Thanks, Dan. I want to start off by thanking our customers, partners and global team for helping us deliver a great quarter. The strong results we are reporting today demonstrate the continued execution of our strategy to deliver long-term sustainable growth.
Our volume growth accelerated to 27%.
Our revenue grew 19%. We delivered more than 200 basis points of operating margin expansion on both a GAAP and a non-GAAP basis. And we realized operating leverage across each of our non-transaction related expenses.
Excluding the effect of unrealized losses from our strategic investment portfolio, which I will discuss later, non-GAAP EPS grew 31%.
Our Q3 performance shows the consistent strength of our platform and the scalability of our business. Revenue in the third quarter increased 19% on both the spot and currency-neutral basis to $4.38 billion. Hyperwallet and iZettle contributed approximately 1.9 points to revenue growth versus the third quarter of 2018, U.S. revenue grew 19% and international revenue grew 20% on a currency-neutral basis. On a spot basis, transaction revenue grew 18%, accelerating a point from last year in the second quarter of this year. Revenue from other value-added services grew 24%.
In the third quarter, transaction take rate was 2.21% and total take rate was 2.45% compared to Q3 2018. This was a decline of 12 basis points and 13 basis points respectively.
Continued strength in P2P contributed to approximately half of the decline for both transaction and total take rate. The performance of eBay's Marketplaces business and the headwinds from the stronger dollar also contributed to the reduction in take rate. $70 million in revenue from hedge gains benefited both transaction take rate and total take rate by approximately 3 basis points. Volume-based expenses increased 23% in the third quarter to $2 billion.
Transaction expense was 95 basis points as a rate of TPV, improving 1 basis point from Q3 2018. Transaction loss was 14 basis points as a rate of TPV, an improvement of 4 basis points from Q3 2018 and flat to last quarter. This level of transaction loss as a rate of TPV maxed the lowest we've ever achieved and we realized this result while accelerating TPV growth. This reduction in transaction loss was driven by continued improvements in our risk management capabilities.
Loan losses were 5 basis points as a rate of TPV, which represents an increase of 2 basis points from Q3 last year. This increase was due primarily to growth in both our merchant and international consumer loan portfolios. Transaction margin dollars grew 16% to $2.3 billion in the third quarter. Transaction margin as a rate was 53.4%, a decline of approximately 150 basis points versus Q3 2018.
Non-transaction related expenses grew 6% versus last year. Normalizing for cost related to our 2018 acquisitions, these expenses grew 1.9% or $0.04 for every dollar increase in revenue. This performance highlights the scalability of our model, our operating discipline and our ability to grow at a low marginal cost. On a non-GAAP basis, operating income in the third quarter grew 30% and exceeded $1 billion for the first time.
In addition, our operating margin expanded more than 200 basis points from Q3 2018. We delivered leverage across each of our non-transaction related expenses.
Adjusting for 2018 acquisitions, operating income grew 31% and our operating margin expanded 250 basis points in the quarter. Other income in the quarter declined by $256 million relative to Q3 2018, primarily due to $228 million net unrealized loss on our strategic investment portfolio. On a per share basis, these unrealized losses negatively affected our results by approximately $0.15 after-tax.
When we guided Q3 2019 EPS in July, we included an expected benefit of $0.03 related to a funding round for Toss, a privately held company in which we have an equity investment. A few weeks later this funding round closed and as expected, we recognized a $0.03 per share benefit to GAAP and non-GAAP EPS.
In addition, in the quarter, our strategic equity investments in Uber and MercadoLibre resulted in an unrealized loss of approximately $0.18 per share.
Consistent with the plans we discussed in April on our first quarter earnings call, we disclosed the expected effect of these net unrealized losses for the third quarter in our 8-K released on October 8. Since January 2018, certain equity investments are required to be revalued based on observable price movements. This new standard had a relatively minor impact on our results in 2018. This year, however, our strategic investments in MercadoLibre and Uber have created more earnings volatility. Starting in 2020, we will update our non-GAAP methodology to exclude the impact of these gains and losses on our strategic investments as we believe this will provide a better understanding of our operating performance and a more meaningful comparison of our results between periods.
In the third quarter, our non-GAAP effective tax rate was 11.1% versus 16.4% last year.
Excluding the impact of unrealized losses from our strategic investment portfolio, our tax rate would have been 13.5%.
Our non-GAAP effective tax rate also benefited from a favorable geographic mix of pretax income.
Non-GAAP EPS for the third quarter grew 5% to $0.61. Adjusting for unrealized losses of $0.15 this year, non-GAAP EPS grew 31% in the quarter. We ended the quarter with cash, cash equivalents and investments of $13.2 billion.
In addition, we generated $923 million of free cash flow or approximately $0.21 of free cash flow for every dollar of revenue. Normalizing for the proceeds, we received from selling our U.S. consumer credit receivables portfolio last year, free cash flow grew 20%.
During the quarter, we returned $350 million to shareholders through share repurchases.
In addition in Q3, we also access the public debt markets for the first time, raising $5 billion in gross proceeds. The senior fixed rate notes are trenched in three, five, seven and 10 year terms. The average life of this debt is 6.6 years with a weighted average interest rate of 2.56%.
We use a portion of the proceeds to repay our outstanding borrowings on our 364 day credit facility and plan to use the remainder of the proceeds consistent with our capital allocation priorities.
I’d now like to discuss our guidance for the fourth quarter of 2019 and the full year, as well as our preliminary thoughts for 2020.
For the fourth quarter, we expect revenue in the range of $4.89 billion to $4.95 billion or 17% to 18% growth on a currency neutral basis. In the fourth quarter for the first time, we’re lapping the acquisitions of both iZettle and Hyperwallet.
Last year, as we disclosed when we reported Q4 2018 results, these acquisitions contributed approximately 1.5 points of growth. Relative to when we provided guidance in July, the U.S. dollar strengthened. We estimate this headwind to be approximately $30 million in the fourth quarter.
Both our integration with Paymentus and the pricing initiatives that we discussed last quarter are on track and we expect to be substantially complete by the early part of next year.
For Q4, we expect non-GAAP earnings per share to be in the range of $0.81 to $0.83, representing 18% to 21% growth.
Our guidance includes no expectation of any gains or losses on our strategic investment portfolio.
As a result, for the full year, we now expect revenue to be in the range of $17.7 billion to $17.76 billion or approximately 15% growth on a currency neutral basis. Normalizing for the sale of the U.S. consumer credit receivables portfolio, the implied revenue growth rate would be approximately 18.5% for the full year.
We now expect our non-GAAP earnings per share to be in the range of $3.06 to $3.08, representing 26% to 27% growth, excluding the net unrealized gains year-to-date of $0.11 from our strategic investment portfolio. This guidance implies non-GAAP earnings growth of 25% to 26% for the year, which represents a raise in our EPS outlook.
In addition, given the strong free cash flow we generated year-to-date, we now expect free cash flow for the full year to be approximately $3.5 billion.
I’d now like to provide an initial framework for how we’re thinking about 2020.
As a reminder, our medium-term outlook calls for 17% to 18% revenue growth on a currency neutral basis compounded annually, which includes approximately 1.5 points of revenue growth each year on average from acquisitions.
We’re very pleased with the strength of our business and expect our core trends to continue.
Our current expectation is that revenue will grow 17% organically on a currency neutral basis next year, without the effect of any acquisitions. 2020 also has two dynamics, I’d like to discuss.
First, our operating agreement with eBay expires in July and we estimate that this transition will impact revenue growth by approximately 1 point next year.
Second, we will be lapping the contributions to revenue in 2019 from our acquisitions of Hyperwallet and iZettle, which we expect to be an additional point of headwind.
Together, these factors pressure revenue growth by approximately 2 points in 2020. Even with this, the strength of our core business provides us with the ability to grow revenue in the range contemplated in our medium-term guidance.
Our initial 2020 framework also calls for at least 50 basis points of operating margin expansion.
Next year, we’re accelerating our investment in several key initiatives to drive long-term growth and strengthen our platform. At the same time, our ongoing focus on efficiency and natural leverage opportunities will allow us to sustainably deliver operating margin expansion.
We expect a portion of this operating leverage to be offset by below the line items, including additional interest expense on a recent debt issuance and lower interest income earned on corporate cash.
As a result, our initial outlook is for approximately 17% to 18% growth on non-GAAP EPS in 2020. It is important to note, we are confident that we will grow non-GAAP EPS by approximately 20% compounded annually over the medium-term, consistent with our previous guidance. The strength, diversification and durability of our business give us confidence in our medium-term outlook.
In conclusion, our third quarter results demonstrate our ability to deliver strong revenue and earnings growth and generate significant free cash flow, while advancing our strategic priorities.
Our scale affords us continued leverage opportunities.
We’re focused on creating value for our customers and shareholders and strengthening our position as the world’s leading digital payments platform.
With that, I’ll turn it over to the operator for questions. Thank you.