28%53% driven by the expansion of our installment credit products. Approximately 37% and 53% of our consumer loans receivable outstanding as of December 31, 2022 and 2021, respectively, were due from 2015consumers in the U.K. The decline in the percentage of consumer loans receivable outstanding in the U.K. at December 31, 2022 compared to 2016. The decrease in consumer loan receivables in 2017December 31, 2021 was due to designation of U.S. consumer credit portfolio as held for sale. The increase in consumer loans receivable in 2016 was due to theoverall growth in the consumer loan portfolio, of loans receivable outstanding arisingparticularly from consumers who chose PayPal Credit as a funding optioninstallment credit products in other markets including Germany, the U.S., and an increase in working capital advances to selected merchant sellers.Japan.
The following table provides information regarding the credit quality of our pool of consumer loans and interest receivable balances:balance:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Percent of consumer loans and interest receivable current | 97.1 | % | | 97.0 | % |
Percent of consumer loans and interest receivable > 90 days outstanding(1) | 1.4 | % | | 1.5 | % |
Net charge-off rate(2) | 4.5 | % | | 4.3 | % |
|
| | | | | |
| | December 31, |
| | 2017 | | 2016 |
Percent of consumer loans and interest receivables current(1) | 96.0 | % | | 90.0 | % |
Percent of consumer loans and interest receivables > 90 days outstanding(1)(2) | 1.2 | % | | 4.1 | % |
Net charge off rate(1)(3) | 3.9 | % | | 6.4 | % |
(1) Amounts as of December 31, 2017 represent loans and interest receivables due from consumer accounts not classified as held for sale and amounts as of December 31, 2016 represent total consumer loans and interest receivables including U.S. consumer receivables because they were not classified as held for sale as of that date.
(2) Represents percentage of balances which are 90 days past the billing date to the consumer.or contractual repayment date, as applicable.
(3)(2) Net charge offcharge-off rate is the annual ratio of net credit losses, excluding fraud losses, on consumer loans receivables as a percentage of the average daily amount of consumer loans and interest receivablesreceivable balance during the year.period.
Through our PayPal Working Capital product, weWe offer creditaccess to merchant finance products tofor certain small and medium-sized merchants that are existing users ofbusinesses, which we refer to as our other payment services.merchant finance offerings. Total PayPal Working Capitalmerchant loans, advances, and interest and fees receivable outstanding, net of participation interest sold, as of December 31, 2022 was $2.1 billion compared to $1.4 billion as of December 31, 2021, representing a year-over-year increase of 48%. The increase in merchant loans, advances and interest and fees receivable outstanding was due primarily to growth in our PayPal Business Loan products in the U.S. Approximately 86% and 5% of our merchant receivables outstanding as of December 31, 2017, net of participation interest sold,2022 were $703 million. Total PayPal Working Capital loans, advancesdue from merchants in the U.S. and fees receivable outstandingU.K., as compared to approximately 82% and 8% as of December 31, 2016 were $558 million, reflecting a year-over-year increase of 26% due to the increase in the availability of our credit products domestically and internationally.
To assess a merchant who requests a PayPal Working Capital loan or advance, we use, among other indicators, an internally developed risk model 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 amount of the loan or advance and fixed fee. The PRM uses multiple variables as predictors of the merchant's ability to repay a working capital loan or 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 loan or advance will have PRM scores greater than 525. We generally consider scores above 610 to be very good and to pose less credit risk. For all outstanding working capital loans and advances, we assess a participating merchant’s PRM score on a recurring basis. At December 31, 2017 and December 31, 2016, the weighted average PRM score related to our PayPal Working Capital balances outstanding was 619 and 625,2021, respectively.
The number of days our PayPal Working Capital loans and advances receivables are past due is based on the current expected repayment period of the loan or advance and fixed fee as compared to an original expected repayment period. We generally calculate the repayment rate of the merchant's estimated future payment volume such that repayment of the advance and fixed fee is expected to occur within 9 to 12 months from the date of the loan or advance. On a monthly 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.
As of December 31, 2017, the total outstanding balance in our pool of Swift merchant loans, advances, interest and fees receivable was $309 million. We closely monitor credit quality for all merchant loans and advances, so that we can evaluate, quantify, and manage our credit risk exposure. To assess a merchant seeking a loan or an advance, we use, among other indicators, a risk model developed internally which utilizes information obtained from multiple data sources, both external and internal, to predict the likelihood of timely and satisfactory repayment by the merchant of the loan or advance amount and the related interest or fixed fee. Drivers of the model include elements sourced from a consumer credit bureau report, business credit bureau report, prior repayment history with our products where available, and other information obtained during the application process. We use delinquency status and trends to assist in making new and ongoing credit decisions, to adjust our internal model, plan our collection practices and strategies and in the end our determination of our allowance for these loans and advances.
For Swift business loan and advance products, the determination of delinquency, from current to 180 days past due, is based on the current expected repayment period of the loan and fixed fee payment as compared to the original expected repayment period.
The following table provides information regarding the credit quality of our merchant receivables:loans, advances, and interest and fees receivable balance:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Percent of merchant loans, advances, and interest and fees receivable current | 90.7 | % | | 91.8 | % |
Percent of merchant loans, advances, and interest and fees receivable > 90 days outstanding(1) | 3.7 | % | | 3.1 | % |
Net charge-off rate (2) | 4.5 | % | | 4.7 | % |
|
| | | | | |
| | December 31, |
| | 2017 | | 2016 |
| PayPal Working Capital loans and advances | | | |
| Percentage of merchant receivables with PRM scores > 610 | 64.0 | % | | 67.7 | % |
| Percentage of merchant receivables with PRM scores < 525 | 16.1 | % | | 12.9 | % |
| Percent of merchant receivables within original expected repayment period | 83.8 | % | | 82.8 | % |
| Percent of merchant receivables > 90 days outstanding after the end of original expected repayment period | 7.1 | % | | 7.5 | % |
| | | | |
| Swift business loans and advances | | | |
| Percent of merchant receivables within original expected repayment period | 95.5 | % | | N/A |
|
| Percent of merchant receivables > 90 days outstanding after the end of original expected repayment period | 1.9 | % | | N/A |
|
(2) Net charge-off rate is the annual ratio of net credit losses, excluding fraud losses, on merchant loans and advances as a percentage of the average daily amount of merchant loans, advances, and interest and fees receivable balance during the period.
We continue to evaluate and modify our acceptable risk parameters in response to the changing macroeconomic environment. Following a reduction in originations in merchant loans and advances in 2020 due to the COVID-19 pandemic, changes to our acceptable risk parameters in 2021 and 2022 resulted in a gradual increase in originations, and thus a higher merchant receivable balance as of December 31, 2022 as compared to December 31, 2021. Modifications to the acceptable risk parameters offor our PayPalconsumer credit products for the periods presented did not have a material impact on our loans. consumer loans in the periods presented.
For additional information, see "Note 10—“Note 11—Loans and Interest Receivable"Receivable” in the notes to the consolidated financial statements, and “Item 1A. Risk Factors—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 includeincludes costs incurred in our global customer operations centers, including costs 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 related to the delivery of our products.products, including payment devices, card production, and customer onboarding and compliance costs.
Customer support and operations costs increased $97$45 million, or 2%, in 2022 compared to 2021. The increase in 2022 was primarily attributable to increases in expenses related to software that supports our consumer loan products, customer onboarding and compliance costs, other operating charges, and costs associated with the production of PayPal and Venmo branded debit and credit cards, partially offset by a decline in contractors and consulting costs.
Sales and marketing
Sales and marketing includes costs incurred for customer acquisition, business development, advertising, and marketing programs.
Sales and marketing expenses decreased $188 million, or 8%, in 20172022 compared to 2016 and increased $157 million, or 14%, in 2016 compared to 2015. The increase in 2017 was2021 due primarily to lower spending on marketing campaigns compared to the prior year and declines in employee-related and consulting costs, partially offset by an increase in network infrastructure expensesamortization of acquired intangibles and contractorpayments made to our channel partners.
Technology and employee related expenses to support the growth in our active customer accountsdevelopment
Technology and the number of payment transactions occurring on our Payments Platform. The increase in 2016 was due primarily to an increase in contractor and employee related expenses to service the growth in our active customer accounts and the number of 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 contractorincludes costs to support these programs.
Sales and marketing expenses increased $159 million, or 16%, in 2017 compared to 2016 and increased $32 million, or 3%, in 2016 compared to 2015. The increase in 2017 was due primarily to higher spend on external marketing campaigns and higher employee related expenses. The increase in 2016 was due primarily to higher marketing spend related to Xoom on advertising campaigns intended to enhance our global brand recognition.
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,payments platform, new products, and the improvement of our existing products. Product development expenses excludeproducts, including the amortization of software and website development costs thatincurred in developing our payments platform, which are capitalized. The amortization ofIt also includes acquired developed technology is included in depreciation and amortization expense.our site operations and other infrastructure costs incurred to support our payments platform.
Product
Technology and development expenses increased $119$215 million, or 14%7%, in 20172022 compared to 2016 and increased $42 million, or 5%, in 2016 compared to 2015. The increase in 2017 was2021 due primarily to an increaseincreases in employee related expenses. The increaseemployee-related expenses and cloud computing services utilized in
2016 was due primarily to an increase in employee related expenses, driven primarily by Xoom, delivering our products and services, partially offset by a decreasedecline in contractorcosts related expenses.to contractors and consultants.
General and administrative
General and administrative expenses consist primarily ofincludes 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 and regulatory proceedings, settlements, judgments and fines, may fluctuate substantially from period to period.
For the period 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 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. 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 period 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 period presented prior to the separation, 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 $127decreased $15 million, or 12%1%, in 20172022 compared to 2016 and increased $155 million, or 18%, in 2016 compared to 2015. The increase in 2017 was2021 due primarily to declines in professional services and employee-related expenses due in part to a decline in stock-based compensation expense, partially offset by an increase in employee related expenses and professional expenses, and continued investments in compliance programs. The increase in 2016 was due primarily to an increase in employee expenses, contractor related expenses incurred to operate as an independent public company, and continued investments in compliance programs.
Depreciation and amortization
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 amortization of equipment used to deliver our services and the amortization of acquired intangible assets.
Depreciation and amortization expenses increased $81 million, or 11%, in 2017 compared to 2016, and increased $116 million, or 19%, in 2016 compared to 2015. The increases in 2017 and 2016 were due primarily to additional depreciation expenses associated with investments in our technology platform. Amortization expense for intangible assets was $126 million, $150 million and $93 million in the years ended December 31, 2017, 2016 and 2015, respectively. The decrease in amortization of acquired intangibles in 2017 was due primarily to lower amortization expense resulting from fully amortized assets. Additionally, the increase in depreciation and amortization in 2017 was partially attributable to an impairment charge of $30 million related to a portion of the acquired customer-related intangible assets. For additional information, see “Note 4—Goodwill and Intangible Assets” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The increase in amortization of intangibles in 2016 was due primarily to our acquisitions completed in 2015.enterprise software services.
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. asset impairment charges.
Restructuring and other charges increased by $132$145 million in 20172022 compared to 2016 due to restructuring charges of $40 million and cost adjustments of $92 million related to our loans and receivables, held for sale portfolio.2021.
InDuring the first quarter of 2017,2022, management approved a plan to implementinitiated a strategic reduction of the existing global workforce which was substantially completed by the end of 2017. We recognized $40 million ofintended to streamline and optimize our global operations to enhance operating efficiency. This effort focused on reducing redundant operations and simplifying our organizational structure. The associated restructuring expenses during the year ended December 31, 2017. No restructuring expenses were recognized in 2016. In January 2015, at a regular meeting of eBay’s board of directors (the “eBay Board”), the eBay Board approved a plan to implement a strategic reduction of its existing global workforce. The reduction was completed by the end of 2015 primarily impacting sales and marketing and product development expenses. Restructuring expenses were $48 million in 2015.
Subsequent to the designation as held for sale of the U.S. consumer credit receivables portfolio in November 2017, approximately $92 million related to adjustments to the cost basis, which are primarily driven by charge offs against those loans and interest receivables, were recorded in restructuring and other charges during the year ended December 31, 2017.
Income Tax Expense
On December 22, 2017,2022 were $121 million. We primarily incurred employee severance and benefits costs, as well as associated consulting costs. The strategic actions associated with this plan were substantially completed by the U.S. government enactedfourth quarter of 2022. The estimated reduction in annualized employee-related costs associated with the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes 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 will resultimpacted workforce was approximately $265 million, including approximately $100 million 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 analysisstock-based compensation. A portion of the impactreduction in annual costs associated with the impacted workforce was reinvested in the business to drive additional growth.
During the first quarter of 2020, management approved a strategic reduction of the Tax Act, we have recordedexisting global workforce as part of a provisional estimatemultiphase process to reorganize our workforce concurrently with the redesign of discrete net tax expense of $180 million inour operating structure, which spanned multiple quarters. During the periodyear ended December 31, 2017. This discrete expense consists of provisional estimates of $1,468 million net expense for2021, the Transition Tax payableassociated restructuring charges were $27 million. We primarily incurred employee severance and benefits costs, as well as associated consulting costs under the 2020 strategic reduction, which was substantially completed in installments over eight years, $1,295 million net benefit for2021.
For information on the decreaseassociated restructuring liability, see “Note 17—Restructuring and Other Charges” 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.
We have not completed our accounting for the income tax effects of certain elements of the Tax Act, including the new GILTI and BEAT taxes. Duenotes to the complexity of these new tax rules,consolidated financial statements included in this Form 10-K.
Additionally, we are continuing to evaluate these provisionsreview our real estate and facility capacity requirements due to our new and evolving work models. We incurred asset impairment charges of the Tax Act$81 million and whether such taxes are recorded$26 million, respectively, due to exiting certain leased properties which resulted in a reduction of right-of-use lease assets and related leasehold improvements.
Other income (expense), net
Other income (expense), net of $(471) million in 2022 increased $308 million as a current-period expense whencompared to $(163) million in 2021 due primarily to net losses and impairments on strategic investments incurred or whether such amounts should be factored into a company’s measurement of its deferred taxes. As a result, we have not included an estimate of the tax expense/benefit related to these items forin the period ended December 31, 2017.compared to net gains in the prior period and, to a lesser extent, an increase in interest expense due in part to incremental expense from our May 2022 fixed rate debt, partially offset by an increase in interest income due to an increase in interest rates.
Income tax expense (benefit)
Our effective income tax rate was 18%28% in 2017, 14%2022 and (2)% in 2016, and 17% in 2015.2021. The increase in our effective income tax rate in 20172022 compared to 2021 was primarily dueattributable to a decrease in discrete nettax benefits associated with stock-based compensation deductions and an increase in tax expense recorded for U.S. tax reform, partially offset byrelated to the adoptionintra-group transfer of the new stock-based compensation accounting standard in 2017. The decrease in our effective tax rate during 2016 compared to 2015 was due primarily to favorable discrete tax adjustments during the year ended December 31, 2016 and other separation-related costs incurred during the year ended December 31, 2015.intellectual property. See “Note 17—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
LIQUIDITY AND CAPITAL RESOURCES
Non-GAAP financial information is defined as a numerical measure of a company’s performance that excludes or includes amounts that create differences between the most directly comparable measure calculated and presented in accordance with accounting principles generally accepted in the United States (“GAAP”). Pursuant to the requirements of Regulation S-K, the following portion of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes 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 financial results prepared in accordance with GAAP.
We present non-GAAP financial measures to enhance an investor’s evaluation of our operating results and to facilitate meaningful comparisons of our results between periods. Management uses these non-GAAP financial measures to, among other things; evaluate our 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:
Stock-based compensation expense and related employer payroll taxes. This consists of expenses for equity awards under our equity incentive plans. We exclude stock-based compensation expense from our non-GAAP measures primarily because they are non-cash expenses. The related employer payroll taxes are dependent on our stock price and the timing and size of exercises and vesting of equity awards, over which management has limited to no control, and as such management does not believe it correlates to the operation of our business.
Amortization or impairment of acquired intangible assets, impairment of goodwill and transaction expenses from the acquisition or disposal of a business. We incur amortization or impairment of acquired intangible assets and goodwill in connection with acquisitions and may incur significant gains or losses or transactional expenses from the acquisition or disposal of a business and therefore exclude these amounts from our non-GAAP measures. We exclude these items because management does not believe they are reflective of our ongoing operating results.
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 expenses for employee severance and other exit and disposal costs. We exclude restructuring charges primarily because management does not believe they are reflective of ongoing operating results.
Certain other significant gains, losses, benefits, or charges that are not indicative of 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 adjustment is made to present stock-based compensation and the other amounts described above on an after-tax basis consistent with the presentation of non-GAAP net income.
The following table provides reconciliations of our consolidated non-GAAP financial measures to the most directly comparable GAAP financial measures for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In millions, except percentages) |
| GAAP net revenues | $ | 13,094 |
| | $ | 10,842 |
| | $ | 9,248 |
|
Other(1) | (39 | ) | | — |
| | — |
|
| Non-GAAP net revenues | $ | 13,055 |
| | $ | 10,842 |
| | $ | 9,248 |
|
(1) Elimination of allowance on interest receivable due to the U.S. consumer credit portfolio designation as held for sale.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 |
| 2016 |
| 2015 |
| | (In millions, except percentages) |
| GAAP operating income | $ | 2,127 |
|
| $ | 1,586 |
|
| $ | 1,461 |
|
| Stock-based compensation expense and related employer payroll taxes | 761 |
|
| 455 |
|
| 356 |
|
Amortization of acquired intangible assets(1) | 129 |
|
| 133 |
|
| 85 |
|
| Separation | — |
|
| — |
|
| 15 |
|
| Restructuring | 40 |
|
| — |
|
| 48 |
|
Other(2) | (302 | ) |
| — |
|
| — |
|
| Acquisition related transaction expense | — |
|
| — |
|
| 10 |
|
| Total non-GAAP operating income adjustments | 628 |
|
| 588 |
|
| 514 |
|
| Non-GAAP operating income | $ | 2,755 |
|
| $ | 2,174 |
|
| $ | 1,975 |
|
| Non-GAAP operating margin | 21 | % |
| 20 | % |
| 21 | % |
(1) Includes $30 million impairment related to a portion of acquired TIO customer-related intangible assets in 2017.
(2) Includes elimination of allowance on loans receivable ($283 million), allowance on interest receivable ($39 million) due to the U.S. consumer credit portfolio designation as held for sale and certain fees associated with the sale ($5 million), and impairment of an investment in an intellectual property fund ($15 million).
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In millions, except percentages) |
| GAAP income before income taxes | $ | 2,200 |
| | $ | 1,631 |
| | $ | 1,488 |
|
| GAAP income tax expense | 405 |
| | 230 |
| | 260 |
|
| GAAP net income | 1,795 |
| | 1,401 |
| | 1,228 |
|
| Non-GAAP adjustments to net income: | | | | | |
| Non-GAAP operating income adjustments (see table above) | $ | 628 |
| | $ | 588 |
| | $ | 514 |
|
Other(1) | 224 |
| | — |
| | — |
|
| Separation (other income and expense) | — |
| | — |
| | (12 | ) |
| Tax effect of non-GAAP adjustments | (329 | ) | | (164 | ) | | (142 | ) |
| Non-GAAP net income | $ | 2,318 |
| | $ | 1,825 |
| | $ | 1,588 |
|
| | | | | | |
| GAAP income tax expense | $ | 405 |
| | $ | 230 |
| | $ | 260 |
|
| Non-GAAP tax adjustments | 105 |
| | 164 |
| | 142 |
|
| Non-GAAP income tax expense | $ | 510 |
| | $ | 394 |
| | $ | 402 |
|
| | | | | | |
| GAAP net income per diluted share | $ | 1.47 |
| | $ | 1.15 |
| | $ | 1.00 |
|
| Non-GAAP net income per diluted share | $ | 1.90 |
| | $ | 1.50 |
| | $ | 1.29 |
|
Shares used in GAAP diluted share calculation(2)(3) | 1,221 |
| | 1,218 |
| | 1,229 |
|
Shares used in non-GAAP diluted share calculation(2)(3) | 1,221 |
| | 1,218 |
| | 1,229 |
|
| | | | | | |
| GAAP effective tax rate | 18 | % | | 14 | % | | 17 | % |
| Tax effect of non-GAAP adjustments to net income | — | % | | 4 | % | | 3 | % |
| Non-GAAP effective tax rate | 18 | % | | 18 | % | | 20 | % |
(1) Tax expense related to the Tax Act ($180 million)and intra-entity transfer of intellectual property ($44 million).
(2) 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.
(3) 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.
In addition to the non-GAAP measures discussed above, we also use free cash flow to assess our performance. Free cash flow represents cash flows from operating activities less purchases of property and equipment. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after the purchases of property 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 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.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In millions) |
| Net cash provided by operating activities | $ | 2,531 |
| | $ | 3,158 |
| | $ | 2,546 |
|
| Less: Purchases of property and equipment | (667 | ) | | (669 | ) | | (722 | ) |
| Free cash flow | $ | 1,864 |
| | $ | 2,489 |
| | $ | 1,824 |
|
Liquidity and Capital Resources
We require liquidity and access to capital to fund our global operations, including our customer protection programs, our PayPal credit products, capital expenditures, investments in our business, potential acquisitions and strategic investments, working capital, and other cash needs. We believe that our existing cash, cash equivalents, and investments, cash expected to be generated from operations, and our expected access to capital markets, together with potential external funding through third party sources, will be sufficient to meet our cash requirements within the next 12 months and beyond.
SOURCES OF LIQUIDITY
Cash, cash equivalents, and investments
The following table summarizes theour cash, cash equivalents, and investments as of December 31, 20172022 and December 31, 2016:2021:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| (In millions) |
Cash, cash equivalents, and investments(1)(2) | $ | 13,723 | | | $ | 12,981 | |
|
| | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 |
| | (In millions) |
Cash, cash equivalents and investments(1)(2) | $ | 7,487 |
| | $ | 6,447 |
|
(1) Excludes assets related to funds receivable and customer accounts of $18.2$36.4 billion and $14.4$36.1 billion atas of December 31, 20172022 and December 31, 2016,2021, respectively.
(2) Excludes total restricted cash of $81$17 million and $17$109 million at December 31, 20172022 and 2021, respectively, and strategic investments of$2.1 billion and $3.2 billion at December 31, 2016, respectively,2022 and cost method investments of$88 million and $50 million as of December 31, 2017 and December 31, 2016,2021, respectively.
Cash, cash equivalents, and investments held by our foreign subsidiaries were $6.1 billion as of December 31, 2017 and $5.0$8.6 billion at December 31, 2016,2022 and $7.4 billion at December 31, 2021, or 81%62% and 78%57%, of our total cash, cash equivalents, and investments as of those respective dates. At December 31, 20172022, all of our cash, cash equivalents, and investments held by foreign subsidiaries were subject to U.S. taxation under Subpart F, Global Intangible Low Taxed Income (“GILTI”) or the one-time transition tax as further discussed in “Note 17—Income Taxes”under the Tax Cuts and Jobs Act of 2017 (“Tax Act”). Subsequent repatriations to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Subsequent repatriationsthe U.S. will not be taxable from a U.S. federal tax perspective, but may be subject to state income 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 ratio 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. Accordingly, not all of our cash is available for general corporate purposes.
Cash flows
The following table summarizes our consolidated statements of cash flows:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | (In millions) |
| Net cash provided by (used in): | | | | | |
Operating activities(1) | $ | 5,813 | | | $ | 5,797 | | | $ | 6,219 | |
Investing activities(1) | (3,421) | | | (5,149) | | | (16,545) | |
Financing activities(1) | (1,110) | | | (557) | | | 12,454 | |
| Effect of exchange rates on cash, cash equivalents, and restricted cash | (155) | | | (102) | | | 169 | |
| Net increase (decrease) in cash, cash equivalents, and restricted cash | $ | 1,127 | | | $ | (11) | | | $ | 2,297 | |
(1) Prior period amounts have been revised to conform to the current period presentation. Refer to “Note 1—Overview and Summary of Significant Accounting Policies” to our consolidated financial statements included in this Form 10-K for additional information.
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 credit losses and actual cash transaction losses incurred, and changes in other assets and liabilities. Significant non-cash expenses for the period include depreciation and amortization and stock-based compensation. The cash impact from actual transaction losses incurred during a period is reflected as changes in other assets and liabilities. The expenses recognized during the period for provision for credit losses are estimates of current expected credit losses on our merchant and consumer credit products. Actual charge-offs of receivables related to our merchants and consumer credit products have no impact on cash from operating activities.
The net cash generated from operating activities of $5.8 billion in 2022 was due primarily to operating income of $3.8 billion, as well as adjustments for non-cash expenses including provision for transaction and credit losses of $1.6 billion, depreciation and amortization of $1.3 billion, and stock-based compensation of $1.3 billion. Cash flows from operating activities was also impacted by changes in income taxes payable of $373 million, net losses on our strategic investments of $304 million, and an increase in other liabilities of $483 million. These changes, which favorably impacted cash generated from operations, were partially offset by actual cash transaction losses incurred during the period of $1.2 billion and changes in deferred income taxes of $811 million.
The net cash generated from operating activities of $5.8 billion in 2021 was due primarily to operating income of $4.3 billion, as well as adjustments for non-cash expenses including stock-based compensation of $1.4 billion, depreciation and amortization of $1.3 billion, and provision for transaction and credit losses of $1.1 billion. Cash flows from operating activities was also impacted by actual cash transaction losses incurred during the period of $1.2 billion, changes in deferred income taxes of $482 million, an increase in accounts receivable of $222 million, and changes in other assets and liabilities of $287 million.
The net cash generated from operating activities of $6.2 billion in 2020 was due primarily to operating income of $3.3 billion, as well as adjustments for non-cash expenses including provision for transaction and credit losses of $1.7 billion, stock-based compensation of $1.4 billion, and depreciation and amortization of $1.2 billion. Cash flows from operating activities was also impacted by net gains on our strategic investments of $1.9 billion and actual cash transaction losses incurred during the period of $1.1 billion, partially offset by increase in other liabilities of $1.0 billion.
Cash paid for income taxes, net in 2022, 2021, and 2020 was $878 million, $474 million, and $565 million, respectively.
Investing activities
Cash flows from investing activities includes purchases, maturities and sales of investments, cash paid for acquisitions and strategic investments, purchases and sales of property and equipment, purchases, originations, and principal repayment of loans receivable, changes in funds receivable, and changes in collateral posted related to derivative instruments, net.
The net cash used in investing activities of $3.4 billion in 2022 was due primarily to purchases and originations of loans receivable of $28.2 billion, purchases of investments of $20.2 billion, changes in funds receivable from customers of $2.8 billion, and purchases of property and equipment of $706 million. These cash outflows were partially offset by principal repayment of loans receivable of $24.9 billion and maturities and sales of investments of $23.4 billion.
The net cash used in investing activities of $5.1 billion in 2021 was due primarily to purchases of investments of $40.1 billion, purchases and originations of loans receivable of $13.4 billion, acquisitions (net of cash acquired) of $2.8 billion, and purchases of property and equipment of $908 million. These cash outflows were partially offset by maturities and sales of investments of $39.7 billion, principal repayment of loans receivable of $11.8 billion, changes in collateral posted related to derivative instruments, net of $336 million, and changes in funds receivable from customers of $193 million.
The net cash used in investing activities of $16.5 billion in 2020 was due primarily to purchases of investments of $41.5 billion, purchases and originations of loans receivable of $6.1 billion, acquisitions (net of cash acquired) of $3.6 billion, changes in funds receivable from customers of $1.6 billion, purchases of property and equipment of $866 million, and changes in collateral posted related to derivative instruments, net of $327 million. These cash outflows were partially offset by maturities and sales of investments of $30.9 billion, principal repayment of loans receivable of $6.4 billion and proceeds from the sale of property and equipment of $120 million.
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, changes in funds payable and amounts due to customers, and changes in collateral received related to derivative instruments, net.
The net cash used in financing activities of $1.1 billion in 2022 was due primarily to the repurchase of $4.2 billion of our common stock under our July 2018 stock repurchase program, repayments of borrowings under financing arrangements of $1.7 billion (including the repurchase and redemption of certain fixed rate notes and repayment of borrowings under a prior credit agreement, both described below under “Available credit and debt”), and tax withholdings of $336 million related to net share settlement of equity awards. These cash outflows were partially offset by borrowings under financing arrangements of $3.5 billion (including proceeds from the issuance of fixed rate debt in May 2022 and borrowings under our Paidy credit agreements) and changes in funds payable and amounts due to customers of $1.5 billion.
The net cash used in financing activities of $557 million in 2021 was due primarily to the repurchase of $3.4 billion of our common stock under our July 2018 stock repurchase program, tax withholdings of $1.0 billion related to net share settlement of equity awards, and repayments of borrowings under Paidy credit agreements of $361 million. The cash outflows were partially offset by changes in funds payable and amounts due to customers of $3.6 billion, cash proceeds from borrowings under our Paidy credit agreements of $272 million, and changes in collateral received related to derivative instruments, net of $207 million.
The net cash generated from financing activities of $12.5 billion in 2020 was due primarily to changes in funds payable and amounts due to customers of $10.6 billion and $7.0 billion of cash proceeds from the issuance of long-term debt in the form of fixed rate notes in May 2020 as well as proceeds from borrowings under our Credit Agreement (as defined below under “Available credit and debt”). These cash inflows were partially offset by repayment of outstanding borrowings under our Credit Agreement of $3.0 billion, the repurchase of $1.6 billion of our common stock under our stock repurchase programs, and tax withholdings related to net share settlement of equity awards of $521 million.
Effect of exchange rates on cash, cash equivalents, and restricted cash
Foreign currency exchange rates had a negative impact of $155 million, a negative impact of $102 million, and a positive impact of $169 million on cash, cash equivalents, and restricted cash during 2022, 2021, and 2020, respectively, which resulted primarily from the impact of fluctuations in the exchange rate of the U.S. dollar to the Australian dollar. The negative impact of foreign currency exchange on cash, cash equivalents, and restricted cash in 2022 was also attributable, to a lesser extent, to the fluctuations in the exchange rate of the U.S. dollar to the Swedish krona, Japanese yen, Indian rupee, and the Euro. The negative impact of foreign currency exchange on cash, cash equivalents, and restricted cash in 2021 was also attributable, to a lesser extent, to the fluctuations in the exchange rate of the U.S. dollar to the Euro and Swedish krona.
Available credit and debt
In the fourth quarter of 2017,February 2022, we entered into a credit agreement ("2017(the “Paidy Credit Agreement"Agreement”) thatwith Paidy as co-borrower, which provides for an unsecured $3.0 billion, 364-day delayed-draw term loanrevolving credit facility which is available in up to three borrowings. Borrowings and other amounts payable underof ¥60.0 billion. In September 2022, the 2017Paidy Credit Agreement are guaranteedwas modified to increase the borrowing capacity by our PayPal, Inc. subsidiary. Subject to specified conditions, we may designate one or more¥30.0 billion for a total borrowing capacity of our subsidiaries¥90.0 billion (approximately $686 million as additional borrowers under the 2017 Credit Agreement provided that we and PayPal, Inc. guarantee all borrowings and other obligations of any such subsidiaries under the 2017 Credit Agreement. As of December 31, 2017, no subsidiaries were designated as additional borrowers. Funds borrowed2022). In the year ended December 31, 2022, ¥64.3 billion (approximately $491 million) was drawn down under the 2017Paidy Credit Agreement may be used for capital allocation and other general corporate purposes of us and our subsidiaries.
Loans under the 2017 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 1.25 percent or (ii) a formula based on the agent bank's prime rate, the NYFRB 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 2017 Credit Agreement will terminate and all amounts owing thereunder will be due and payable in December 2018, 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 2017 Credit Agreement will be terminated and be required to be paid, as applicable. The 2017 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 and a maximum consolidated leverage ratio, based on our public debt ratings.
As of December 31, 2017, $1.0 billion was outstanding under the 2017 Credit Agreement at an interest rate of 2.78% (one month LIBOR plus a margin of 1.125%).Agreement. Accordingly, at December 31, 2017, $2.02022, ¥25.7 billion (approximately $195 million) of borrowing capacity was available for the purposes permitted by the 2017Paidy Credit Agreement, subject to customary conditions to borrowing.
The company maintains uncommitted credit facilities in various regions throughout the world, aggregating to approximately $250 million. Interest rate terms for these facilities vary by region and reflect prevailing market rates for companies with strong credit ratings. As of December 31, 2017, no amounts were outstanding under these facilities, and therefore, approximately $250 million of borrowing capacity was available, subject to customary conditions to borrowing.
In October 2021, we assumed a credit agreement through our acquisition of Paidy (the “Prior Credit Agreement”). The Prior Credit Agreement provided for a secured revolving credit facility of approximately ¥22.8 billion (approximately $198 million at the thirdtime of acquisition). In the first quarter of 2015,2022, we terminated the Prior Credit Agreement and repaid outstanding borrowings.
In September 2019, we entered into a credit agreement (“2015 Credit(the “Credit Agreement” and collectively with the 2017 Credit Agreement, the "Credit Agreements") that provides for an unsecured $2.0$5.0 billion, five-year revolving credit facility that includes a $150 million letter of credit sub-facility and a $150$500 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 from time to time. Borrowings and other amounts payable under the 2015 Credit Agreement are guaranteed by our PayPal, Inc. 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 PayPal, Inc. guarantee all borrowings and other obligations of any such subsidiaries under the 2015 Credit Agreement. As of December 31, 2017,2022, 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 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 certain conditions stated in the 2015 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 2015 Credit Agreement. The 2015 Credit Agreement will terminate and all amounts owing 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 and a maximum consolidated leverage ratio, based on our public debt ratings.
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. As of December 31, 2017, no borrowings or letters of credit were outstanding under the 2015 Credit Agreement. Accordingly, at December 31, 2017, $2.0Agreement and as such, $5.0 billion of borrowing capacity was available for the purposes permitted by the 2015 Credit Agreement, subject to customary conditions to borrowing.
We maintain uncommitted credit facilities in various regions throughout the world with a borrowing capacity of approximately $80 million in the aggregate, where we can withdraw and utilize the funds at our discretion for general corporate purposes. As of December 31, 2022, the majority of the borrowing capacity under these credit facilities was available, subject to customary conditions to borrowing.
In May 2022, May 2020 and September 2019, we issued fixed rate notes with varying maturity dates for an aggregate principal amount of $12.0 billion (collectively referred to as the “Notes”). Proceeds from the issuance of these Notes may be used for general corporate purposes, which may include funding the repayment or redemption of outstanding debt, share repurchases, ongoing operations, capital expenditures, and possible acquisitions of businesses, assets, or strategic investments. In May 2022, we used a portion of the proceeds from that debt issuance to repurchase and redeem $1.6 billion in notes from our prior debt issuances in September 2019 and May 2020. As of December 31, 2022, we had $10.4 billion in fixed rate debt outstanding with varying maturity dates.
For additional information, see “Note 12—Debt” to our consolidated financial statements included in this Form 10-K.
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, make strategic investments, repurchase shares under our stock repurchase programs, or reduce our cost of capital.
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.the arrangement. As of December 31, 2017,2022, we had a total of $3.3$1.7 billion in cash withdrawals offsetting our $3.3$1.7 billion in Aggregate Cash Deposits held within the financial institution under the cash pooling arrangement.
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 March 2016, as approved by management and our Luxembourg banking subsidiary's 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. In the fourth quarter of 2017, an additional amount of $700 million of European customer balances held in our Luxembourg banking subsidiary was approved and designated to be used to extend credit to our U.S. consumers. These funds were classified as cash and cash equivalents in our consolidated balance sheet on the date of designation and represent approximately 30% of European customer balances potentially available for corporate use by us at December 31, 2017 as determined by applying financial regulations maintained by the CSSF. 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 will be successful in achieving that goal.Credit ratings
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. Following the closing of this transaction, which is expected to occur in the third quarter of 2018, Synchrony Bank will become the exclusive issuer of the PayPal credit online consumer financing program in the U.S., and we will no longer hold an ownership interest in the receivables generated through the program (other than charged off receivables).
As of December 31, 2017,2022, we continue to be rated investment grade by Standard and Poor'sPoor’s Financial Services, LLC, and Fitch Ratings, Inc., and Moody’s Investors Services 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 rates, including the interest rate on loansborrowings under our credit agreements.
CURRENT AND FUTURE CASH REQUIREMENTS
Our material cash requirements include funds to support current and potential: operating activities, credit products, customer protection programs, stock repurchases, strategic investments, acquisitions, other commitments, and capital expenditures and other future obligations.
Credit products
Growth in our portfolio of loan receivables increases our liquidity needs, and any inability to meet those liquidity needs could adversely affect our business. We are currently evaluating partnerships and third-party sources of funding for our credit products.
In June 2018, the Credit Agreements. 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 fund European and U.S. credit activities. In August 2022, the CSSF approved PayPal’s management designating up to 50% of such balances to fund our credit activities through the end of February 2023. During 2022, an additional $1.1 billion was approved to fund our credit activities. As of December 31, 2022, the cumulative amount approved by management to be designated to fund credit activities aggregated to $3.8 billion and represented approximately 37% of European customer balances made available for our corporate use at that date, as determined by applying financial regulations maintained by the CSSF. We may periodically seek to designate additional amounts of European customer balances for our credit activities, as we deem necessary, based on utilization of the approved funds and anticipated credit funding requirements. Under certain exceptional circumstances, corporate liquidity could be called upon to meet our obligations related to our European customer balances.
While our objective is to expand the availability of our credit products with capital from external sources, there can be no assurance that we will be successful in achieving that goal.
Customer protection programs
The risk of losses from our customer protection
programs are specific to individual customers,consumers, merchants, and transactions, and may also be impacted by regional variations in, and changes or modifications to, the programs, including as a result of changes in 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,rate ranged between 0.18%0.09% and 0.19%0.12% of TPV. Historical trendsloss rates may not be an indicationindicative of future results.
In January 2016, our Board of Directors authorized a stock repurchase program that provided forStock repurchases
During the repurchase of up to $2year ended December 31, 2022, we repurchased approximately $4.2 billion of our common stock with no expiration fromin the date of authorization.open market under our stock repurchase program authorized in July 2018. In April 2017,June 2022, our Board of Directors authorized an additional stock repurchase program that provides for the repurchase of up to $5$15.0 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. The 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 programs may be made through open market transactions, block trades, privately negotiated transactions or other means at times and in such amounts as management deems appropriate and will be funded from our working capital or other financing alternatives. However, 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, we may terminate our stock repurchase programs at any time without notice.
During the year ended December 31, 2017, we repurchased approximately $1.0 billion of our common stock under our January 2016 and April 2017 stock repurchase programs. As of December 31, 2017,2022, a total of approximately $5.0$861 million and $15.0 billion remained available for future repurchases of our common stock under our April 2017July 2018 and June 2022 stock repurchase program. During the year ended December 31, 2016, we repurchased approximately $995 millionprograms, respectively. For additional information, see “Note 14—Stock Repurchase Programs” to our consolidated financial statements included in this Form 10-K.
Future obligations
As of December 31, 2016, a2022 and 2021, approximately $4.9 billion and $4.1 billion, respectively, of unused credit was available to PayPal Credit account holders in the U.K. While this amount represents the total of approximately $1.0 billion remainedunused credit available, for future repurchaseswe have not experienced, and do not anticipate, that all of our common stockPayPal 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.
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 our estimates. We cannot provide certainty regarding the timing and amounts of these payments. The following table summarizes our obligations as of December 31, 2022 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 | | Transition Tax | | Long-term Debt | | Total |
| Payments Due During the Year Ending December 31, | (In millions) |
| 2023 | $ | 900 | | | $ | 170 | | | $ | 212 | | | $ | 739 | | | $ | 2,021 | |
| 2024 | 708 | | | 157 | | | 284 | | | 1,568 | | | 2,717 | |
| 2025 | 374 | | | 116 | | | 354 | | | 1,280 | | | 2,124 | |
| 2026 | 329 | | | 105 | | | — | | | 1,522 | | | 1,956 | |
| 2027 | 20 | | | 92 | | | — | | | 729 | | | 841 | |
| Thereafter | — | | | 150 | | | — | | | 9,215 | | | 9,365 | |
| $ | 2,331 | | | $ | 790 | | | $ | 850 | | | $ | 15,053 | | | $ | 19,024 | |
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 cloud computing services, advertising, and capital expenditures, and other goods and services entered into in the ordinary course of business.
•Operating lease amounts include minimum rental payments under our January 2016 stock repurchase program.non-cancelable operating leases (including leases not yet commenced) primarily for office and 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.
•Long-term debt amounts represent the future principal and interest payments (based on contractual interest rates) on our fixed-rate debt. For more information, see “Note 12—Debt” to our consolidated financial statements included in this 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 $1.9 billion of such non-current liabilities included in deferred and other tax liabilities recorded on our consolidated balance sheet as of December 31, 2022.
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 “Item 1A. Risk Factors—Risk Factors That May Affect Our Business, Results of Operations and Financial Condition”Factors” and “Note 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 and investments, cash expected to be generated from operations, and our expected access to capital markets, together with potential external funding through third party sources, will be sufficient to fund our operating activities, anticipated capital expenditures, and PayPal 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 program, or reduce our cost of capital.business faces.
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. In the fourth quarter of 2017, an additional amount of $700 million of European customer balances held in our Luxembourg banking subsidiary was approved and designated to be used to extend credit to our U.S. consumers. We have 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 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.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In millions) |
| Net cash provided by (used in): | | | | | |
| Operating activities | $ | 2,531 |
| | $ | 3,158 |
| | $ | 2,546 |
|
| Investing activities | (5,358 | ) | | (4,999 | ) | | (8,038 | ) |
| Financing activities | 4,084 |
| | 2,038 |
| | 4,728 |
|
| Effect of exchange rates on cash and cash equivalents | 36 |
| | — |
| | (44 | ) |
| Net increase/(decrease) in cash and cash equivalents | $ | 1,293 |
| | $ | 197 |
| | $ | (808 | ) |
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 incurred, and changes in other assets and liabilities. Significant non-cash expenses for the period include depreciation and amortization and stock-based compensation. The cash impact from actual transaction losses incurred during a period is reflected as a negative impact to changes in other assets and liabilities in cash from operating activities. The expenses recognized during the period for provision for loan losses are estimates of probable incurred losses on our consumer and merchant credit products (excluding the U.S. consumer credit portfolio from and after November 2017). Actual charge-offs of receivables related to our consumer and merchant credit products (excluding the U.S. consumer credit portfolio from and after November 2017) have no impact on cash from operating activities.
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 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 are now 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 billion in 2015 due primarily to operating income of approximately $1.5 billion. Adjustments for non-cash expenses of depreciation and amortization and stock-based compensation (including excess tax benefits from stock-based compensation) were approximately $928 million during 2015. Adjustments to non-cash expenses related to transaction and loan losses were approximately $809 million during 2015. The cash generated from operating activities was negatively impacted by 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 payables and receivables of approximately $96 million and increases in accounts receivable of approximately $22 million.
Cash paid for income taxes in 2017, 2016 and 2015 was $117 million, $48 million and $216 million, respectively.
Investing Activities
Cash flows from investing activities includes purchases, maturities and sales of investments, cash paid for acquisitions, purchases and sales of property and equipment, changes in principal loans receivable, funds receivable and customer accounts. For periods prior to the distribution, it also includes notes payable and receivable from eBay.
The net cash used in investing activities of $5.4 billion in 2017 was due primarily to purchases of investments of $19.4 billion, increase in funds receivable and customer accounts of $2.5 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 now 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 $18.5 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 $5.0 billion in 2016 was due primarily to purchases of investments of $21.0 billion, increases in our loan receivable portfolio (net of collections) originated through our PayPal credit 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, 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.
The net cash used in investing activities of $8.0 billion in 2015 was due primarily to purchases of investments of $21.6 billion, acquisitions, net of cash acquired 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 billion and net cash inflows relating to receivables from eBay of $575 million.
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 net of repayments under financing arrangements, funds payable and amounts due to customers, and excess tax benefits from stock based compensation (for periods prior to 2017). For periods prior to the distribution, it also includes contribution from eBay.
The net cash provided by financing activities of $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 $1.0 billion, partially offset by repayment of a loan of $170 million assumed in connection with our acquisition of Swift Financial, 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 $3.0 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.
Free Cash Flow
We define free cash flow as cash flows from operating activities less purchases of property and equipment.
Free cash flow was $1.9 billion in 2017, a decrease of $625 million from 2016. The decrease in free cash flow during the period was primarily due to lower cash generated from operating activities of $627 million, which was impacted by the change in presentation from investing activities to operating activities of originations and collections on the U.S. consumer credit portfolio subsequent to its designation as held for sale in November 2017. Free cash flow generated during 2017 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 $2.5 billion in 2016, an increase of $665 million from 2015. The increase in free cash flow during the period was primarily due to higher cash generated from operating activities of $612 million and lower purchases of property and equipment of $53 million. Free cash flow generated during 2016 was used for funding our credit portfolio, repurchasing our common stock under our stock repurchase program, 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
The positive effect of currency exchange rates on cash and cash equivalents 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 and cash equivalents in 2016. The negative effect of currency exchange rates on cash and cash equivalents during 2015 of $44 million was due to the strengthening of the U.S. dollar against certain foreign currencies, primarily the Euro.
Off-Balance Sheet Arrangements
As of December 31, 2017 and 2016, 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, 2017, approximately $26.4 billion of unused credit was available to PayPal Credit account holders compared to $28.8 billion of unused credit as of December 31, 2016. 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 our U.S. PayPal Credit consumer products based on, among other things, account usage and customer creditworthiness. When a consumer funds a purchase in the U.S. using a PayPal credit product issued by a chartered financial institution, the chartered financial institution extends credit to the consumer, funds the extension of credit at the point of sale and advances funds to the merchant. We subsequently purchase the receivables related to the consumer loans extended by the chartered financial institution and, as a result of such purchase, bear the risk of loss in the event of loan defaults. Although the chartered financial institution continues to own each customer account, we own the related receivable (excluding participation interests sold) and are responsible for all servicing functions related to the account. Upon the closing of the sale of our loans and interest receivables, held for sale, which is expected to occur in the third quarter of 2018, we will no longer purchase receivables related to the 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, 2017 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 | | Transition Tax | | Total |
| Payments Due During the Year Ending December 31, | (In millions) |
| 2018 | $ | 287 |
| | $ | 119 |
| | $ | — |
| | $ | 406 |
|
| 2019 | 137 |
| | 112 |
| | 127 |
| | 376 |
|
| 2020 | 65 |
| | 82 |
| | 117 |
| | 264 |
|
| 2021 | 4 |
| | 62 |
| | 117 |
| | 183 |
|
| 2022 | 3 |
| | 50 |
| | 117 |
| | 170 |
|
| Thereafter | 19 |
| | 130 |
| | 990 |
| | 1,139 |
|
| | $ | 515 |
| | $ | 555 |
| | $ | 1,468 |
| | $ | 2,538 |
|
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.
Operating lease amounts include minimum rental payments under our non-cancelable operating leases for office and 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 17—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 $383 million of such non-current liabilities included in deferred and other tax liabilities recorded on our consolidated balance sheet as of December 31, 2017.
Seasonality
The Company does not experience meaningful seasonality with respect to net revenues. No individual quarter in 2017, 2016 or 2015 accounted for more than 30% of annual net revenue.
Critical Accounting Policies and Estimates
The application of U.S. GAAPgenerally accepted accounting principles (“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 or assumption 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 managementManagement 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.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 directiondirectional 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 such estimates require regular review and adjustment.
ALLOWANCE FOR TRANSACTION AND CREDIT LOSSES
Transaction and loan losses
Transaction and loancredit losses include the expense associated with our customer protection programs, fraud, chargebacks, and credit losses associated with our loans receivable balances. Our transaction and loancredit losses fluctuate depending on many factors, including: total TPV, product mix, current and projected macroeconomic conditions, merchant insolvency events, changes to and usage of our customer protection programs, the impact of regulatory changes, and the credit quality of loans receivable arising from transactions funded with our PayPal credit products, which include our PayPal Credit consumer productrevolving and installment credit products offered to consumers at checkout, and merchant loans and advances consisting ofarising from the PayPal Working Capital and Swift business loans and advances to merchant sellers.PayPal Business Loan products.
We establish allowances for negative customer balances and estimated transaction losses arising from processing customer transactions, such as chargebacks for unauthorized credit card use and merchant-related chargebacks due to non-delivery or unsatisfactory delivery of goods or services, ACH returns, buyerpurchased items, purchase protection program claims, account takeovers, and account overdrafts.Automated Clearing House returns. Additions to the allowance, in the form of provisions, are reflected in transaction and loancredit losses inon 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.income (loss). The allowances are based on known facts and circumstances, internal factors including experience with similar cases, historical trends involving loss paymentcollection and write-off patterns, and the mix of transaction and loss types.types, as well as current and projected macroeconomic factors, as appropriate.
We also establish an allowance for loans and interest receivable, which represents our estimate of probable incurred loancurrent expected credit losses inherent in our consumer loans receivable and merchantportfolio of loans and advances. Increases to the allowance for loans receivable are reflected as transaction and loan losses in our consolidated financial statements.interest receivable. This evaluation process is subject to numerous estimates and judgments. In connection with the pending 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. Such allowances on any newly originated U.S. consumer loan receivables from and after November
2017 will not be established. 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 statement of income. For our consumer loan receivables not subject to the sale agreement with Synchrony Bank, consisting primarily of our international consumer receivables, theThe allowance is primarily based on forecasted principal balance delinquency rates (“roll rates”). Roll rates are the percentageexpectations of balances which we estimate will migrate from one stage of delinquency to the nextcredit losses based on our historical experience,lifetime loss data as well as externalmacroeconomic forecasts applied to the portfolio. The loss models incorporate various portfolio attributes including geographic region, first borrowing versus repeat borrowing, delinquency, loan term, internally developed risk ratings, credit rating, and vintage, which vary by portfolio. The loss models also incorporate macroeconomic factors such as estimated bankruptciesforecasted trends in unemployment, retail e-commerce sales, and levelshousehold disposable income (and through the second quarter of unemployment. Roll2022, benchmark credit card charge-off rates), which are sourced externally, using a single scenario that we believe is most appropriate to the economic conditions applicable to a particular period. Projected loss rates, inclusive of historical loss data and macroeconomic factors, are applied to the principal amount of our internationalmerchant and consumer receivables. Our consumer receivables consist of revolving products, which do not have a contractual term, and installment products. The reasonable and supportable forecast period for each stagerevolving products, installment products, and merchant products that we have included in our projected loss rates for 2022, which approximates the estimated life of delinquency, from currentthe loans, is approximately 2 years, approximately 7 months to 180 days past3.5 years, and approximately 2.5 to 3.5 years, respectively. In 2021, the payment due date,reasonable and supportable forecast periods were consistent with 2022 except for installment products, which had an estimated life of 7 months to 2.5 years. We also include qualitative adjustments that incorporate incremental information not captured in order to estimate the principal loans which have incurred losses and are probable to be charged off. For merchant loans and advances receivable, that includes PayPal Working Capital and Swift business loan and advance products, the allowance is primarily based on principal balances, forecasted delinquency rates and recoveries through the usequantitative estimates of a vintage-based loss forecasting model.
The determination of delinquency, from current to 180 days past due, for principal balances related to merchant loans and advances is based on theour current expected repayment period of the loan or advance and interest or fixed fee as compared to the original expected repayment period. For PayPal Working Capital product 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 loan or 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.
credit losses. The allowance for loss against thecurrent expected credit losses on 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 determined primarily based on fee balances, forecastedby applying loss curves to each portfolio by geography, delinquency, rates and recoveries through the useperiod of a vintage-basedorigination, among other factors.
Determining appropriate current expected credit loss forecasting model. Increases to the allowance for fees receivable is 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 PayPal Working Capital 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 of bankruptcy. 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 for international consumers and recorded in restructuring and other charges for the U.S. consumer receivables, in our consolidated statement of income. For Swift business loan and advance products, we charge off the receivable when the repayments are 180 days past our expectation of repayments. 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. Charge-offs that are recovered are recorded as a reduction to our allowanceallowances for loans and interest receivable.
Determining appropriate allowances for these lossesreceivable 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 current expected credit losses incurred at the balance sheet date. Based on our results fordate after incorporating the year endedimpact of externally sourced macroeconomic forecasts. As of December 31, 2017, an aggregate ten percent increase2022, we utilized externally published projections of the U.S. and U.K. forecasted unemployment rates, forecasted U.S. retail e-commerce sales, and forecasted U.K. household disposable income, among others, over the reasonable and supportable forecast period. As of December 31, 2021, we utilized externally published projections of the U.S. and U.K. forecasted unemployment rates over the reasonable and supportable forecast period. The overall principal and interest coverage ratio as of December 31, 2022 and 2021 was approximately 7% and 9%, respectively. A significant change in the forecasted macroeconomic factors could result in a material change in our transactionallowances. Our allowance as of December 31, 2022 took into account uncertainty with respect to macroeconomic conditions, and uncertainty around the financial health of our borrowers and effectiveness of loan loss ratemodification programs made available to merchants. Our allowance as of December 31, 2021 took into account continued volatility with respect to macroeconomic conditions and uncertainty around the financial health of our merchant borrowers, including uncertainty around the effectiveness of loan modification programs made available to merchants. An increase of 1% in the principal and interest coverage ratio would negatively impact transaction and loan lossesincrease our allowances by approximately $101 million.$80 million based on the loans and interest receivable balance outstanding as of December 31, 2022.
Accounting for Income TaxesACCOUNTING 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 taxed by the U.S. through new provisions under the Tax Act such as the new GILTI tax and BEATbase erosion anti-abuse tax or as a result of our indefinite reinvestment assertion. Indefinite reinvestment is determined by management’s judgment about, and intentions concerning, our future operations.
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.adequate. We adjust these reserves, as well as the related interest and penalties, 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, 2017,2022, a one-percentage point increase in our effective tax rate would have resulted in an increase in our income tax expense of approximately $22$34 million.
LOSS CONTINGENCIES
We are currently involved in various claims, regulatory and 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 and are 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 violationviolations and may revise our estimates. Due to the inherent uncertainties of the legal and regulatory processprocesses in the multiple jurisdictions in which we operate, our judgments may bediffer materially different thanfrom the actual outcomes.
Revenue RecognitionREVENUE 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 judgmentmerchants. Evaluating whether these incentives are a payment to determine whether the payments shoulda customer, or consideration payable on behalf of a customer, requires judgment. Incentives determined to be made to a customer, or payable on behalf of a customer, are 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 IntangiblesVALUATION OF GOODWILL AND INTANGIBLES
The valuation of assets acquired in a business combination and asset impairment reviews requirerequires 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-controllingnoncontrolling interest in an acquired business to properly allocate purchase price consideration between assets that are depreciated or amortized 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 believedthat we believe 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.
EVALUATION OF STRATEGIC INVESTMENTS FOR IMPAIRMENT
We evaluate goodwillhave strategic investments in non-marketable equity securities, which include investments that do not have a readily determinable fair value and intangible assetsare measured at cost minus impairment, if any, and are adjusted for changes resulting from observable price changes in orderly transactions for an identical or similar investment in the same issuer (the Measurement Alternative). We review these investments regularly to determine if impairment has occurred. We assess whether an impairment loss on an annual basis,these non-marketable equity securities, which are primarily investments in privately held companies, has occurred based on qualitative factors such as the companies’ financial condition and business outlook, industry performance, regulatory, economic or sooner iftechnological environment, and other relevant events and factors affecting the company. When indicators of impairment exist. Under the Financial Accounting Standards Board (“FASB”) guidance, the evaluation of indefinite-lived intangible assets for impairment allows for a qualitative assessment to be performed, which is similar to the FASB guidance for evaluating goodwill for impairment.
In performing these qualitative assessments,exist, 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 thatestimate the fair value of these non-marketable equity securities using the reporting unit market approach and/or indefinite-lived intangible assets are less than their carrying amounts,the income approach. If any impairment is identified, we must perform a quantitative impairment test.
Underwrite down the quantitative impairment test, if the carrying amount of the reporting unit goodwill or indefinite-lived intangible asset exceeds the impliedinvestment to its fair value and record the corresponding charge through other income (expense), net in our consolidated statements of the reporting unit goodwill or indefinite-lived intangible asset, an impairment loss is recorded in the statement of income. Measurement of theincome (loss). Estimating fair value requires judgment and use of a reporting unit is based on one or more of the following fair value measures: amounts at which the unitestimates such as a whole could be bought or sold in a current transaction between willing parties, using present value techniques of estimated futurediscount rates, forecasted cash flows, or using valuation techniques based on multiplesand market data of earnings or revenue, or a similar performance measure.comparable companies, among others.
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 orderintended 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, 20172022 and 2016,2021, approximately 39%57% and 25%40%, respectively, of our total cash, cash equivalents, and investment portfolio (excluding restricted cash and strategic investments) was held in cash and cash equivalents.The remaining portfolio and assets underlying the customer balances that we hold on our consolidated balance sheetsheets as customer accounts are maintained in interest and non-interest bearing bank deposits, time deposits, U.S. and foreign government and agency securities and corporateavailable-for-sale debt securities. 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. We seek to preserve principal while holding eligible liquid assets, as defined by applicable regulatory requirements and commercial law in thecertain 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.
InInterest rate movements affect the fourth quarterinterest income we earn on cash and cash equivalents, time deposits, and available-for-sale debt securities and the fair value of 2017,those securities. A hypothetical 100 basis points increase in interest rates would have resulted in a decrease in the fair value of our cash equivalents and available-for-sale debt securities investment by approximately $161 million and $272 million at December 31, 2022 and 2021, respectively. Changes in the fair value of our available-for-sale debt securities resulting from such interest rate changes are reported as a component of accumulated other comprehensive income (“AOCI”) and are realized only if we entered into an unsecured $3.0sell the securities prior to their scheduled maturities or the declines in fair values are due to expected credit losses.
As of December 31, 2022 and 2021, we had $10.4 billion 364 day delayed-draw term loan credit facility, which is availableand $9.0 billion, respectively, in up to three borrowings ("2017 Credit Agreement"). Infixed rate debt with varying maturity dates. Since these notes bear interest at fixed rates, they do not result in any financial statement risk associated with changes in interest rates. However, the third quarterfair value of 2015,these notes fluctuates when interest rates change, increasing in periods of declining interest rates and declining in periods of increasing interest rates.
As of December 31, 2022 and 2021, we entered into a $2.0 billion senior unsecured credit facility maturing in 2020 ("2015 Credit Agreement"). The company maintains uncommittedalso had revolving credit facilities in various regions throughout the world, aggregatingof approximately $5.7 billion and $5.2 billion, respectively, available to approximately $250 million.
us. We are obligated to pay interest on borrowings under these facilities as well as other customary fees, including an upfront fee and an unused commitment fee based on our debt rating. Borrowings under the 2017 Credit Agreement and 2015 Credit Agreement,these facilities, if any, bear interest at floating rates. As a result, we will beare exposed to the risk related to fluctuations in interest ratesrate to the extent of our borrowings. As of December 31, 2017, $1.02022 and 2021, we had ¥64.3 billion was(approximately $491 million) and ¥11.3 billion (approximately $98 million), respectively, outstanding under these credit facilities. A 100 basis points hypothetical adverse change in applicable market interest rates would not have resulted in a material impact to interest expense recorded in the 2017 Credit Agreement at an interest rate of 2.78% (one month LIBOR plus a margin of 1.125%). Accordingly, at December 31, 2017, $2.0 billion of borrowing capacity was available forperiod. For additional information, see “Note 12—Debt” in the purposes permitted bynotes to the 2017 Credit Agreement, subject to customary conditions to borrowing. As of December 31, 2017, no borrowings or letters of credit were outstanding under the 2015 Credit Agreement or uncommitted facilities.consolidated financial statements included in this Form 10-K.
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 higherlarger payment obligations by customers of our credit products to us, and otheror to 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 allowanceallowances for loanloans and interest receivable, which could have an adverse effect on our net income.income (loss).
A 100 basis point increase in interest rates would not have had a material impact on our financial assets or liabilities at December 31, 2017 and 2016.FOREIGN CURRENCY EXCHANGE RATE RISK
Foreign Currency Risk
We have significant operations internationally that are denominated in foreign currencies, primarily the British Pound,pound, Euro, Australian Dollardollar, and Canadian Dollar, subjectingdollar, which subject us to foreign currency exchange rate risk whichand may adversely impact our financial results. We transact business in various foreign currencies and have significant international revenues and costs. In addition, we charge our international subsidiaries for their use of intellectual property and technology and for certain corporate services. Our cash flows, results of operations, and certain of our intercompany balances that are exposed to foreign currency 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 United States (“U.S.”) dollar, and are adversely affected by a strengthening of the U.S. dollar, relative to foreign currencies. We considered the historical trends in foreign currency exchange rates and determined that it was reasonably possible that changes in exchange rates of 10% for all currencies could be experienced in the near term.
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 and our investment in foreign subsidiaries from adverse changes in foreign currency exchange rates. These hedging contracts reduce, but do not entirely eliminate, the impact of adverse foreign currency exchange rate movements. We designate these contracts as cash flow hedges of forecasted revenues denominated in foreign currencies and net investment 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”) andAOCI. Cash flow hedges are subsequently reclassified into revenue in the same period the forecasted transaction affects earnings. The ineffective portion of the unrealizedaccumulated gains and losses on these contracts, if any, is recorded immediatelyassociated with net investment hedges will remain in AOCI until the foreign subsidiaries are sold or substantially liquidated, at which point they will be reclassified into earnings.
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%a hypothetical 10% at December 31, 20172022 and 2016,2021, the amount recorded in AOCI related to our foreign currency exchange forward contracts, before taxes, would have been approximately $536$710 million and $341$512 million lower, respectively. Ifrespectively, before considering the U.S. dollar strengthened by 20% at December 31, 2017 and 2016,offsetting impact of the amount recorded in AOCI related to our foreign currency exchange forward contracts, before taxes, would have been approximately $536 million and $341 million higher, respectively.underlying hedged item.
We have an additional foreign currency exchange management program wherebyin which 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 other income (expense), net, and are offset by the gains and losses on the foreign currency exchange contracts.
Adverse changes in exchange rates of 20%a hypothetical 10% for all foreign currencies would have resulted in an adversea negative impact on income before income taxes of approximately $243$173 million and $160$196 million at December 31, 20172022 and 2016,2021, respectively, without considering the offsetting effect of hedging.foreign currency exchange contracts. Foreign currency exchange contracts in place as of December 31, 20172022 would have positively impacted income before income taxes by approximately $211$144 million, resulting in a net negative impact of approximately $32$29 million. Foreign currency exchange contracts in place as of December 31, 20162021 would have positively impacted income before income taxes by approximately $128$203 million, resulting in a net negativepositive impact of approximately $32$7 million. These reasonably possible adverse changes in currency exchange rates of 20%10% were applied to total monetary assets, monetary liabilities, and liabilitiesavailable-for-sale debt securities 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 in the near term.
Equity Price RiskEQUITY INVESTMENT RISK
Our strategic investments are subject to a variety of market-related risks that could substantially reduce or increase the carrying value of the portfolio. As of December 31, 20172022 and 2016,2021, our cost methodstrategic investments totaled $88 million$2.1 billion and $50 million, respectively,$3.2 billion which represented approximately 1%14% and 20% of our total cash, cash equivalents, and short-term and long-term investment portfolio at each of those respective dates. Our strategic investments include marketable equity securities, which are publicly traded, and werenon-marketable equity securities, which are primarily related to cost method investments in privately held companies. We are required to record all adjustments to the value of these strategic investments through our consolidated statements of income (loss). As such, we expect volatility to our net income (loss) in future periods due to changes in fair value related to our investments in marketable equity securities and changes in observable prices related to our non-marketable equity securities accounted for under the Measurement Alternative. These changes could be material based on market conditions. Additionally, the financial success of our investments in privately held companies is typically dependent on a liquidity event, such as a public offering, acquisition, private sale, or other favorable market event providing the ability to realize appreciation in the value of the investment. A hypothetical adverse change of 10% in the carrying value of our strategic investments as of December 31, 2017 and 2016, we did not hold any marketable equity instruments.2022, which could be experienced in the near term, would have resulted in an incremental decrease of approximately $215 million to the carrying value of the portfolio. We review our investmentsnon-marketable equity securities accounted for under the Measurement Alternative 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 purchases and sales and acquisitions of the securities, in which we have invested and other publicly available data.data, for which we assess factors such as the investees’ financial condition and business outlook, industry performance, regulatory, economic, or technological environment, and other relevant events and factors affecting the investee.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited consolidated financial statements covering the years ended December 31, 2017, 20162022, 2021, and 20152020 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.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, 2017,2022, the end of the period covered by this report, our disclosure controls and procedures were effective.
Management'sManagement’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, 2017.2022.
The effectiveness of our internal control over financial reporting as of December 31, 20172022 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.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Incorporated by reference from our Proxy Statement for our 20182023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2017.2022.
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 20182023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2017.2022.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Incorporated by reference from our Proxy Statement for our 20182023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2017.
2022.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Incorporated by reference from our Proxy Statement for our 20182023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2017.
2022.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Incorporated by reference from our Proxy Statement for our 20182023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2017.2022.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
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Report of Independent Registered Public Accounting Firm
To theBoard of Directors and Stockholders of PayPal Holdings, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of PayPal Holdings, Inc. and its subsidiaries (the “Company”) as of December 31, 20172022 and 2016,2021, and the related consolidated statements of income (loss), of comprehensive income (loss), of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2017,2022, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 20172022 listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company'sCompany’s internal control over financial reporting as of December 31, 2017,2022, 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, 20172022 and 2016,2021, and the results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 20172022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for credit losses on financial instruments in 2020.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, 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 the Company’s consolidatedfinancial statements and on the Company'sCompany’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(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 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 regarding the amounts and disclosures in the consolidatedfinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial 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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loans Receivable
As described in Notes 1 and 11 to the consolidated financial statements, as of December 31, 2022, the Company recorded total loans and interest receivable of $7,431 million, net of an allowance of $598 million. The allowance for loans receivable is primarily based on expectations of credit losses based on historical lifetime loss data as well as macroeconomic forecasts applied to the portfolio. The loss models incorporate various portfolio attributes, as well as macroeconomic factors such as forecasted trends in unemployment, retail e-commerce sales, and household disposable income. The forecasted macroeconomic factors are sourced externally, using a single scenario to reflect the economic conditions applicable to a particular period. Management also includes qualitative adjustments that incorporate incremental information not captured in the expected credit loss models.
The principal considerations for our determination that performing procedures relating to the allowance for loans receivable is a critical audit matter are (i) the high degree of auditor subjectivity and effort in performing procedures and evaluating audit evidence relating to certain models which apply macroeconomic forecasts to estimate expected credit losses; and (ii) the audit effort involved in the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the allowance for loans receivable, including controls over certain models which apply macroeconomic forecasts to estimate expected credit losses. These procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in testing management’s process for estimating the allowance for loans receivable. Testing management’s process included (i) evaluating the appropriateness of the methodology and certain models; (ii) testing the completeness and accuracy of certain data used in the estimate; and (iii) evaluating the reasonableness of management’s application of macroeconomic forecasts to estimate expected credit losses.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 7, 20189, 2023
We have served as the Company’s auditor since 2000.
PayPal Holdings, Inc.
CONSOLIDATED BALANCE SHEETS
| | | | As of December 31, | | As of December 31, |
| | 2017 | | 2016 | | 2022 | | 2021 |
| | (In millions, except par value) | | (In millions, except par value) |
| ASSETS | | | | ASSETS | |
| Current assets: | | | | Current assets: | |
| Cash and cash equivalents | $ | 2,883 |
| | $ | 1,590 |
| Cash and cash equivalents | $ | 7,776 | | | $ | 5,197 | |
| Short-term investments | 2,812 |
| | 3,385 |
| Short-term investments | 3,092 | | | 4,303 | |
| Accounts receivable, net | 283 |
| | 214 |
| Accounts receivable, net | 963 | | | 800 | |
| Loans and interest receivable, net of allowances of $129 in 2017 and $339 in 2016 | 1,314 |
| | 5,348 |
| |
| Loans and interest receivable, held for sale | 6,398 |
| | — |
| |
| Loans and interest receivable, net of allowances of $598 and $491 as of December 31, 2022 and 2021, respectively | | Loans and interest receivable, net of allowances of $598 and $491 as of December 31, 2022 and 2021, respectively | 7,431 | | | 4,846 | |
| | Funds receivable and customer accounts | 18,242 |
| | 14,363 |
| Funds receivable and customer accounts | 36,357 | | | 36,141 | |
| | Prepaid expenses and other current assets | 713 |
| | 833 |
| Prepaid expenses and other current assets | 1,898 | | | 1,287 | |
| Total current assets | 32,645 |
| | 25,733 |
| Total current assets | 57,517 | | | 52,574 | |
| Long-term investments | 1,961 |
| | 1,539 |
| Long-term investments | 5,018 | | | 6,797 | |
| Property and equipment, net | 1,528 |
| | 1,482 |
| Property and equipment, net | 1,730 | | | 1,909 | |
| Goodwill | 4,339 |
| | 4,059 |
| Goodwill | 11,209 | | | 11,454 | |
| Intangible assets, net | 168 |
| | 211 |
| Intangible assets, net | 788 | | | 1,332 | |
| Other assets | 133 |
| | 79 |
| Other assets | 2,455 | | | 1,737 | |
| Total assets | $ | 40,774 |
| | $ | 33,103 |
| Total assets | $ | 78,717 | | | $ | 75,803 | |
| LIABILITIES AND EQUITY | | | | LIABILITIES AND EQUITY | | | |
| Current liabilities: | | | | Current liabilities: | |
| Accounts payable | $ | 257 |
| | $ | 192 |
| Accounts payable | $ | 126 | | | $ | 197 | |
| Notes payable | 1,000 |
| | — |
| |
| | Funds payable and amounts due to customers | 19,742 |
| | 15,163 |
| Funds payable and amounts due to customers | 40,107 | | | 38,841 | |
| | Accrued expenses and other current liabilities | 1,781 |
| | 1,459 |
| Accrued expenses and other current liabilities | 4,055 | | | 3,755 | |
| Income taxes payable | 83 |
| | 64 |
| Income taxes payable | 813 | | | 236 | |
| Total current liabilities | 22,863 |
| | 16,878 |
| Total current liabilities | 45,101 | | | 43,029 | |
| Deferred tax liability and other long-term liabilities | 1,917 |
| | 1,513 |
| Deferred tax liability and other long-term liabilities | 2,925 | | | 2,998 | |
| Long-term debt | | Long-term debt | 10,417 | | | 8,049 | |
| Total liabilities | 24,780 |
| | 18,391 |
| Total liabilities | 58,443 | | | 54,076 | |
| Commitments and contingencies (Note 13) |
| |
| Commitments and contingencies (Note 13) | | | |
| Equity: | | | | Equity: | |
| Common stock, $0.0001 par value; 4,000 shares authorized; 1,200 and 1,207 shares outstanding as of December 31, 2017 and 2016, respectively | — |
| | — |
| |
| Treasury stock at cost, 47 and 27 shares as of December 31, 2017 and 2016, respectively | (2,001 | ) | | (995 | ) | |
| Common stock, $0.0001 par value; 4,000 shares authorized; 1,136 and 1,168 shares outstanding as of December 31, 2022 and 2021, respectively | | Common stock, $0.0001 par value; 4,000 shares authorized; 1,136 and 1,168 shares outstanding as of December 31, 2022 and 2021, respectively | — | | | — | |
| Preferred stock, $0.0001 par value; 100 shares authorized, unissued | | Preferred stock, $0.0001 par value; 100 shares authorized, unissued | — | | | — | |
| Treasury stock at cost, 173 and 132 shares as of December 31, 2022 and 2021, respectively | | Treasury stock at cost, 173 and 132 shares as of December 31, 2022 and 2021, respectively | (16,079) | | | (11,880) | |
| Additional paid-in-capital | 14,314 |
| | 13,579 |
| Additional paid-in-capital | 18,327 | | | 17,208 | |
| Retained earnings | 3,823 |
| | 2,069 |
| Retained earnings | 18,954 | | | 16,535 | |
| Accumulated other comprehensive income (loss) | (142 | ) | | 59 |
| Accumulated other comprehensive income (loss) | (928) | | | (136) | |
| Total equity | 15,994 |
| | 14,712 |
| Total equity | 20,274 | | | 21,727 | |
| Total liabilities and equity | $ | 40,774 |
| | $ | 33,103 |
| Total liabilities and equity | $ | 78,717 | | | $ | 75,803 | |
The accompanying notes are an integral part of these consolidated financial statements.
PayPal Holdings, Inc.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
| | | | Year Ended December 31, | | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2022 | | 2021 | | 2020 |
| | (In millions, except for per share amounts) | | (In millions, except for per share amounts) |
| Net revenues | $ | 13,094 |
| | $ | 10,842 |
| | $ | 9,248 |
| Net revenues | $ | 27,518 | | | $ | 25,371 | | | $ | 21,454 | |
| Operating expenses: | | | | | | Operating expenses: | |
| Transaction expense | 4,419 |
| | 3,346 |
| | 2,610 |
| Transaction expense | 12,173 | | | 10,315 | | | 7,934 | |
| Transaction and loan losses | 1,011 |
| | 1,088 |
| | 809 |
| |
| Transaction and credit losses | | Transaction and credit losses | 1,572 | | | 1,060 | | | 1,741 | |
| Customer support and operations | 1,364 |
| | 1,267 |
| | 1,110 |
| Customer support and operations | 2,120 | | | 2,075 | | | 1,778 | |
| Sales and marketing | 1,128 |
| | 969 |
| | 937 |
| Sales and marketing | 2,257 | | | 2,445 | | | 1,861 | |
| Product development | 953 |
| | 834 |
| | 792 |
| |
| Technology and development | | Technology and development | 3,253 | | | 3,038 | | | 2,642 | |
| General and administrative | 1,155 |
| | 1,028 |
| | 873 |
| General and administrative | 2,099 | | | 2,114 | | | 2,070 | |
| Depreciation and amortization | 805 |
| | 724 |
| | 608 |
| |
| Restructuring and other charges | 132 |
| | — |
| | 48 |
| Restructuring and other charges | 207 | | | 62 | | | 139 | |
| Total operating expenses | 10,967 |
| | 9,256 |
| | 7,787 |
| Total operating expenses | 23,681 | | | 21,109 | | | 18,165 | |
| Operating income | 2,127 |
| | 1,586 |
| | 1,461 |
| Operating income | 3,837 | | | 4,262 | | | 3,289 | |
| Other income (expense), net | 73 |
| | 45 |
| | 27 |
| Other income (expense), net | (471) | | | (163) | | | 1,776 | |
| Income before income taxes | 2,200 |
| | 1,631 |
| | 1,488 |
| Income before income taxes | 3,366 | | | 4,099 | | | 5,065 | |
| Income tax expense | 405 |
| | 230 |
| | 260 |
| |
| Net income | $ | 1,795 |
| | $ | 1,401 |
| | $ | 1,228 |
| |
| Income tax expense (benefit) | | Income tax expense (benefit) | 947 | | | (70) | | | 863 | |
| Net income (loss) | | Net income (loss) | $ | 2,419 | | | $ | 4,169 | | | $ | 4,202 | |
| | | | | | | | | | | | |
| Net income per share: | | | | | | |
| Net income (loss) per share: | | Net income (loss) per share: | |
| Basic | $ | 1.49 |
| | $ | 1.16 |
| | $ | 1.00 |
| Basic | $ | 2.10 | | | $ | 3.55 | | | $ | 3.58 | |
| Diluted | $ | 1.47 |
| | $ | 1.15 |
| | $ | 1.00 |
| Diluted | $ | 2.09 | | | $ | 3.52 | | | $ | 3.54 | |
| | | | | | | |
| Weighted average shares: | | | | | | Weighted average shares: | |
| Basic | 1,203 |
| | 1,210 |
| | 1,222 |
| Basic | 1,154 | | | 1,174 | | | 1,173 | |
| Diluted | 1,221 |
| | 1,218 |
| | 1,229 |
| Diluted | 1,158 | | | 1,186 | | | 1,187 | |
The accompanying notes are an integral part of these consolidated financial statements.
PayPal Holdings, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In millions) |
| Net income | $ | 1,795 |
| | $ | 1,401 |
| | $ | 1,228 |
|
| Other comprehensive income (loss), net of reclassification adjustments: | | | | | |
| Foreign currency translation | 43 |
| | (15 | ) | | (37 | ) |
| Unrealized (losses) gains on investments, net | (7 | ) | | 11 |
| | (16 | ) |
| Tax benefit (expense) on unrealized gains/losses on investments, net | 1 |
| | (1 | ) | | 3 |
|
| Change in unrealized gains/losses on hedging activities, net | (242 | ) | | 74 |
| | (69 | ) |
| Tax benefit (expense) on unrealized gains/losses on hedging activities, net | 4 |
| | (1 | ) | | — |
|
| Other comprehensive (loss) income, net of tax | (201 | ) | | 68 |
| | (119 | ) |
| Comprehensive income | $ | 1,594 |
| | $ | 1,469 |
| | $ | 1,109 |
|
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | (In millions) |
| Net income (loss) | $ | 2,419 | | | $ | 4,169 | | | $ | 4,202 | |
| Other comprehensive income (loss), net of reclassification adjustments: | | | | | |
| Foreign currency translation adjustments (“CTA”) | (305) | | | (72) | | | (48) | |
| Net investment hedges CTA (losses) gains, net | (25) | | | — | | | 55 | |
| Tax benefit on net investment hedges CTA losses, net | 6 | | | — | | | — | |
| Unrealized (losses) gains on cash flow hedges, net | (88) | | | 522 | | | (329) | |
| Tax benefit (expense) on unrealized (losses) gains on cash flow hedges, net | 4 | | | (26) | | | 4 | |
| Unrealized (losses) gains on investments, net | (504) | | | (98) | | | 9 | |
| Tax benefit (expense) on unrealized (losses) gains on investments, net | 120 | | | 22 | | | (2) | |
| Other comprehensive income (loss), net of tax | (792) | | | 348 | | | (311) | |
| Comprehensive income (loss) | $ | 1,627 | | | $ | 4,517 | | | $ | 3,891 | |
The accompanying notes are an integral part of these consolidated financial statements.
PayPal Holdings, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | Common Stock Shares | | Treasury Stock | | Additional Paid-In Capital | | Accumulated Other
Comprehensive Income
(Loss) | | Retained Earnings | | Noncontrolling Interest | | Total
Equity |
| | Common Stock Shares | | Treasury Stock | | Additional Paid-In Capital | | Net Parent Investment | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total Equity | |
| | | (In millions) |
| | (In millions) | |
| Balances at December 31, 2014 | 1,218 |
| | $ | — |
| | $ | — |
| | $ | 8,138 |
| | $ | 110 |
| | $ | — |
| | $ | 8,248 |
| |
| Balances at December 31, 2019 | | Balances at December 31, 2019 | 1,173 | | | $ | (6,872) | | | $ | 15,588 | | | $ | (173) | | | $ | 8,342 | | | $ | 44 | | | $ | 16,929 | |
| Adoption of current expected credit loss standard | | Adoption of current expected credit loss standard | — | | | — | | | — | | | — | | | (178) | | | — | | | (178) | |
| Net income | — |
| | — |
| | — |
| | 560 |
| | — |
| | 668 |
| | 1,228 |
| Net income | — | | | — | | | — | | | — | | | 4,202 | | | — | | | 4,202 | |
| 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 |
| |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 1,401 |
| | 1,401 |
| |
| Foreign currency translation | — |
| | — |
| | — |
| | — |
| | (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 |
| |
| Tax expense on unrealized gains on hedging activities, net | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) | |
| Foreign CTA | | Foreign CTA | — | | | — | | | — | | | (48) | | | — | | | — | | | (48) | |
| Net investment hedge CTA gain | | Net investment hedge CTA gain | — | | | — | | | — | | | 55 | | | — | | | — | | | 55 | |
| Unrealized losses on cash flow hedges, net | | Unrealized losses on cash flow hedges, net | — | | | — | | | — | | | (329) | | | — | | | — | | | (329) | |
| Tax benefit on unrealized losses on cash flow hedges, net | | Tax benefit on unrealized losses on cash flow hedges, net | — | | | — | | | — | | | 4 | | | — | | | — | | | 4 | |
| Unrealized gains on investments, net | | Unrealized gains on investments, net | — | | | — | | | — | | | 9 | | | — | | | — | | | 9 | |
| Tax expense on unrealized gains on investments, net | | Tax expense on unrealized gains on investments, net | — | | | — | | | — | | | (2) | | | — | | | — | | | (2) | |
| Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes | 10 |
| | — |
| | (10 | ) | | — |
| | — |
| | — |
| | (10 | ) | Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes | 11 | | | — | | | (365) | | | — | | | — | | | — | | | (365) | |
| Common stock repurchased | (27 | ) | | (995 | ) | | — |
| | — |
| | — |
| | — |
| | (995 | ) | Common stock repurchased | (12) | | | (1,635) | | | — | | | — | | | — | | | — | | | (1,635) | |
| Stock-based compensation | — |
| | — |
| | 449 |
| | — |
| | — |
| | — |
| | 449 |
| Stock-based compensation | — | | | — | | | 1,421 | | | — | | | — | | | — | | | 1,421 | |
| Stock-based compensation tax impact | — |
| | — |
| | 40 |
| | — |
| | — |
| | — |
| | 40 |
| |
| Balances at December 31, 2016 | 1,207 |
| | $ | (995 | ) | | $ | 13,579 |
| | $ | — |
| | $ | 59 |
| | $ | 2,069 |
| | $ | 14,712 |
| |
| Balances at December 31, 2020 | | Balances at December 31, 2020 | 1,172 | | | $ | (8,507) | | | $ | 16,644 | | | $ | (484) | | | $ | 12,366 | | | $ | 44 | | | $ | 20,063 | |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 1,795 |
| | 1,795 |
| Net income | — | | | — | | | — | | | — | | | 4,169 | | | — | | | 4,169 | |
| Foreign currency translation | — |
| | — |
| | — |
| | — |
| | 43 |
| | — |
| | 43 |
| |
| Foreign CTA | | Foreign CTA | — | | | — | | | — | | | (72) | | | — | | | — | | | (72) | |
| Unrealized gains on cash flow hedges, net | | Unrealized gains on cash flow hedges, net | — | | | — | | | — | | | 522 | | | — | | | — | | | 522 | |
| Tax expense on unrealized gains on cash flow hedges, net | | Tax expense on unrealized gains on cash flow hedges, net | — | | | — | | | — | | | (26) | | | — | | | — | | | (26) | |
| Unrealized losses on investments, net | — |
| | — |
| | — |
| | — |
| | (7 | ) | | — |
| | (7 | ) | Unrealized losses on investments, net | — | | | — | | | — | | | (98) | | | — | | | — | | | (98) | |
| Tax benefit on unrealized losses on investments, net | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| Tax benefit on unrealized losses on investments, net | — | | | — | | | — | | | 22 | | | — | | | — | | | 22 | |
| Change in unrealized gains/losses on hedging activities, net | — |
| | — |
| | — |
| | — |
| | (242 | ) | | — |
| | (242 | ) | |
| Tax expense on unrealized gains 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 and stock-based awards issued and assumed, net of shares withheld for employee taxes | 11 | | | — | | | (881) | | | — | | | — | | | — | | | (881) | |
| Common stock repurchased | (20 | ) | | (1,006 | ) | | — |
| | — |
| | — |
| | — |
| | (1,006 | ) | Common stock repurchased | (15) | | | (3,373) | | | — | | | — | | | — | | | — | | | (3,373) | |
| Stock-based compensation | — |
| | — |
| | 756 |
| | — |
| | — |
| | — |
| | 756 |
| Stock-based compensation | — | | | — | | | 1,445 | | | — | | | — | | | — | | | 1,445 | |
| 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 |
| |
| Change in noncontrolling interest | | Change in noncontrolling interest | — | | | — | | | — | | | — | | | — | | | (44) | | | (44) | |
| Balances at December 31, 2021 | | Balances at December 31, 2021 | 1,168 | | | $ | (11,880) | | | $ | 17,208 | | | $ | (136) | | | $ | 16,535 | | | $ | — | | | $ | 21,727 | |
| Net income | | Net income | — | | | — | | | — | | | — | | | 2,419 | | | — | | | 2,419 | |
| Foreign CTA | | Foreign CTA | — | | | — | | | — | | | (305) | | | — | | | — | | | (305) | |
| Net investment hedge CTA losses, net | | Net investment hedge CTA losses, net | — | | | — | | | — | | | (25) | | | — | | | — | | | (25) | |
| Tax benefit on net investment hedges CTA losses, net | | Tax benefit on net investment hedges CTA losses, net | — | | | — | | | — | | | 6 | | | — | | | — | | | 6 | |
| Unrealized losses on cash flow hedges, net | | Unrealized losses on cash flow hedges, net | — | | | — | | | — | | | (88) | | | — | | | — | | | (88) | |
| Tax benefit on unrealized losses on cash flow hedges, net | | Tax benefit on unrealized losses on cash flow hedges, net | — | | | — | | | — | | | 4 | | | — | | | — | | | 4 | |
| Unrealized losses on investments, net | | Unrealized losses on investments, net | — | | | — | | | — | | | (504) | | | — | | | — | | | (504) | |
| Tax benefit on unrealized losses on investments, net | | Tax benefit on unrealized losses on investments, net | — | | | — | | | — | | | 120 | | | — | | | — | | | 120 | |
| Common stock and stock-based awards issued, net of shares withheld for employee taxes | | Common stock and stock-based awards issued, net of shares withheld for employee taxes | 9 | | | — | | | (195) | | | — | | | — | | | — | | | (195) | |
| Common stock repurchased | | Common stock repurchased | (41) | | | (4,199) | | | — | | | — | | | — | | | — | | | (4,199) | |
| Stock-based compensation | | Stock-based compensation | — | | | — | | | 1,313 | | | — | | | — | | | — | | | 1,313 | |
| Other | | Other | — | | | — | | | 1 | | | — | | | — | | | — | | | 1 | |
| Balances at December 31, 2022 | | Balances at December 31, 2022 | 1,136 | | | $ | (16,079) | | | $ | 18,327 | | | $ | (928) | | | $ | 18,954 | | | $ | — | | | $ | 20,274 | |
The accompanying notes are an integral part of these consolidated financial statements.
PayPal Holdings, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | (In millions) |
| Cash flows from operating activities: | | | | | |
| Net income (loss) | $ | 2,419 | | | $ | 4,169 | | | $ | 4,202 | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | |
| Transaction and credit losses | 1,572 | | | 1,060 | | | 1,741 | |
| Depreciation and amortization | 1,317 | | | 1,265 | | | 1,189 | |
| Stock-based compensation | 1,261 | | | 1,376 | | | 1,376 | |
| Deferred income taxes | (811) | | | (482) | | | 165 | |
| | | | | |
| Net (gains) losses on strategic investments | 304 | | | (46) | | | (1,914) | |
| Other | 205 | | | 100 | | | 47 | |
| Changes in assets and liabilities: | | | | | |
| Accounts receivable | (163) | | | (222) | | | (100) | |
| | | | | |
| Transaction loss allowance for cash losses, net | (1,230) | | | (1,178) | | | (1,120) | |
| Other current assets and non-current assets | 118 | | | (486) | | | (171) | |
| Accounts payable | (35) | | | (31) | | | (4) | |
| Income taxes payable | 373 | | | 73 | | | (230) | |
| Other current liabilities and non-current liabilities | 483 | | | 199 | | | 1,038 | |
| | | | | |
| Net cash provided by operating activities | 5,813 | | | 5,797 | | | 6,219 | |
| Cash flows from investing activities: | | | | | |
| Purchases of property and equipment | (706) | | | (908) | | | (866) | |
| Proceeds from sales of property and equipment | 5 | | | 5 | | | 120 | |
| Purchases and originations of loans receivable | (28,170) | | | (13,420) | | | (6,098) | |
| Principal repayment of loans receivable | 24,903 | | | 11,826 | | | 6,392 | |
| Purchases of investments | (20,219) | | | (40,116) | | | (41,513) | |
| Maturities and sales of investments | 23,411 | | | 39,698 | | | 30,908 | |
| Acquisitions, net of cash and restricted cash acquired | — | | | (2,763) | | | (3,609) | |
| Funds receivable | (2,813) | | | 193 | | | (1,552) | |
| Collateral posted related to derivative instruments, net | (19) | | | 336 | | | (327) | |
| Other investing activities | 187 | | | — | | | — | |
| Net cash used in investing activities | (3,421) | | | (5,149) | | | (16,545) | |
| Cash flows from financing activities: | | | | | |
| Proceeds from issuance of common stock | 143 | | | 162 | | | 137 | |
| Purchases of treasury stock | (4,199) | | | (3,373) | | | (1,635) | |
| Tax withholdings related to net share settlements of equity awards | (336) | | | (1,036) | | | (521) | |
| Borrowings under financing arrangements | 3,475 | | | 272 | | | 6,966 | |
| Repayments under financing arrangements | (1,686) | | | (361) | | | (3,000) | |
| Funds payable and amounts due to customers | 1,498 | | | 3,572 | | | 10,597 | |
| Collateral received related to derivative instruments, net | (6) | | | 207 | | | (38) | |
| Other financing activities | 1 | | | — | | | (52) | |
| Net cash (used in) provided by financing activities | (1,110) | | | (557) | | | 12,454 | |
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (155) | | | (102) | | | 169 | |
| Net change in cash, cash equivalents, and restricted cash | 1,127 | | | (11) | | | 2,297 | |
| Cash, cash equivalents, and restricted cash at beginning of period | 18,029 | | | 18,040 | | | 15,743 | |
| Cash, cash equivalents, and restricted cash at end of period | $ | 19,156 | | | $ | 18,029 | | | $ | 18,040 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In millions) |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 1,795 |
| | $ | 1,401 |
| | $ | 1,228 |
|
| Adjustments: | | | | | |
| Transaction and loan losses | 1,011 |
| | 1,088 |
| | 809 |
|
| Depreciation and amortization | 805 |
| | 724 |
| | 608 |
|
| Stock-based compensation | 733 |
| | 438 |
| | 346 |
|
| Deferred income taxes | (1,299 | ) | | 52 |
| | 127 |
|
| Excess tax benefits from stock-based compensation | — |
| | (40 | ) | | (26 | ) |
| Gain on sale of principal loans receivable held for sale, net | (25 | ) | | (24 | ) | | (40 | ) |
| Cost basis adjustments to loans and interest receivable held for sale | 92 |
| | — |
| | — |
|
| Changes in assets and liabilities: | | | | | |
| Accounts receivable | 12 |
| | (77 | ) | | (22 | ) |
| Receivable from eBay | — |
| | — |
| | 121 |
|
| Changes in loans and interest receivable held for sale, net | (1,308 | ) | | 24 |
| | 14 |
|
| Transaction loss allowance for cash losses, net | (817 | ) | | (643 | ) | | (493 | ) |
| Other current assets and non-current assets | (188 | ) | | (145 | ) | | (384 | ) |
| Accounts payable | 62 |
| | 11 |
| | 12 |
|
| Payable to eBay | — |
| | — |
| | (217 | ) |
| Income taxes payable | 19 |
| | 69 |
| | 40 |
|
| Other current liabilities and non-current liabilities | 1,639 |
| | 280 |
| | 423 |
|
| Net cash provided by operating activities | 2,531 |
| | 3,158 |
| | 2,546 |
|
| Cash flows from investing activities: | | | | | |
| Purchases of property and equipment | (667 | ) | | (669 | ) | | (722 | ) |
| Proceeds from sales of property and equipment | — |
| | — |
| | 26 |
|
| Changes in principal loans receivable, net | (920 | ) | | (1,523 | ) | | (819 | ) |
| Purchases of investments | (19,418 | ) | | (21,041 | ) | | (21,626 | ) |
| Maturities and sales of investments | 18,450 |
| | 18,429 |
| | 16,148 |
|
| Acquisitions, net of cash acquired | (323 | ) | | (19 | ) | | (1,225 | ) |
| Funds receivable and customer accounts | (2,480 | ) | | (176 | ) | | (395 | ) |
| Notes payable and receivable from eBay | — |
| | — |
| | 575 |
|
| Net cash used in investing activities | (5,358 | ) | | (4,999 | ) | | (8,038 | ) |
| Cash flows from financing activities: | | | | | |
| Proceeds from issuance of common stock | 144 |
| | 109 |
| | 75 |
|
| Purchases of treasury stock | (1,006 | ) | | (995 | ) | | — |
|
| Excess tax benefits from stock-based compensation | — |
| | 40 |
| | 26 |
|
| Contribution from eBay | — |
| | — |
| | 3,858 |
|
| Tax withholdings related to net share settlements of restricted stock units and restricted stock awards | (166 | ) | | (118 | ) | | (18 | ) |
| Borrowings under financing arrangements, net of repayments | 820 |
| | (21 | ) | | (862 | ) |
| Funds payable and amounts due to customers | 4,292 |
| | 3,023 |
| | 1,649 |
|
| Net cash provided by financing activities | 4,084 |
| | 2,038 |
| | 4,728 |
|
| Effect of exchange rate changes on cash and cash equivalents | 36 |
| | — |
| | (44 | ) |
| Net increase (decrease) in cash and cash equivalents | 1,293 |
| | 197 |
| | (808 | ) |
| Cash and cash equivalents at beginning of period | 1,590 |
| | 1,393 |
| | 2,201 |
|
| Cash and cash equivalents at end of period | $ | 2,883 |
| | $ | 1,590 |
| | $ | 1,393 |
|
PayPal Holdings, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
| | | | Year Ended December 31, | | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2022 | | 2021 | | 2020 |
| | (In millions) | | (In millions) |
| Supplemental cash flow disclosures: | | | | | | Supplemental cash flow disclosures: | |
| Cash paid for interest | $ | 6 |
| | $ | 4 |
| | $ | 16 |
| Cash paid for interest | $ | 280 | | | $ | 231 | | | $ | 190 | |
| Cash paid for income taxes | $ | 117 |
| | $ | 48 |
| | $ | 216 |
| |
| Cash paid for income taxes, net | | Cash paid for income taxes, net | $ | 878 | | | $ | 474 | | | $ | 565 | |
| | The table below 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: | | The table below 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 | | Cash and cash equivalents | $ | 7,776 | | | $ | 5,197 | | | $ | 4,794 | |
| Short-term and long-term investments | | Short-term and long-term investments | 17 | | | 109 | | | 24 | |
| Funds receivable and customer accounts | | Funds receivable and customer accounts | 11,363 | | | 12,723 | | | 13,222 | |
| Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows | | Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows | $ | 19,156 | | | $ | 18,029 | | | $ | 18,040 | |
The accompanying notes are an integral part of these consolidated financial statements.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NoteNOTE 1—Overview and Summary of Significant Accounting PoliciesOVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview and OrganizationOVERVIEW 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 payments and mobile paymentssimplifies commerce experiences on behalf of merchants and consumers and merchants worldwide. Our visionPayPal is committed to democratizedemocratizing financial services as we believe that managingto help improve the financial health of individuals and moving money is a rightto increase economic opportunity for entrepreneurs and businesses of all people, not justsizes around the affluent.world. Our goal is to increaseenable our relevance formerchants and consumers and merchants to manage and move their money anywhere in the world in the markets we serve, anytime, on any platform, and using any device. We also facilitatedevice when sending payments or getting paid, including person-to-person payments through our PayPal, Venmo and Xoom products. Our combined payment solutions, including our PayPal, PayPal Credit, Braintree, Venmo, Xoom, and Paydiant 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.payments.
We operate globally and in a rapidly evolving regulatory environment characterized by a heightened regulatory focus by regulators globally on all aspects of the payments industry. Government regulation impacts key aspects of our business. We are subject to regulations that affect the payments industry, in the markets in which we operate. Non-compliance withincluding countering terrorist financing, anti-money laundering, privacy, cybersecurity, and consumer protection. The laws and regulations applicable to us, including those enacted prior to the advent of digital payments, continue to evolve through legislative and regulatory action and judicial interpretation. New or changing laws and regulations, including changes to their interpretation and implementation, 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. We monitor these areas closely and are focused on designing compliant solutions for our customers.
Significant Accounting PoliciesSIGNIFICANT ACCOUNTING POLICIES
Basis of Presentationpresentation and Principlesprinciples 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.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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. 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 we 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 table 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 |
|
The accompanying consolidated financial statements include the financial statements of PayPal and our whollywholly- and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The noncontrolling interest reported in a prior period was a component of equity on our consolidated balance sheets and represented the equity interests not owned by PayPal, and was recorded for consolidated entities we controlled and of which we owned less than 100%. Noncontrolling interest was not presented separately on our consolidated statements of income (loss) as the amount was de minimis.
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 generally 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 (loss). Investments in entities where we do not have the ability to exercise significant influence over the extent dividendsinvestee are received.accounted for at fair value or cost minus impairment, if any, adjusted for changes resulting from observable price changes, which are included in other income (expense), net on our consolidated statements of income (loss). Our investment balance is included in long-term investments on our consolidated balance sheet.sheets.
We determine at the inception of each investment, and re-evaluate if certain events occur, whether an entity in which we have made an investment is considered a variable interest entity (“VIE”). If we determine an investment is in a VIE, we then assess if we are the primary beneficiary, which would require consolidation.
As of December 31, 2021, we had consolidated two VIEs that provided financing for and held loans receivable of Paidy, Inc. (“Paidy”). We were the primary beneficiary of the VIEs as we performed the servicing and collection for the loans receivable, which were the activities that most significantly impacted the VIE’s economic performance, and we had the obligation to absorb the losses and/or the right to receive the benefits of the VIE that could potentially be significant to these entities. The financial results of these VIEs were included in our consolidated financial statements. As of December 31, 2021, the carrying value of the assets and liabilities of our consolidated VIEs was included as short-term investments of $87 million, loans and interest receivable, net of $21 million, and long-term debt of $98 million. Cash of $87 million, included in short-term investments, was restricted to settle the debt obligations. In the first quarter of 2022, we terminated Paidy’s legacy debt structure and replaced it with a new credit agreement executed in February 2022. As a result, we no longer have any consolidated VIEs as of December 31, 2022. See “Note 12—Debt” for additional information.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of December 31, 2022 and December 31, 2021, the carrying value of our investments in nonconsolidated VIEs was $128 million and $74 million, respectively, and is included as non-marketable equity securities applying the equity method of accounting in long-term investments on our consolidated balance sheets. Our maximum exposure to loss related to our nonconsolidated VIEs, which represents funded commitments and any future funding commitments, was $232 million and $205 million as of December 31, 2022 and 2021, respectively.
In the opinion of management, these consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a 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, 2017.2022.
Reclassifications
Beginning with the fourth quarter of 2022, we reclassified certain cash flows related to our collateral security arrangements for derivative instruments from cash flows from operating activities to cash flows from investing activities and cash flows from financing activities within the consolidated statements of cash flows. Prior period amounts have been reclassified to conform to the current period presentation.
The current period presentation classifies all changes in collateral posted and collateral received related to derivative instruments on our consolidated statements of cash flows as cash flows from investing activities and cash flows from financing activities, respectively. We believe that the current period presentation provides a more meaningful representation of the nature of the cash flows and allows for greater transparency as the cash flows related to the derivatives impact operating cash flows upon settlement exclusive of the offsetting cash flows from collateral.
The following tables present the effects of the changes on the presentation of these cash flows to the previously reported consolidated statements of cash flows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| (In millions) |
| |
| As Previously Reported (1) | | Adjustments | | Reclassified |
| | | | | |
| Net cash provided by (used in): | | | | | |
Operating activities(2) | $ | 6,340 | | | $ | (543) | | | $ | 5,797 | |
Investing activities(3) | (5,485) | | | 336 | | | (5,149) | |
Financing activities(4) | (764) | | | 207 | | | (557) | |
| Effect of exchange rates on cash, cash equivalents, and restricted cash | (102) | | | — | | | (102) | |
| Net decrease in cash, cash equivalents, and restricted cash | $ | (11) | | | $ | — | | | $ | (11) | |
(1) As reported in our 2021 Form 10-K filed with the SEC on February 3, 2022.
(2) Financial statement lines impacted in operating activities were “Other current assets and non-current assets” and “Other current liabilities and non-current liabilities,” which decreased by $336 million and $207 million, respectively, to arrive at the reclassified amounts.
(3) Financial statement line impacted in investing activities was “Collateral posted related to derivative instruments, net.”
(4) Financial statement line impacted in financing activities was “Collateral received related to derivative instruments, net.”
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| (In millions) |
| |
| As Previously Reported (1) | | Adjustments | | Reclassified |
| | | | | |
| Net cash provided by (used in): | | | | | |
Operating activities(2) | $ | 5,854 | | | $ | 365 | | | $ | 6,219 | |
Investing activities(3) | (16,218) | | | (327) | | | (16,545) | |
Financing activities(4) | 12,492 | | | (38) | | | 12,454 | |
| Effect of exchange rates on cash, cash equivalents, and restricted cash | 169 | | | — | | | 169 | |
| Net increase in cash, cash equivalents, and restricted cash | $ | 2,297 | | | $ | — | | | $ | 2,297 | |
(1) As reported in our 2021 Form 10-K filed with the SEC on February 3, 2022.
(2) Financial statement lines impacted in operating activities were “other current assets and non-current assets” and “other current liabilities and non-current liabilities,” which increased by $327 million and $38 million, respectively, to arrive at the reclassified amounts.
(3) Financial statement line impacted in investing activities was “Collateral posted related to derivative instruments, net.”
(4) Financial statement line impacted in financing activities was “Collateral received related to derivative instruments, net.”
Use of estimates
The preparation of consolidated financial statements in conformity with GAAPUnited States (“U.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 those related to provisions for transaction and loancredit losses, income taxes, loss contingencies, income taxes, revenue recognition, and the valuation of goodwill and intangible assets.assets, and the valuation of strategic investments. We base our estimates on historical experience and various other assumptions which we believe to be reasonable under the circumstances. Actual results could materially differ from thosethese 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 composedcomprised of primarily bank deposits, government and agency securities, and commercial paper.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Investments
Short-term investments include time deposits government and agency securities and corporateavailable-for-sale debt securities with original maturities of greater than three months but less than one year when purchased. Governmentpurchased or maturities of one year or less on the reporting date. Long-term investments include time deposits and agency securities and corporateavailable-for-sale debt securities are classifiedwith maturities exceeding one year on the reporting date, as well as our strategic investments. Our available-for-sale anddebt securities 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 method investments with maturities exceeding one year. Corporate 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 foreignavailable-for-sale debt securities denominated in currencies other than the functional currency denominated available-for-sale investmentsof our subsidiaries, underlying funds receivable and customer accounts, short-term investments, and long-term investments, under the fair value option as further discussed in “Note 5—Funds Receivable9—Fair Value Measurement of Assets and Customer Accounts” and “Note 6—Investments.Liabilities.” 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.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Our cost methodstrategic investments consist of marketable equity securities, which are publicly traded, and non-marketable equity securities, which are primarily investments in privately held companiescompanies. Marketable equity securities have readily determinable fair values with changes in fair value recorded in other income (expense), net. Non-marketable equity securities include investments that do not have a readily determinable fair value, as well as equity method investments. The investments that do not have readily determinable fair value are measured at cost minus impairment, if any, and are adjusted for changes resulting from observable price changes in orderly transactions for an identical or similar investment in the same issuer (the “Measurement Alternative”). Non-marketable equity securities also include our investments where we do not have the ability to exercise significant influence, or havebut not control, over the investee. Theseinvestee and account for these securities using the equity method of accounting. All gains and losses on these investments, realized and unrealized, and our share of earnings or losses from investments accounted for using the equity method are recorded at costrecognized in other income (expense), net on our consolidated statements of income (loss).
We assess whether an impairment loss on our non-marketable, measurement alternative investments has occurred based on qualitative factors such as the companies’ financial condition and are subject to periodic tests for other-than-temporary impairment.
business outlook, industry performance, regulatory, economic or technological environment, and other relevant events and factors affecting the company. We assess whether an other-than-temporary impairment loss on our equity method investments has occurred due to declines in fair value or other market conditions. When indicators of impairment exist, we estimate the fair value of our non-marketable equity securities using the market approach and/or the income approach. Estimating fair value requires judgment and use of estimates such as discount rates, forecasted cash flows, and market data of comparable companies, among others. If any impairment is identified for non-marketable equity securities or impairment is considered other-than-temporary for our equity method investments, we 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 ourincome (loss). Our available-for-sale debt securities this assessment takes into account the severity and durationin an unrealized loss position are written down to fair value through a charge to other income (expense), net in our consolidated statements of the decline in value, our intentincome (loss) if we intend to sell the security whetheror it is more likely than not we will be required to sell the security before recovery of its amortized cost basis,basis. For the remaining available-for-sale debt securities in an unrealized loss position, if we identify that the decline in fair value has resulted from credit losses, taking into consideration changes to the rating of the security by rating agencies, implied yields versus benchmark yields, and whetherthe extent to which fair value is less than amortized cost, among other factors, we expectestimate the present value of cash flows expected to recoverbe collected. If the entirepresent value of cash flows expected to be collected is less than the amortized cost basis, of the security (that is, whether a credit loss exists)exists and an allowance for credit losses is recorded, limited by the amount that the fair value is less than the amortized cost basis. Any portion of impairment not related to credit losses is recognized in other comprehensive income (loss).
Loans and interest receivable, held for salenet
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. Upon approval of the decision to sell these receivables from our Board of Directors, 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, which is expected to occur in the third quarter of 2018, Synchrony Bank will become the exclusive issuer of the PayPal Credit online consumer financing program in the U.S., and we will no longer hold an ownership interest in the receivables generated through the program (other than charged off receivables). This transaction will be accounted for as a sale, and the receivables will no longer be reported on our consolidated financial statements.
Loans and interest receivable, held for sale,net represents consumermerchant receivables originated under PayPal credit consumer accounts that are subject to the sale agreement with Synchrony Bank. Until the transaction with Synchrony Bank closes, we will continue to work with independent chartered financial institutions to extend credit to U.S. consumers using our PayPal Working Capital (“PPWC”) product and PayPal Business Loan (“PPBL”) product and consumer loans originated under our PayPal Credit and installment credit product. We purchaseproducts. PayPal Credit consists of revolving credit products.
In the related receivables extended byU.S., PPWC, PPBL, and consumer interest-bearing installment products are provided under a program agreement we have with an independent chartered financial institution and are responsible(“partner institution”). The partner institution extends credit to merchants for the PPWC and PPBL products and to consumers for interest-bearing installment products and we purchase the related servicing functions. Duringreceivables originated by the years ended December 31, 2017partner institution. For our merchant finance products outside the U.S., we extend working capital advances and 2016,loans in Europe through our Luxembourg banking subsidiary, and working capital loans in Australia through an Australian subsidiary. In the U.S., we purchased approximately $8.7 billion and $7.4 billion, respectively, inextend certain short-term, interest-free, installment loans to consumers through a U.S. subsidiary. For our international consumer credit receivables.products, we extend credit in Europe through our Luxembourg banking subsidiary, and in Australia and Japan, through local subsidiaries.
As part of the arrangementsour arrangement with the independent chartered financial institutionspartner institution in the U.S., we sell back a participation interest in the pool of receivables for the PPWC, PPBL, and 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 exceeds the carrying amount of the participation interest sold, which results in a gain reflected as net revenues in our consolidated financial statements.interest-bearing installment products. The independent chartered financialpartner institution and other investors havehas no recourse against us related to their participation interests for failure of debtors to pay when due. The participation interests held by the chartered financialpartner institution
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 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 interestinterests for which control has been surrendered. In connection with its purchaseFor this arrangement, gains or losses on the sale of our U.S. consumer credit receivable portfolio, Synchrony Bank has also agreed to acquire the participation interests heldare not material as the carrying amount of the participation interest sold approximates the fair value at time of transfer.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In certain instances where a merchant is able to demonstrate that it is experiencing financial difficulty, there may be a modification of the loan or advance and the related interest or fee receivable for which it is probable that, without modification, we would be unable to collect all amounts due, therefore resulting in a troubled debt restructuring (“TDR”). Refer to “Note 11—Loans and Interest Receivable” for further information related to TDRs.
Loans, advances, and interest and fees receivable are reported at their outstanding balances, net of any participation interests sold and unamortized deferred origination costs. We maintain the servicing rights for the entire pool of consumer and merchant receivables held byoutstanding and receive a market-based service fee for servicing the chartered financial institutionassets underlying the participation interest sold.
We offer both revolving and other investors.
installment credit products to our consumers. 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 representsAnother partner institution is the exclusive issuer of the PayPal Credit consumer loans not classified as held for sale and merchant receivables originated under our PayPal Working Capital product and Swift merchant loan and advance products. In the U.S., we work with independent chartered financial institutions that extend credit to the consumer or merchant using our PayPal Working Capital product and Swift merchant loan product, and purchase the related receivables extended by the independent chartered financial institutions. During the years ended December 31, 2017 and 2016, we purchased approximately $1.5 billion and $1.0 billion, respectively, in credit 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. 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 institutionsfinancing program in the U.S., we sell back a participation We do not hold an ownership interest in the pool of merchant receivables outstanding undergenerated through the program and therefore, do not record these receivables on our consolidated financial statements. PayPal Working Capital program for merchants. For this arrangement, gains or lossesearns a revenue share on the saleportfolio 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 heldconsumer receivables owned by the chartered financialpartner institution, andwhich is recorded in revenues from 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 poolvalue added services on our consolidated statements 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.income (loss).
Loans, advances, 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.
Allowance for loans and interest receivable
In connection with the pending sale of our U.S. consumer credit receivables to Synchrony Bank, and the designation of that portfolio as held for sale, 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 will not be established. Adjustments to the cost basis of this portfolio, which are primarily driven by charge-offs, will be recorded in restructuring and other charges in our consolidated statement of income.
The allowance for loans and interest receivable represents management’sour estimate of incurredcurrent expected credit losses inherent in our portfolio of loans and receivables, net.interest receivables. Increases to the allowance for loans receivablesreceivable are reflected as a component of transaction and loancredit losses inon our consolidated financial statements.statements of income (loss). Increases to the allowance for interest and fees receivable are reflected as a reduction of net revenues on our consolidated statements of income (loss), or as a reduction of deferred revenue when interest and fees are billed at the inception of a loan or advance. The evaluation process to assess the adequacy of allowances is subject to numerous estimates and judgments.
For our consumerThe Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”) effective January 1, 2020.
The allowance for merchant loans, advances, and interest and fees receivable not classified as held for sale, the allowance is primarily based on forecasted principal balance delinquency rates (“roll rates”). Roll rates are the percentageexpectations of balances which we estimate will migrate from one stage of delinquency to the nextcredit losses based on our historical experience,lifetime loss data as well as externalmacroeconomic forecasts applied to the portfolio. In the third quarter of 2022, our expected credit loss models for our merchant receivables were updated. These changes did not have a material impact on our provision recorded in the year ended December 31, 2022. The merchant loss models incorporate various portfolio attributes including geographic region, first borrowing versus repeat borrowing, delinquency, internally developed risk ratings, and vintage, as well as macroeconomic factors such as forecasted trends in unemployment and retail e-commerce sales (and through the second quarter of 2022, benchmark credit card charge-off rates.) The forecasted macroeconomic factors are sourced externally, using a single scenario that we believe is most appropriate to the economic conditions applicable to a particular period. The reasonable and supportable forecast period for merchant products that we have included in our projected loss rates for 2022 and 2021, which approximates the estimated bankruptcieslife of the loans, is approximately 2.5 to 3.5 years. Projected loss rates, inclusive of historical loss data and levels of unemployment. Roll ratesmacroeconomic factors, are applied to the principal amount of our consumer receivablesmerchant receivables. We also include qualitative adjustments that incorporate incremental information not captured in the quantitative estimates of our current expected credit losses. The allowance for current expected credit losses on interest and fees receivable is determined primarily by applying loss curves to each stageportfolio by geography, delinquency, and period of delinquency, fromorigination, among other factors.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 loans 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 receivables outstanding is based on the current expected repayment period of the loan or advance and interest or fixed fee as compared to the original expected repayment period.
For PayPal Working Capital loans and advances, 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 againstconsumer loans and 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 useexpectations of a vintage-basedcredit losses based on historical lifetime loss forecasting model. Increases to the allowance for interest receivable are reflected as a reduction of net revenues in our consolidated statement of income. Increases to the allowance for fees receivable are 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 PayPal Working Capital 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 PayPal Working Capital merchant 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. We charge off Swift merchant loans and advances when the repayments are 180 days past our expectation of repayments.
Bankrupt accounts are charged off within 60 days after receipt of notification 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 ourdata. The allowance for loans and interest receivable.receivable for our revolving credit product also incorporates macroeconomic forecasts applied to the portfolio. The consumer loss models incorporate various portfolio attributes including geographic region, loan term, delinquency, credit rating, vintage, and for the revolving credit portfolio macroeconomic factors such as forecasted trends in unemployment and household disposable income. The forecasted macroeconomic factors are sourced externally, using a single scenario that we believe is most appropriate to the economic conditions applicable to a particular period. The reasonable and supportable forecast period for revolving products and installment products that we have included in our projected loss rates for 2022, which approximates the estimated life of the loans, is approximately 2 years and approximately 7 months to 3.5 years, respectively. In 2021, the reasonable and supportable forecast periods were consistent with 2022 except for installment products, which had an estimated life of 7 months to 2.5 years. Projected loss rates, inclusive of historical loss data and, for the revolving credit portfolio macroeconomic factors, are derived based on and applied to the principal amount of our consumer receivables. We also include qualitative adjustments that incorporate incremental information not captured in the quantitative estimates of our current expected credit losses, such as expectations of macroeconomic conditions not captured in the loss models for our installment products. The allowance for current expected credit losses on interest and fees receivable is determined primarily by applying loss curves to each portfolio by geography, delinquency, and period of origination, among other factors.
Customer accounts
We hold all customer balances, both in the U.S. and 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 regulatorsapplicable regulatory requirements and commercial law 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. Customer funds for which PayPal is an agent and custodian on behalf of our customers are not reflected on our consolidated balance sheets. These funds include U.S. dollar funds which are deposited at one or more third-party financial institutions insured by the Federal Deposit Insurance Corporation (“FDIC”) and are eligible for FDIC pass-through insurance (subject to applicable limits).
Under applicable accounting standards, we are an agent when facilitating cryptocurrency transactions on behalf of our customers. Cryptocurrencies held on behalf of our customers are not PayPal’s assets and therefore, are not reflected as cryptocurrency assets on our consolidated balance sheets; however, we recognize a crypto asset safeguarding liability with a corresponding safeguarding asset to reflect our obligation to safeguard the cryptocurrencies held on behalf of our 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 agreed that PayPal’s management may designate up to 35% of European customer balances held in our Luxembourg banking subsidiary to fund European and U.S. credit activities. In August 2022, the CSSF approved PayPal’s management designating up to 50% of such balances to fund our credit activities through the end of February 2023. During the year ended December 31, 2022, an additional $1.1 billion was approved to fund our credit activities. As of December 31, 2022, the cumulative amount approved by management to be designated $800 millionto fund credit activities aggregated to $3.8 billion and represented approximately 37% of European customer balances made available for our corporate use at that date as determined by applying financial regulations maintained by the CSSF. At the time PayPal’s management designates the European customer balances held in our Luxembourg banking subsidiary to be used to extend credit, to our European customers. In the fourth quarter of 2017, an additional amount of $700 million of European customer balances held in our Luxembourg banking subsidiary was approved and designated to be used to extend credit to our U.S. consumers. This is consistent with our strategy of diversifying funding sources for our credit business and does not represent a change in our credit business development strategy or risk appetite. These funds wereare classified as cash and cash equivalents inand no longer classified as customer accounts on our consolidated balance sheet on the date of designation and collectively represent approximately 30% of European customer balances potentially available for corporate use by the Company at December 31, 2017 as determined by applying financial regulations maintained by the CSSF.sheets. The remaining assets underlying the customer balances remain separately classified as customer accounts inon our consolidated balance sheet.sheets. We do not commingleidentify these customer accounts withseparately from corporate funds and maintain these assets separatelythem in interest and non-interest bearing bank deposits, time deposits, corporateand available-for-sale debt securitiessecurities. Customer balances deposited with our partners on a short-term basis in advance of customer transactions and U.S.used to fulfill our direct obligation under amounts due to customers are classified as cash and foreign government and agency securities.cash equivalents within our customer accounts classification on our consolidated balance sheets. See “Note 5—8—Funds Receivable and Customer Accounts”Accounts and Investments” for additional information related to customer accounts.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Accordingly, we have presentedWe present 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. These changes had 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 | ) |
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. In addition, a portion of our customers’ funds are settled directly to their bank account. These funds are also classified as funds receivable and funds payable and arise due to the time required to initiate collection from and clear transactions through external payment networks.
Property and equipment
Property and equipment consists primarily of computer equipment, software and website development costs, land and buildings, leasehold improvements, and leasehold improvements.furniture and fixtures. Property and equipment are stated at historical cost less accumulated depreciation.depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets; generally, one to threefour years for computer equipment and software, including capitalized software and website development costs, three years for furniture and fixtures, up to thirty30 years for buildings and building improvements, and the shorter of five years or the non-cancelable term of the lease for leasehold improvements.
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 three years and are recorded as amortization within the financial statement captions aligned with the internal organizations that are the primary beneficiaries of such assets. We capitalized $511 million and $462 million of internally developed software and website development costs for the years ended December 31, 2022 and 2021, respectively. Amortization expense for these capitalized costs was $426 million, $366 million, and $322 million for the years ended December 31, 2022, 2021, and 2020, respectively. Costs related to the maintenance of internal use software and website development costs are expensed as incurred.
Leases
We determine whether an arrangement is a lease for accounting purposes at contract inception. Operating leases are recorded as right-of-use (“ROU”) assets, which are included in other assets, and lease liabilities, which are included in accrued expenses and other current liabilities and deferred tax liability and other long-term liabilities on our consolidated balance sheets. For sale-leaseback transactions, we evaluate the sale and the lease arrangement based on our conclusion as to whether control of the underlying asset has been transferred, and recognize the sale-leaseback as either a sale transaction or under the financing method. The financing method requires the asset to remain on our consolidated balance sheets throughout the term of the lease and the proceeds to be recognized as a financing obligation.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Our leases do not provide an implicit rate and therefore we use an incremental borrowing rate for specific terms on a collateralized basis using information available on the commencement date in determining the present value of lease payments. The ROU asset calculation includes lease payments to be made and excludes lease incentives. The ROU asset and lease liability may include amounts attributed to options to extend or terminate the lease when it is reasonably certain we will exercise that option. When we reach a decision to exercise a lease renewal or termination option, we recognize the associated impact to the ROU asset and lease liability. Lease expense for operating leases is recognized on a straight-line basis over the lease term.
We evaluate ROU assets related to leases for indicators of impairment whenever events or changes in circumstances indicate that the carrying amount of an ROU asset may not be recoverable. When a decision has been made to exit a lease prior to the contractual term or to sublease that space, we evaluate the asset for impairment and recognize the associated impact to the ROU asset and related expense, if applicable. The evaluation is performed at the asset group level initially and when appropriate, at the lowest level of identifiable cash flows, which is at the individual lease level. Undiscounted cash flows expected to be generated by the related ROU assets are estimated over the ROU assets’ useful lives. If the evaluation indicates that the carrying amount of the ROU assets may not be recoverable, any potential impairment is measured based upon the fair value of the related ROU asset or asset group as determined by appropriate valuation techniques.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We have lease agreements with lease and non-lease components. We have elected to apply the practical expedient and account for the lease and non-lease components as a single lease component for all leases, where applicable. In addition, we have elected to apply the practical expedients related to lease classification, hindsight, and land easement. We apply a single portfolio approach to account for the ROU assets and lease liabilities.
Goodwill and intangible assets
Goodwill is tested for impairment, at a minimum, on an annual basis. Goodwill is tested for impairmentbasis 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 ismay be 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 mergers 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, 20172022 and 2016.2021. We determined that no adjustment to the carrying value of goodwill of our reporting unit was required. As of December 31, 2017,2022, we determined that no events occurred, or circumstances changed from August 31, 20172022 through December 31, 20172022 that would more likely than not reduce the fair value of the reporting unit below its carrying amount.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Intangible assets consist of customer-relatedacquired customer list and user base 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 onetwo to eightseven 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 netundiscounted cash flow the asset is expected to generate.
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 or unsatisfactory delivery of goods or services, ACH returns, buyerpurchased items, purchase protection program claims, account takeovers, and account overdrafts.takeovers. This allowance represents an accumulation of the estimated amounts necessary to provide forof probable 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.loss data. 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.types, as applicable. Additions to the allowance are reflected as a component of transaction and loancredit losses inon our consolidated statementstatements of income. At December 31, 2017 and 2016, theincome (loss). The allowance for transaction losses totaled $92 million and $78 million, respectively, and wasis included in accrued expenses and other current liabilities inon our consolidated balance sheet.sheets.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Allowance for negative customer balances
Negative customer balances occur primarily when there are insufficient funds in a customer’s PayPal account to cover charges applied for Automated Clearing House (“ACH”) returns, debit card transactions, and merchant-related chargebacks due to nondeliverynon-delivery or unsatisfactory delivery of goods or services.purchased items, which are generally within the scope of our protection programs. Negative customer balances can be cured by the customer by adding funds to thetheir account, receiving payments, or through back-up funding sources. We also utilize third-party collection agents.agencies. For negative customer balances that are not expected to be cured or otherwise collected, we provide an allowance for uncollectible accounts.expected losses. The allowance is estimatedrepresents expected losses based on known factshistorical trends involving collection and circumstances,write-off patterns, internal factors including our experience with similar cases, other known facts and circumstances, and reasonable and supportable macroeconomic forecasts, as applicable. Loss rates are derived using historical trends involving collectionloss data for each delinquency bucket using a roll rate model that captures the losses and the likelihood that a negative customer balance will be written off as the delinquency age of such balance increases. The loss rates are then applied to the outstanding negative customer balances. Once the quantitative calculation is performed, we review the adequacy of the allowance and determine if qualitative adjustments need to be considered. We write-off patterns.negative customer balances in the month in which the balance becomes outstanding for 120 days. Write-offs that are recovered are recorded as a reduction to our allowance for negative customer balances. Negative customer balances are included in other current assets, net of the allowance inon our consolidated balance sheet.sheets. Adjustments to the allowance for negative customer balances are recorded as a component of transaction and loan loss incredit losses on our consolidated statementstatements of income. The allowance for negative customer balances was $174 million and $144 million at December 31, 2017 and 2016, respectively.income (loss).
Derivative instruments
See “Note 10—Derivative Instruments” for information related to the derivative instruments.
Fair value measurements
We have significant international revenues and costs denominated in foreign currencies, subjecting our operations to foreign currency risk. 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 inmeasure certain foreign currencies. All outstanding derivatives are recognized in our consolidated balance sheet 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 period the forecasted transaction affects earnings.
We also hedge our economic exposure to foreign currency denominated monetary assets and liabilities with foreign currency contracts. The gainsat fair value on a recurring basis and losses on the foreign exchange contracts economically offset transaction gainscertain financial and losses on certain foreign currency denominated monetarynon-financial assets and liabilities recognized in earnings. Accordingly, these outstanding non-designated derivatives are recognized in our consolidated balance sheet at fair value and changeson a non-recurring basis when a change in fair value from these contracts are recorded in other income (expense), netor impairment is evidenced. Fair value is defined as the price received to sell an asset or paid to transfer a liability in the consolidated statementprincipal market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value is estimated by maximizing the use of income. Our hedging programobservable inputs and minimizing the use of unobservable inputs. The categorization within the following three-level fair value hierarchy for our recurring and non-recurring fair value measurements is based upon the lowest level of input that is available and significant to the fair value measurement:
•Level 1 - Observable inputs, such as unadjusted quoted prices in active markets for identical assets or liabilities.
•Level 2 - Observable inputs other than Level 1 quoted prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not designedactive or operatedother inputs that are observable or can be market-corroborated.
•Level 3 - Unobservable inputs that cannot be directly corroborated by observable market data and that typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
See “Note 9—Fair Value Measurement of Assets and Liabilities” for trading or speculative purposes.additional information related to our fair value measurements.
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 hedgesCrypto asset safeguarding liability and corresponding safeguarding asset
See “Note 7—Other Financial Statement Details” for information related to our non-designated derivatives that hedge foreign currency denominated monetary assetscrypto asset safeguarding liability and liabilities are classified in cash flows from operating activities in our consolidated statement of cash flows.corresponding safeguarding asset.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Concentrations of risk
Our derivative instruments expose us to credit risk to the extent counterparties may be unable to meet the terms of the agreements. We seek to mitigate this risk by limiting counterparties to major financial institutions, by spreading the risk across several major financial 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—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, 2017 and 2016, 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, time deposits,cash equivalents, short-term investments, accounts receivable, loans and interest receivable, loans and interest receivable held for sale, funds receivable, certain customer accounts, accounts payable, notes payable, and funds payable and amounts due to customers are carried at cost, which approximates their fair value due to the short-term maturity of these instruments.
Concentrations of risk
Our cash, cash equivalents, accounts receivable, loans and interest receivable, andnet, funds receivable and customer accounts, long-term investments, and long-term notes receivable, 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 alsoWe have corporate deposit balances with financial services institutions which exceed the Federal Deposit Insurance Corporation (“FDIC”)FDIC insurance limit of $250,000. As part of our cash management process, we perform periodic evaluations of the relative credit standing of these 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. Our long-term notes receivable is derived from deferred proceeds associated with the sale of our U.S. consumer credit receivables portfolio to a partner institution in 2018. As of December 31, 20172022 and 2016,2021, one customer accounted for 16%20% and 24%25% of net accounts receivables, respectively. No customer accounted for more than 10% of net loans receivable as of December 31, 20172022 and 2016.2021. At December 31, 2022 and 2021, one partner institution accounted for our long-term notes receivable balance, which represented 18% and 22% of other assets, respectively. During the years ended December 31, 2017, 20162022, 2021, and 2015,2020, no customer accounted for more than 10% of net revenues. During the years ended December 31, 2017, 20162022, 2021, and 2015,2020, we earned approximately 20%2%, 22%6%, and 26%13% of revenue, respectively, 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 loans and interest receivable, net and heldSee “Note 2—Revenue” for sale portfolio, subscription fees, gateway fees, gain on sale of participation interest in certain consumer loans receivable and merchant loans and advances, revenue share we earn through partnerships, interest earned on certain PayPal customer account balances, fees earned through our Paydiant products and other services that we provideinformation 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 our portfolio of loans and advances 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.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 isare 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 $438$518 million, $350$740 million, and $303$654 million for the years ended December 31, 2017, 2016,2022, 2021, and 2015,2020, respectively.
Internal use software and website development costs
Direct costs incurred to develop software for internal use and website development costs are capitalized and amortized generally over an estimated useful life of one to three years and are recorded as depreciation and amortization. PayPal capitalized $309 million and $341 million of internally developed software and website development costs for the years ended December 31, 2017 and 2016, respectively. Amortization expense for these capitalized costs was $262 million, $208 million and $166 million for the years ended December 31, 2017, 2016 and 2015, 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”(“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 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 determined compensation expense associated with restricted stock units based on the fair value of eBay’s common stock on the date of grant. Following separation, weWe determine compensation expense associated with restricted stock units, performance based restricted stock units, and restricted stock awards based on the estimated 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, 2017, 20162022, 2021, and 20152020 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 usehave designated 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. Revenues costs and expenses of our non-U.S. subsidiaries withdollar functional currencies other than the U.S. dollarcurrency subsidiaries are translated into U.S. dollars using daily exchange rates. Gains and losses resulting from these translations are recorded as a component of accumulated other comprehensive income.income (loss) (“AOCI”). Gains and losses from the remeasurement of foreign currency transactions into the functional currency are recognized as other income (expense), net in our consolidated statementstatements of income.income (loss).
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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. We account for Global Intangible Low-Taxed Income as a current-period expense when incurred.
Other income (expense), net
Other income (expense), net includes: (i) interest income, which consists of interest earned on corporate cash and cash equivalents and short-term and long-term investments, (ii) interest expense, which consists of interest expense, fees, and amortization of debt discount on our long-term debt (including current portion) and credit facilities, (iii) realized and unrealized gains (losses) on strategic investments, which includes changes in fair value related to our marketable equity securities and observable price changes and impairments on our non-marketable equity securities, and (iv) other, which primarily includes foreign currency exchange gains and losses due to remeasurement of certain foreign currency denominated monetary assets and liabilities, and fair value changes on the derivative contracts not designated as hedging instruments.
Recent accounting guidance
In March 2022, the Financial Accounting Standards Board (“FASB”) issued ASU 2022-02, Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures (Topic 326): Financial Instruments – Credit Losses. This amended guidance will eliminate the accounting designation of a loan modification as a TDR, including eliminating the measurement guidance for TDRs. The amendments also enhance existing disclosure requirements and introduce new requirements related to modifications of receivables due from borrowers experiencing financial difficulty. Additionally, this guidance requires entities to disclose gross write-offs by year of origination for financing receivables, such as loans and interest receivable. The amended guidance is effective for fiscal years beginning after December 15, 2022 and is required to be applied prospectively, except for the recognition and measurement of TDRs, which can be applied on a modified retrospective basis. We have concluded that our financial statements were not materially impacted upon adoption. We adopted this guidance effective January 1, 2023 on a prospective basis and will provide additional disclosures as required.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Recently adopted accounting guidance
In March 2022, the SEC released Staff Accounting Bulletin No. 121 (“SAB 121”), which provides guidance for an entity to consider when it has obligations to safeguard customers’ crypto assets, whether directly or through an agent or another third party acting on its behalf. The interpretive guidance requires a reporting entity to record a liability to reflect its obligation to safeguard the crypto assets held for its platform users with a corresponding safeguarding asset. The crypto asset safeguarding liability and the corresponding safeguarding asset will be measured at the fair value of the crypto assets held for the platform users with the measurement of the safeguarding asset taking into account any potential loss events. SAB 121 also requires disclosures related to the entity’s safeguarding obligations for crypto assets held for its platform users. SAB 121 was effective in the first interim or annual financial statements ending after June 15, 2022 with retrospective application as of the beginning of the fiscal year. We adopted this guidance for the quarter ended June 30, 2022 with retrospective application as of January 1, 2022. As of June 30, 2022, we recorded $596 million for both the crypto asset safeguarding liability and corresponding safeguarding asset, which were classified as accrued expenses and other current liabilities and prepaid expenses and other current assets, respectively, on our condensed consolidated balance sheet. For additional information, see “Note 7—Other Financial Statement Details.”
There are other new accounting pronouncements issued by the FASB that we have adopted or will adopt, as applicable. We do not believe any of these new accounting pronouncements have had, or will have, a material impact on our consolidated financial statements or disclosures.
NOTE 2—REVENUE
We enable our customers to send and receive payments. We earn revenue primarily by completing payment transactions for our customers on our payments platform 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 paid by our customers to receive payments on our platform. 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. For a portion of our transactions, the variable component of the fee is eligible for reimbursement when the underlying transaction is approved for a refund. We estimate the amount of fee refunds that will be processed each quarter and record a provision against our transaction revenues. The volume of activity processed on our payments platform, which results in transaction revenue, is referred to as Total Payment Volume (“TPV”). We earn additional fees from merchants and consumers on transactions where we perform currency conversion, when we enable cross-border transactions (i.e., transactions where the merchant and consumer are in different countries), to facilitate the instant transfer of funds for our customers from their PayPal or Venmo account to their bank account or debit card, to facilitate the purchase and sale of cryptocurrencies, as contractual compensation from sellers that violate our contractual terms (for example, through fraud or counterfeiting), and other miscellaneous fees. Our transaction revenues are also reduced by certain incentives provided to our customers.
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 any significant material rights. Some of our contracts include tiered pricing, which are 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 a class of customers with similar volume. We do not have any capitalized contract costs and we do not carry any material contract balances.
Our primary 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 payments platform. When we authorize a transaction, we become obligated to our customer to complete the payment transaction.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.
To promote engagement and acquire new users on our platform, we may provide incentives to merchants and consumers in various forms including discounts on fees, rebates, rewards, and coupons. Evaluating whether an incentive is a payment to a customer requires judgment. Incentives that are determined to be consideration payable to a customer or paid on behalf of a customer are recognized as a reduction of revenue. Certain incentives paid to users that are not our customers are classified as sales and marketing expense.
We provide merchants and consumers with protection programs for certain transactions completed on our payments platform. These programs are intended to protect both merchants and consumers from loss primarily due to fraud and counterparty performance. These protection programs do not provide a separate service to our customers and we estimate and record associated costs in transaction and credit losses during the period the payment transaction is completed.
REVENUES FROMOTHER VALUE ADDED SERVICES
We earn revenues from other value added services, which are comprised primarily of revenue earned through partnerships, referral fees, 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. Revenue earned from other value added services is recorded on a net basis when we are considered the agent with respect to processing transactions.
We also earn revenues from interest and fees earned on our portfolio of loans receivable and interest earned on certain assets underlying customer balances. Interest and fees earned on the 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 regularly reviews our operating results on a consolidated basis. We operate as 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 are most appropriately depicted through our primary geographical markets and types of revenue categories (transaction revenues and revenues from other value added services). Revenues recorded within these categories are earned from similar products and services for which the nature of associated fees and the related revenue recognition models are substantially the same.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table presents our revenue disaggregated by primary geographical market and category:
| | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | |
| | 2022 | | 2021 | | 2020 | | | | |
| (In millions) |
| Primary geographical markets | | | | | | | | | |
| U.S. | $ | 15,807 | | | $ | 13,712 | | | $ | 11,013 | | | | | |
| United Kingdom (“U.K.”) | 2,071 | | | 2,340 | | | 2,340 | | | | | |
Other countries(1) | 9,640 | | | 9,319 | | | 8,101 | | | | | |
Total net revenues(2) | $ | 27,518 | | | $ | 25,371 | | | $ | 21,454 | | | | | |
| | | | | | | | | |
| Revenue category | | | | | | | | | |
| Transaction revenues | $ | 25,206 | | | $ | 23,402 | | | $ | 19,918 | | | | | |
| Revenues from other value added services | 2,312 | | | 1,969 | | | 1,536 | | | | | |
Total net revenues(2) | $ | 27,518 | | | $ | 25,371 | | | $ | 21,454 | | | | | |
(1) No single country included in the other countries category generated more than 10% of total revenue.
(2) Total net revenues include $1.3 billion, $425 million, and $597 million for the years ended December 31, 2022, 2021, and 2020, respectively, which do not represent revenues recognized in the scope of Accounting Standards Codification Topic 606, Revenue from contracts with customers. Such revenues relate to interest and fees earned on loans and interest receivable, as well as hedging gains or losses, and interest earned on certain assets underlying customer balances.
Net income per sharerevenues are attributed to the country in which the party paying our PayPal fee is located.
NOTE 3—NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding during the period. The weighted average number of common shares outstanding for basic and diluted earnings per share for the years ended December 31, 2017 and 2016 was based on the weighted average number of common shares outstanding for the period. 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. 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. Diluted net income (loss) per share is computed by dividing net income (loss) 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 (loss) per share by application of the treasury stock method. The calculation of diluted net income (loss) per share excludes all anti-dilutive common shares.
Recent Accounting Pronouncements
In 2014, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance related to revenue recognition. This new standard will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition guidance provides a unified model to determine During periods when and how revenuewe report net loss, diluted net loss per share 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 updated the guidance for reporting revenue gross versus net to improve the implementation guidance on principal versus agent considerations, and for identifying performance obligations and the accounting of intellectual property licenses. In addition, the FASB introduced practical expedients and made narrow scope improvements to the new accounting guidance. We have evaluated the impact of this new standard and have concluded that our financial statements will not be materially impacted upon adoption; however, we will expand certain disclosures as required. We will adopt the guidance on January 1, 2018 on a full retrospective basis, reflecting the application of the new standard in each prior reporting period.
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 in GAAP by requiring equity investments to be measured at fair value with changes in fair value recognized in net income. This new standard also amends the presentation of certain fair value changes for financial liabilities measured at fair value and it amends certain disclosure requirements associated with the fair value of financial instruments. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted in limited situations. 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 and on a prospective basis to all outstanding equity investments without a readily determinable fair value. We will adopt the guidance on January 1, 2018 and prospectively apply the measurement alternative to our cost method investments, which will require us to measure these equity investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment in the same issuer. The amount of the impact to long-term investments will depend on any price changes observed after adoption on January 1, 2018.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 12 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 will adopt the new standard January 1, 2019, using a modified retrospective basis and anticipate applying the optional practical expedients related to the transition. We are evaluating the impact of adopting this new accounting guidance 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 that 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 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 this 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. 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 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 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. The adoption of this standard will require changes in cash and cash equivalents underlying customer accounts and restricted cash to be included in the reconciliation of beginning and ending balances shown on the statement of cash flows.
In 2017, the FASB issued new guidance 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. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. 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. The adoption of this standard is not expected to have a material impact on our 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 callable debt securities purchased at a discount will not be impacted. Therefore, the new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. Transition is on a modified retrospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We are evaluating the impact this new accounting guidance will have on our 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. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
permitted. The guidance will be applied prospectively upon adoption. The amount of the impact to share-based compensation expense will depend on the terms specified in any new changes to the share-based payment awards.
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 nonfinancial and financial risk components and by refining the measurement of hedge results to better reflect an entity’s hedging strategies. The amendments will also align the recognition and presentation ofbasic net loss per share because the effects of potentially dilutive items would decrease 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. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. 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 will early adopt the guidance in the first quarter of 2018 using a modified retrospective approach to reflect application of the new guidance effective January 1, 2018. Adoption of the guidance will not have a material impact on our financial statements.net loss per share.
Recently Adopted Accounting Guidance
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 put or call 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. We adopted the new guidance effective January 1, 2017. The adoption of this standard did not 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. We adopted the new guidance effective January 1, 2017. The adoption of this standard did not 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. We adopted the new guidance effective January 1, 2017. As a result of the adoption, starting in the first quarter of 2017, stock-based compensation ("SBC") excess tax benefits or tax deficiencies are 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. For the year ended December 31, 2017, we recognized approximately $52 million of SBC net excess tax benefits within the provision for income taxes. Additionally, starting in the first quarter of 2017, we presented the cash flows related to the applicable SBC net excess tax benefits in operating activities along with other income tax cash flows rather than in financing activities. The remaining amendments did not have a material impact on our 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. Adoption of the new guidance must be made on a modified retrospective basis. We elected to early adopt the new guidance effective January 1, 2017. As a result of the adoption, we recorded a decrease of approximately $41 million in retained earnings as of the beginning of the first quarter of 2017, with a corresponding decrease in prepaid taxes related to the unamortized tax expense attributed to intra-entity transfers of assets previously deferred. Additionally, for the year ended December 31, 2017 we did not recognize approximately $16 million of amortization of prepaid taxes attributed to prior period intra-entity asset transfers previously deferred within the provision for income taxes. As of adoption, when a new intra-entity transfer of assets occurs, we will recognize the income tax consequences associated with this activity in the consolidated statement of income in the period the transaction takes place. For the year ended December 31, 2017, we recognized $44 million of income tax expense associated with intra-entity asset transfers which occurred during the period.
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
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
group of similar identifiable assets; if so, the set of assets and activities is not a business. The guidance also requires a business to 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 guidance should be applied prospectively to any transactions occurring within the period of adoption. We elected to early adopt the new guidance effective January 1, 2017. The adoption of this standard did not have an 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. We have elected to early adopt the new guidance for our annual goodwill impairment test to be performed after January 1, 2017. The adoption of this standard did not have a material impact on our financial statements.
In 2017, the FASB issued guidance that requires a company to evaluate the appropriate financial statement disclosures about the potential material effects that the new accounting guidance related to revenue recognition, measurement of credit losses on financial instruments and accounting for leases will have on its financial statements when adopted. If a company does not know or cannot reasonably estimate the impact that adoption of these new standards is expected to have on the financial statements, then in addition to making a statement to that effect, the company should consider additional qualitative disclosures to assist the reader in assessing the significance of the impact that these new guidance standards will have on the financial statements when adopted. We have considered the guidance and, where possible, have added additional qualitative disclosures on the potential impact to our financial statements.
Note 2—Net Income Per Share
The following table sets forth the computation of basic and diluted net income (loss) per share for the periods indicated:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (In millions, except per share amounts) |
| Numerator: | | | | | |
| Net income (loss) | $ | 2,419 | | | $ | 4,169 | | | $ | 4,202 | |
| Denominator: | | | | | |
Weighted average shares of common stock—basic | 1,154 | | | 1,174 | | | 1,173 | |
| Dilutive effect of equity incentive awards | 4 | | | 12 | | | 14 | |
Weighted average shares of common stock—diluted | 1,158 | | | 1,186 | | | 1,187 | |
| Net income (loss) per share: | | | | | |
| Basic | $ | 2.10 | | | $ | 3.55 | | | $ | 3.58 | |
| Diluted | $ | 2.09 | | | $ | 3.52 | | | $ | 3.54 | |
| Common stock equivalents excluded from net income (loss) per diluted share because their effect would have been anti-dilutive or potentially dilutive | 13 | | | 2 | | | 1 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015(1) |
| | (In millions, except per share amounts) |
| Numerator: | | | | | |
| Net income | $ | 1,795 |
| | $ | 1,401 |
| | $ | 1,228 |
|
| Denominator: | | | | | |
| Weighted average shares of common stock - basic | 1,203 |
| | 1,210 |
| | 1,222 |
|
| Dilutive effect of equity incentive awards | 18 |
| | 8 |
| | 7 |
|
| Weighted average shares of common stock - diluted | 1,221 |
| | 1,218 |
| | 1,229 |
|
| Net income per share: | | | | | |
| Basic | $ | 1.49 |
| | $ | 1.16 |
| | $ | 1.00 |
|
| Diluted | $ | 1.47 |
| | $ | 1.15 |
| | $ | 1.00 |
|
| Common stock equivalents excluded from income per diluted share because their effect would have been anti-dilutive | 2 |
| | 8 |
| | 12 |
|
(1) The weighted average number
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 4—BUSINESS COMBINATIONS
There were no acquisitions accounted for basic and diluted earnings per share foras business combinations or divestitures completed in 2022.
ACQUISITIONS COMPLETED IN 2021
During 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.
Note 3—Business Combinations
During 2017,2021, we completed twofive acquisitions reflecting 100% of the equity interests of the acquired companies, for an aggregate purchase price of $421 million:$3.1 billion.
TIO Networks Corp.Paidy
We completed the acquisition of TIO Networks Corp. (“TIO”)Paidy in July 2017October 2021 by acquiring all of 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
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 $2 million and initial goodwill$2.7 billion, consisting of approximately $170$2.6 billion in cash and approximately $161 million whichin assumed restricted stock and restricted stock units, subject to vesting conditions. Paidy is attributable to the workforce of TIO 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.
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. Refer to Note 4—"Goodwill and Intangible Assets" and Note 13—"Commitments and Contingencies" for further details.
Swift Financial Corporation
We completedtwo-sided payments platform that primarily provides buy now, pay later solutions (installment credit offerings) in Japan. With the acquisition of Swift Financial Corporation (“Swift Financial”) in September 2017 by acquiring all of the outstanding shares for a total purchase price of approximately $183 million. We acquired Swift Financial to enable us to enhancePaidy, we expanded 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 resultedrelevance 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 $136 million and initial goodwill of approximately $106 million, which is attributable to the workforce of Swift Financial 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. 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.Japan.
We have included the financial results of these acquired businesses in our consolidated financial statements from their respective date of acquisition. Revenues and expenses related to these acquisitions for the year ended December 31, 2017 were not material. Pro forma results of operations have not been presented because the effect of these acquisitions were not material to our financial results.
There were no acquisitions or divestitures completed in 2016.
During 2015, we completed four acquisitions, reflecting 100% of the equity interests of the acquired companies, for an aggregate amount of $1.4 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.
Xoom
We completed the acquisition of Xoom Corporation (“Xoom”) in November 2015 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 $1.1 billion included cash consideration paid of approximately $961 million, net of cash acquired of $92 million, and the fair value of assumed unvested equity totaling $7 million.
The following table summarizes the final allocation of the purchase consideration to the fair value of the assets acquired and liabilities assumed:
| | | | | |
| (In millions) |
| Goodwill | $ | 1,897 | |
| Customer lists and user base | 512 | |
| Marketing related | 83 | |
| Developed technology | 47 | |
| Total intangibles | $ | 642 | |
| Loans and interest receivable, net | 197 | |
| Cash and cash equivalents | 102 | |
| Other net assets | 87 | |
| Short-term and long-term debt | (188) | |
| Deferred tax liabilities, net | (166) | |
| Total purchase price | $ | 2,571 | |
The intangible assets acquired consist primarily of merchant contracts, trade names/trademarks, and developed technology with estimated useful lives of three to seven years. Contractual gross loans and interest receivable acquired were $216 million. We expect to collect substantially all of these receivables. The excess of the purchase consideration, including the fair value of our equity investment, over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill and is attributable to the workforce of Paidy and the synergies expected to arise from the acquisition, including continued customer acquisition. Goodwill was not deductible for income tax purposes.
In connection with the acquisition, we issued restricted stock and restricted stock units with an approximate grant date fair value of $161 million, which represents post-business combination expense. The equity granted is a combination of shares issued to certain former Paidy employees subject to a holdback arrangement and assumed Paidy employee equity grants, which vest over a period of up to approximately four years subject to continued employment.
|
| | | |
| | (In millions) |
| Goodwill | $ | 645 |
|
| Intangibles | 217 |
|
| Cash | 92 |
|
| Short-term investments | 72 |
|
| Accounts receivable | 40 |
|
| Other net liabilities | (6 | ) |
| Total purchase consideration | $ | 1,060 |
|
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Other acquisitions
In 2021, we completed four other acquisitions accounted for as business combinations. The intangibles acquired consiststotal purchase price for these acquisitions was $542 million, consisting primarily of partner relationships,cash consideration. The allocation of purchase consideration resulted in approximately $90 million of technology, trade namecustomer, and customer-relatedmarketing-related intangible assets with an estimated useful lifelives ranging from approximately one to seven years, net assets of 2$17 million, and goodwill of approximately $435 million attributable to 5the workforce of the acquired companies and the synergies expected to arise from these acquisitions, including the integration of the acquired technology with our existing product offerings. Goodwill was not considered deductible for income tax purposes.
ACQUISITIONS COMPLETED IN 2020
During the year ended December 31, 2020, we completed one acquisition reflecting 100% of the equity interests of the acquired company, for a purchase price of $3.6 billion.
Honey Science Corporation
We completed our acquisition of Honey Science Corporation (“Honey”) in January 2020 by acquiring all outstanding shares for total consideration of approximately $4.0 billion, consisting of approximately $3.6 billion in cash and approximately $400 million in assumed restricted stock, restricted stock units, and stock options, subject to vesting conditions. Honey was acquired to enhance our value proposition by allowing us to further simplify and personalize shopping experiences for consumers while driving conversion and increasing consumer engagement and sales for merchants.
The following table summarizes the final allocation of the purchase consideration to the fair value of the assets acquired and liabilities assumed:
| | | | | |
| (In millions) |
| Goodwill | $ | 2,962 | |
| Customer lists and user base | 115 | |
| Marketing related | 30 | |
| Developed technology | 572 | |
| Total intangibles | $ | 717 | |
| Accounts receivable, net | 50 | |
| Deferred tax liabilities, net | (58) | |
| Other net liabilities | (36) | |
| Total purchase price | $ | 3,635 | |
The intangible assets acquired consist primarily of customer contracts, trade name/trademarks, and developed technology with estimated useful lives of three years. The excess of the purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill whichand is attributable to the workforce of XoomHoney and the synergies expected to arise from the acquisition. We doacquisition through continued customer acquisition, cross selling initiatives, and product enhancements. Goodwill was not expect goodwill to be deductible for income tax purposes.
Paydiant
We completed the acquisition of Paydiant, Inc. (“Paydiant”) in April 2015 for total consideration of approximately $230 million, net of cash acquired. We acquired Paydiant to expand our capabilities in mobile payments. The allocation of purchase consideration resulted in approximately $49 million of technology and customer-related intangible assets, net liabilities of approximately $6 million, and initial goodwill of approximately $187 million. We do not expect goodwill to be deductible for income tax purposes.
CyActive
We completed the acquisition of CyActive Security, Ltd. (“CyActive”) in April 2015 for total consideration of approximately $43 million, net of cash acquired. We acquired CyActive to further enhance our information security capabilities. The allocation of purchase consideration resulted in approximately $8 million of technology-related intangible assets, net liabilities of approximately $2 million, and initial goodwill of approximately $37 million. We do not expect goodwill to be deductible for income tax purposes.
In connection with the acquisition, we assumed restricted stock, restricted stock units, and options with an approximate grant date fair value of $400 million, which represents post-business combination expense. The equity granted was a combination of shares issued to certain former Honey employees subject to a holdback arrangement and assumed Honey employee grants, which vest over a period of up to four years and are subject to continued employment.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
OTHER INFORMATION
Prior to acquisition, we held minority interests in certain of the companies we acquired in 2021. We have includedremeasured these investments immediately before the financial resultscompletion of these acquired businessesthe respective acquisitions at a total acquisition-date fair value of $64 million, which resulted in an aggregate gain of $36 million recognized as other income (expense), net in our consolidated financial statements from their respective dates of acquisition. Revenues and expenses related to these acquisitions forincome (loss). The acquisition-date fair value was derived using the year ended December 31, 2015 were not material. Pro forma results of operations have not been presented because the effect of these acquisitions were not material to our financial results.value paid less a control premium based on market analysis performed by a third party.
NOTE 5—GOODWILL AND INTANGIBLE ASSETS Note 4—Goodwill and Intangible Assets
GoodwillGOODWILL
The following table presents goodwill balances and adjustments to those balances during the years ended December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | Goodwill
Acquired | | Adjustments | | December 31, 2021 | | Goodwill
Acquired | | Adjustments | | December 31, 2022 |
| | (In millions) |
| Total goodwill | $ | 9,135 | | | 2,355 | | | (36) | | | $ | 11,454 | | | — | | | (245) | | | $ | 11,209 | |
The goodwill acquired during 2021 was attributable to the five acquisitions completed within 2021 as described in “Note 4—Business Combinations.” The adjustments to goodwill during 2022 and 2021 pertained primarily to foreign currency translation adjustments.
INTANGIBLE ASSETS
The components of identifiable intangible assets were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| | 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) |
| Intangible assets: | | | | | | | | | | | | | | | |
| Customer lists and user base | $ | 1,664 | | | $ | (1,092) | | | $ | 572 | | | 7 | | $ | 1,726 | | | $ | (919) | | | $ | 807 | | | 7 |
| Marketing related | 395 | | | (339) | | | 56 | | | 5 | | 405 | | | (315) | | | 90 | | | 5 |
| Developed technology | 1,099 | | | (1,048) | | | 51 | | | 3 | | 1,109 | | | (822) | | | 287 | | | 3 |
| All other | 438 | | | (329) | | | 109 | | | 7 | | 454 | | | (306) | | | 148 | | | 7 |
| Intangible assets, net | $ | 3,596 | | | $ | (2,808) | | | $ | 788 | | | | | $ | 3,694 | | | $ | (2,362) | | | $ | 1,332 | | | |
Amortization expense for intangible assets was $471 million, $443 million, and $451 million for the years ended December 31, 20172022, 2021, and 2016:2020, respectively.
Expected future intangible asset amortization as of December 31, 2022 was as follows:
| | | | | |
| Fiscal years: | (In millions) |
| 2023 | $ | 214 | |
| 2024 | 196 | |
| 2025 | 160 | |
| 2026 | 103 | |
| 2027 | 65 | |
| Thereafter | 50 | |
| $ | 788 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2015 | | Goodwill Acquired | | Adjustments | | December 31, 2016 | | Goodwill Acquired | | Adjustments | | December 31, 2017 |
| | (In millions) |
| Total goodwill | $ | 4,069 |
| | $ | — |
| | $ | (10 | ) | | $ | 4,059 |
| | $ | 276 |
| | $ | 4 |
| | $ | 4,339 |
|
The goodwill acquired during 2017 was due primarily to the two acquisitions that we completed in 2017. The adjustments to goodwill during 2017 relate to foreign exchange rate translations. The adjustments to goodwill during 2016 pertain to measurement period adjustments related primarily to our acquisition of Xoom.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Intangible Assets
NOTE 6—LEASES
PayPal enters into various leases, which are primarily real estate operating leases. We use these properties for executive and administrative offices, data centers, product development offices, customer services and operations centers, and warehouses.
While a majority of our lease agreements do not contain an explicit interest rate, certain of our lease agreements are subject to changes based on the Consumer Price Index or another referenced index. In the event of changes to the relevant index, lease liabilities are not remeasured and instead are treated as variable lease payments and recognized in the period in which the obligation for those payments is incurred.
The short-term lease exemption has been adopted for all leases with a duration of less than 12 months.
PayPal’s lease portfolio includes a small number of subleases. A sublease situation can arise when currently leased real estate space is available and is surplus to operational requirements.
As of December 31, 2022, we had no finance leases.
The components of identifiable intangible assets arelease expense were as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (In millions) |
| Lease expense | | | | | |
| Operating lease expense | $ | 171 | | | $ | 170 | | | $ | 166 | |
| | | | | |
| | | | | |
| Sublease income | (8) | | | (8) | | | (6) | |
| Lease expense, net | $ | 163 | | | $ | 162 | | | $ | 160 | |
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | |
| 2022 | | 2021 | | 2020 | |
| (In millions) | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
| Operating cash flows from operating leases | $ | 172 | | | $ | 167 | | | $ | 159 | | |
| ROU lease assets obtained in exchange for new operating lease liabilities | $ | 131 | | | $ | 124 | | | $ | 345 | | |
| Other non-cash ROU lease asset activity | $ | (52) | | | $ | (21) | | | $ | (23) | | |
Supplemental balance sheet information related to leases was as follows:
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| (In millions, except weighted-average figures) |
| Operating ROU lease assets | $ | 574 | | | $ | 659 | |
| Current operating lease liabilities | 151 | | | 142 | |
| Operating lease liabilities | 569 | | | 620 | |
| Total operating lease liabilities | $ | 720 | | | $ | 762 | |
Weighted-average remaining lease term—operating leases | 5.7 years | | 6.1 years |
Weighted-average discount rate—operating leases | 3 | % | | 3 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| | 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) |
| Intangible assets: | | | | | | | | | | | | | | | |
| Customer lists and user base | $ | 613 |
| | $ | (563 | ) | | $ | 50 |
| | 3 | | $ | 605 |
| | $ | (542 | ) | | $ | 63 |
| | 4 |
| Marketing related | 198 |
| | (196 | ) | | 2 |
| | 1 | | 197 |
| | (190 | ) | | 7 |
| | 2 |
| Developed technologies | 274 |
| | (215 | ) | | 59 |
| | 3 | | 245 |
| | (206 | ) | | 39 |
| | 3 |
| All other | 245 |
| | (188 | ) | | 57 |
| | 5 | | 245 |
| | (143 | ) | | 102 |
| | 5 |
| Intangible assets, net | $ | 1,330 |
| | $ | (1,162 | ) | | $ | 168 |
| | | | $ | 1,292 |
| | $ | (1,081 | ) | | $ | 211 |
| | |
All identifiable intangible assets
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Future minimum lease payments for our operating leases as of December 31, 2022 were as follows:
| | | | | |
| Operating Leases |
| Fiscal years: | (In millions) |
| 2023 | $ | 169 | |
| 2024 | 155 | |
| 2025 | 114 | |
| 2026 | 103 | |
| 2027 | 90 | |
| Thereafter | 147 | |
| Total | $ | 778 | |
| Less: present value discount | (58) | |
| Lease liability | $ | 720 | |
Operating lease amounts include minimum lease payments under our non-cancelable operating leases primarily for office and data center facilities. The amounts presented are subjectconsistent with contractual terms and are not expected to amortization and no significant residual value is estimateddiffer significantly from actual results under our existing leases. We recognize rent expense under such agreements on a straight-line basis. Rent expense for the intangible assets. Amortization expense for intangible assets was $126years ended December 31, 2022, 2021, and 2020 totaled $202 million, $150$192 million, and $93$172 million, respectively.
In the first quarter of 2020, we entered into a sale-leaseback arrangement as the seller-lessee for a data center as the buyer-lessor obtained control of the facility. We sold the data center and simultaneously entered into an operating lease agreement with the purchaser for the right to use the facility for 8 years. The Company received proceeds of approximately $119 million, net of selling costs, which resulted in a de minimis net gain on the sale transaction.
In the years ended December 31, 2022, 2021 and 2020, we incurred asset impairment charges of $81 million, $26 million, and $30 million, respectively, within restructuring and other charges on our consolidated statements of income (loss). The impairments included a reduction to our ROU lease assets in the amount of $52 million, $21 million, and $23 million, respectively, which were attributed to certain leased space we are no longer utilizing for our business operations, a portion of which is being subleased.
As of December 31, 2022, we entered into an additional operating lease for real estate, which will commence in the second quarter of 2023 or later with minimum lease payments aggregating to $12 million and a lease term of 6 years.
NOTE 7—OTHER FINANCIAL STATEMENT DETAILS
CRYPTO ASSET SAFEGUARDING LIABILITY AND CORRESPONDING SAFEGUARDING ASSET
We allow our customers in certain markets to buy, hold, sell, receive, and send certain cryptocurrencies as well as use the proceeds from sales of cryptocurrencies to pay for purchases at checkout. These cryptocurrencies consist of Bitcoin, Ethereum, Bitcoin Cash, and Litecoin (collectively,“our customers’ crypto assets”). We engage third parties, which are licensed trust companies, to provide certain custodial services, including holding our customers’ cryptographic key information, securing our customers’ crypto assets, and protecting them from loss or theft, including indemnification against certain types of losses such as theft. Our third-party custodian holds the crypto assets in a custodial account in PayPal’s name for the benefit of PayPal’s customers. We maintain the internal recordkeeping of our customers’ crypto assets, including the amount and type of crypto asset owned by each of our customers in that custodial account. Given that we currently utilize one third-party custodian, there is concentration risk in the event the custodian is not able to perform in accordance with our agreement.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Due to the unique risks associated with cryptocurrencies, including technological, legal, and regulatory risks, we recognize a crypto asset safeguarding liability to reflect our obligation to safeguard the crypto assets held for the benefit of our customers, which is recorded in accrued expenses and other current liabilities on our consolidated balance sheet. We also recognize a corresponding safeguarding asset which is recorded in prepaid expenses and other current assets on our consolidated balance sheet. The crypto asset safeguarding liability and corresponding safeguarding asset are measured and recorded at fair value on a recurring basis using prices available in the market we determine to be the principal market at the balance sheet date. The corresponding safeguarding asset may be adjusted for loss events, as applicable. As of December 31, 2022, the Company has not incurred any safeguarding loss events, and therefore, the crypto asset safeguarding liability and corresponding safeguarding asset were recorded at the same value. The following table summarizes the significant crypto assets we hold for the benefit of our customers and the crypto asset safeguarding liability and corresponding safeguarding asset as of December 31, 2022 (in millions):
| | | | | | | |
| | | |
| |
| Bitcoin | $ | 291 | | | |
| Ethereum | 250 | | | |
| Other | 63 | | | |
| Crypto asset safeguarding liability | $ | 604 | | | |
| Crypto asset safeguarding asset | $ | 604 | | | |
PROPERTY AND EQUIPMENT, NET
| | | | | | | | | | | |
| | As of December 31, |
| 2022 | | 2021 |
| (In millions) |
| Property and equipment, net: | | | |
| Computer equipment and software | $ | 3,380 | | | $ | 3,298 | |
| Internal use software and website development costs | 3,814 | | | 3,301 | |
| Land and buildings | 388 | | | 380 | |
| Leasehold improvements | 364 | | | 379 | |
| Furniture and fixtures | 141 | | | 146 | |
| Development in progress and other | 25 | | | 86 | |
| Total property and equipment, gross | 8,112 | | | 7,590 | |
| Accumulated depreciation and amortization | (6,382) | | | (5,681) | |
| Total property and equipment, net | $ | 1,730 | | | $ | 1,909 | |
Depreciation and amortization expense was $846 million, $822 million, and $738 million for the years ended December 31, 2017, 20162022, 2021, and 2015,2020, respectively. We test intangible assets for recoverability when
Net changes in circumstances indicate that the carrying valueaccounts payable on our consolidated statements 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 byincludes non-cash investing activities associated with property and equipment; the intangible assets. Basedimpact of which was a decrease of $36 million and $27 million in 2022 and 2021, respectively, and an increase of $17 million in 2020.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Geographical information
The following table summarizes long-lived assets based on geography, which consist of property and equipment, net and operating lease ROU assets:
| | | | | | | | | | | |
| | As of December 31, |
| | 2022 | | 2021 |
| | (In millions) |
| Long-lived assets: | | | |
| U.S. | $ | 1,910 | | | $ | 2,050 | |
| Other countries | 394 | | | 518 | |
| Total long-lived assets | $ | 2,304 | | | $ | 2,568 | |
Long-lived assets attributed to the U.S. and other countries are based upon the country in which the asset is located or owned.
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, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized Gains (Losses) on Cash Flow Hedges | | Unrealized Gains (Losses) on Investments | | Foreign Currency Translation Adjustment (“CTA”) | | Net Investment
Hedges CTA Gains (Losses) | | Estimated Tax
(Expense) Benefit | | Total |
| | (In millions) |
| Beginning balance | $ | 199 | | | $ | (87) | | | $ | (270) | | | $ | 24 | | | $ | (2) | | | $ | (136) | |
| Other comprehensive income (loss) before reclassifications | 374 | | | (499) | | | (305) | | | (25) | | | 130 | | | (325) | |
| Less: Amount of gain reclassified from AOCI | 462 | | | 5 | | | — | | | — | | | — | | | 467 | |
| Net current period other comprehensive income (loss) | (88) | | | (504) | | | (305) | | | (25) | | | 130 | | | (792) | |
| Ending balance | $ | 111 | | | $ | (591) | | | $ | (575) | | | $ | (1) | | | $ | 128 | | | $ | (928) | |
The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the year ended December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized Gains (Losses) on Cash Flow Hedges | | Unrealized Gains (Losses) on Investments | | Foreign CTA | | Net Investment
Hedges CTA Gains (Losses) | | Estimated Tax
(Expense) Benefit | | Total |
| (In millions) |
| Beginning balance | $ | (323) | | | $ | 11 | | | $ | (198) | | | $ | 24 | | | $ | 2 | | | $ | (484) | |
| Other comprehensive income (loss) before reclassifications | 332 | | | (98) | | | (72) | | | — | | | (4) | | | 158 | |
| Less: Amount of loss reclassified from AOCI | (190) | | | — | | | — | | | — | | | — | | | (190) | |
| Net current period other comprehensive income (loss) | 522 | | | (98) | | | (72) | | | — | | | (4) | | | 348 | |
| Ending balance | $ | 199 | | | $ | (87) | | | $ | (270) | | | $ | 24 | | | $ | (2) | | | $ | (136) | |
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the year ended December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized Gains (Losses) on Cash Flow Hedges | | Unrealized Gains (Losses) on Investments | | Foreign
CTA | | Net Investment
Hedges CTA Gains (Losses) | | Estimated Tax (Expense)
Benefit | | Total |
| (In millions) |
| Beginning balance | $ | 6 | | | $ | 2 | | | $ | (150) | | | $ | (31) | | | $ | — | | | $ | (173) | |
| Other comprehensive income (loss) before reclassifications | (309) | | | 9 | | | (48) | | | 55 | | | 2 | | | (291) | |
| Less: Amount of gain reclassified from AOCI | 20 | | | — | | | — | | | — | | | — | | | 20 | |
| Net current period other comprehensive income (loss) | (329) | | | 9 | | | (48) | | | 55 | | | 2 | | | (311) | |
| Ending balance | $ | (323) | | | $ | 11 | | | $ | (198) | | | $ | 24 | | | $ | 2 | | | $ | (484) | |
The following table provides details about reclassifications out of AOCI for the periods presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Details about AOCI Components | | Amount of Gains (Losses) Reclassified from AOCI | | Affected Line Item in the Statements of Income (Loss) |
| | Year Ended December 31, | | |
| | 2022 | | 2021 | | 2020 | | |
| | (In millions) | | |
Gains (losses) on cash flow hedges—foreign currency exchange contracts | | $ | 462 | | | $ | (190) | | | $ | 20 | | | Net revenues |
| Unrealized gains (losses) on investments | | 5 | | | — | | | — | | | Other income (expense), net |
| | 467 | | | (190) | | | 20 | | | Income before income taxes |
| | — | | | — | | | — | | | Income tax expense (benefit) |
| Total reclassifications for the period | | $ | 467 | | | $ | (190) | | | $ | 20 | | | Net income (loss) |
OTHER INCOME (EXPENSE), NET
The following table reconciles the components of other income (expense), net for the periods presented below:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| (In millions) |
| Interest income | $ | 174 | | | $ | 57 | | | $ | 88 | |
| Interest expense | (304) | | | (232) | | | (209) | |
| Net gains (losses) on strategic investments | (304) | | | 46 | | | 1,914 | |
| Other | (37) | | | (34) | | | (17) | |
| Other income (expense), net | $ | (471) | | | $ | (163) | | | $ | 1,776 | |
Refer to “Note 1—Overview and Summary of Significant Accounting Policies” for details on the results of this test, we recorded an impairment charge of approximately $30 million in depreciation and amortization in our consolidated statement of income, which was measured as the excess of carrying value over the estimated fair value of the assets. The calculation of the estimated fair valuecomposition 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 will amortize 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 the TIO goodwill was assigned to would be below its carrying amount.balances.
Expected future intangible asset amortization as of December 31, 2017 is as follows:
|
| | | |
| Fiscal years: | (In millions) |
| 2018 | $ | 99 |
|
| 2019 | 42 |
|
| 2020 | 27 |
|
| 2021 | — |
|
| 2022 | — |
|
| | $ | 168 |
|
Note 5—Funds Receivable and Customer Accounts
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 8—FUNDS RECEIVABLE AND CUSTOMER ACCOUNTS AND INVESTMENTS
The following table summarizes the assets underlying our funds receivable and customer accounts, short-term investments, and long-term investments as of December 31, 20172022 and 2021:
| | | | | | | | | | | |
| | December 31,
2022 | | December 31,
2021 |
| (In millions) |
| Funds receivable and customer accounts: | | | |
| Cash and cash equivalents | $ | 11,363 | | | $ | 12,723 | |
| Time deposits | 95 | | | 334 | |
| Available-for-sale debt securities | 17,349 | | | 18,336 | |
| Funds receivable | 7,550 | | | 4,748 | |
| Total funds receivable and customer accounts | $ | 36,357 | | | $ | 36,141 | |
| Short-term investments: | | | |
| Time deposits | $ | 482 | | | $ | 590 | |
| Available-for-sale debt securities | 2,593 | | | 3,604 | |
| Restricted cash | 17 | | | 109 | |
| Total short-term investments | $ | 3,092 | | | $ | 4,303 | |
| Long-term investments: | | | |
| Time deposits | $ | 55 | | | $ | 45 | |
| Available-for-sale debt securities | 2,817 | | | 3,545 | |
| | | |
| Strategic investments | 2,146 | | | 3,207 | |
| Total long-term investments | $ | 5,018 | | | $ | 6,797 | |
As of December 31, 2016:2022 and 2021, the estimated fair value of our available-for-sale debt securities included within funds receivable and customer accounts, short-term investments, and long-term investments was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022(1) |
| | Gross
Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | |
Estimated
Fair Value |
| (In millions) |
| Funds receivable and customer accounts: | | | | | | | |
| U.S. government and agency securities | $ | 8,736 | | | $ | — | | | $ | (252) | | | $ | 8,484 | |
| Foreign government and agency securities | 1,479 | | | — | | | (44) | | | 1,435 | |
| Corporate debt securities | 1,637 | | | — | | | (82) | | | 1,555 | |
| Asset-backed securities | 1,324 | | | — | | | (26) | | | 1,298 | |
| Municipal securities | 410 | | | — | | | (3) | | | 407 | |
| Commercial paper | 3,702 | | | 1 | | | (14) | | | 3,689 | |
| Short-term investments: | | | | | | | |
| U.S. government and agency securities | 815 | | | — | | | (3) | | | 812 | |
| Foreign government and agency securities | 435 | | | — | | | (11) | | | 424 | |
| Corporate debt securities | 641 | | | — | | | (14) | | | 627 | |
| Asset-backed securities | 415 | | | — | | | (9) | | | 406 | |
| Commercial paper | 324 | | | — | | | — | | | 324 | |
| Long-term investments: | | | | | | | |
| U.S. government and agency securities | 493 | | | — | | | (36) | | | 457 | |
| Foreign government and agency securities | 386 | | | — | | | (22) | | | 364 | |
| Corporate debt securities | 987 | | | — | | | (58) | | | 929 | |
| Asset-backed securities | 1,085 | | | — | | | (18) | | | 1,067 | |
Total available-for-sale debt securities(2) | $ | 22,869 | | | $ | 1 | | | $ | (592) | | | $ | 22,278 | |
(1) “—” Denotes gross unrealized gain or unrealized loss of less than $1 million in a given position.
(2) Excludes foreign currency denominated available-for-sale debt securities accounted for under the fair value option. Refer to “Note 9—Fair Value Measurement of Assets and Liabilities.”
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021(1) |
| | Gross
Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | |
Estimated
Fair Value |
| (In millions) |
| Funds receivable and customer accounts: | | | | | | | |
| U.S. government and agency securities | $ | 8,754 | | | $ | — | | | $ | (31) | | | $ | 8,723 | |
| Foreign government and agency securities | 1,849 | | | — | | | (9) | | | 1,840 | |
| Corporate debt securities | 3,377 | | | — | | | (15) | | | 3,362 | |
| Asset-backed securities | 1,552 | | | — | | | (3) | | | 1,549 | |
| Municipal securities | 535 | | | — | | | — | | | 535 | |
| Short-term investments: | | | | | | | |
| U.S. government and agency securities | 537 | | | — | | | — | | | 537 | |
| Foreign government and agency securities | 493 | | | — | | | (1) | | | 492 | |
| Corporate debt securities | 2,285 | | | — | | | — | | | 2,285 | |
| Asset-backed securities | 278 | | | — | | | (1) | | | 277 | |
| Long-term investments: | | | | | | | |
| U.S. government and agency securities | 568 | | | — | | | (6) | | | 562 | |
| Foreign government and agency securities | 742 | | | — | | | (6) | | | 736 | |
| Corporate debt securities | 1,445 | | | — | | | (11) | | | 1,434 | |
| Asset-backed securities | 817 | | | — | | | (4) | | | 813 | |
Total available-for-sale debt securities(2) | $ | 23,232 | | | $ | — | | | $ | (87) | | | $ | 23,145 | |
(1) “—” Denotes gross unrealized gain or unrealized loss of less than $1 million in a given position.
(2) Excludes foreign currency denominated available-for-sale debt securities accounted for under the fair value option. Refer to “Note 9—Fair Value Measurement of Assets and Liabilities.”
Gross amortized cost and estimated fair value balances exclude accrued interest receivable on available-for-sale debt securities, which totaled $65 million and $36 million at December 31, 2022 and 2021, respectively, and were included in other current assets on our consolidated balance sheets.
|
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (In millions) |
| Cash and cash equivalents | $ | 5,192 |
| | $ | 4,319 |
|
| Government and agency securities | 6,651 |
| | 5,625 |
|
| Time deposits | 739 |
| | 522 |
|
| Corporate debt securities | 1,248 |
| | 1,093 |
|
| Funds receivable | 4,412 |
| | 2,804 |
|
| Total funds receivable and customer accounts | $ | 18,242 |
| | $ | 14,363 |
|
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of December 31, 20172022 and December 31, 2016,2021, the gross unrealized losses and estimated fair value of our investments classified as available-for-sale debt securities included within funds receivable and customer accounts, short-term investments, and long-term investments for which an allowance for credit losses was not deemed necessary in the current period, aggregated by the length of time those individual securities have been in a continuous loss position, was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022(1) |
| Less than 12 months | | 12 months or longer | | Total |
| | Fair Value | | Gross
Unrealized
Losses | | Fair Value | | Gross
Unrealized
Losses | | Fair Value | | Gross
Unrealized
Losses |
| (In millions) |
| Funds receivable and customer accounts: | | | | | | | | | | | |
| U.S. government and agency securities | $ | 3,730 | | | $ | (89) | | | $ | 4,246 | | | $ | (163) | | | $ | 7,976 | | | $ | (252) | |
| Foreign government and agency securities | 410 | | | (11) | | | 997 | | | (34) | | | 1,407 | | | (45) | |
| Corporate debt securities | 9 | | | (1) | | | 1,545 | | | (81) | | | 1,554 | | | (82) | |
| Asset-backed securities | 773 | | | (11) | | | 508 | | | (14) | | | 1,281 | | | (25) | |
| Municipal securities | 264 | | | (3) | | | 50 | | | — | | | 314 | | | (3) | |
| Commercial paper | 3,079 | | | (14) | | | — | | | — | | | 3,079 | | | (14) | |
| Short-term investments: | | | | | | | | | | | |
| U.S. government and agency securities | 345 | | | — | | | 73 | | | (3) | | | 418 | | | (3) | |
| Foreign government and agency securities | 61 | | | — | | | 362 | | | (11) | | | 423 | | | (11) | |
| Corporate debt securities | 97 | | | (2) | | | 465 | | | (12) | | | 562 | | | (14) | |
| Asset-backed securities | 175 | | | (2) | | | 217 | | | (7) | | | 392 | | | (9) | |
| Commercial paper | 224 | | | — | | | — | | | — | | | 224 | | | — | |
| Long-term investments: | | | | | | | | | | | |
| U.S. government and agency securities | — | | | — | | | 457 | | | (36) | | | 457 | | | (36) | |
| Foreign government and agency securities | 31 | | | (2) | | | 333 | | | (20) | | | 364 | | | (22) | |
| Corporate debt securities | 85 | | | (6) | | | 834 | | | (52) | | | 919 | | | (58) | |
| Asset-backed securities | 872 | | | (9) | | | 195 | | | (9) | | | 1,067 | | | (18) | |
| Total available-for-sale debt securities | $ | 10,155 | | | $ | (150) | | | $ | 10,282 | | | $ | (442) | | | $ | 20,437 | | | $ | (592) | |
|
| | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | Gross Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| | (In millions) |
| Government and agency securities | $ | 5,946 |
| | $ | — |
| | $ | (5 | ) | | $ | 5,941 |
|
| Corporate debt securities | 529 |
| | — |
| | — |
| | 529 |
|
| Total | $ | 6,475 |
| | $ | — |
| | $ | (5 | ) | | $ | 6,470 |
|
|
| | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Gross Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| | (In millions) |
| Government and agency securities | $ | 5,198 |
| | $ | — |
| | $ | (2 | ) | | $ | 5,196 |
|
| Corporate debt securities | 531 |
| | — |
| | — |
| | 531 |
|
| Total | $ | 5,729 |
| | $ | — |
| | $ | (2 | ) | | $ | 5,727 |
|
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 statement 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(1) “—” Denotes gross unrealized loss or fair value of available-for-sale investments and the corresponding foreign exchange gains and losses relating to customer liabilities. At December 31, 2017 and 2016, the estimatedless than $1 million in a given position.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021(1) |
| Less than 12 months | | 12 months or longer | | Total |
| | Fair Value | | Gross
Unrealized
Losses | | Fair Value | | Gross
Unrealized
Losses | | Fair Value | | Gross
Unrealized
Losses |
| (In millions) |
| Funds receivable and customer accounts: | | | | | | | | | | | |
| U.S. government and agency securities | $ | 8,224 | | | $ | (31) | | | $ | — | | | $ | — | | | $ | 8,224 | | | $ | (31) | |
| Foreign government and agency securities | 1,703 | | | (9) | | | 20 | | | — | | | 1,723 | | | (9) | |
| Corporate debt securities | 1,816 | | | (15) | | | — | | | — | | | 1,816 | | | (15) | |
| Asset-backed securities | 1,302 | | | (3) | | | — | | | — | | | 1,302 | | | (3) | |
| Municipal securities | 50 | | | — | | | — | | | — | | | 50 | | | — | |
| Short-term investments: | | | | | | | | | | | |
| U.S. government and agency securities | 440 | | | — | | | — | | | — | | | 440 | | | — | |
| Foreign government and agency securities | 485 | | | (1) | | | — | | | — | | | 485 | | | (1) | |
| Corporate debt securities | 336 | | | — | | | — | | | — | | | 336 | | | — | |
| Asset-backed securities | 273 | | | (1) | | | — | | | — | | | 273 | | | (1) | |
| Long-term investments: | | | | | | | | | | | |
| U.S. government and agency securities | 562 | | | (6) | | | — | | | — | | | 562 | | | (6) | |
| Foreign government and agency securities | 736 | | | (6) | | | — | | | — | | | 736 | | | (6) | |
| Corporate debt securities | 1,355 | | | (11) | | | — | | | — | | | 1,355 | | | (11) | |
| Asset-backed securities | 707 | | | (4) | | | — | | | — | | | 707 | | | (4) | |
| Total available-for-sale debt securities | $ | 17,989 | | | $ | (87) | | | $ | 20 | | | $ | — | | | $ | 18,009 | | | $ | (87) | |
(1) “—” Denotes gross unrealized loss or fair value of our investments included within funds receivable and customer accounts under the fair value option was $1.4 billion and $1.0 billion, respectively. In the years ended December 31, 2017 and 2016, $176less than $1 million of net gains and $66 million of netin a given position.
Unrealized losses from fair value changes, respectively, werehave not been recognized in otherinto income (expense), net on the consolidated statement of income.
The aggregate fair value of investments in an unrealized loss position was $6.0 billion and $4.1 billion as of as of December 31, 2017 and December 31, 2016, respectively. The aggregate gross unrealized loss on our short-term and long-term investments was not material as of December 31, 2017 and December 31, 2016. We believe the decline in value is due to temporary market conditions and expect to recover the entire amortized cost basis of the securities. Wewe neither intend to sell, nor anticipate the needthat it is more likely than not that we will be required to sell, the securities before recovery.recovery of their amortized cost basis. The decline in fair value is due primarily to changes in market interest rates, rather than credit losses. 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.
As of December 31, 2017 and 2016, we had no material investments that had been in a continuous unrealized loss position for greater than 12 months.due to expected credit losses has occurred. Amounts reclassified to earnings from unrealized gains and losses were not material for the years ended December 31, 20172022 and 2016.2021.
Our available-for-sale debt securities included within funds receivable and customer accounts, short-term investments, and long-term investments classified by date of contractual maturity were as follows:
| | | | | | | | | | | |
| | December 31, 2022 |
| Amortized Cost | | Fair Value |
| (In millions) |
| One year or less | $ | 11,591 | | | $ | 11,470 | |
| After one year through five years | 9,232 | | | 8,790 | |
| After five years through ten years | 1,968 | | | 1,941 | |
| After ten years | 78 | | | 77 | |
| Total | $ | 22,869 | | | $ | 22,278 | |
STRATEGIC INVESTMENTS
Our strategic investments include marketable equity securities, which are publicly traded, and non-marketable equity securities, which are primarily investments in privately held companies. Our marketable equity securities have readily determinable fair values and are recorded as long-term investments on our consolidated balance sheets at fair value with changes in fair value recorded in other income (expense), net on our consolidated statements of income (loss). Marketable equity securities totaled $323 million and $1.9 billion as of December 31, 2022 and 2021, respectively, including the impact of the sale of marketable equity securities during the year ended December 31, 2022.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The estimated fair valuesOur non-marketable equity securities are recorded in long-term investments on our consolidated balance sheets. As of our investments classified as available-for-sale included within funds receivable and customer accounts by date of contractual maturity at December 31, 2017 were as follows:
|
| | | |
| | December 31,
2017 |
| | (In millions) |
| One year or less | $ | 6,396 |
|
| One year through two years | 38 |
|
| Two years through three years | 36 |
|
| Total | $ | 6,470 |
|
Note 6—Investments
At December 31, 20172022 and 2016,2021, we had non-marketable equity securities of $136 million and $79 million, respectively, where we have the estimatedability to exercise significant influence, but not control, over the investee. We account for these equity securities using the equity method of accounting. The remaining non-marketable equity securities do not have a readily determinable fair value of our short-term and long-termwe measure these equity investments classified as availableat cost minus impairment, if any, and adjust for sale was as follows: |
| | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | Gross
Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair Value |
| | (In millions) |
Short-term investments(1)(2): | | | | | | | |
| Corporate debt securities | $ | 2,092 |
| | $ | 1 |
| | $ | (1 | ) | | $ | 2,092 |
|
| Government and agency securities | 210 |
| | — |
| | — |
| | 210 |
|
Long-term investments(1): | | | | | | | |
| Corporate debt securities | 1,769 |
| | 2 |
| | (7 | ) | | 1,764 |
|
| Government and agency securities | 98 |
| | — |
| | — |
| | 98 |
|
Total(1)(2) | $ | 4,169 |
| | $ | 3 |
| | $ | (8 | ) | | $ | 4,164 |
|
(1) Excludes short-term restricted cash of $79 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 $163 million, which are not considered available-for-sale securities.
|
| | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Gross
Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair Value |
| | (In millions) |
Short-term investments(1)(2): | | | | | | | |
| Corporate debt securities | $ | 2,867 |
| | $ | 1 |
| | $ | (1 | ) | | $ | 2,867 |
|
| Government and agency securities | 32 |
| | — |
| | — |
| | 32 |
|
| Long-term investments: | | | | | | | |
| Corporate debt securities | 1,473 |
| | 1 |
| | (4 | ) | | 1,470 |
|
| Government and agency securities | 10 |
| | — |
| | — |
| | 10 |
|
Total(1)(2) | $ | 4,382 |
| | $ | 2 |
| | $ | (5 | ) | | $ | 4,379 |
|
(1) Excludes short-term restricted cash of $17 million that we intend to use to support our global sabbatical program.
(2) Excludes time deposits of $122 million, which are not considered available-for-sale securities.
Inchanges resulting from observable price changes in orderly transactions for an identical or similar investment in the second quarter of 2016, we 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 statement of income to offset certain foreign exchangesame issuer. All gains and losses on these investments, realized and unrealized, and our foreign denominated customer liabilities. Asshare of December 31, 2017 and 2016,earnings or losses from investments accounted for using the estimated fair value of our investments included within short-term investments and long-term investments under the fair value option was $277 million and $356 million, respectively. In the years ended December 31, 2017 and 2016, $36 million of net gains and $48 million of net losses, respectively, from fair value changes wereequity method are recognized in other income (expense), net on our consolidated statements of income (loss). The carrying value of our non-marketable equity securities totaled $1.8 billion and $1.3 billion as of December 31, 2022 and 2021, respectively.
Measurement Alternative adjustments
The adjustments to the consolidated statementcarrying value of income.our non-marketable equity securities accounted for under the Measurement Alternative in the years ended December 31, 2022 and 2021 were as follows:
| | | | | | | | | | | |
| Year Ended December 31, |
| | 2022 | | 2021 |
| (In millions) |
| Carrying amount, beginning of period | $ | 1,268 | | | $ | 779 | |
| Adjustments related to non-marketable equity securities: | | | |
Net additions(1) | 100 | | | 133 | |
| Gross unrealized gains | 423 | | | 356 | |
| Gross unrealized losses and impairments | (104) | | | — | |
| Carrying amount, end of period | $ | 1,687 | | | $ | 1,268 | |
(1) Net additions include purchases, reductions due to sales of securities, and reclassifications when Measurement Alternative is subsequently elected or no longer applies.
The following table summarizes the cumulative gross unrealized gains and cumulative gross unrealized losses and impairment related to non-marketable equity securities accounted for under the Measurement Alternative, held at December 31, 2022 and 2021, respectively:
| | | | | | | | | | | |
| December 31,
2022 | | December 31,
2021 |
| (In millions) |
| Cumulative gross unrealized gains | $ | 1,137 | | | $ | 733 | |
| Cumulative gross unrealized losses and impairments | $ | (131) | | | $ | (27) | |
Unrealized gains (losses) on strategic investments, excluding those accounted for using the equity method
The following table summarizes the net unrealized gains (losses) on marketable and non-marketable equity securities, excluding those accounted for using the equity method, held at December 31, 2022 and 2021, respectively:
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 |
| (In millions) |
| Net unrealized gains (losses) | $ | 79 | | | $ | (46) | |
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 9—FAIR VALUE MEASUREMENT OF ASSETS AND LIABILITIES
The aggregate fair value of short-term and long-term investments in an unrealized loss position was $2.8 billion as of December 31, 2017 and $2.2 billion as of December 31, 2016, of which $207 million and $10 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 not material as of December 31, 2017 and 2016. 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 the 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. Amounts reclassified to earnings from unrealized gains and losses were not material for the years ended December 31, 2017 and 2016.FINANCIAL ASSETS AND LIABILITIES MEASURED AND RECORDED AT FAIR VALUE ON A RECURRING BASIS
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, 2017 were as follows:
|
| | | |
| | December 31, 2017 |
| | (In millions) |
| One year or less | $ | 2,302 |
|
| One year through two years | 942 |
|
| Two years through three years | 672 |
|
| Three years through four years | 179 |
|
| Four years through five years | 58 |
|
| Greater than five years | 11 |
|
| Total | $ | 4,164 |
|
Other Investments
We have cost method investments which are reported in long-term investments on our consolidated balance sheet. Our cost method investments consist primarily of minority equity interests in privately held companies and totaled $88 million and $50 million as of December 31, 2017 and 2016, respectively. The increase in our cost method investments was due to additional investments made in 2017.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 7—Fair Value Measurement of Assets and Liabilities
Financial Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis as of December 31, 20172022 and 2016:2021:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | Quoted Prices in
Active Markets for
Identical Assets
(Level 1) | | Significant Other Observable Inputs (Level 2) |
| | (In millions) |
| Assets: | | | | | | |
Cash and cash equivalents(1) | | $ | 932 | | | $ | — | | | $ | 932 | |
Short-term investments(2): | | | | | | |
| U.S. government and agency securities | | 812 | | | — | | | 812 | |
| Foreign government and agency securities | | 424 | | | — | | | 424 | |
| Corporate debt securities | | 627 | | | — | | | 627 | |
| Asset-backed securities | | 406 | | | — | | | 406 | |
| Commercial paper | | 324 | | | — | | | 324 | |
| Total short-term investments | | 2,593 | | | — | | | 2,593 | |
Funds receivable and customer accounts(3): | | | | | | |
| Cash and cash equivalents | | 192 | | | — | | | 192 | |
| U.S. government and agency securities | | 8,484 | | | — | | | 8,484 | |
| Foreign government and agency securities | | 1,777 | | | — | | | 1,777 | |
| Corporate debt securities | | 1,694 | | | — | | | 1,694 | |
| Asset-backed securities | | 1,298 | | | — | | | 1,298 | |
| Municipal securities | | 407 | | | — | | | 407 | |
| Commercial paper | | 3,689 | | | — | | | 3,689 | |
| Total funds receivable and customer accounts | | 17,541 | | | — | | | 17,541 | |
| Derivatives | | 244 | | | — | | | 244 | |
| Crypto asset safeguarding asset | | 604 | | | — | | | 604 | |
Long-term investments(2),(4): | | | | | | |
| U.S. government and agency securities | | 457 | | | — | | | 457 | |
| Foreign government and agency securities | | 364 | | | — | | | 364 | |
| Corporate debt securities | | 929 | | | — | | | 929 | |
| Asset-backed securities | | 1,067 | | | — | | | 1,067 | |
| Marketable equity securities | | 323 | | | 323 | | | — | |
| Total long-term investments | | 3,140 | | | 323 | | | 2,817 | |
| Total financial assets | | $ | 25,054 | | | $ | 323 | | | $ | 24,731 | |
| Liabilities: | | | | | | |
| Derivatives | | $ | 298 | | | $ | — | | | $ | 298 | |
| Crypto asset safeguarding liability | | 604 | | | — | | | 604 | |
| Total financial liabilities | | $ | 902 | | | $ | — | | | $ | 902 | |
|
| | | | | | | | |
| | | 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$6.8 billion not subject tomeasured and recorded at fair value measurement on a recurring basis.value.
(2) Excludes restricted cash of $81$17 million and time deposits of $163$537 million not subject tomeasured and recorded at fair value measurement on a recurring basis.value.
(3)Excludes cash, time deposits, and funds receivable of $10.2$18.8 billion underlying funds receivable and customer accounts not subject tomeasured and recorded at fair value measurement.value.
(4) Excludes non-marketable equity securities of $1.8 billion measured using the Measurement Alternative or equity method accounting.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | Quoted Prices in
Active Markets for
Identical Assets
(Level 1) | | Significant Other Observable Inputs (Level 2) |
| | (In millions) |
| Assets: | | | | | | |
Cash and cash equivalents(1) | | $ | 400 | | | $ | — | | | $ | 400 | |
Short-term investments(2): | | | | | | |
| U.S. government and agency securities | | 537 | | | — | | | 537 | |
| Foreign government and agency securities | | 505 | | | — | | | 505 | |
| Corporate debt securities | | 2,285 | | | — | | | 2,285 | |
| Asset-backed securities | | 277 | | | — | | | 277 | |
| Total short-term investments | | 3,604 | | | — | | | 3,604 | |
Funds receivable and customer accounts(3): | | | | — | | | |
| Cash and cash equivalents | | 622 | | | — | | | 622 | |
| U.S. government and agency securities | | 8,723 | | | — | | | 8,723 | |
| Foreign government and agency securities | | 4,090 | | | — | | | 4,090 | |
| Corporate debt securities | | 3,439 | | | — | | | 3,439 | |
| Asset-backed securities | | 1,549 | | | — | | | 1,549 | |
| Municipal securities | | 535 | | | — | | | 535 | |
| Total funds receivable and customer accounts | | 18,958 | | | — | | | 18,958 | |
| Derivatives | | 304 | | | — | | | 304 | |
Long-term investments(2), (4): | | | | | | |
| U.S. government and agency securities | | 562 | | | — | | | 562 | |
| Foreign government and agency securities | | 736 | | | — | | | 736 | |
| Corporate debt securities | | 1,434 | | | — | | | 1,434 | |
| Asset-backed securities | | 813 | | | — | | | 813 | |
| Marketable equity securities | | 1,860 | | | 1,860 | | | — | |
| Total long-term investments | | 5,405 | | | 1,860 | | | 3,545 | |
| Total financial assets | | $ | 28,671 | | | $ | 1,860 | | | $ | 26,811 | |
| Liabilities: | | | | | | |
| Derivatives | | $ | 130 | | | $ | — | | | $ | 130 | |
|
| | | | | | | | |
| | | Balances at
December 31, 2016 | | Significant Other
Observable Inputs
(Level 2) |
| | | (In millions) |
| Assets: | | | | |
Cash and cash equivalents(1) | | $ | 268 |
| | $ | 268 |
|
Short-term investments(2): | | | | |
| Corporate debt securities | | 2,882 |
| | 2,882 |
|
| Government and agency securities | | 364 |
| | 364 |
|
| Total short-term investments | | 3,246 |
| | 3,246 |
|
Funds receivable and customer accounts(3) | | 6,898 |
| | 6,898 |
|
| Derivatives | | 223 |
| | 223 |
|
| Long-term investments: | | | | |
| Corporate debt securities | | 1,479 |
| | 1,479 |
|
| Government and agency securities | | 10 |
| | 10 |
|
| Total long-term investments | | 1,489 |
| | 1,489 |
|
| Total financial assets | | $ | 12,124 |
| | $ | 12,124 |
|
| Liabilities: | | | | |
| Derivatives | | $ | 59 |
| | $ | 59 |
|
(1) Excludes cash of $1.3$4.8 billion not subject tomeasured and recorded at fair value measurement on a recurring basis.value.
(2) Excludes restricted cash of $17$109 million and time deposits of $122$635 million not subject tomeasured and recorded at fair value measurement on a recurring basis.value.
(3)Excludes cash, time deposits, and funds receivable of $7.5$17.2 billion underlying funds receivable and customer accounts not subject tomeasured and recorded at fair value measurementvalue.
(4) Excludes non-marketable equity securities of $1.3 billion measured using the Measurement Alternative or equity method accounting.
Our marketable equity securities are valued using quoted prices for identical assets in active markets (Level 1). There are no active markets for our crypto asset safeguarding liability or the corresponding safeguarding asset. Accordingly, we have valued the asset and liability using quoted prices on a recurring basis.
Ourthe active exchange that has been identified as the principal market for the underlying crypto assets (Level 2). All other financial assets and liabilities are valued using marketquoted prices on both active markets (Level 1) andfor identical instruments in 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.inputs (Level 2).
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
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of December 31, 2017,2022 and 2021, we did not have any assets or liabilities requiring measurement at fair value on a recurring basis without observable market values that would require a high level of judgment to determine fair value (Level 3).
Cash 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 available-for-sale debt securities denominated in currencies other than the functional currency of our subsidiaries 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 statements of income (loss) to significantly reduce the accounting asymmetry that would otherwise arise when recognizing the corresponding foreign currency denominatedexchange gains and losses relating to customer liabilities. The following table summarizes the estimated fair value of our available-for-sale investments underlying funds receivable and customer accounts, short-term investments and long-term investmentsdebt securities under the fair value option as further discussedof December 31, 2022 and 2021:
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| (In millions) |
| Funds receivable and customer accounts | $ | 481 | | | $ | 2,327 | |
| Short-term investments | $ | — | | | $ | 13 | |
| | | |
The following table summarizes the gains (losses) from fair value changes recognized in “Note 5—Funds Receivableother income (expense), net related to the available-for-sale debt securities under the fair value option for the years ended December 31, 2022 and Customer Accounts”2021:
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | | 2022 | | 2021 |
| | | | | (In millions) |
| Funds receivable and customer accounts | | | | | $ | (149) | | | $ | (101) | |
| Short-term investments | | | | | $ | — | | | $ | (30) | |
| | | | | | | |
ASSETS MEASURED AND RECORDED AT FAIR VALUE ON A NON-RECURRING BASIS
The following tables summarize our assets held as of December 31, 2022 and 2021 for which a non-recurring fair value measurement was recorded during the years ended December 31, 2022 and 2021, respectively:
| | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | | Significant Other Observable Inputs (Level 2) | | Significant Other Unobservable Inputs (Level 3) |
| | (In millions) | | |
Non-marketable equity securities measured using the Measurement Alternative(1) | | $ | 987 | | | | $ | 589 | | | $ | 398 | |
Other assets(2) | | 165 | | | | 165 | | | — | |
| Total | | $ | 1,152 | | | | $ | 754 | | | $ | 398 | |
(1) Excludes non-marketable equity securities of $700 million accounted for under the Measurement Alternative for which no observable price changes occurred during the year ended December 31, 2022.
(2) Consists of ROU lease assets recorded at fair value pursuant to impairment charges that occurred during the year ended December 31, 2022. See “Note 6—Investments.”Leases” for additional information.
Financial Assets
| | | | | | | | | | | | | | | |
| | December 31, 2021 | | | Significant Other Observable Inputs (Level 2) |
| | (In millions) |
Non-marketable equity securities measured using the Measurement Alternative(1) | | $ | 611 | | | | $ | 611 | |
Other assets(2) | | 86 | | | | 86 | |
| Total | | $ | 697 | | | | $ | 697 | |
(1) Excludes non-marketable equity securities of $657 million accounted for under the Measurement Alternative for which no observable price changes occurred during the year ended December 31, 2021.
(2) Consists of ROU lease assets recorded at fair value pursuant to impairment charges that occurred during the year ended December 31, 2021. See “Note 6—Leases” for additional information.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We measure the non-marketable equity securities accounted for under the Measurement Alternative at cost minus impairment, if any, adjusted for observable price changes in orderly transactions for an identical or similar investment in the same issuer. Non-marketable equity securities that have been remeasured during the period based on observable price changes are classified within Level 2 in the fair value hierarchy because we estimate the fair value based on valuation methods which only include significant inputs that are observable, such as the observable transaction price at the transaction date. The fair value of non-marketable equity securities that have been remeasured due to impairment are classified within Level 3 as we estimate fair value using significant unobservable inputs such as discount rates, forecasted cash flows, and Liabilities Not Measuredmarket data of comparable companies, among others.
We evaluate ROU assets related to leases for indicators of impairment whenever events or changes in circumstances indicate that the carrying amount of an ROU asset may not be recoverable. Impairment losses on ROU lease assets related to office operating leases are calculated initially using estimated rental income per square foot derived from observable market data, and Recorded at Fair Valuethe impaired asset is classified within Level 2 in the fair value hierarchy.
FINANCIAL ASSETS AND LIABILITIES NOT MEASURED AND RECORDED AT FAIR VALUE
Our financial instruments, including cash, restricted cash, time deposits, accounts receivable, loans and interest receivable, loans and interest receivable held for sale, funds receivable,net, certain customer accounts, accounts payable, notes payable, and funds payable and amounts duelong-term debt related to customersborrowings on our credit facilities are carried at amortized cost, which approximates their fair value. Our notes receivable had a carrying value due toof approximately $441 million and fair value of approximately $396 million as of December 31, 2022. Our notes receivable had a carrying value of approximately $381 million and fair value of approximately $424 million as of December 31, 2021. Our long-term debt (including current portion) in the short-term maturityform of these instruments.fixed rate notes had a carrying value of approximately $10.3 billion and fair value of approximately $9.5 billion as of December 31, 2022. Our fixed rate notes had a carrying value of approximately $9.0 billion and fair value of approximately $9.3 billion as of December 31, 2021. If these financial instruments were measured at fair value in the financial statements, cash would be classified as Level 1,1; restricted cash, time deposits, certain customer accounts, and notes payablelong-term debt (including current portion) would be classified as Level 2,2; and the remaining financial instruments would be classified as Level 3 in the fair value hierarchy.
PayPal Holdings, Inc.NOTE 10—DERIVATIVE INSTRUMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SUMMARY OF DERIVATIVE INSTRUMENTS
Note 8—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. We do not use any derivative instruments for trading or speculative purposes.
Foreign Exchange Contracts
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Cash flow hedges
We transact business in various foreign currencies and have significant international revenues and costs denominated in foreign currencies, which subjects us to foreign currency exchange risk. We have a foreign currency exposure management program wherebyin which 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 thethese foreign currency 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)AOCI and subsequently reclassified into earningsrevenue in the same period the forecasted transaction affects earnings. The ineffective portion of the unrealized gains and losses on these contracts, if any, is recorded immediately in earnings. We evaluate the effectiveness of our foreign currency exchange contracts on a quarterly basis by comparing the change in the fair valuecritical terms of the derivative instruments with the change in the fair valuecritical terms of the forecasted cash flows of the hedged item.item; if the critical terms are the same, we conclude the hedge will be perfectly effective. 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 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 are classified in cash flows from operating activities on our consolidated statements of cash flows.
As of December 31, 2022, we estimated that $110 million of net derivative gains related to our cash flow hedges included in AOCI are expected to be reclassified into earnings within the next 12 months. During the years ended December 31, 2017, 20162022, 2021, and 20152020, 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, 2017,the hedged transaction. If we estimated that $111 million of net derivative losses relatedelect to discontinue our cash flow hedges and it is probable that the original forecasted transaction will occur, we continue to report the derivative’s gain or loss in AOCI until the forecasted transaction affects earnings, at which point we also reclassify it into earnings. Gains and losses on derivatives held after we discontinue our cash flow hedges and 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.
Net investment hedges
We use forward foreign currency exchange contracts to reduce the foreign currency exchange risk related to our investment in certain foreign subsidiaries. These derivatives are designated as net investment hedges and accordingly, the gains and losses on the portion of the derivatives included in the assessment of hedge effectiveness is recorded in AOCI as part of foreign currency translation. We exclude forward points from the assessment of hedge effectiveness and recognize them in other income (expense), net on a straight-line basis over the life of the hedge. The accumulated other comprehensive incomegains and losses associated with these instruments will remain in AOCI until the foreign subsidiaries are sold or substantially liquidated, at which point they will be reclassified into earnings within the next 12 months.earnings. The cash flows associated with derivatives designated as a net investment hedge are classified in cash flows from investing activities on our consolidated statements of cash flows.
We have an additionalnot reclassified any gains or losses related to net investment hedges from AOCI into earnings during any of the periods presented.
Foreign currency exchange contracts not designated as hedging instruments
We have a foreign currency exposure management program wherebyin which we use foreign currency exchange contracts to offset the foreign currency exchange risk onof 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 foreign currency exchange rate movements on our assets and liabilities. The foreign currency gains and losses on ourdue to remeasurement of certain foreign currency denominated monetary assets and liabilities are recorded in other income (expense), net, which isare offset by the gains and losses on thethese foreign currency exchange contracts. The cash flows associated with our non-designated derivatives used to hedge foreign currency denominated monetary assets and liabilities are classified in cash flows from operating activities on our consolidated statements of cash flows.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FAIR VALUE OF DERIVATIVE CONTRACTS
Fair Value of Derivative Contracts
The fair value of our outstanding derivative instruments as of December 31, 20172022 and 20162021 was as follows:
| | | | | | | | | | | | | | | | | |
| | Balance Sheet Location | | As of December 31, |
| | | 2022 | | 2021 |
| Derivative Assets: | | | (In millions) |
| Foreign currency exchange contracts designated as hedging instruments | Other current assets | | $ | 167 | | | $ | 205 | |
| Foreign currency exchange contracts designated as hedging instruments | Other assets (non-current) | | 15 | | | 21 | |
| Foreign currency exchange contracts not designated as hedging instruments | Other current assets | | 62 | | | 78 | |
| | | | | |
| Total derivative assets | | | $ | 244 | | | $ | 304 | |
| | | | | |
| Derivative Liabilities: | | | | | |
| Foreign currency exchange contracts designated as hedging instruments | Other current liabilities | | $ | 68 | | | $ | 27 | |
| Foreign currency exchange contracts designated as hedging instruments | Other long-term liabilities | | 133 | | | — | |
| Foreign currency exchange contracts not designated as hedging instruments | Other current liabilities | | 97 | | | 103 | |
| | | | | |
| Total derivative liabilities | | | $ | 298 | | | $ | 130 | |
|
| | | | | | | | | |
| | Balance Sheet Location | | As of December 31, |
| | | | 2017 | | 2016 |
| Derivative Assets: | | | (In millions) |
| Foreign exchange contracts designated as cash flow hedges | Other Current Assets | | $ | — |
| | $ | 135 |
|
| Foreign exchange contracts not designated as hedging instruments | Other Current Assets | | 66 |
| | 88 |
|
| Total derivative assets | | | $ | 66 |
| | $ | 223 |
|
| | | | | | |
| Derivative Liabilities: | | | | | |
| Foreign exchange contracts designated as cash flow hedges | Other Current Liabilities | | $ | 94 |
| | $ | 4 |
|
| Foreign exchange contracts not designated as hedging instruments | Other Current Liabilities | | 124 |
| | 55 |
|
| Total derivative liabilities | | | $ | 218 |
| | $ | 59 |
|
| | | | | | |
| Net fair value of derivative instruments | | | $ | (152 | ) | | $ | 164 |
|
Master Netting AgreementsMASTER NETTING AGREEMENTS - Rights of SetoffRIGHTS OF SET-OFF
Under master netting agreements with respectivecertain counterparties to our foreign currency 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 inon our consolidated balance sheet.sheets. Rights of setoffset-off associated with our foreign currency exchange contracts represented a potential offset to both assets and liabilities by $56of $70 million as of December 31, 20172022 and $44$102 million as of December 31, 2016. During the year ended December 31, 2017, we2021.
We have 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. WeThe following table provides the collateral exchanged posted $38 million ofand received:
| | | | | | | | | | | | | | |
| | | December 31,
2022 | | December 31,
2021 |
| | (In millions) |
Cash collateral posted(1) | | $ | 24 | | | $ | 5 | |
Cash collateral received(2) | | $ | 203 | | | $ | 209 | |
| | | | |
(1) Right to reclaim cash collateral related to our derivative liabilities as of December 31, 2017. This amount, which is recognized in other current assets on our consolidated balance sheet, is relatedsheets.
(2) Obligation to the right to reclaimreturn counterparty cash collateral. We did not post or receive any collateral related to our derivative assets recognized in other current liabilities as of December 31, 2016.on our consolidated balance sheets.
Effect of Derivative Contracts on Accumulated Other Comprehensive Income
The following table summarizes the activity of derivative contracts that qualify for hedge accounting as of December 31, 2017 and December 31, 2016, and the impact of designated derivative instruments on accumulated other comprehensive income for the twelve months ended December 31, 2017 and 2016:
|
| | | | | | | | | | | | | | | |
| | December 31, 2016 | | Amount of gain (loss) recognized in other comprehensive income (effective portion) | | Less: Amount of gain reclassified from accumulated other comprehensive income to net revenue (effective portion) | | December 31, 2017 |
| | (In millions) |
| Foreign exchange contracts designated as cash flow hedges | $ | 131 |
| | $ | (225 | ) | | $ | 17 |
| | $ | (111 | ) |
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
EFFECT OF DERIVATIVE CONTRACTS ON CONSOLIDATED FINANCIAL STATEMENTS |
| | | | | | | | | | | | | | | |
| | December 31, 2015 | | Amount of gain (loss) 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 |
|
Effect of Derivative Contracts on Consolidated Statements of Income
The following table provides the location in the financialconsolidated statements of theincome (loss) and amount of recognized gains or losses related to our derivative instruments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| (In millions) |
| Net revenues | | Other income (expense), net | | Net revenues | | Other income (expense), net | | Net revenues | | Other income (expense), net |
| Total amounts presented in the consolidated statements of income (loss) in which the effects of derivatives are recorded | $ | 27,518 | | | $ | (471) | | | $ | 25,371 | | | $ | (163) | | | $ | 21,454 | | | $ | 1,776 | |
| | | | | | | | | | | |
| Gains (losses) on derivatives in cash flow hedging relationship: | | | | | | | | | | | |
| Amount of gains (losses) on foreign exchange contracts reclassified from AOCI | 462 | | | — | | | (190) | | | — | | | 20 | | | — | |
| Gains on derivatives in net investment hedging relationship: | | | | | | | | | | | |
| Amount of gains on foreign exchange contracts excluded from the assessment of effectiveness | — | | | 84 | | | — | | | — | | | — | | | — | |
| Gains (losses) on derivatives not designated as hedging instruments: | | | | | | | | | | | |
| Amount of gains (losses) on foreign exchange contracts | — | | | 118 | | | — | | | 144 | | | — | | | (110) | |
Amount of losses on equity derivative contracts (1) | — | | | (174) | | | — | | | — | | | — | | | (64) | |
| Total gains (losses) | $ | 462 | | | $ | 28 | | | $ | (190) | | | $ | 144 | | | $ | 20 | | | $ | (174) | |
(1) During the years ended December 31, 2022 and December 31, 2020, equity derivative contracts were entered into and matured which related to the sale of marketable equity securities related to a strategic investment. The cash flows associated with the equity derivative contracts were classified in cash flows from investing activities on our consolidated statements of cash flows.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In millions) |
| Foreign exchange contracts designated as cash flow hedges recognized in net revenues | $ | 17 |
| | $ | 119 |
| | $ | 182 |
|
| Foreign exchange contracts not designated as cash flow hedges recognized in other income (expense), net | (54 | ) | | 76 |
| | 17 |
|
| Total gain (loss) recognized from derivative contracts in the consolidated statement of income | $ | (37 | ) | | $ | 195 |
| | $ | 199 |
|
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table provides the amount of pre-tax unrealized gains andor losses included in the assessment of hedge effectiveness related to foreign exchange contracts notour derivative instruments designated as cash flow hedgeshedging instruments that are offset by the foreign currency gains and losses on our assets and liabilities recognized in other comprehensive income (expense), net.(loss):
Notional Amounts of Derivative Contracts | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| (In millions) |
| Unrealized gains (losses) on foreign exchange contracts designated as cash flow hedges | $ | 374 | | | $ | 332 | | | $ | (309) | |
| Unrealized (losses) gains on foreign exchange contracts designated as net investment hedges | (25) | | | — | | | 55 | |
| Total unrealized gains (losses) recognized from derivative contracts designated as hedging instruments in the consolidated statements of comprehensive income (loss) | $ | 349 | | | $ | 332 | | | $ | (254) | |
NOTIONAL AMOUNTS OF DERIVATIVE CONTRACTS
Derivative transactions are measured in terms of the notional amount; 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 currency exchange payments under these contracts is determined. The following table provides the notional amounts of our outstanding derivatives:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| (In millions) |
| Foreign exchange contracts designated as hedging instruments | $ | 7,149 | | | $ | 5,349 | |
| Foreign exchange contracts not designated as hedging instruments | 11,840 | | | 20,414 | |
| | | |
| Total | $ | 18,989 | | | $ | 25,763 | |
NOTE 11—LOANS AND INTEREST RECEIVABLE
|
| | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 |
| | (In millions) |
| Foreign exchange contracts designated as cash flow hedges | $ | 2,639 |
| | $ | 1,865 |
|
| Foreign exchange contracts not designated as hedging instruments | 5,669 |
| | 4,612 |
|
| Total | $ | 8,308 |
| | $ | 6,477 |
|
CONSUMER RECEIVABLES
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 9—PropertyCredit in the U.K. Once a consumer is approved for credit, it is made available to them as a funding source in their PayPal wallet. Additionally, we offer installment credit products at the time of checkout in various markets, including the U.S., several markets across Europe, Australia, and Equipment, Net
|
| | | | | | | |
| | As of December 31, |
| 2017 | | 2016 |
| (In millions) |
| Property and equipment, net: | | | |
| Computer equipment and software | $ | 2,301 |
| | $ | 2,049 |
|
| Internal use software and website development costs | 1,828 |
| | 1,372 |
|
| Land and buildings | 364 |
| | 357 |
|
| Leasehold improvements | 388 |
| | 335 |
|
| Furniture and fixtures | 129 |
| | 119 |
|
| Development in progress and other | 148 |
| | 268 |
|
| Total property and equipment, gross | 5,158 |
| | 4,500 |
|
| Accumulated depreciation | (3,630 | ) | | (3,018 | ) |
| Total property and equipment, net | $ | 1,528 |
| | $ | 1,482 |
|
Depreciation expense was $649Japan. The majority of the installment loans allow consumers to pay for purchases over periods of 12 months or less. Beginning in June 2022, we purchase receivables related to interest-bearing installment loans extended to U.S. consumers by a partner institution and are responsible for servicing functions related to that portfolio. During the year ended December 31, 2022, we purchased approximately $381 million in 2017, $574 million in 2016consumer receivables. As of December 31, 2022 and $515 million in 2015.
The net change in purchases2021, the outstanding balance of propertyconsumer receivables, which consisted of revolving and equipment included in accounts payableinstallment loans and interest receivable, was not material in 2017, $35 million in 2016,$5.9 billion and not material in 2015.
Note 10—Loans and Interest Receivable
Loans and Interest Receivable, Held for Sale
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,$3.8 billion, respectively, net of anythe participation interest sold and pro-rata allowances, including unamortized deferred origination costs and estimated collectible interest and fees. Upon approval of 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. Due to the designation as held for sale, the associated allowance for this portfolio was reversed, resulting in an increasepartner institution of approximately $39$17 million in revenue from other value added services and a decrease of approximately $283 million in transaction and loan losses in our consolidated statement of income.nil, respectively. See “Note 1—Overview and Summary of Significant Accounting Policies” for additional information. As of December 31, 2017, the total outstanding balance in our held for sale portfolio was $6.4 billion, net of theinformation on this participation interest sold to an independent chartered financial institution and other investors of $1.1 billion.arrangement.
We use consumer FICO scores, where available, among other measures in evaluatingclosely monitor the credit quality of our U.S. PayPal Credit consumer receivables, held for sale. A FICO score is a type of credit score that lenders use to assess an applicant's credit risk and whether to extend credit. Individual FICO scores are generally obtained each quarter in which the U.S. consumer has an outstanding consumer receivable that we own. The weighted average U.S. consumer FICO scores related to our loans and interest receivable, held for sale balance outstanding at December 31, 2017 and December 31, 2016 were 680 and 679, respectively. The Company has revised its weighted average U.S. consumer FICO score as of December 31, 2016 to conform to the current period presentation.
As of December 31, 2017 and December 31, 2016, approximately 51.1% and 52.1%, respectively, of the pool of loans and interest receivable, held for sale was due from U.S. consumers with FICO scores greater than or equal to 680, which is generally considered “prime” by the consumer credit industry. As of December 31, 2017 and December 31, 2016, approximately 11.7% and 11.1%, respectively, of the pool of loans and interest receivable, held for sale was due from U.S. customers with FICO scores below 599.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table presents the principal amount of U.S. consumer loans and interest receivable, segmented by a FICO score range: |
| | | | | | | |
| | As of December 31, |
| 2017 | | 2016 |
| (In millions) |
| > 760 | $ | 832 |
| | $ | 665 |
|
| 680-759 | 2,439 |
| | 1,938 |
|
| 600-679 | 2,378 |
| | 1,840 |
|
| < 599 | 752 |
| | 553 |
|
| Total | $ | 6,401 |
| | $ | 4,996 |
|
None of our loans and interest receivable were designated as held for sale as of December 31, 2016. FICO score segmentation as of December 31, 2016 included in the table above provides the credit quality of these receivables for comparative purposes only.
The following table presents the delinquency status of U.S. 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. As of December 31, 2017, approximately 90.6%, of the portfolio of consumer receivables and interest receivable, was current.
|
| | | | | | | | | | | | | | | | | | | | | | |
December 31, 2017(1) |
| (In millions) |
| Current | | 30 - 59 Days | | 60 - 89 Days | | 90 - 180 Days | | Total Past 30 days | | Total |
| $ | 5,800 |
| | $ | 240 |
| | $ | 103 |
| | $ | 258 |
| | $ | 601 |
| | $ | 6,401 |
|
(1) Includes approximately $50 million of U.S. consumer receivables not designated as held for sale that are fully reserved and are expected to be charged off, and excludes approximately $47 million related to accrued unbilled interest.
No allowances are recorded for potential losses against the loans and interest receivable, held for sale portfolio. Adjustments to the cost basis of the held for sale portfolio, which are primarily driven by charge-offs, are recorded as incurred and recognized in restructuring and other charges in our consolidated statement of income.
Loans and Interest Receivable, Net
Consumer receivables
We offer credit products to consumers who choose PayPal Credit as their funding source at checkout. As of December 31, 2017, the outstanding balance in our pool of consumer receivables that excludes amounts classified as held for sale and consists of loans and interest receivable due from international consumer accounts was $326 million. As of December 31, 2016, the outstanding balance in our pool of consumer receivables was $5.1 billion, which includes receivables due from both U.S. and international consumers as the U.S. consumer receivables were not designated as held for sale as of that date.
We closely monitor credit quality for our international consumer receivables to manageevaluate and evaluatemanage our related exposure to credit risk. Credit risk management begins with initial underwriting and continues through tothe 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 external sources, such as credit bureaus where available, and internal historical experiencedata, including the consumer’s prior repayment history with PayPal Creditour credit products as well as other measures.where available. We use delinquency status and trends to assist in making (or, for interest-bearing installment loans in the U.S., to assist the partner institution in making) new and ongoing credit decisions, to adjust our models, to plan our collection practices and strategies, and in our determination ofdetermining our allowance for international consumer loans and interest receivable.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following tables present the delinquency status of the principal amount of consumer loans and interest receivable.receivable by year of origination. The amounts shown below are based on the number of days past the billing date to the consumer. Currentfor revolving loans or contractual repayment date for installment loans. The “current” category represents balances that are within 3029 days of the billing date. Amountsdate or contractual repayment date, as applicable.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| (In millions, except percentages) |
| | | | | | | | | | | | | | | | |
| | Revolving Loans
Amortized Cost Basis | | Installment Loans Amortized Cost Basis | | | | |
| | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Total | | Percent |
| Current | | $ | 1,850 | | | $ | 3,726 | | | $ | 123 | | | $ | — | | | $ | — | | | $ | — | | | $ | 5,699 | | | 97.1% |
| 30 - 59 Days | | 23 | | | 26 | | | 2 | | | — | | | — | | | — | | | 51 | | | 0.9% |
| 60 - 89 Days | | 15 | | | 20 | | | 2 | | | — | | | — | | | — | | | 37 | | | 0.6% |
| 90 - 179 Days | | 34 | | | 47 | | | 4 | | | — | | | — | | | — | | | 85 | | | 1.4% |
Total(1) | | $ | 1,922 | | | $ | 3,819 | | | $ | 131 | | | $ | — | | | $ | — | | | $ | — | | | $ | 5,872 | | | 100% |
(1) Excludes receivables from other consumer credit products of $11 million at December 31, 2017 represent loans and interest receivable due2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| (In millions, except percentages) |
| | | | | | | | | | | | | | | | |
| | Revolving Loans
Amortized Cost Basis | | Installment Loans Amortized Cost Basis | | | | |
| | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Total | | Percent |
| Current | | $ | 1,790 | | | $ | 1,939 | | | $ | 3 | | | $ | — | | | $ | — | | | $ | — | | | $ | 3,732 | | | 97.0% |
| 30 - 59 Days | | 18 | | | 16 | | | — | | | — | | | — | | | — | | | 34 | | | 0.9% |
| 60 - 89 Days | | 12 | | | 13 | | | — | | | — | | | — | | | — | | | 25 | | | 0.6% |
| 90 - 179 Days | | 27 | | | 28 | | | 1 | | | — | | | — | | | — | | | 56 | | | 1.5% |
Total(1) | | $ | 1,847 | | | $ | 1,996 | | | $ | 4 | | | $ | — | | | $ | — | | | $ | — | | | $ | 3,847 | | | 100% |
(1) Excludes receivables from other consumer accounts excluding amounts classified as held for sale,credit products of which approximately 96.0% were current. Amounts as of$44 million at December 31, 2016 represent total consumer loans and interest receivable, including U.S. consumer receivables because they were not designated as held for sale as of that date, of which approximately 90.0% were current.2021.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
|
| | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 |
| (In millions) |
| Current | | 30 - 59 Days | | 60 - 89 Days | | 90 - 180 Days | | Total Past 30 days | | Total |
| $ | 313 |
| | $ | 7 |
| | $ | 2 |
| | $ | 4 |
| | $ | 13 |
| | $ | 326 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| (In millions) |
| Current | | 30 - 59 Days | | 60 - 89 Days | | 90 - 180 Days | | Total Past 30 days | | Total |
| $ | 4,601 |
| | $ | 219 |
| | $ | 82 |
| | $ | 211 |
| | $ | 512 |
| | $ | 5,113 |
|
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 within 60 days after receipt of notification of bankruptcy. Loans receivable past the payment due date continue to accrue interest until they are charged off. We record an allowance for loss against the interest and fees receivable.
The following table summarizes the activity in the allowance for consumer loans and interest receivable for the years ended December 31, 20172022 and 2016:2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Consumer Loans Receivable | Interest Receivable | Total Allowance(1) | | Consumer Loans Receivable | Interest Receivable | Total Allowance(1) |
| (In millions) |
| Beginning balance | $ | 243 | | $ | 43 | | $ | 286 | | | $ | 299 | | $ | 53 | | $ | 352 | |
| Provisions | 292 | | 15 | | 307 | | | 20 | | 10 | | 30 | |
| Charge-offs | (216) | | (29) | | (245) | | | (116) | | (20) | | (136) | |
| Recoveries | 21 | | — | | 21 | | | 28 | | — | | 28 | |
Other(2) | (18) | | (4) | | (22) | | | 12 | | — | | 12 | |
| Ending balance | $ | 322 | | $ | 25 | | $ | 347 | | | $ | 243 | | $ | 43 | | $ | 286 | |
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016(1) |
| | Consumer Loans Receivable | Interest Receivable | Total(2) Allowance | | Consumer Loans Receivable | Interest Receivable | Total Allowance |
| | (In millions) |
Beginning Balance(1) | $ | 265 |
| $ | 40 |
| $ | 305 |
| | $ | 179 |
| $ | 32 |
| $ | 211 |
|
| Reversal of allowance related to loans and interest receivable, held for sale | (283 | ) | (39 | ) | (322 | ) | | — |
| — |
| — |
|
| Provisions | 406 |
| 113 |
| 519 |
| | 388 |
| 116 |
| 504 |
|
| Charge-offs | (362 | ) | (108 | ) | (470 | ) | | (330 | ) | (108 | ) | (438 | ) |
| Recoveries | 31 |
| — |
| 31 |
| | 28 |
| — |
| 28 |
|
| Ending Balance | $ | 57 |
| $ | 6 |
| $ | 63 |
| | $ | 265 |
| $ | 40 |
| $ | 305 |
|
(1) Includes allowance related to loans and interest receivable, held for sale portfolio prior to its designation as held for sale.
(2) Includes approximately $50 millionof U.S. consumer receivables not designated as held for sale that are fully reserved and are expected to be charged off.
The tables above exclude receivablesExcludes allowances from other consumer credit products of $55$3 million and $16$4 million at December 31, 20172022 and 2016, respectively,2021, respectively.
(2) Includes amounts related to foreign currency remeasurement and, allowances of $7 million and $3 million atfor the year ended December 31, 2017 and 2016, respectively.2021, initial allowance for purchased credit deteriorated (“PCD”) loans acquired during the period. A portion of the Paidy loan portfolio acquired was determined to be purchase credit deteriorated as the loans were 30 days or more past due. As such, we recorded current expected credit losses on the PCD loans.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The provision for loanthe year ended December 31, 2022 was primarily attributable to growth in the consumer receivable portfolio. Qualitative adjustments were made to account for limitations in our current expected credit loss models due to uncertainty with respect to macroeconomic conditions and the financial health of our borrowers.
The increase in charge-offs for the year ended December 31, 2022 compared to the same period in the prior year was due to the expansion of our short-term installment products.
The provision for current expected credit losses relating to our international consumer loans receivable portfolio is recognized in transaction and loan losses.credit losses on our consolidated statements of income (loss). The provision for interest receivable on thefor interest and fees earned on our international consumer loans receivable portfolio is recognized in net revenues from other value added services as a reduction to revenue. Loans receivable continue to accrue interest until they are charged off.
We charge off consumer receivable balances in revenue.the month in which a customer’s balance becomes 180 days past the billing date or contractual repayment date, except for the U.S. consumer interest-bearing installment receivables, which are charged off 120 days past the contractual repayment date. Bankrupt accounts are charged off within 60 days after receipt of notification of bankruptcy. Charge-offs are recorded as a reduction to our allowance for loans and interest receivable and subsequent recoveries, if any, are recorded as an increase to the allowance for loans and interest receivable.
Merchant receivablesMERCHANT RECEIVABLES
We offer creditaccess to merchant finance products tofor certain existing small and medium-sized merchantsbusinesses through our PayPal Working Capital productPPWC and subsequentPPBL products, which we collectively refer to as our acquisition of Swiftmerchant finance offerings. We purchase receivables related to credit extended to U.S. merchants by a partner institution and are responsible for servicing functions related to that portfolio. During the years ended December 31, 2022 and 2021, we purchased approximately $3.2 billion and $1.8 billion in late September 2017, Swift business loan and advance products.merchant receivables, respectively. As of December 31, 2017,2022 and 2021, the total outstanding balance in our pool of merchant loans, advances, and interest and fees receivable was $1.01$2.1 billion and $1.4 billion, respectively, net of the participation interest sold to an independent chartered financial institution. Asthe partner institution of December 31, 2016, the total outstanding balance in our pool of merchant loans, advances, interest$97 million and fees receivable was $558 million.$63 million, respectively. See “Note 1—Overview and Summary of Significant Accounting Policies” for additional information on this participation arrangement.
PayPal Working Capital receivables
As of December 31, 2017, the total outstanding balance in our pool of PayPal Working Capital loans, advances and fees receivable was $703 million, net of the related participation interest sold to an independent chartered financial institution of $28 million. As
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
of December 31, 2016, the total outstanding balance in our pool of working capital loans, advances and fees receivable was $558 million.
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 targets an annual percentage rate based on the overall credit assessment of the merchant. Loans and advances are repaid through a fixed percentage of the merchant'smerchant’s future payment volume that PayPal processes. Through our PPBL product, we provide merchants access to short-term business financing for a fixed fee based on an evaluation of the applying business as well as the business owner. PPBL repayments are collected through periodic payments until the balance has been satisfied.
The interest or fee is fixed at the time the loan or advance is extended and is recognized as deferred revenues includedrevenue in accrued expenses and other current liabilities inon our consolidated balance sheet.sheets. The fixed interest or fee is amortized to netinto revenues from other value added services based on the amount repaid over the repayment period. We estimate the repayment period for PPWC based on the merchant'smerchant’s payment processing history with PayPal. There is no stated interest rate. ThereFor PPWC, 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 of the merchant'smerchant’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 monthly 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 closely monitorperiod, as well as the credit quality for all working capitalof our merchant loans and advances that we extend or purchase to manage and evaluate our related exposure to credit risk. To assess a merchant who requests a PayPal Working Capital loan or advance, we use, among other indicators, an internally developed risk model 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 loans or advances. 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 score within the range of 350 to 750. We generally expect that merchants to which we extend a working capital loan or 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 the participating merchant’s PRM score on a recurring basis for all outstanding working capital loans and advances owned by PayPal. At December 31, 2017 and 2016, the weighted average PRM score related to our PayPal Working Capital balances outstanding was 619 and 625, respectively.
The following table presents the principal amount of PayPal Working Capital loans, advances and fees receivable segmented by PRM score ranges:
|
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (In millions) |
| > 610 | $ | 450 |
| | $ | 378 |
|
| 526-609 | 140 |
| | 108 |
|
| <525 | 113 |
| | 72 |
|
| Total | $ | 703 |
| | $ | 558 |
|
Swift Merchant loans and advance receivables
As of December 31, 2017, the total outstanding balance in our pool of Swift merchant loans, advances, interest and fees receivable was $309 million. Through our Swift merchant loan products, we provide merchants with access to short-term business financing based on an evaluation of both the applying business as well as the business owner.
We closely monitor credit quality for all merchant loans and advances that we underwrite and issue, so that we can evaluate, quantify, and manage our credit risk exposure. To assess a merchant seeking a loan or an advance, we use, among other indicators, a risk modelmodels developed internally which utilizesutilize information obtained from multiple internal and external data sources both external and internal, to predict the likelihood of timely and satisfactory repayment by the merchant of the loan or advance amount and the related interest or fixed fee. DriversPrimary drivers of the modelmodels include elementsthe merchant’s annual payment volume, payment processing history with PayPal, prior repayment history with PayPal’s credit products where available, information sourced from consumer credit bureau and business credit bureau reports, prior repayment history with our products where available, and other information obtained during the application process. We use delinquency status and trends to assist in making new and(or, in the U.S., to assist the partner institution in making) ongoing credit decisions, adjustingto adjust our internal model,models, to plan our collection practices and strategies, and in our determination ofdetermining our allowance for these loans, advances, and advances.
Swift merchant loansinterest and advances are collected by daily or weekly payments until the balance has been satisfied. The interest or fee is fixed at the time the loan is extended and recognized as deferred revenues included in other current liabilities in our consolidated
fees receivable.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
balance sheet. The fixed interest or fee is amortized to net revenues from other value added services based on the amount repaid over the repayment period. There is no stated interest rate and the terms are generally less than 12 months.
Merchant receivablereceivables delinquency and allowance
The following tables present our estimatethe delinquency status of the principal amount of PayPal Working Capital and Swift businessmerchant loans, advances, and interest and fees receivable by year of origination. The amounts are based on the number of days past their originalthe expected or contractual repayment date for amounts outstanding. The “current” category represents balances that are within 29 days of the expected repayment period. Indate or contractual repayment date, as applicable.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| (In millions, except percentages) |
| | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Total | | Percent |
| Current | | $ | 1,826 | | | $ | 20 | | | $ | 57 | | | $ | 42 | | | $ | 2 | | | $ | 1,947 | | | 90.7% |
| 30 - 59 Days | | 63 | | | 7 | | | 3 | | | 4 | | | — | | | 77 | | | 3.6% |
| 60 - 89 Days | | 34 | | | 4 | | | 4 | | | 2 | | | — | | | 44 | | | 2.0% |
| 90 - 179 Days | | 55 | | | 9 | | | 3 | | | 3 | | | — | | | 70 | | | 3.3% |
| 180+ Days | | 1 | | | 2 | | | 2 | | | 3 | | | — | | | 8 | | | 0.4% |
Total(1) | | $ | 1,979 | | | $ | 42 | | | $ | 69 | | | $ | 54 | | | $ | 2 | | | $ | 2,146 | | | 100% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| (In millions, except percentages) |
| | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Total | | Percent |
| Current | | $ | 1,100 | | | $ | 129 | | | $ | 95 | | | $ | 3 | | | $ | — | | | $ | 1,327 | | | 91.8% |
| 30 - 59 Days | | 24 | | | 12 | | | 12 | | | 1 | | | — | | | 49 | | | 3.4% |
| 60 - 89 Days | | 10 | | | 8 | | | 7 | | | — | | | — | | | 25 | | | 1.7% |
| 90 - 179 Days | | 10 | | | 11 | | | 11 | | | 1 | | | — | | | 33 | | | 2.3% |
| 180+ Days | | — | | | 4 | | | 7 | | | 1 | | | — | | | 12 | | | 0.8% |
Total(1) | | $ | 1,144 | | | $ | 164 | | | $ | 132 | | | $ | 6 | | | $ | — | | | $ | 1,446 | | | 100% |
(1) Balances include the second quarterimpact of 2016, we refinedmodification programs offered by the Company as a part of our estimate of the original expected repayment period for PayPal Working Capital loans and advances to take into account the variability in repayment patterns. Prior period amounts have been updated to reflect this change.novel coronavirus (“COVID-19”) pandemic payment relief initiatives (as discussed further below).
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
|
The following table summarizes the activity in the allowance for PayPal Working Capital and Swift businessmerchant loans, advances, and interest and fees receivable, for the years ended December 31, 20172022 and 2016:2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Merchant Loans and Advances | Interest and Fees Receivable | Total Allowance | | Merchant Loans and Advances | Interest and Fees Receivable | Total Allowance |
| (In millions) |
| Beginning balance | $ | 192 | | $ | 9 | | $ | 201 | | | $ | 440 | | $ | 43 | | $ | 483 | |
| Provisions | 109 | | 18 | | 127 | | | (116) | | (22) | | (138) | |
| Charge-offs | (105) | | (9) | | (114) | | | (173) | | (12) | | (185) | |
| Recoveries | 34 | | — | | 34 | | | 41 | | — | | 41 | |
| | | | | | | |
| Ending balance | $ | 230 | | $ | 18 | | $ | 248 | | | $ | 192 | | $ | 9 | | $ | 201 | |
The provision for the year ended December 31, 2022 was primarily attributable to originations in the merchant portfolio and a slight deterioration in credit quality of loans outstanding. Qualitative adjustments were made to account for uncertainty around the effectiveness of loan modification programs made available to merchants in previous years, as described further below.
The decrease in the charge-offs for the year ended December 31, 2022 compared to the prior year was due to the charge-off of accounts in 2021 that experienced financial difficulties as a result of the COVID-19 pandemic.
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| | PayPal Working Capital & Swift Loans and Advances | Interest & Fees Receivable | Total Allowance | | PayPal Working Capital Loans and Advances | Fees Receivable | Total Allowance |
| | (In millions) |
| Beginning Balance | $ | 28 |
| $ | 3 |
| $ | 31 |
| | $ | 19 |
| $ | 3 |
| $ | 22 |
|
| Provisions | 65 |
| 12 |
| 77 |
| | 45 |
| 6 |
| 51 |
|
| Charge-offs | (46 | ) | (8 | ) | (54 | ) | | (41 | ) | (6 | ) | (47 | ) |
| Recoveries | 5 |
| — |
| 5 |
| | 5 |
| — |
| 5 |
|
| Ending Balance | $ | 52 |
| $ | 7 |
| $ | 59 |
| | $ | 28 |
| $ | 3 |
| $ | 31 |
|
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For our PayPal Working Capital product, wemerchant loans and advances, the determination of delinquency is based on the current expected or contractual repayment period of the loan or advance and fixed interest or fee payment as compared to the original expected or contractual repayment period. We charge off the receivablereceivables outstanding under our PPBL product when the repayments are 180 days past the contractual repayment date. We charge off the receivables outstanding under our PPWC product when the repayments are 180 days past our 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 repayments are 360 days past due regardless of whether or not the merchant has made a payment withinin the last 60 days. The provision for loan losses relating to our PayPal Working Capital loans and advances is recognized in transaction and loan losses, and the provisions for fees receivable is recognized in deferred revenues included in other current liabilities in our consolidated balance sheet as a reduction in deferred revenue.
For Swift merchant loans and advances, the determination of delinquency, from current to 180 days past due, is based on the current expected repayment period of the loan or advance and fixed interest or fee payment as compared to the original expected repayment period. We charge off the receivable when the repayments are 180 days past our expectation of repayments. Bankrupt accounts are charged off within 60 days of receiving notification of bankruptcy. The provision for loancredit losses on merchant loans and advances is recognized in transaction and loan losses.credit losses on our consolidated statements of income (loss), and the provision for interest and fees receivable is recognized as a reduction of deferred revenue in accrued expenses and other current liabilities on our consolidated balance sheets. Charge-offs that are recovered are recorded as a reduction to our allowance for loans and interest receivable and subsequent recoveries, if any, are recorded as an increase to the allowance for loans and interest receivable.
Troubled debt restructurings
In certain instances where a merchant is able to demonstrate that it is experiencing financial difficulty, there may be a modification of the loan or advance and the related interest or fee receivable for which it is probable that, without modification, we would be unable to collect all amounts due. These modifications are intended to provide merchants with financial relief, and help enable us to mitigate losses.
These modifications include an increase in term by approximately 1 to 5.5 years while moving the delinquency status to current. The fee on certain of these loans or advances remains unchanged over the extended term. Alternatively, certain loans and advances have been modified to replace the initial fixed fee structure at the time the loan or advance was extended with a fixed annual percentage rate applied over the amended remaining term, which will continue to accrue interest at the fixed rate until the earlier of maturity or charge-off. These modifications had a de minimis impact on our consolidated statements of income (loss) in the years ended December 31, 2022 and 2021.
Allowances for TDRs are assessed separately from other loans and advances within our portfolio and are determined by estimating current expected credit losses utilizing the modified term and interest rate assumptions. Historical loss estimates are utilized in addition to macroeconomic assumptions to determine expected credit loss rates. Further, we may include qualitative adjustments that incorporate incremental information not captured in the quantitative estimates of our current expected credit losses.
During the year ended December 31, 2022, merchant loans, advances, and interest and fees receivables which have been modified as TDRs were de minimis. The following table shows merchant loans, advances and interest and fees receivables which were modified as TDRs in the year ended December 31, 2021:
| | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, 2021 | | |
| | Number of Accounts
(in thousands) | | Outstanding Balances(1) (in millions) | | Weighted Average Payment Term Extensions
(in months) |
| Loans and interest receivable | | 3 | | | $ | 45 | | | 36 |
(1) Balances are as of modification date.
A merchant is considered in payment default after a modification when the merchant’s payment becomes 60 days past their expected or contractual repayment date. For loans or advances that have defaulted after being modified, the increased estimate of current expected credit loss is factored into overall expected credit losses. In the years ended December 31, 2022 and 2021, the amount of merchant loans, advances, and interest and fees receivables classified as TDRs that have subsequently defaulted on payments was de minimis.
NOTE 12—DEBT
FIXED RATE NOTES
In May 2022, we issued fixed rate notes with varying maturity dates for an aggregate principal amount of $3.0 billion. Interest on these notes is payable on June 1 and December 1 of each year, beginning on December 1, 2022.
In May 2020, we issued fixed rate notes with varying maturity dates for an aggregate principal amount of $4.0 billion. Interest on these notes is payable on June 1 and December 1 of each year, beginning on December 1, 2020.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 11—SegmentIn September 2019, we issued fixed rate notes with varying maturity dates for an aggregate principal amount of $5.0 billion. Interest on these notes is payable in arrears semiannually (payable on April 1 and Geographical InformationOctober 1).
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.
The notes issued from the May 2022, May 2020, and September 2019 debt issuances are senior unsecured obligations and are collectively referred to as the “Notes.” We may redeem the Notes in whole, at any time, or in part, from time to time, prior to maturity, at their redemption prices. Upon the occurrence of both a change of control of the Company and a downgrade of the Notes below an investment grade rating, we will be required to offer to repurchase each series of Notes at a price equal to 101% of the then outstanding principal amounts, plus accrued and unpaid interest. The Notes are subject to covenants, including limitations on our ability to create liens on our assets, enter into sale and leaseback transactions, and merge or consolidate with another entity, in each case subject to certain exceptions, limitations, and qualifications. Proceeds from the issuance of these Notes may be used for general corporate purposes, which may include funding the repayment or redemption of outstanding debt, share repurchases, ongoing operations, capital expenditures, acquisitions of businesses, assets, or strategic investments.
In May 2022, we repurchased certain Notes under the September 2019 and May 2020 debt issuances prior to maturity through tender offers. In addition, in June 2022, we redeemed the outstanding balance of the notes maturing in September 2022 through a make-whole redemption. We repurchased and redeemed $1.6 billion of outstanding Notes, as described above, which resulted in de minimis debt extinguishment net gains that were recorded as interest expense within other income (expense), net on our consolidated statements of income (loss).
As of December 31, 2022 and 2021, we had an outstanding aggregate principal amount of $10.4 billion and $9.0 billion, respectively, related to the Notes. The following tables summarizetable summarizes the allocationNotes:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, | | |
| Maturities | | Effective Interest Rate | | 2022 | | 2021 |
| | | | | | | (in millions) | | |
| September 2019 debt issuance of $5.0 billion: | | | | | | | | | | | |
| Fixed-rate 2.200% notes | 9/26/2022 | | 2.39% | | | | $ | — | | | $ | 1,000 | | | |
| Fixed-rate 2.400% notes | 10/1/2024 | | 2.52% | | | | 1,250 | | | 1,250 | | | |
| Fixed-rate 2.650% notes | 10/1/2026 | | 2.78% | | | | 1,250 | | | 1,250 | | | |
| Fixed-rate 2.850% notes | 10/1/2029 | | 2.96% | | | | 1,500 | | | 1,500 | | | |
| | | | | | | | | | | |
| May 2020 debt issuance of $4.0 billion: | | | | | | | | | | | |
| Fixed-rate 1.350% notes | 6/1/2023 | | 1.55% | | | | 418 | | | 1,000 | | | |
| Fixed-rate 1.650% notes | 6/1/2025 | | 1.78% | | | | 1,000 | | | 1,000 | | | |
| Fixed-rate 2.300% notes | 6/1/2030 | | 2.39% | | | | 1,000 | | | 1,000 | | | |
| Fixed-rate 3.250% notes | 6/1/2050 | | 3.33% | | | | 1,000 | | | 1,000 | | | |
| | | | | | | | | | | |
| May 2022 debt issuance of $3.0 billion: | | | | | | | | | | | |
| Fixed-rate 3.900% notes | 6/1/2027 | | 4.06% | | | | 500 | | | — | | | |
| Fixed-rate 4.400% notes | 6/1/2032 | | 4.53% | | | | 1,000 | | | — | | | |
| Fixed-rate 5.050% notes | 6/1/2052 | | 5.14% | | | | 1,000 | | | — | | | |
| Fixed-rate 5.250% notes | 6/1/2062 | | 5.34% | | | | 500 | | | — | | | |
| Total term debt | | | | | | | $ | 10,418 | | | $ | 9,000 | | | |
| | | | | | | | | | | |
| Unamortized premium (discount) and issuance costs, net | | | | | | | (74) | | | (50) | | | |
Less: current portion of term debt(1) | | | | | | | (418) | | | (999) | | | |
| Total carrying amount of term debt | | | | | | | $ | 9,926 | | | $ | 7,951 | | | |
(1) The current portion of net revenuesterm debt is included within accrued expenses and long-lived assets basedother current liabilities on geography:our consolidated balance sheets.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In millions) |
| Net revenues: | | | | | |
| U.S. | $ | 7,084 |
| | $ | 5,760 |
| | $ | 4,640 |
|
| U.K. | 1,402 |
| | 1,257 |
| | 1,191 |
|
| Other countries | 4,608 |
| | 3,825 |
| | 3,417 |
|
| Total net revenues | $ | 13,094 |
| | $ | 10,842 |
| | $ | 9,248 |
|
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
|
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (In millions) |
| Long-lived assets: | | | |
| U.S. | $ | 1,432 |
| | $ | 1,391 |
|
| Other countries | 96 |
| | 91 |
|
| Total long-lived assets | $ | 1,528 |
| | $ | 1,482 |
|
Net revenues earned from transaction revenues are attributed to U.S., U.K.The effective interest rates for the Notes include interest on the Notes, amortization of debt issuance costs, and other countries primarily based uponamortization of the country in whichdebt discount. The interest expense recorded for the merchant is located, or inNotes, including amortization of the case of a cross-border transaction, may be earned from the country in which the consumerdebt discount, debt issuance costs, 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 assetsdebt extinguishment net gains, was $290 million, $224 million, and $190 million for the years ended December 31, 20172022, 2021, and 2016 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.2020, respectively.
Information regarding net revenues by major products and services for the years ended December 31, 2017, 2016 and 2015 was as follows:CREDIT FACILITIES |
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In millions) |
| Transaction revenues | $ | 11,402 |
| | $ | 9,490 |
| | $ | 8,128 |
|
| Other value added services: | 1,692 |
| | 1,352 |
| | 1,120 |
|
| Total net revenues | $ | 13,094 |
| | $ | 10,842 |
| | $ | 9,248 |
|
Five-year revolving credit facility Note 12—Notes Payable
In the fourth quarter of 2017,September 2019, we entered into a credit agreement ("2017 Credit Agreement"(the “Credit Agreement”) that provides for an unsecured $3.0$5.0 billion, 364-day delayed-draw term loanfive-year revolving credit facility which isthat includes a $150 million letter of credit sub-facility and a $500 million swingline sub-facility, with available in up to three borrowings. Borrowings and other amounts payableborrowings under the 2017revolving credit facility reduced by the amount of any letters of credit and swingline borrowings outstanding from time to time. Loans borrowed under the Credit Agreement are guaranteedavailable in U.S. dollar, Euro, British pound, Canadian dollar, and Australian dollar, and in each case subject to the sub-limits and other limitations provided in the Credit Agreement. We may also, subject to the agreement of the applicable lenders and satisfaction of specified conditions, increase the commitments under the revolving credit facility by PayPal, Inc.up to $2.0 billion. Subject to specifiedspecific conditions, we may designate one or more of our subsidiaries as additional borrowers under the 2017 Credit Agreement, provided that we and PayPal Holdings, Inc. guarantee allguarantees the portion of borrowings made available and other obligations of any such subsidiaries under the 2017 Credit Agreement. As of December 31, 2017, no2022, certain subsidiaries were designated as additional borrowers. Funds borrowed under the 2017 Credit Agreement may be used for working capital, allocationcapital expenditures, acquisitions, and other general corporate purposes. Duringpurposes not in contravention with the three months ended December 31, 2017, we effected a single draw down $1.0 billionCredit Agreement.
We are obligated to pay interest on loans under the 2017 Credit Agreement. The borrowing bearsAgreement and other customary fees for a credit facility of this size and type, including an upfront fee and an unused commitment fee based on our debt rating. Loans under the Credit Agreement bear interest at either (i) the applicable eurocurrency rate plus a margin (based on our public debt ratings) ranging from 0.875% to 1.375%, (ii) the applicable overnight rate plus a margin (based on our public debt ratings) ranging from 0.875% to 1.375%, (iii) a formula based on the prime rate, the federal funds effective rate, or London Interbank Offered Rate ("LIBOR")
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
of one month plus a margin (based on our public debt ratings) ranging from zero to 0.375%, or (iv) a formula based on the Euro Short-Term Rate (“ESTR”) or the Sterling Overnight Index Average (“SONIA”) rate plus a margin (based on our public debt ratings) ranging from 0.875% to 1.375%. In January 2022, an amendment to the agreement was signed which provides for the additional borrowing rate option of 1.125% resultingutilizing SONIA or ESTR rates. The Credit Agreement will terminate and all amounts owed thereunder will be due and payable in September 2024, unless the commitments are terminated earlier. The Credit Agreement contains customary representations, warranties, affirmative and negative covenants, including a weighted average interest ratefinancial covenant, events of 2.78%.default, and indemnification provisions in favor of the lenders. The negative covenants include restrictions regarding the incurrence of liens and the incurrence of subsidiary indebtedness, in each case subject to certain exceptions. The financial covenant requires us to meet a quarterly financial test with respect to a maximum consolidated leverage ratio.
In March 2020, we drew down $3.0 billion under the Credit Agreement. In May 2020, we repaid the $3.0 billion using proceeds from the May 2020 debt issuance. As of December 31, 2017, $1.0 billion was2022, no borrowings or letters of credit were outstanding under the 2017 Credit Agreement. Accordingly, at December 31, 2017, $2.02022, $5.0 billion of borrowing capacity was available for the purposes permitted by the 2017 Credit Agreement, subject to customary conditions to borrowing. The total interest expense and fees we recorded related to the Credit Agreement was approximately $16 million for the year ended December 31, 2020.
Paidy credit agreement
In February 2022, we entered into a credit agreement (the “Paidy Credit Agreement”) with Paidy as co-borrower, which provides for an unsecured revolving credit facility of ¥60.0 billion. In September 2022, the Paidy Credit Agreement was modified to increase the borrowing capacity by ¥30.0 billion for a total borrowing capacity of ¥90.0 billion (approximately $686 million as of December 31, 2022.) Borrowings under the Paidy Credit Agreement are for use by Paidy for working capital, capital expenditures, and other permitted purposes. Loans under the Paidy Credit Agreement bear interest at the Tokyo Interbank Offered Rate plus a margin (based on our public debt rating) ranging from 0.40% to 0.60%. The company maintainsPaidy Credit Agreement will terminate and all amounts owed thereunder will be due and payable in February 2027, unless the commitments are terminated earlier. The Paidy Credit Agreement contains customary representations, warranties, affirmative and negative covenants, including a financial covenant, events of default, and indemnification provisions in favor of the lenders. The negative covenants include restrictions regarding the incurrence of liens and subsidiary indebtedness, in each case subject to certain exceptions. The financial covenant requires us to meet a quarterly financial test with respect to a maximum consolidated leverage ratio.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In the year ended December 31, 2022, ¥64.3 billion (approximately $491 million) was drawn down under the Paidy Credit Agreement, which was recorded in long-term debt on our consolidated balance sheet. Accordingly, at December 31, 2022, ¥25.7 billion (approximately $195 million) of borrowing capacity was available for the purposes permitted by the Paidy Credit Agreement, subject to customary conditions to borrowing. During the year ended December 31, 2022, the total interest expense and fees we recorded related to the Paidy Credit Agreement were de minimis.
Prior credit agreement
In October 2021, we assumed a credit agreement through our acquisition of Paidy (the “Prior Credit Agreement”), which provided for a secured revolving credit facility of ¥22.8 billion (approximately $198 million at acquisition). As of December 31, 2021, ¥11.3 billion (approximately $98 million) was outstanding under the Prior Credit Agreement, which was recorded in long-term debt on our consolidated balance sheet. In the first quarter of 2022, we terminated the Prior Credit Agreement and repaid all outstanding borrowings. The total interest expense and fees we recorded related to the Prior Credit Agreement were de minimis for the year ended December 31, 2022.
Other available facilities
We also maintain uncommitted credit facilities in various regions throughout the world, aggregating towhich had a borrowing capacity of approximately $250 million.$80 million and $90 million in the aggregate, as of December 31, 2022 and 2021, respectively. This available credit includes facilities where we can withdraw and utilize the funds at our discretion for general corporate purposes. Interest rate terms for these facilities vary by region and reflect prevailing market rates for companies with strong credit ratings. As of December 31, 2017, no amounts were outstanding2022, the majority of the borrowing capacity under thosethese credit facilities and therefore, approximately $250 million of borrowing capacity was available, subject to customary conditions to borrowing.
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. Borrowings and other amounts payable under the 2015 Credit Agreement are guaranteed by PayPal, Inc. 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 PayPal, Inc. guarantee all borrowings and other obligations of any such subsidiaries under the 2015 Credit Agreement. As of December 31, 2017, 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. 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 LIBOR of one month plus a marginFUTURE PRINCIPAL PAYMENTS
of 1.125% resulting in a weighted-average interest rate of 2.36% . As of December 31, 2017, no borrowings or letters of credit were outstanding under the 2015 Credit Agreement. Accordingly, at December 31, 2017, $2.0 billion of borrowing capacity was available for the purposes permitted by the 2015 Credit Agreement subject to customary conditions to borrowing.
Note 13—Commitments and Contingencies
Commitments
As of December 31, 2017,2022, the future principal payments associated with our term debt were as follows (in millions):
| | | | | |
| 2023 | $ | 418 | |
| 2024 | 1,250 | |
| 2025 | 1,000 | |
| 2026 | 1,250 | |
| 2027 | 500 | |
| Thereafter | 6,000 | |
| Total | $ | 10,418 | |
NOTE 13—COMMITMENTS AND CONTINGENCIES
COMMITMENTS
As of December 31, 2022 and 2021, approximately $26.4$4.9 billion and $4.1 billion, respectively, of unused credit was available to PayPal Credit account holders compared to $28.8 billion of unused credit as of December 31, 2016.in the U.K. 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. When a consumer funds a purchase in the U.S. using a PayPal Credit product issued by a chartered financial institution, the chartered financial institution extends credit to the consumer, funds the extension of credit at the point of sale and advances funds to the merchant. We subsequently purchase the receivables related to the consumer loans extended by the chartered financial institution and, as a result of such purchase, bear the risk of loss in the event of loan defaults. Although the chartered financial institution continues to own each customer account, we own the related receivable (excluding participation interests sold) and are responsible for all servicing functions related to the account. See “Note 1—Overview and Summary of Significant Accounting Policies” for additional information.
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, 2017, are as follows:
|
| | | |
| | Operating Leases |
| | (In millions) |
| 2018 | $ | 119 |
|
| 2019 | 112 |
|
| 2020 | 82 |
|
| 2021 | 62 |
|
| 2022 | 50 |
|
| Thereafter | 130 |
|
| Total minimum lease payments | $ | 555 |
|
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
LITIGATION AND REGULATORY MATTERS
Rent expense for the years ended December 31, 2017, 2016 and 2015 totaled $69 million, $76 million and $59 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.damages or penalties or may require us to change or adopt certain business practices. 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.statements at that time. 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 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 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 and reasonably estimable were not material for the year ended December 31, 2017.2022. Except as otherwise noted for the proceedings described in this Note 13, we have concluded, based on currently available information, that reasonably possible losses arising directly from the proceedings (i.e., monetary damages or amounts paid in judgment or settlement) in excess of our recorded accruals are also not material. However,Determining legal reserves or possible losses from such matters involves judgment and regulatory proceedings are inherentlymay not reflect the full range of uncertainties and unpredictable and subjectoutcomes. We may be exposed to significant uncertainties. If one or more matters were resolved against us in a reporting period for amountslosses in excess of management’s expectations, the impactamount recorded, and such amounts could be material. If any of our estimates and assumptions change or prove to have been incorrect, it could have a material adverse effect on our operatingbusiness, financial position, results of operations, or financial condition for that reporting period could be material.cash flows.
Regulatory Proceedingsproceedings
We are requiredroutinely report 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 on payments we have self-reportedrejected or blocked pursuant to legal requirements under OFAC certainsanctions regulations. Between January 2013 and January 2022, we voluntarily disclosed to OFAC transactions that were inadvertently processed but subsequentlyand identified as possible violations of U.S. economicOFAC sanctions regulations and trade sanctions. In March 2015, we reached a settlement with OFAC regarding possible violations arising from our sanctions compliance practices between 2009responded to subpoenas and 2013, priorinformation requests related 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. SuchIn January 2023, OFAC notified us that it had completed its review of these matters and closed them with the issuance of a cautionary letter with no monetary penalties or sanctions.
PayPal Australia Pty Limited (“PPAU”) self-reported transactionsa potential violation to the Australian Transaction Reports and Analysis Centre (“AUSTRAC”) on May 22, 2019. This self-reported matter relates to PPAU incorrectly filing required international funds transfer instructions (“IFTIs”) over a period of time under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (“AML/CTF Act”). On September 23, 2019, PPAU received a notice from AUSTRAC requiring that PPAU appoint an external auditor (a partner of a firm which is not our independent auditor) to review certain aspects of PPAU’s compliance with its obligations under the AML/CTF Act. The external auditor was appointed on November 1, 2019. As required under the terms of AUSTRAC’s notice, as amended, PPAU issued to AUSTRAC the external auditor’s interim reports on December 31, 2019, March 13, 2020, May 6, 2020, and July 7, 2020 and a final report on August 31, 2020.
AUSTRAC has notified PPAU that its enforcement team is investigating the matters reported upon by the external auditor in its August 31, 2020 final report. AUSTRAC continues to engage with PPAU regarding the transaction categories it considers reportable under the AML/CTF Act as IFTIs. PPAU is continuing to cooperate with AUSTRAC in all respects, including remediation activities, ongoing regular engagement with AUSTRAC, and responding to notices and requests for information and documents.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We cannot estimate the potential impact, if any, on our business or financial statements at this time. In the event an adverse outcome arises from any associated enforcement proceeding, or other further matter initiated by AUSTRAC, including in relation to AUSTRAC’s determination of reportable IFTIs, then this could result in claims or actions against us, including litigation,enforceable undertakings, 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 businessbusiness.
On March 28, 2016, weWe have received a Civil Investigative DemandDemands (“CID”CIDs”) from the Federal Trade CommissionConsumer Financial Protection Bureau (“FTC”CFPB”) as partrelated to Venmo’s unauthorized funds transfers and collections processes, and related matters, including treatment 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.consumers who request payments but accidentally designate an unintended recipient. The CID requestedCIDs request the production of documents and answers to written questionsquestions. We are cooperating with the CFPB in connection with these CIDs.
We previously received a CID from the CFPB related to our Venmo service.the marketing and use of PayPal Credit in connection with certain merchants that provide educational services (the “CFPB PayPal Credit Matter”). The CID requested the production of documents, written reports, and answers to written questions. We have cooperatedbeen informed by the CFPB that this matter has been formally closed without action.
We are responding to subpoenas and requests for information received from the U.S. Securities and Exchange Commission (“SEC”) Enforcement Division relating to whether the interchange rates paid to the bank that issues debit cards bearing our licensed brands were consistent with Regulation II of the Board of Governors of the Federal Reserve System, and to the reporting of marketing fees earned from the PayPal-branded card programs (the “SEC Debit Card Program Matter”). We are cooperating with the SEC Enforcement Division in connection with this investigation.
In February 2022, we received a CID from the Federal Trade Commission (“FTC”) related to PayPal’s practices relating to commercial customers that submit charges on behalf of other merchants or sellers, and related activities. The CID requests the production of documents and answers to written questions. We are cooperating with the FTC in connection with this CID.
In January 2023, we received notice of an administrative proceeding and a related request for information from the CID.German Federal Cartel Office (“FCO”) related to terms in PayPal (Europe) S.à.r.l. et Cie, S.C.A.’s contractual terms with merchants in Germany prohibiting surcharging and requiring parity presentation of PayPal relative to other payment methods. We are cooperating with the FCO in connection with this proceeding.
Legal Proceedingsproceedings
On January 12, 2017,August 20, 2021, a putative shareholder derivativesecurities class action captioned SilvermanKang v. Schulman,PayPal Holdings, Inc., et al., Case No. 5:17-cv-00162 (the “California Derivative Case”)21-cv-06468, was filed in the U.S. District Court for the Northern District of California (the “Court”“Kang Securities Action”). The California Derivative Case was based on substantially similar allegations as the allegations underlying a putative securities class action captioned Cho v. PayPal Holdings, Inc., et al., Case No. 3:16-cv-07371 (the “Securities Case”), which was filed in the Court and assertedKang Securities Action asserts claims relating to our disclosure of the CFPB PayPal Credit Matter and the SEC Debit Card Program Matter in our Quarterly Report on Form 10-Q for the quarterly period ended March 31,June 30, 2021. The Kang Securities Action purports to be brought on behalf of purchasers of the Company’s stock between February 9, 2017 and July 28, 2021 (the “Class Period”), and asserts claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against the Company, its Chief Executive Officer, and former Chief Financial Officer. The complaint alleges that certain public statements made by the Company during the Class Period were rendered materially false and misleading (which, allegedly, caused the Company’s stock to trade at artificially inflated prices) by the defendants’ failure to disclose that, among other things, PayPal’s business practices with respect to PayPal Credit and regarding interchange rates paid to its bank partner related to its bank-issued co-branded debit cards were non-compliant with applicable laws and/or regulations. The Kang Securities Action seeks unspecified compensatory damages on behalf of the putative class members. On November 2, 2021, the court appointed a Lead Plaintiff, and on January 25, 2022, the Lead Plaintiff filed an amended complaint. The amended complaint alleges a class period between April 27, 2016 and July 28, 2021 (the “Amended Class Period”), and in addition to the Company, its Chief Executive Officer, and former Chief Financial Officer, also names other Company executives as defendants. The amended complaint alleges that on March 28, 2016, we received a CID fromvarious statements made by the FTC as part of its investigation to determine whether we, through our Venmo service, have been or are engaged in deceptive or unfair practicesdefendants during the Amended Class Period were rendered materially false and misleading, in violation of the Federal Trade Commission Act. On February 8, 2017, the Court entered an order formally relating the California Derivative Case toSections 10(b) and 20(a) of the Securities CaseExchange Act of 1934, by PayPal’s alleged violations of the 2015 consent order with the CFPB, federal consumer financial laws, and assigningRegulation II. On August 8, 2022, the casecourt granted Defendants’ motion to dismiss the amended complaint in its entirety, and granted Lead Plaintiff’s request for leave to file a further amended complaint. On September 16, 2022, Lead Plaintiff filed a Second Amended Complaint (the “SAC”), which asserts the same judge handling the Securities Case. Onclaims against the same day,Defendants based on the Court also entered an order stayingsame alleged conduct as the Californiaprior complaint. Defendants moved to dismiss the SAC on November 3, 2022, and briefing is ongoing.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
On December 16, 2021 and January 19, 2022, two related putative shareholder derivative actions captioned Pang v. Daniel Schulman, et al., Case No. 21-cv-09720, and Lalor v. Daniel Schulman, et al., Case No. 22-cv-00370, respectively, were filed in the U.S. District Court for the Northern District of California (the “California Derivative Case pending resolutionActions”), purportedly on behalf of the defendants’ anticipatedCompany. On August 2, 2022, a related putative shareholder derivative action captioned Jefferson v. Daniel Schulman, et al., No. 2022-0684, was filed in the Court of Chancery for the State of Delaware (the “Delaware Derivative Action,” and collectively with the California Derivative Actions, the “Derivative Actions”), purportedly on behalf of the Company. The Derivative Actions are based on the same alleged facts and circumstances as the Kang Securities Action, and name certain of our officers, including our Chief Executive Officer and former Chief Financial Officer, and members of our Board of Directors, as defendants. The Derivative Actions allege claims for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, waste of corporate assets, and violations of the Securities Exchange Act of 1934, and seek to recover damages on behalf of the Company. On February 1, 2022, the court entered an order consolidating the two California Derivative Actions and staying them until all motions to dismiss in the Kang Securities Action are resolved.
On October 4, 2022, a putative securities class action captioned Defined Benefit Plan of the Mid-Jersey Trucking Industry and Teamsters Local 701 Pension and Annuity Fund v. PayPal Holdings, Inc., et al., Case No. 22-cv-5864, was filed in the U.S. District Court for the District of New Jersey. On January 11, 2023, the Court appointed Caisse de dépôt et placement du Québec as lead plaintiff and renamed the action In re PayPal Holdings, Inc. Securities Litigation (“PPH Securities Action”). The PPH Securities Action asserts claims relating to our public statements with respect to net new active accounts (“NNA”) results and guidance, and the detection of illegitimately created accounts. The PPH Securities Action purports to be brought on behalf of purchasers of the Company’s stock between February 3, 2021 and February 1, 2022 (the “Class Period”), and asserts claims for violations of Sections 10(b) and 20(a) of the Securities Case. Exchange Act of 1934 against the Company, its Chief Executive Officer, and former Chief Financial Officer. The complaint alleges that certain public statements made by the Company during the Class Period were rendered materially false and misleading (which, allegedly, caused the Company’s stock to trade at artificially inflated prices) by the defendants’ failure to disclose that, among other things, the Company’s incentive campaigns were susceptible to fraud and led to the creation of illegitimate accounts, which allegedly affected the Company’s NNA results and guidance. The PPH Securities Action seeks unspecified compensatory damages on behalf of the putative class members.
On March 24, 2017,November 2, 2022, a secondputative shareholder derivative action substantially similar to the California Derivative Case captioned SeemanShah v. Daniel Schulman, et al., Case No. 1:17-cv-00318-UNA,22-cv-1445, was filed in the U.S. District Court for the District of Delaware (the “Delaware Derivative Case”“Shah Action”). 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-HRL, 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 Derivative Cases are purportedly brought on behalf of the CompanyCompany. The Shah Action is based on the same alleged facts and allege thatcircumstances as the Company’sPPH Securities Action, and names certain of our officers, including our Chief Executive Officer Chief Financial Officer,and former interim Chief Financial Officer, and members of itsour Board of Directors, breached theiras defendants. The Shah Action alleges claims for breach of fiduciary duties to the Company, violated Section 14(a)duty, aiding and abetting breach of fiduciary duty, unjust enrichment, waste of corporate assets, and violations 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 regulations with respect to its Venmo service, as alleged in the Securities Case, and/or by permitting or causing the Company to engage in unfair trade practices through its Venmo service. The Derivative Cases seek, among other things,seeks to recover unspecified compensatory damages on behalf of the Company arising out of the individual defendants’ alleged wrongful conduct. Although plaintiffs in the 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 consolidates these cases and appoints 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 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 a 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 been futile. That motion was heard by the Court on December 14, 2017. 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. Company.
We have received subpoenas from the U.S. Department of Justice (“DOJ”) seeking the production of certain information related to our historical anti-money laundering program. We are cooperating with the DOJ in providing information in response to the subpoenas. We are unable to predict the outcome of the government’s investigation.
In November 2017, we announced that we had suspended the operations of TIO Networks (“TIO”) as part of an ongoing investigation of security vulnerabilities of the 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 U.S. District Court for the Northern District of California 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 seeks to represent a class of shareholders who acquired shares of the Company’s stock between February 14, 2017 through December 1, 2017 and seeks damages and attorneys’ fees, among other relief. 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 3—"Business Combinations" and Note 4—"Goodwill and Intangible Assets" to our consolidated financial statements for additional disclosure relating to the suspension of operations of TIO.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
General Mattersmatters
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 consumingtime-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.
PayPal Holdings, Inc.
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) or regulators 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/orand legal review and/orand challenges that tend tomay 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 we have grown larger, our business has grown and expanded in scale and scope, (both in termsincluding the number of active accounts and payments transactions on our platform, the range and increasing complexity of the range of products and services that we offer, and our geographical operations) and our products and services have increased in complexity.operations. 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 ProvisionsINDEMNIFICATION PROVISIONS
We entered into a separation and distribution agreement, a tax matters agreement, an operating agreement and various otherOur agreements with eBay to govern thegoverning our separation and relationship of the two companies going forward. These agreementsfrom eBay 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 aremay include indemnities mainly related to intellectual property rights.rights, confidentiality, willful misconduct, data privacy obligations, and certain breach of contract claims, among others. 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.
PayPal has participated in the U.S. Government’s Paycheck Protection Program administered by the U.S. Small Business Administration. Loans made under this program are funded by an independent chartered financial institution that we partner with. We receive a fee for providing services in connection with these loans and retain operational and audit risk related to those activities. We have agreed, under certain circumstances, to indemnify the chartered financial institution and its assignee of a portion of these loans in connection with the services provided for loans made under this program.
To date, no significant costs have been incurred, either individually or collectively, in connection with our indemnification provisions.
Off-Balance Sheet ArrangementsOFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 20172022 and 2016,2021, 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.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
PROTECTION PROGRAMS
Protection Programs
We provide merchants and consumers with protection programs on substantially allfor certain transactions completed throughon our Payments Platform, except for transactions using our gateway and Paydiant products.payments platform. These programs are intended to protect both merchants and consumers from loss primarily due to fraud and counterparty performance. Our BuyerPurchase 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.
The maximum potential exposure under our These protection programs is estimated to be the portion of total eligible transaction volume (TPV)are considered assurance-type warranties under applicable accounting standards for which buyer or seller protection claims may be raised under our existing user agreements. Since eligible transactions are typically completedwe estimate and record associated costs in a period significantly shorter thantransaction and credit losses during the period under which disputes may be opened,the payment transaction is completed.
At December 31, 2022 and based on our historical2021, the allowance for transaction losses to date, we do not believe that the maximum potential exposure is representative of our actual potential exposure.was $66 million and $121 million, respectively. The actual amount of potential exposure cannot be quantified as we are unable to determine total eligible transactions where performance by a merchant orallowance for negative customer 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 probablebalances was $212 million and the amount can be reasonably estimated.
$234 million at December 31, 2022 and 2021, respectively. The following table provides management's estimate ofshows changes in the maximum potential exposure related to our protection programs as of December 31, 2017 and December 31, 2016:
|
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (In millions) |
| Maximum potential exposure | $ | 165,207 |
| | $ | 131,739 |
|
The following table provides the amount of allowance for transaction losses and negative customer balances related to ourprotection programs as of December 31, 2017 and December 31, 2016:
|
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (In millions) |
| Allowance for transaction losses and negative customer balances | $ | 266 |
| | $ | 222 |
|
Note 14—Related Party Transactions
As of December 31, 2017, there were no material amounts payable to or amounts receivable from related parties. For all periods subsequent tofor 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, tax matters agreement, employee matters agreement, intellectual property matters agreement and colocation services agreements. Information included in this Note 14 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 from eBay and its subsidiaries during the yearyears ended December 31, 2015. 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 claims2022 and disputes related to eligible eBay purchases. Recoveries associated with transaction losses incurred on eligible eBay purchases during the year ended December 31, 2015 were $27 million, which were recorded as a reduction to transaction and loan loss. Other costs recovered from eBay related to the customer protection programs during the year ended December 31, 2015 were $12 million, and were included as a reduction2021:
Table of Contents | | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| (In millions) |
| Beginning balance | $ | 355 | | | $ | 414 | |
| Provision | 1,170 | | | 1,153 | |
| Realized losses | (1,417) | | | (1,331) | |
| Recoveries | 170 | | | 119 | |
| Ending balance | $ | 278 | | | $ | 355 | |
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 14—STOCK REPURCHASE PROGRAMS
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 year ended December 31, 2015 were $64 million. 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 were 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 for the year ended December 31, 2015.
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.
Note 15—Stock Repurchase Programs
In January 2016,April 2017, our Board of Directors authorized a stock repurchase program that provided for the repurchase of up to $2 billion of our common stock, with no expiration from the date of authorization. In April 2017, our Board of Directors authorized an additional stock repurchase program that provides for the repurchase of up to $5 billion of our common stock, with no expiration from the date of authorization. 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 became effective in the first quarter of 2020 upon completion of the January 2016April 2017 stock repurchase program. TheIn June 2022, our Board of Directors authorized an additional stock repurchase program that provides for the repurchase of up to $15 billion of our common stock, with no expiration from the date of authorization. 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 programs 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 capital 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 programs at any time without prior notice.
The stock repurchase activity under our stock repurchase programs duringDuring the year ended December 31, 2017 is summarized as follows:2022, we repurchased approximately 41 million shares of our common stock for approximately $4.2 billion at an average cost of $103.47. These shares were purchased in the open market under our stock repurchase program authorized in July 2018. As of December 31, 2022, a total of approximately $861 million and $15.0 billion remained available for future repurchases of our common stock under our July 2018 and June 2022 stock repurchase programs, respectively.
During the year ended December 31, 2021, we repurchased approximately 15 million shares of our common stock for approximately $3.4 billion at an average cost of $219.75. These shares were purchased in the open market under our stock repurchase program authorized in July 2018. As of December 31, 2021, a total of approximately $5.1 billion remained available for future repurchases of our common stock under our July 2018 stock repurchase program.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
|
| | | | | | | | | | | | | | |
| | Shares Repurchased | | Average Price
Paid per Share(1) | | Value of Shares Repurchased | | Remaining Amount Authorized |
| | (In millions, except per share amounts) |
| Balance as of January 2017 | | | | | | | $ | 1,005 |
|
| Repurchases of shares of common stock for three months ended: | | | | | | | |
| March 31, 2017 | 12.2 |
| | $ | 42.38 |
| | $ | 517 |
| | $ | 488 |
|
| New Authorization in April 2017 of $5 billion | — |
| | $ | — |
| | $ | — |
| | $ | 5,488 |
|
| June 30, 2017 | 1.8 |
| | $ | 49.41 |
| | $ | 89 |
| | $ | 5,399 |
|
| September 30, 2017 | 1.7 |
| | $ | 59.49 |
| | $ | 100 |
| | $ | 5,299 |
|
| December 31, 2017 | 4.0 |
| | $ | 74.30 |
| | $ | 300 |
| | $ | 4,999 |
|
| Balance as of December 31, 2017 | 19.7 |
| | | | $ | 1,006 |
| | $ | 4,999 |
|
(1)Average price paid per share includes broker commissions.
TheseDuring the year ended December 31, 2020, we repurchased approximately 12 million shares of our common stock for approximately $1.6 billion at an average cost of $136.19. These shares were purchased in the open market under our stock repurchase programs authorized in April 2017 and July 2018. As of December 31, 2020, a total of approximately $8.4 billion remained available for future repurchases of our common stock under our July 2018 stock repurchase program.
Shares of common stock repurchased for the periods presented were recorded as treasury stock for the purposes of calculating net income (loss) per share and were accounted for under the cost method. No repurchased shares of common stock have been retired.
Note 16—Stock-Based and Employee Savings Plans
NOTE 15—STOCK-BASED AND EMPLOYEE SAVINGS PLANS
Prior to
EQUITY INCENTIVE PLANS
Under 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.
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 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 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 restricted stock options, RSUs,units (“RSUs”), restricted stock awards, PBRSUs,performance based restricted stock units (“PBRSUs”), stock options, deferred stock units, and stock payments, may be granted to our directors, officers, and employees. At December 31, 2017, there were 792022, 47 million shares were authorized under our equity incentive plansthe Plan and 46approximately 31 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.
All stock options
In 2022, the Company adopted a plan for which equity-based incentive awards may be granted under these plans 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) withemployees (the “Inducement Plan”). Grants under the remainder vesting at a rateInducement Plan are in addition to the Plan mentioned above. As of 2.08% per month thereafter,December 31, 2022, 5 million shares were authorized under the Inducement Plan and generally expire seven years from the date ofapproximately 3 million shares were available for future grant. The cost of stock options is determined using the Black-Scholes option pricing model on the date of grant.
RSUs are granted to eligible employees under our equity incentive plans. In general,the Plan. RSUs issued prior to January 1, 2022 generally vest in equal annual installments over a period of three to fouryears. RSUs issued on or after January 1, 2022 generally vest over three years at a rate of 33% after one year, then in equal quarterly installments thereafter. RSUs are subject to an employee'semployee’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 market value of eBay's common stock on the date of grant. The cost of RSUs granted following separation was determined using the fair value of PayPal'sPayPal’s common stock on the date of grant.
Certain of our executives and non-executives are eligible to receive PBRSUs, which are equity awards that may be earned based on an initial target number with thenumber. The final number of PBRSUs that may be vestedvest and settled determined basedsettle depending 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 had 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
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Incentive Award Plan to officers and certain employees providing services to the Company. PBRSUs granted under PayPal's 2015 Equity Incentive Award Plan have one to three-year performance periods with cliff vesting following the completion of the performance period, subject to the Committee'sCompensation 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
All stock options under the Plan were assumed in connection with acquisitions on the same terms and conditions (including vesting) applicable to such acquired companies’ equity awards. The cost of stock options was determined using the Black-Scholes option pricing model.
Prior to separation, eligible employees participated in eBay’s employee stock purchase plan. Effective July 17, 2015,
EMPLOYEE STOCK PURCHASE PLAN
Under the Boardterms of Directors adopted the PayPal Holdings, Inc. Employee Stock Purchase Plan (“ESPP”). Under the terms of this plan,, 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 contribute 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. TheAll 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 earningsnet income (loss) per share. For the yearyears ended December 31, 2017,2022, 2021, and 2020, our employees purchased 2.71.9 million, 1.4 million, and 1.7 million shares of PayPal common stockunder the ESPP at an average per share price of $34.06. For the year ended December 31, 2016, our employees purchased 2.7 million shares of PayPal common stock at an average 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$73.20, $114.36, and 1.2 million shares of PayPal common stock at an average price of $28.12.$80.36, respectively. As of December 31, 2017,2022, approximately 5.446 million shares were reserved for future issuance under the ESPP.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
RSU, PBRSU, AND RESTRICTED STOCK ACTIVITY
The following table summarizes RSU, PBRSU, and restricted stock activity under the Plan and the Inducement Plan as of December 31, 2022 and changes during the year ended December 31, 2022:
| | | | | | | | | | | |
| Units | | Weighted Average Grant-Date
Fair Value
(per share) |
| | (In thousands, except per share amounts) |
| Outstanding at January 1, 2022 | 17,534 | | | $ | 172.55 | |
Awarded and assumed(1) | 17,238 | | | $ | 105.20 | |
Vested(1) | (9,930) | | | $ | 145.75 | |
Forfeited/cancelled(2) | (5,254) | | | $ | 147.81 | |
| | | |
| Outstanding at December 31, 2022 | 19,588 | | | $ | 133.27 | |
| Expected to vest | 17,507 | | | |
(1) Includes approximately 0.5 million of additional PBRSUs issued during 2022 due to the achievement of company performance metrics on awards granted in previous years.
(2) Includes approximately 1.0 million of PBRSUs cancelled during 2022 resulting from a change in the method of payout of the Company portion of our Annual Incentive Plan from equity to cash for certain employees.
During the years ended December 31, 2022, 2021, and 2020, the aggregate intrinsic value of RSUs and PBRSUs vested under the Plan was $935 million, $3.4 billion, and $1.7 billion, respectively.
In the year ended December 31, 2022, the Company granted 1.5 million PBRSUs with a one-year performance period (fiscal 2022) of which 1.0 million were subsequently cancelled due to the change in method of payout as mentioned above. As such, 0.5 million will become fully vested following the completion of the performance period in February 2023 (one year from the annual incentive award cycle grant date). In the year ended December 31, 2022, the Company also granted 1.1 million PBRSUs with a three-year performance period.
In the year ended December 31, 2021, the Company granted 0.7 million PBRSUs with a one-year performance period (fiscal 2021), which became fully vested following the completion of the performance period in February 2022 (one year from the annual incentive award cycle grant date), and 0.5 million PBRSUs with a three-year performance period.
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, 2017:2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Shares | | Weighted
Average
Exercise
Price | | Weighted
Average
Remaining
Contractual
Term (Years) | | Aggregate
Intrinsic Value |
| | (In thousands, except per share amounts and years) |
| Outstanding at January 1, 2022 | 339 | | | $ | 17.55 | | | | | |
| Assumed | 3 | | | $ | 55.55 | | | | | |
| Exercised | (190) | | | $ | 20.62 | | | | | |
| Forfeited/expired/cancelled | (11) | | | $ | 13.66 | | | | | |
| | | | | | | |
| Outstanding at December 31, 2022 | 141 | | | $ | 14.56 | | | 4.93 | | $ | 8,080 | |
| Expected to vest | 24 | | | $ | 23.89 | | | 7.46 | | $ | 1,172 | |
| Options exercisable | 117 | | | $ | 12.60 | | | 4.40 | | $ | 6,875 | |
|
| | | | | | | | | | | | |
| | Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
| | (In thousands, except per share amounts and years) |
| Outstanding at January 1, 2017 | 4,288 |
| | $ | 28.65 |
| | | | |
| Granted and assumed | 308 |
| | $ | 13.94 |
| | | | |
| Exercised | (1,986 | ) | | $ | 25.66 |
| | | | |
| Forfeited/expired/canceled | (170 | ) | | $ | 32.90 |
| | | | |
| Outstanding at December 31, 2017 | 2,440 |
| | $ | 28.94 |
| | 4.33 | | $ | 111,371 |
|
| Expected to vest | 731 |
| | $ | 28.01 |
| | 5.48 | | $ | 34,052 |
|
| Options exercisable | 1,653 |
| | $ | 29.48 |
| | 3.76 | | $ | 74,561 |
|
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The weighted average grant date fair value of options granted to our employees (including options assumed from acquisitions)acquisitions during the years 2017, 2016ended December 31, 2022, 2021, and 20152020 was $49.47, $8.79$147.92, $237.26 and $11.20,$108.61, respectively. The aggregate intrinsic value was calculated as the difference between the exercise price of the underlying awardsoptions and the quoted price of our common stock at December 31, 2017.2022. During the years 2017ended December 31, 2022, 2021, and 2016,2020, the aggregate intrinsic value of options exercised under PayPal's equity incentive plansthe Plan was $53$16 million, $81 million, and $31$66 million, respectively, determined as of the date of option exercise. During the year 2015, the aggregate intrinsic value of options exercised under eBay's and PayPal's equity incentive plans was $72 million, determined as of the date of option exercise. At December 31, 2017, 2.4 million2022, substantially all outstanding options were in-the-money.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
RSU and PBRSU Activity
The following table summarizes the RSUs and PBRSUs granted under our equity incentive plans as of December 31, 2017 and changes during the year ended December 31, 2017:
|
| | | | | | |
| | Units | | Weighted Average Grant-Date Fair Value (per share) |
| | (In thousands, except per share amounts) |
| Outstanding at January 1, 2017 | 29,185 |
| | $ | 37.06 |
|
| Awarded | 19,744 |
| | $ | 44.24 |
|
| Vested | (10,912 | ) | | $ | 36.70 |
|
| Forfeited | (4,142 | ) | | $ | 38.98 |
|
| Outstanding at December 31, 2017 | 33,875 |
| | $ | 41.14 |
|
| Expected to vest | 30,506 |
| | |
During the years 2017 and 2016, the aggregate intrinsic value of RSUs and PBRSUs vested under PayPal's equity incentive plans was $519 million and $378 million, respectively. During the year 2015, the aggregate intrinsic value of RSUs and PBRSUs vested under eBay's and PayPal's equity incentive plans was $315 million.
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.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Stock-Based Compensation Expense
We record stock-basedStock-based compensation expense for our equity incentive plans in accordance with the provisions ofPlan and the authoritative accounting guidance, which requires the measurement and recognition of compensation expenseInducement Plan is measured based on estimated fair values.value at the time of grant, and recognized over the award’s vesting period.
The impact on our results of operations of recording stock-based compensation expense under the eBay and PayPal equity incentive plansPlan for the years ended December 31, 2017, 20162022, 2021, and 20152020 was as follows:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | (In millions) |
| Customer support and operations | $ | 269 | | | $ | 263 | | | $ | 250 | |
| Sales and marketing | 151 | | | 175 | | | 172 | |
| Technology and development | 512 | | | 515 | | | 529 | |
| General and administrative | 383 | | | 468 | | | 460 | |
| Total stock-based compensation expense | $ | 1,315 | | | $ | 1,421 | | | $ | 1,411 | |
| | | | | |
| Capitalized as part of internal use software and website development costs | $ | 52 | | | $ | 68 | | | $ | 48 | |
| Income tax benefit recognized for stock-based compensation arrangements | $ | 209 | | | $ | 221 | | | $ | 226 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In millions) |
| Customer support and operations | $ | 142 |
| | $ | 85 |
| | $ | 62 |
|
| Sales and marketing | 140 |
| | 84 |
| | 52 |
|
| Product development | 240 |
| | 139 |
| | 132 |
|
| General and administrative | 210 |
| | 130 |
| | 94 |
|
| Depreciation and amortization | 12 |
| | 6 |
| | 7 |
|
| Total stock-based compensation expense | $ | 744 |
| | $ | 444 |
| | $ | 347 |
|
| | | | | | |
| Capitalized as part of internal use software and website development costs | $ | 24 |
| | $ | 13 |
| | $ | 7 |
|
| Income tax benefit recognized for stock-based compensation arrangements | $ | 218 |
| | $ | 127 |
| | $ | 98 |
|
As of December 31, 2017,2022, there was approximately $830 million$1.4 billion of unearned stock-based compensation estimated to be expensed primarily from 20182023 through 2019.2025. 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 RSUsequity awards we grant, or assume unvested equity awards in connection with acquisitions.
Stock Option Valuation Assumptions
We calculatedEMPLOYEE SAVINGS PLANS
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, 2017, 2016 and 2015:
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Risk-free interest rate | 1.6 | % | | 1.5 | % | | 1.4 | % |
| Expected life (in years) | 3.3 |
| | 4.6 |
| | 4.3 |
|
| Dividend yield | — |
| | — |
| | — |
|
| Expected volatility | 26 | % | | 25 | % | | 26 | % |
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 assumed stock option awards was based on a combination of historical and implied volatility from traded options on PayPal’s stock.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Employee Saving Plans
Prior to separation, eligible U.S. employees participated in eBay's savings plan, which qualifies under Section 401(k) of the Code. Effective July 17, 2015, the Board of Directors adopted the PayPal Holdings, Inc. Deferred Compensation Plan, which also qualifies under Section 401(k) of the Code. 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 2017, 2016 and 2015, underUnder the PayPal and eBay savings plans,plan, eligible employees received one dollar for each dollar contributed, up to 4% of each employee’s eligible salary, subject to a maximum employer contribution per employee of $10,800, $10,600$12,200 in 2022 and $10,600, respectively, per employee.$11,600 in both 2021 and 2020. Our non-U.S. employees are covered by other savings plans. For the years ended December 31, 2017, 20162022, 2021, and 2015,2020, the matching contribution expense for our U.S. and international savings plans werewas approximately $47$83 million, $42$81 million, and $42$72 million, respectively.
Note 17—Income TaxesNOTE 16—INCOME TAXES
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes significant changes to the U.S. corporatecomponents of 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 the base erosion anti-abuse tax (“BEAT”), a new minimum tax; and the transition of U.S. international 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 have not previously been repatriated to the U.S. (the “Transition Tax”), with future distributions not subject to U.S. federal income tax when repatriated. A majority of the provisions in the Tax Act are 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 provides a one-year measurement period for companies to complete the accounting. We reflected the income tax effects of those aspects of the Tax Act for which the accounting is complete. To the extent our accounting for certain income tax effects of the Tax Act is incomplete but we are able to determine a reasonable estimate, we recorded a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
In connection with our initial analysis of the impact of the Tax Act, we have recorded a provisional estimate of discrete net tax expense of $180 million for the period ended December 31, 2017. This discrete expense consists 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.
We have not completed our accounting for the income tax effects of certain elements of the Tax Act. The Tax Act creates a new requirement that certain income such as Global Intangible Low-Taxed Income (“GILTI”) earned by a controlled foreign corporation (“CFC”) must be included in the gross income of the CFC U.S. shareholder. Because of the complexity of the new GILTI and BEAT tax rules, we are continuing to evaluate these provisions of the Tax Act and whether taxes due on future U.S. inclusions related to GILTI or BEAT should be recorded as a current-period expense when incurred, or factored into a company’s measurement of its deferred taxes. As a result, we have not included an estimate of the tax expense or benefit related to these items for the period ended December 31, 2017.
For periods ended on or prior to July 17, 2015, we were a member of the eBay consolidated group and our U.S. taxable income was included in the consolidated U.S. federal income tax return of eBay as well as in returns filed by eBay with certain state and local taxing jurisdictions. Our foreign income tax returns are filed on a separate company basis. For periods ended on or prior to July 17, 2015, our income tax liability has been computed and presented herein under the “separate return method” as if PayPal 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 utilized 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.as follows:
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 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)
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| (In millions) |
| United States | $ | (155) | | | $ | 290 | | | $ | 1,504 | |
| International | 3,521 | | | 3,809 | | | 3,561 | |
| Income before income taxes | $ | 3,366 | | | $ | 4,099 | | | $ | 5,065 | |
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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, |
| | 2017 | | 2016 | | 2015 |
| | (In millions) |
| United States | $ | (593 | ) | | $ | (342 | ) | | $ | (253 | ) |
| International | 2,793 |
| | 1,973 |
| | 1,741 |
|
| Income before income taxes | $ | 2,200 |
| | $ | 1,631 |
| | $ | 1,488 |
|
The income tax expense (benefit) is composed of the following:
| | | | Year Ended December 31, | | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2022 | | 2021 | | 2020 |
| | (In millions) | | (In millions) |
| Current: | | | | | | Current: | |
| Federal | $ | 1,522 |
| | $ | 44 |
| | $ | 34 |
| Federal | $ | 688 | | | $ | 6 | | | $ | 310 | |
| State and local | 36 |
| | 19 |
| | (5 | ) | State and local | 104 | | | 80 | | | 143 | |
| Foreign | 146 |
| | 115 |
| | 104 |
| Foreign | 966 | | | 326 | | | 245 | |
| | $ | 1,704 |
| | $ | 178 |
| | $ | 133 |
| |
| Total current portion of income tax expense | | Total current portion of income tax expense | $ | 1,758 | | | $ | 412 | | | $ | 698 | |
| Deferred: | | | | | | Deferred: | | | | | |
| Federal | $ | (1,304 | ) | | $ | 90 |
| | $ | 126 |
| Federal | $ | (563) | | | $ | (401) | | | $ | 259 | |
| State and local | (3 | ) | | (35 | ) | | 1 |
| State and local | (101) | | | (45) | | | (32) | |
| Foreign | 8 |
| | (3 | ) | | — |
| Foreign | (147) | | | (36) | | | (62) | |
| | (1,299 | ) | | 52 |
| | 127 |
| |
| Income tax expense | $ | 405 |
| | $ | 230 |
| | $ | 260 |
| |
| Total deferred portion of income tax expense (benefit) | | Total deferred portion of income tax expense (benefit) | (811) | | | (482) | | | 165 | |
| Income tax expense (benefit) | | Income tax expense (benefit) | $ | 947 | | | $ | (70) | | | $ | 863 | |
The following is a reconciliation of the difference between the effective income tax rate and the federal statutory rate.rate:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Federal statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| Domestic income taxed at different rates | (0.6) | % | | (1.7) | % | | — | % |
| State taxes, net of federal benefit | — | % | | 0.9 | % | | 2.2 | % |
| Foreign income taxed at different rates | (12.2) | % | | (13.4) | % | | (7.4) | % |
| Stock-based compensation expense | 4.1 | % | | (7.3) | % | | (1.2) | % |
| Tax credits | (0.4) | % | | (2.4) | % | | (2.0) | % |
| Change in valuation allowances | 2.2 | % | | 0.5 | % | | 0.1 | % |
| Intra-group transfer of intellectual property | 10.0 | % | | 0.7 | % | | 4.1 | % |
| Other | 4.0 | % | | — | % | | 0.2 | % |
| Effective income tax rate | 28.1 | % | | (1.7) | % | | 17.0 | % |
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Federal statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
| State taxes, net of federal benefit | 0.8 | % | | (1.0 | )% | | (0.3 | )% |
| Foreign income taxed at different rates | (25.7 | )% | | (23.2 | )% | | (20.9 | )% |
| Stock-based compensation expense | (0.8 | )% | | 1.6 | % | | 1.5 | % |
| Tax credits | (1.4 | )% | | (1.0 | )% | | (0.7 | )% |
| Change in valuation allowances | 1.4 | % | | 0.5 | % | | 0.3 | % |
| U.S. tax reform (the Tax Act) | 8.2 | % | | — | % | | — | % |
| Other | 0.9 | % | | 2.2 | % | | 2.6 | % |
| Effective income tax rate | 18.4 | % | | 14.1 | % | | 17.5 | % |
TheFor the year ended December 31, 2022, the difference between the effective income tax rate of 28.1% and the U.S. federal statutory rate of 35.0%21% to income before income taxes iswas primarily the result of tax expense related to the intra-group transfer of intellectual property and non-deductible stock-based compensation, partially offset by foreign income taxed at different rates. For the year ended December 31, 2021, the difference between the effective income tax rate of (1.7)% and the U.S. federal statutory rate of 21% to income before income taxes was primarily the result of foreign income taxed at different rates and forstock-based compensation deductions. For the year ended December 31, 2017,2020, the effectsdifference between the effective income tax rate of 17.0% and the Tax Act discussed above.U.S. federal statutory rate of 21% to income before income taxes was primarily the result of foreign income taxed at different rates, partially offset by tax expense related to the intra-group transfer of intellectual property.
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, |
| | 2022 | | 2021 |
| (In millions) |
| Deferred tax assets: | | | |
| Net operating loss and credit carryforwards | $ | 355 | | | $ | 317 | |
| Accruals, allowances, and prepaids | 427 | | | 622 | |
| Lease liabilities | 173 | | | 176 | |
| Partnership investment | — | | | 5 | |
| Stock-based compensation | 154 | | | 188 | |
| Net unrealized losses | 151 | | | 23 | |
| Acquired intangibles | 38 | | | — | |
| Fixed assets and other intangibles | 655 | | | 84 | |
| Total deferred tax assets | 1,953 | | | 1,415 | |
| Valuation allowance | (341) | | | (274) | |
| Net deferred tax assets | $ | 1,612 | | | $ | 1,141 | |
| Deferred tax liabilities: | | | |
| Unremitted foreign earnings | $ | (42) | | | $ | (35) | |
| | | |
| Acquired intangibles | — | | | (240) | |
| ROU lease assets | (138) | | | (154) | |
| Partnership investment | (12) | | | — | |
| Net unrealized gains | (135) | | | (351) | |
| Total deferred tax liabilities | (327) | | | (780) | |
| Net deferred tax assets | $ | 1,285 | | | $ | 361 | |
|
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (In millions) |
| Deferred tax assets: | | | |
| Net operating loss and credit carryforwards | $ | 134 |
| | $ | 84 |
|
| Accruals and allowances | 118 |
| | 187 |
|
| Partnership investment | 7 |
| | 15 |
|
| Stock-based compensation | 124 |
| | 99 |
|
| Net unrealized (gains) losses | 10 |
| | 14 |
|
| Total deferred tax assets | 393 |
| | 399 |
|
| Valuation allowance | (74 | ) | | (24 | ) |
| Net deferred tax assets | $ | 319 |
| | $ | 375 |
|
| Deferred tax liabilities: | | | |
| Unremitted foreign earnings | $ | (39 | ) | | $ | (1,246 | ) |
| Fixed assets and other intangibles | (145 | ) | | (226 | ) |
| Acquired intangibles | (49 | ) | | (95 | ) |
| Net unrealized losses (gains) | — |
| | (2 | ) |
| Total deferred tax liabilities | (233 | ) | | (1,569 | ) |
| Net deferred tax assets (liabilities) | $ | 86 |
| | $ | (1,194 | ) |
The following table shows the deferred tax assets and liabilities within our consolidated balance sheet.sheets: | | | | As of December 31, |
| | | | | | | | 2022 | | 2021 |
| | | As of December 31, | | Balance Sheet Location | | (In millions) |
| | | 2017 | | 2016 | |
| | Balance Sheet Location | | (In millions) | |
| Total deferred tax assets (non-current) | Other assets | | $ | 95 |
| | $ | 21 |
| Total deferred tax assets (non-current) | Other assets | | $ | 1,310 | | | $ | 547 | |
| | Total deferred tax liabilities (non-current) | Long-term liabilities | | (9 | ) | | (1,215 | ) | Total deferred tax liabilities (non-current) | Deferred tax liability and other long-term liabilities | | (25) | | | (186) | |
| Total net deferred tax assets (liabilities) | | $ | 86 |
| | $ | (1,194 | ) | |
| | Total net deferred tax assets | | Total net deferred tax assets | | $ | 1,285 | | | $ | 361 | |
As of December 31, 2017,2022, our federal, state, and foreign net operating loss carryforwards for income tax purposes were approximately $64$6 million, $332$156 million, and $177$634 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 2019,2025, and the state net operating loss carryforwards will begin to expire in 2018.2023. Approximately $26$197 million of the foreign net operating loss carryforwards will begin to expire in 2024, $191 million will begin to expire in 2034, and a majority of the remainder has no expiration date and$246 million may be carried forward indefinitely. As of December 31, 2017,2022, our federal and state tax credit carryforwards for income tax purposes were approximately $25$24 million and $101$374 million, respectively. TheIf not utilized, the federal tax credits will begin to expire in 2032. Most2029. Approximately $49 million of the state tax credits will begin to expire from 2023 through 2028, $8 million will begin to expire in 2038, and $317 million may 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, 2017,2022 and 2016,2021, we increased our valuation allowance by $50$67 million and $11$108 million, respectively.respectively, and during the year ended December 31, 2020, we decreased our valuation allowance by $18 million. At December 31, 20172022, 2021, and 2016,2020, we maintained a valuation allowance with respect to certain of our net deferred tax assets relating toin certain states, operating losses in certain statesstate and foreign jurisdictions, and certain federal and state tax credits in certain states that we believe are not likely to be realized.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Immediately prior to enactmentAt December 31, 2022, none of the Tax Act on December 22, 2017, we had $10.0our approximately $11.0 billion of undistributedunremitted foreign earnings.earnings are considered to be indefinitely reinvested. We hadhave accrued $1,334$42 million of deferred U.S. state income and foreign withholding taxes on the portion of these earnings that were not intended to be indefinitely reinvested in our international operations. Upon passage of the Tax Act, all $10.0$11.0 billion of undistributed foreign earnings became subject to U.S. federal tax at a reduced rate payable over an 8-year period. As a result, we reversed $1,295 million of deferred U.S. income and foreign withholding taxes and recorded a long-term U.S. tax payable of $1,468 million. Due to the change in U.S. federal tax law, management has decided not to indefinitely reinvest any of our unremitted foreign earnings as of December 31, 2017. We have accrued $39 million of deferred U.S. state and foreign withholding taxes on the $10.0 billion of undistributed foreign earnings. This is a provisional estimate pending further legislative action from the states regarding conformity with the Tax Act.
We benefit from tax rulingsagreements concluded in several differentcertain jurisdictions, most significantly SingaporeSingapore. In December 2019, a new agreement was concluded in Singapore. The new agreement took effect January 1, 2021 and Luxembourg. These rulings resultwill be in effect from 2021 through 2030. This agreement results in significantly lower rates of taxation on certain classes of income and requirerequires 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 rulingsthis agreement. This agreement resulted in tax savings of approximately $443$510 million, $310$327 million, and $285$596 million in 2017, 20162022, 2021, and 2015,2020, respectively. The benefit of these tax rulingsthis agreement on our net income (loss) per share (diluted) was approximately $0.36, $0.25$0.44, $0.28, and $0.23$0.50 in 2017, 20162022, 2021, and 2015,2020, respectively. These tax rulings are currently in effect and expire over periods ranging from 2020 to 2021.
The following table reflects changes in unrecognized tax benefits for the periods presented below:
| | | | Year Ended December 31, | | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2022 | | 2021 | | 2020 |
| | (In millions) | | (In millions) |
| Gross amounts of unrecognized tax benefits as of the beginning of the period | $ | 312 |
| | $ | 267 |
| | $ | 165 |
| Gross amounts of unrecognized tax benefits as of the beginning of the period | $ | 1,678 | | | $ | 1,479 | | | $ | 1,141 | |
| Increases related to prior period tax positions | 61 |
| | 14 |
| | 39 |
| Increases related to prior period tax positions | 52 | | | 172 | | | 92 | |
| Decreases related to prior period tax positions | (23 | ) | | (18 | ) | | (4 | ) | Decreases related to prior period tax positions | (185) | | | (187) | | | (78) | |
| Increases related to current period tax positions | 112 |
| | 51 |
| | 68 |
| Increases related to current period tax positions | 337 | | | 232 | | | 360 | |
| Settlements | (35 | ) | | (1 | ) | | (1 | ) | Settlements | (2) | | | (15) | | | (34) | |
| Statute of limitation expirations | (3 | ) | | (1 | ) | | — |
| Statute of limitation expirations | (3) | | | (3) | | | (2) | |
| Gross amounts of unrecognized tax benefits as of the end of the period | $ | 424 |
| | $ | 312 |
| | $ | 267 |
| Gross amounts of unrecognized tax benefits as of the end of the period | $ | 1,877 | | | $ | 1,678 | | | $ | 1,479 | |
If the remaining balance of unrecognized tax benefits were realized in a future period, it would result in a tax benefit of $406 million.$1.2 billion.
During allFor the years presented,ended December 31, 2022, 2021, and 2020, we recognized net interest and penalties of $119 million, $6 million, and $40 million, respectively, related to uncertain tax positions in income tax expense. In 2017 we recognized net interest and penaltiesThis expense is reflected in the “Other” line of $13 million inour effective income tax expense.rate schedule. The amount of interest and penalties accrued as of December 31, 20172022 and 20162021 was approximately $75$342 million and $67$212 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 20032010 to 20152021 tax years. The material jurisdictions in which we are subject to examination by tax authorities for tax years after 20022009 primarily include the U.S. (Federal and California), France,Australia, Germany, India, Israel, Italy, and Singapore. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from theseour open examinations. During 2017, a number of audits were closed/settled including one with Israel and another with the United Kingdom.
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, 20172022 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.
In connection with our separation from eBay in 2015, we entered into various agreements that govern the relationship between the parties going forward, including a tax matters agreement. Under the tax matters agreement, eBay is generally 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 separation 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 separation date.
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 17—RESTRUCTURING AND OTHER CHARGES
Note 18—Restructuring
InDuring the first quarter of 2017,2022, management approved a plan to implementinitiated a strategic reduction of the existing global workforce.workforce intended to streamline and optimize our global operations to enhance operating efficiency. This effort focused on reducing redundant operations and simplifying our organizational structure. The reduction wasassociated restructuring charges in 2022 were $121 million. We primarily incurred employee severance and benefits costs, as well as associated consulting costs under the 2022 strategic reduction. The strategic actions associated with this plan were substantially completed by the endfourth quarter of 2017.2022.
The following table summarizes the restructuring reserve activity during the year ended December 31, 2022:
| | | | | |
| Employee Severance and Benefits and Other Associated Costs |
| (In millions) |
| Accrued liability as of January 1, 2022 | $ | 5 | |
| Charges | 121 | |
| Payments | (102) | |
| Accrued liability as of December 31, 2022 | $ | 24 | |
During the first quarter of 2020, management approved a strategic reduction of the existing global workforce as part of a multiphase process to reorganize our workforce concurrently with the redesign of our operating structure, which spanned multiple quarters. The associated restructuring charges in 2021 and 2020 were $27 million, and $109 million, respectively. We recognized $40primarily incurred employee severance and benefits costs, as well as associated consulting costs under the 2020 strategic reduction, which was substantially completed in 2021.
Additionally, we are continuing to review our real estate and facility capacity requirements due to our new and evolving work models. We incurred asset impairment charges of $81 million, $26 million, and $30 million in 2022, 2021, and 2020, respectively, due to exiting of certain leased properties which resulted in a reduction of ROU lease assets and related leasehold improvements. See “Note 6—Leases” for additional information.
NOTE 18—SUBSEQUENT EVENTS
In January 2023, management initiated a global workforce reduction intended to focus resources on core strategic priorities, and improve our cost structure and operating efficiency. We estimate that this reduction will impact approximately 7% of our employees and will result in approximately $100 million of restructuring expensescharges, primarily related to employee severance and benefits classified in restructuring and other charges in our consolidated statement of income during the year ended December 31, 2017,costs. The actions associated with this plan are expected to be substantially all of which were paid by the end of 2017.
No restructuring expenses were recognized during the year ended December 31, 2016.
In January 2015, at a regular meeting 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. The reduction was completed by the endfirst quarter of 2015. We recognized $48 million of restructuring expenses classified in restructuring and other charges in our consolidated statement of income during the year ended December 31, 2015, all of which were paid by the end of 2015.2023.
Note 19—Accumulated Other Comprehensive (Loss) Income
The following table summarizes the changes in accumulated balances of other comprehensive income 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 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 |
|
PayPal Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table provides details about reclassifications out of accumulated other comprehensive income for the years ended December 31, 2017 and 2016:
|
| | | | | | | | | | |
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, | | |
| | | 2017 | | 2016 | | |
| | | (In millions) | | |
| Gains (losses) on cash flow hedges-foreign exchange contracts | | $ | 17 |
| | $ | 119 |
| | Net revenues |
| Unrealized losses on investments | | (9 | ) | | (4 | ) | | Other income (expense), net |
| | | $ | 8 |
| | $ | 115 |
| | Income before income taxes |
| | | — |
| | — |
| | Income tax expense |
| Total reclassifications for the period | | $ | 8 |
| | $ | 115 |
| | Net income |
Supplementary Data — Quarterly Unaudited Financial Data
The following tables present certain unaudited consolidated quarterly financial information for the years ended December 31, 2017 and 2016.
|
| | | | | | | | | | | | | | | |
| | 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 |
|
|
| | | | | | | | | | | | | | | |
| | 2016 Quarter Ended |
| | March 31 | | June 30 | | September 30 | | December 31 |
| | (Unaudited, in millions, except per share amounts) |
| Net revenues | $ | 2,544 |
| | $ | 2,650 |
| | $ | 2,667 |
| | $ | 2,981 |
|
| Net income | $ | 365 |
| | $ | 323 |
| | $ | 323 |
| | $ | 390 |
|
| 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: | | | | | | | |
| Basic | 1,216 |
| | 1,210 |
| | 1,207 |
| | 1,207 |
|
| Diluted | 1,225 |
| | 1,215 |
| | 1,214 |
| | 1,216 |
|
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 | | Charged to Other Accounts(1) | | Charges
Utilized/
(Write-offs) | | Balance at
End of Period |
| | (In millions) |
| Allowance for Transaction Losses and Negative Customer Balances | | | | | | | | | |
| Year Ended December 31, 2020 | $ | 399 | | | $ | 1,135 | | | $ | — | | | $ | (1,120) | | | $ | 414 | |
| Year Ended December 31, 2021 | $ | 414 | | | $ | 1,153 | | | $ | — | | | $ | (1,212) | | | $ | 355 | |
| Year Ended December 31, 2022 | $ | 355 | | | $ | 1,170 | | | $ | — | | | $ | (1,247) | | | $ | 278 | |
| Allowance for Loans and Interest Receivable | | | | | | | | | |
| Year Ended December 31, 2020 | $ | 258 | | | $ | 689 | | | $ | 210 | | | $ | (319) | | | $ | 838 | |
| Year Ended December 31, 2021 | $ | 838 | | | $ | (104) | | | $ | — | | | $ | (243) | | | $ | 491 | |
| Year Ended December 31, 2022 | $ | 491 | | | $ | 437 | | | $ | — | | | $ | (330) | | | $ | 598 | |
|
| | | | | | | | | | | | | | | |
| | 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, 2015 | $ | 166 |
| | $ | 511 |
| | $ | (492 | ) | | $ | 185 |
|
| Year Ended December 31, 2016 | 185 |
| | 655 |
| | (618 | ) | | 222 |
|
| Year Ended December 31, 2017 | $ | 222 |
| | $ | 823 |
| | $ | (779 | ) | | $ | 266 |
|
| Allowance for Loans and Interest Receivable | | | | | | |
|
|
| Year Ended December 31, 2015 | $ | 195 |
| | $ | 385 |
| | $ | (347 | ) | | $ | 233 |
|
| Year Ended December 31, 2016 | 233 |
| | 555 |
| | (449 | ) | | 339 |
|
| Year Ended December 31, 2017 | $ | 339 |
| | $ | 274 |
| | $ | (484 | ) | | $ | 129 |
|
INDEX OF EXHIBITS
| | | | | | | | | | | | | | | | | |
| | | | 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 |
| | PayPal Holdings, Inc. Restated Certificate of Incorporation | | 10-Q | 7/27/2017 |
| | PayPal Holdings, Inc. Amended and Restated Bylaws.Bylaws effective January 17, 2019 | X | 8-K | 1/18/20182019 |
| | Operating AgreementDescription of Securities | | 10-K | 2/6/2020 |
| | Indenture, dated as of September 26, 2019, by and among eBay Inc., eBay International AG,between PayPal Holdings, Inc., PayPal, Inc., PayPal Pte. Ltd. and PayPal Payments Pte. Holdings S.C.S., dated July 17, 2015.Wells Fargo Bank, National Association, as Trustee | | 8-K | 7/20/20159/26/2019 |
| | Amendment,Officer’s Certificate, dated June 30, 2016,as of September 26, 2019, pursuant to the Operating AgreementIndenture, dated as of September 26, 2019, by and among eBay Inc., eBay International AG,between PayPal Holdings, Inc., PayPal, Inc., PayPal Pte. Ltd. and PayPal Payments Pte. Holdings S.C.S, dated July 17, 2015.Wells Fargo Bank, National Association, as Trustee | | 10-Q8-K | 7/9/26/20162019 |
| | Form of 2022 Note (included in Exhibit 4.03) | | 8-K | 9/26/2019 |
| | Form of 2024 Note (included in Exhibit 4.03) | | 8-K | 9/26/2019 |
| | Form of 2026 Note (included in Exhibit 4.03) | | 8-K | 9/26/2019 |
| | Form of 2029 Note (included in Exhibit 4.03) | | 8-K | 9/26/2019 |
| | Officer’s Certificate, dated as of May 18, 2020, pursuant to the Indenture, dated as of September 26, 2019, by and between PayPal Holdings, Inc. and Wells Fargo Bank, National Association, as Trustee | | 8-K | 5/18/2020 |
| | Form of 2023 Note (included in Exhibit 4.08) | | 8-K | 5/18/2020 |
| | Form of 2025 Note (included in Exhibit 4.08) | | 8-K | 5/18/2020 |
| | Form of 2030 Note (included in Exhibit 4.08) | | 8-K | 5/18/2020 |
| | Form of 2050 Note (included in Exhibit 4.08) | | 8-K | 5/18/2020 |
| | Officer’s Certificate, dated as of May 23, 2022, pursuant to the Indenture, dated as of September 26, 2019, by and between PayPal Holdings, Inc. and Wells Fargo Bank, National Association, as Trustee | | 8-K | 5/23/2022 |
| | Form of 2027 Note (included in Exhibit 4.2) | | 8-K | 5/23/2022 |
| | Form of 2032 Note (included in Exhibit 4.2) | | 8-K | 5/23/2022 |
| | Form of 2052 Note (included in Exhibit 4.2) | | 8-K | 5/23/2022 |
| | Form of 2062 Note (included in Exhibit 4.2) | | 8-K | 5/23/2022 |
| | Tax Matters Agreement by and between eBay Inc. and PayPal Holdings, Inc., dated July 17, 2015.2015 | | 8-K | 7/20/2015 |
| | Employee Matters Agreement by and between eBay Inc. and PayPal Holdings, Inc., dated July 17, 2015. | | 8-K | 7/20/2015 |
| | 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 |
| | Credit and Guarantee Agreement, dated as of July 17, 2015, by andSeptember 11, 2019, among PayPal Holdings, Inc., PayPal, Inc.,the Designated Borrowers party thereto, the Lenders party thereto and JPMorgan Chase Bank, N.A., J.P. Morgan Securities Australia Limited, JPMorgan Chase Bank, N.A., Toronto Branch, and J.P. Morgan Europe Limited, as the Administrative Agent, and the other parties thereto.Agents | | 8-K | 7/20/20159/12/2019 |
| | 364-Day Credit and Guarantee Agreement, dated as of December 5, 2017, by andSeptember 11, 2019, among PayPal Holdings, Inc., PayPal, Inc., the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent.Agent | | 8-K | 9/12/6/20172019 |
| | PayPal Employee Incentive Plan, as amended and restated.restated | | DEF 14A | 4/14/2016 |
| | PayPal Holdings, Inc. Amended and Restated 2015 Equity Incentive Award Plan as amended and restated. | | DEF 14A8-K | 4/14/20165/25/2018 |
| | PayPal Holdings, Inc. Amended and Restated Deferred Compensation Plan effective November 6, 2018 | | 10-K | 2/7/2019 |
| | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference |
Exhibit
Number | | Exhibit Description | Filed with this Form 10-K | Form | Date Filed |
| | PayPal Holdings, Inc. Deferred Compensation Plan. | | 8-K | 7/20/2015 |
| | PayPal Holdings, Inc.Executive Change in Control and Severance Plan, for Key Employees, dated June 16, 2015.as amended and restated, effective as of September 27, 2021 | | 10-12B/A10-Q | 6/18/201511/9/2021 |
| | 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.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.Plan | | 10-12B/A | 5/14/2015 |
| | Form of Global Performance Based Restricted Stock Unit Award Grant Notice and Performance Based Restricted Stock UniteUnit Award Agreement under the PayPal Holdings, Inc. 2015 Equity Incentive Award Plan, as amended and restated.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.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 |
|
| Plan | | 10-12B/A | | | |
| | | | Incorporated by Reference5/14/2015 |
Exhibit
| | Exhibit Description | Filed with this Form 10-K | Form | Date Filed |
| | Form of Electing Director Quarterly Award Agreement under the PayPal Holdings, Inc. 2015 Equity Incentive Award Plan.Plan | | 10-12B/A | 5/14/2015 |
| | Form of PayPal Holdings, Inc. Amended and Restated Employee Stock Purchase Plan.Plan | | 10-12B/A8-K | 5/14/201525/2018 |
| | Amendment to PayPal Holdings, Inc. Amended and Restated Employee Stock Purchase Plan | | 10-Q | 11/9/2021 |
| | PayPal Holdings, Inc. 2022 Inducement Plan | | 10-Q | 8/2/2022 |
| | Offer Letter dated September 29, 2014 between eBay Inc. and Daniel Schulman.Schulman | | 10-12B/A | 5/14/2015 |
| | Amendment dated December 31, 2014 to Offer Letter between eBay Inc. and Daniel Schulman.Schulman | | 10-12B/A | 5/14/2015 |
| | Letter dated April 7, 2015 from eBay Inc. to Louise Pentland.Pentland | | 10-K | 2/11/2016 |
| | Letter dated April 13, 2015 from eBay Inc. to Jonathan Auerbach.Auerbach | | 10-K | 2/11/2016 |
| | Letter dated May 19, 2015 from eBay Inc. to William Ready. | | 10-12B/A | 6/2/2015 |
| | Letter Agreement dated July 29, 2015 between John Rainey and PayPal Holdings, Inc. | | 10-Q | 10/29/2015 |
| | Letter Agreement, dated April 17, 2016, between Aaron Karczmer and PayPal Holdings, Inc. | | 10-Q | 4/27/2017 |
| | Letter dated May 5, 2013 from eBay Inc. to Tomer Barel. | | 10-K | 2/11/2016 |
| | Letter Agreement dated August 22, 2017,effective February 20, 2019 between Tomer BarelMark Britto and PayPal Holdings, Inc. | | 10-Q | 10/24/20174/25/2019 |
| | Letter Agreement effective July 13, 2022, between Blake Jorgensen and PayPal Holdings, Inc. | | 10-Q | 8/2/2022 |
| | Letter Agreement dated June 15, 2022 between Gabrielle Rabinovitch and PayPal Holdings, Inc. | | 8-K | 6/17/2022 |
| | Letter Agreement dated September 27, 2022 between Gabrielle Rabinovitch and PayPal Holdings, Inc. | | 8-K | 10/3/2022 |
| | Letter Agreement dated September 1, 2022 between John Kim and PayPal Holdings, Inc. | | 10-Q | 11/3/2022 |
| | Independent Director Compensation Policy.Policy | X | 10-K | 2/5/2021 |
| | List of Subsidiaries.PayPal Holdings, Inc. Executive Change in Control and Severance Plan, as amended and restated | X | 10-Q | 7/29/2021 |
| | | | | | | | | | | |
| | PricewaterhouseCoopers LLP consent. | X123 |
| | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference |
Exhibit
Number | | Exhibit Description | Filed with this Form 10-K | Form | Date Filed |
| | First Amendment, dated as of March 23, 2020, to the Credit Agreement, dated as of September 11, 2019, among PayPal Holdings, Inc., the Designated Borrowers party thereto, the Lenders party thereto and JPMorgan Chase Bank, N.A., J.P. Morgan Securities Australia Limited, JPMorgan Chase Bank, N.A., Toronto Branch, and J.P. Morgan Europe Limited, as the Administrative Agents | | 10-Q | 5/7/2020 |
| | First Amendment, dated as of March 23, 2020, to the 364-Day Credit Agreement, dated as of September 11, 2019, among PayPal Holdings, Inc., the Lenders party thereto and JPMorgan Chase Bank, N.A., as the Administrative Agent | | 10-Q | 5/7/2020 |
| | Joinder Agreement, dated as of March 25, 2020, among PayPal International Treasury Centre S.à r.l., PayPal Holdings, Inc., and J.P. Morgan Securities Australia Limited, JPMorgan Chase Bank, N.A., J.P. Morgan Europe Limited, and JPMorgan Chase Bank, N.A., Toronto Branch, as the Administrative Agents, to the Credit Agreement, dated as of September 11, 2019, among PayPal Holdings, Inc., the Designated Borrowers party thereto, the Lenders party thereto and the Administrative Agents | | 10-Q | 5/7/2020 |
| | Joinder Agreement, dated as of March 25, 2020, among PayPal (Europe) S.à r.l. et Cie, S.C.A., PayPal Holdings, Inc., and J.P. Morgan Securities Australia Limited, JPMorgan Chase Bank, N.A., J.P. Morgan Europe Limited, and JPMorgan Chase Bank, N.A., Toronto Branch, as the Administrative Agents, to the Credit Agreement, dated as of September 11, 2019, among PayPal Holdings, Inc., the Designated Borrowers party thereto, the Lenders party thereto and the Administrative Agents | | 10-Q | 5/7/2020 |
| | Joinder Agreement, dated as of March 27, 2020, among PayPal Pte. Ltd., PayPal Holdings, Inc., and J.P. Morgan Securities Australia Limited, JPMorgan Chase Bank, N.A., J.P. Morgan Europe Limited, and JPMorgan Chase Bank, N.A., Toronto Branch, as the Administrative Agents, to the Credit Agreement, dated as of September 11, 2019, among PayPal Holdings, Inc., the Designated Borrowers party thereto, the Lenders party thereto and the Administrative Agents | | 10-Q | 5/7/2020 |
| | Joinder Agreement, dated as of March 31, 2020, among PayPal Australia Pty Limited, PayPal Holdings, Inc., and J.P. Morgan Securities Australia Limited, JPMorgan Chase Bank, N.A., J.P. Morgan Europe Limited, and JPMorgan Chase Bank, N.A., Toronto Branch, as the Administrative Agents, to the Credit Agreement, dated as of September 11, 2019, among PayPal Holdings, Inc., the Designated Borrowers party thereto, the Lenders party thereto and the Administrative Agents | | 10-Q | 5/7/2020 |
| | Second Amendment, dated as of January 7, 2022, to the Credit Agreement, dated as of September 11, 2019, among PayPal Holdings, Inc., the Designated Borrowers party thereto, the Lenders party thereto and JPMorgan Chase Bank, N.A., J.P. Morgan Securities Australia Limited, JPMorgan Chase Bank, N.A., Toronto Branch, and J.P. Morgan AG, as the Administrative Agents | | 10-K | 2/3/2022 |
| | 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 2002.2002 | X | | |
| | Certification of PayPal Holdings, Inc.’s Chief Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.2002 | X | | |
| | Certification of PayPal Holdings, Inc.’s Chief Executive Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002.2002 | X | | |
| | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference |
Exhibit
Number | | Exhibit Description | Filed with this Form 10-K | Form | Date Filed |
| | Certification of PayPal Holdings, Inc.’s Chief Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002.2002 | X | | |
101.INS101 | | XBRL Instance DocumentThe following financial information related to the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income (Loss), (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows; and (vi) the related Notes to Consolidated Financial Statements | X | | |
101.SCH104 | | XBRL Taxonomy Extension Schema DocumentCover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101 | X | | |
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
ITEM 16. FORM 10-K SUMMARY
None.
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 7, 2018.9, 2023.
| | | | | | | | | | | | | | |
| PayPal Holdings, Inc. |
| | | |
| PayPal Holdings, Inc. |
| By: | | |
| 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,Gabrielle Rabinovitch, Bimal Patel, Brian Y. Yamasaki and Aaron A. Anderson,Jeffrey W. Karbowski, 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 or her 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 7, 2018.
| | | | | | | | | | | | | | |
| Principal Executive Officer: | | Principal Financial Officer: |
| | | | |
| By: | /s/ Daniel H. Schulman | | By: | /s/ Gabrielle Rabinovitch |
| Daniel H. Schulman | | | Gabrielle Rabinovitch |
| President, Chief Executive Officer and Director | | | Acting Chief Financial Officer and Senior Vice President, Investor Relations and Treasurer |
| | | | |
| | | Principal Accounting Officer: |
| | | | |
| | | By: | /s/ Jeffrey W. Karbowski |
| | | | Jeffrey W. Karbowski |
| | | | Vice President, Chief Accounting Officer |
Additional Directors
| | | | | | | | | | | | | | |
| By: | /s/ Rodney C. Adkins | | By: | /s/ Jonathan Christodoro |
| Rodney C. Adkins | | | Jonathan Christodoro |
| Director | | | Director |
| | | | |
| By: | /s/ John J. Donahoe | | By: | /s/ David W. Dorman |
| John J. Donahoe | | | David W. Dorman |
| Director | | | Director |
| | | | |
| By: | /s/ Belinda Johnson | | By: | /s/ Enrique Lores |
| Belinda Johnson | | | Enrique Lores |
| Director | | | Director |
| | | | |
| By: | /s/ Gail J. McGovern | | By: | /s/ Deborah M. Messemer |
| Gail J. McGovern | | | Deborah M. Messemer |
| Director | | | Director |
| | | | |
| By: | /s/ David M. Moffett | | By: | /s/ Ann M. Sarnoff |
| David M. Moffett | | | Ann M. Sarnoff |
| Director | | | Director |
| | | | |
| By: | /s/ Frank D. Yeary | | | |
| Frank D. Yeary | | | |
| Director | | | |
| | | | |
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 | | | Executive Vice President, Chief Financial Officer |
| | | | |
| | | 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 |
| Jonathan Christodoro | | | John J. Donahoe |
| Director | | | Director |
| | | | |
By: | /s/ David W. Dorman | | By: | /s/ Belinda Johnson |
| David W. Dorman | | | Belinda Johnson |
| Director | | | Director |
| | | | |
By: | /s/ Gail J. McGovern | | By: | /s/ David M. Moffett |
| Gail J. McGovern | | | David M. Moffett |
| Director | | | Director |
| | | | |
By: | /s/ Ann M. Sarnoff | | By: | /s/ Frank D. Yeary |
| Ann M. Sarnoff | | | Frank D. Yeary |
| Director | | | Director |
| | | | |
| | | | |
