eBay Inc. (EBAY) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the eBay's Q1 2015 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Tom Hudson, Vice President of Investor Relations, you may begin.

Good afternoon and thank you for joining us, and welcome to eBay's earnings release conference call for the first quarter of 2015. Joining me today on the call are John Donahoe, our President and Chief Executive Officer; and Bob Swan, Chief Financial Officer, Dan Schulman, our CEO elect of PayPal and Devin Wenig, our CEO elect of eBay. We're providing a slide presentation to accompany Bob's commentary during the call. All growth rates mentioned in John and Bob's prepared remarks represent year-over-year comparisons, unless they clarify otherwise. This would also include Dan and Devin’s statements as well. In addition all segments results are adjusted for the effects of foreign currency exchange. This conference call is also being broadcast on the Internet, and both the presentation and call are available through the Investor Relations section of eBay's website at investor.ebayinc.com. You can visit our Investor Relations website for the latest company news and updates. In addition, archive of the webcast will be accessible for 90 days through the same link. Before we begin, I'd like to remind you that during the course of this conference call, we'll discuss non-GAAP measures in talking about our company's performance. You can find a reconciliation of those measures to the nearest comparable GAAP measures in the slide presentation accompanying the call. In addition, management will make forward-looking statements relating to the planned separation of eBay Inc.'s Marketplaces and PayPal businesses, and our future performance that are based on our current expectations, forecasts and assumptions involve risks and uncertainties. These statements include, but are not limited to, statements regarding expected financial results for the second quarter and full year 2015; a future growth in Payments, Marketplaces and eBay Enterprise businesses; the implementation, completion and timing of the planned separation. Our actual results may differ materially from those discussed in the call for a variety of reasons. You can find more information about the risks, uncertainties and other factors that could affect our operating results in our most recent annual report or on our Form 10-K or in future quarterly reports or Form 10-Q available at the investor.ebayinc.com. You should not rely on any forward-looking statements. All information in this presentation is as of April 22, 2015 and we do not intend and undertake no duty to update this information. With that, let me turn the call over to John.

Thanks, Tom. Good afternoon, everyone, and welcome to our Q1 earnings call. We had a strong first quarter and despite currency headwinds pressuring topline growth, eBay and PayPal rocked to a good start for the full year. I feel very good about the focus and performance of our teams at eBay and PayPal. Each business is executing well with greater focus on operating discipline as we prepare for separation. Joining our call today are eBay CEO Designee Devin Wenig and PayPal CEO Designee, Dan Schulman. Devin and Dan will provide more perspective on Q1 performance for eBay and PayPal respectively, as well as their views on the future opportunities and focus for each business. Bob will then provide full details on the quarter including eBay Enterprise. But let me provide some highlights. In the first quarter, eBay Inc. revenue was up 9% on an FX neutral basis with PayPal contributing 17% growth and eBay Marketplaces up 3%. Non-GAAP EPS was up 10%. For Q1 PayPal enabled $61 billion of volume, topping a 165 million active accounts and eBay drove 20 billion of gross merchandise volume, topping a 157 million active buyers. Before I turn it over to Dan and Devin, let me briefly recap where we are in the separation process. As you know, last September we announced our decision to separate eBay and PayPal into independent publicly traded companies. Separation will enable each business to operate with greater focus and strategic agility and better position to capitalize on the respective growth opportunities. We believe more than ever that separation is the best path for eBay and PayPal and the right approach to delivering sustainable value to shareholders. We are moving forward with clarity and speed. We passed the significant milestone in Q1 with the initial filing of PayPal Form-10 and we filed our first amendment earlier this month with additional information. We expect separation to occur in the third quarter. The operating agreement between eBay and PayPal is designed to preserve synergies, while giving each business the strategic flexibility to pursue growth opportunities. Highlights of the operating agreement include: First, economics in the form of incentive payments designed to maintain PayPal’s current penetration rate of approximately 80%. Second, data sharing that enables each company to provide great customer service and maintain world-class risk, trust and fraud prevention programs. Third, product development and service agreements that ensure PayPal devotes resources to developing new payments products and services for eBay, preserving a high level of service quality. And fourth, non-compete agreements that encourage eBay and PayPal to continue their strong partnership. The operating agreement is deigned to setup eBay and PayPal to succeed as independent companies. Meanwhile, Dan and Devin are building out their leadership teams and driving sharper strategic focus on the opportunities ahead. You will hear more from them in a moment. In Q1 we announced two new Board members, Tony Bates and Gail McGovern. This is in addition to our previous announcements of new Board members, Bonnie Hammer, Frank Yeary, Perry Traquina and Jonathan Christodoro. We feel very good about our ability to create two world-class Boards for eBay and PayPal at separation. In summary, we remain deeply committed to doing what's best for eBay ad PayPal and to delivering sustainable value for shareholders. Looking ahead, we are clear in what we need to do to deliver on our 2015 plans and ensure a smooth separation process. We'll continue to do what's best for our business, for our customers and for our shareholders. Now I will turn it over to Dan Schulman who will provide more details on PayPal.

Thank you, John and thanks everyone for being on the call today. PayPal is off to a solid start for the year and I like our current trajectory and progress. We grew our revenues 17% on a FX neutral basis and our Merchant Services TPV continue to decline in the first quarter, growing 33% year-over-year, more than double the pace of the e-commerce market, indicating we gain meaningful share. Our growth and the new capabilities we are building position us well as we look towards the future. There are four key metrics that I believe measure the growth and health of our business. They are, one, our topline growth. Two, the growth of our account base, which demonstrates our scale. Three, the engagement of that base as measured by revenue per active account and four, free cash flow. These metrics are my top priorities as they measure the progress of our strategic initiatives, which are to grow ubiquity, increase engagement of both merchants and consumers and produce a strong return for investors. We drove progress in all of these areas in the first quarter. First, the topline. The 17% revenue growth we delivered is a strong foundation to build on as we move into 2015. Second, we continue our steady growth in customer accounts, increasing total active accounts by 3.6 million to 165 million customers across the globe. We expect strong growth to continue in 2015 as we further penetrate the merchant population and build out our products and services to grow more and more relevant to consumers. Third, our customer engagement also steadily increased with transactions per account growing to 23 in Q1 from 21 in the first quarter a year ago. This -- we processed as well more than 1 billion transactions in the first quarter. This represents an increase of 24% year-over-year and importantly, our monetization per account accelerated sequentially to $49. We also continue to see an increase in mobile payments transactions, now reaching nearly 30% of our overall transactions with mobile payments transactions growing over 40% year-over-year. Our Merchant Services business now represents 76% of total volume, growing at 33% and we increased our penetration on eBay by 260 basis points year-over-year. We continue to improve our penetration of the top online merchants reaching 74% of the IR100 merchants in the U.S. Braintree maintained its strong triple-digit growth in the first quarter and signed some great new accounts including Lyft, SHAG [ph] and One Kings Lane. The fourth key metric for PayPal is free cash flow. We took significant cost actions in Q1 to streamline our operations and free up capacity. As a result, we expect segment margins to be up one to two points on a year-over-year basis for the full year of 2015 as we discussed in January. We do expect to reinvest additional margin leverage to continue to expand our business in order to generate significant long-term returns for shareholders. At the same time, we are committed to growing free cash flow. For the year, we expect free cash flow to be between $1.7 million and $1.9 billion including one-time costs associated with separation. We are currently in one of the most exciting periods in the history of financial services. Today PayPal operates in two fast-growing parts of the digital payments industry, online and mobile. But the online and offline payments world are digitizing and converging through mobile experiences. As a result, I believe our addressable market is not just 2.5 trillion associated with online and mobile, but more like the 25 trillion associated with commerce, both online and offline. PayPal has a powerful set of assets and we are well positioned to take advantage of the changes sweeping through our industry. To capitalize on this opportunity we're in the midst of a massive transformation, completely rebuilding our technology platform, enabling greater scale, faster production cycles and closer collaboration between teams so we can continuously deliver better products to our customers. PayPal now has one of the largest hybrid clouds in the world and we have transformed our core business capabilities into robust service-based platforms. PayPal's newly modernized technology platform is becoming a strategic asset. In revamping our technology and processes, we're dramatically reducing our product development cycles allowing us to deploy software releases in weeks versus months. We're also accelerating through strategic acquisitions. In March we announced the acquisition of CyActive, which will play a key role within our security center of excellence. This transaction closed on April 9th. We also announced the acquisition of Paydiant which closed on the 1st of April. Using Paydiant's platform, our merchant partners can create their own branded digital wallets to accelerate mobile in-store payments and drive consumer engagement. Everything we've done in the first six months of my tenure is positioning PayPal to take advantage of what I see as one of the greatest opportunities for growth that the payments industry has ever seen. We have a lot to execute on, but we now have the right organizational structure, leadership team and operational to get it done. I'm excited about where we are, what we are building and about PayPal's strong position and potential in this dynamic market. Thanks a lot, and I'll now turn it over to Devin to discuss eBay's results.

Thanks, Dan. It's great to have the chance today to share my thoughts about eBay's Q1 performance and our plans for the future. Let's start with the quarter. EBay had a good quarter one showing signs of stabilization. Let me share some key metrics. GMV and three month trailing active buyers each grew 5% consistent with the prior quarter. Overall traffic including mobile grew at steady rates as well. International GMV on an FX neutral basis grew 7%, a one point acceleration in Q4 and sold item growth was 9%, also a one point acceleration. In addition StubHub and eBay classifieds both performed well. After the challenges faced in 2014 and following two sequential quarters of declining growth, our quarter one results are encouraging. I'm pleased with how our team is executing and delivering. We are certainly not ready to declare a victory over last year's SCO and password reset challenges, but we're making progress. SCO generated traffic is still impacting growth while this channel is beginning to stabilize, effectively managing SCO traffic is a constantly evolving process. We're working to stay out front of it. Also following the password reset, we're making ongoing investments to ensure we have a stable, secure platform for our users. We're focused on increasing user engagement and confidence over time. Steady progress, but we are just getting started. We have more work to do to ensure we deliver consistent sustainable performance and accelerate growth. Let me step back now and provide broader context. I'll focus the rest of my remarks on our path forward and the tremendous opportunities we see ahead. EBay turns 20 this year, in our industry and in Silicon Valley that's an extraordinary milestone. EBay helped define the beginning of ecommerce and we intend to continue being a leader in its future. Over the past two decades, eBay has created tremendous assets and deep global commerce expertise. We are launching the next chapter with a passionate community of 25 million sellers. They offer incredible diverse selection and value through 800 million listings and we have a global base of more than 157 million active buyers who generate nearly 83 billion of GMV annually. I believe as we begin creating next 20 years of global that's a great place to start. We intend to lead by focusing on three strategic pillars. First, building a more robust commerce platform; second, engaging the core, buyer and seller segments, who create a vibrant marketplace and fuel our commerce fly wheel; and third, creating exceptional product and brand experiences. A robust commerce platform of vibrant marketplace, exceptional customer experiences, that's our formula for success. Let me touch on each area. First, managing a robust commerce platform is essential to creating sustainable performance. We're focused on building a stronger, more resilient foundation. We'll move towards becoming the world's first online global marketplace to use structured, cataloged data at scale for all listings. We believe that doing so will help us deliver an exceptional, unmatched experience for both buyers and sellers. At the same time, we will diversify our sources of traffic and customer acquisition, leveraging promising early trends on social and messaging platforms. EBay will have multiple robust channels competing for our marginal investment dollar. This requires a transformation in our tech and our marketing which is already underway. The result a more competitive eBay with more control over our experience and ultimately, our performance. Creating a vibrant marketplace is our second pillar. EBay is at its best when we bring diverse inventory at great value to customers who love to shop. Our core buyer and seller segments may eBay the world's most vibrant marketplace to find, discover and buy practically anything. EBay's consumers love to shop. They hunt for value at different price points. They demand broad selection and they enjoy discovering unique things that express their personality. For these consumers who represent a broad addressable and growing market, we intend to make eBay the global destination for great value and selection insuring a trusted marketplace is foundational and we'll continue making investments in this area. We also will run our business more by category. We will sharpen how we merchandise our sellers' inventory, presenting eBay's unique range of choice and value in new and innovative ways. On the sellers' side, eBay's sweet spot is small and medium sized merchants and brands. They represent 70% of the global retail market, offering the diverse inventory and value our consumers are looking for. As a partner and not a competitor to SMVs, we intend to make eBay the global platform for them to grow and to thrive. We will offer improved seller tools, unmatched access to data and more balanced and predictable policies and standards. Consumer selling is another key eBay strength and we intend to revitalize this segment of our market. An estimated $100 billion of value is trapped in people's closets and garages and that's just in the U.S. This is an enormous opportunity with simplified listing flows, predictive pricing data and higher touch intermediation for those that require it, we intend to make eBay the platform for consumers to buy and sell anything, anytime, anywhere. And finally, our third pillar, creating exceptional products and brand experiences. EBay is a powerful global brand and we'll strengthen that brand by delivering exceptional, engaging product experiences. Some of our recent launches such as our iPad app and our launch of live auctions are great examples of what we can do and we will do going forward. We will continue to substantially upgrade the buying and selling experience on eBay with much more to come this year. In summary, Q1 was a good start and I'm confident in our full year outlook including generating $2.1 billion to $2.3 billion of free cash flow. Going forward, we intend to play our game, no one else's, and focus where eBay can win. Global commerce trends such as the impact of mobile on consumer behavior and the influence of digital on retail favor many of our core strengths. We'll take advantage of this. We've assembled a world class management team with deep technology, retail, data and customer service expertise. And as we take eBay forward, we will operate with clarity and with discipline. We will pursue thoughtful capital allocation strategies that deliver compelling shareholder value while maximizing our strategic flexibility. It is an incredible privilege to be eBay's next CEO, building on our extraordinary heritage and leading this iconic brand forward. My team and I are excited to be creating eBay's next chapter and I look forward to sharing more with you in the months ahead. And with that, I will turn it over to Bob.

Thanks, Devin. During my discussion I'll reference our earning slide presentation that companies the webcast. Q1 was a great start to the year. We delivered $4.4 billion of total revenue and $0.77 of non-GAAP EPS. We generated $829 million in free cash flow and repurchased 1 billion of our stock. We're making excellent progress on our plans to separate PayPal from eBay and we currently anticipate a third quarter close. In Q1, we generated net revenues of $4.4 billion, up 4% with strength across the Board. Organic revenue growth was 9% in the quarter and currency negatively impacted growth by approximately five points. We delivered revenue at the high end of the guidance range despite the impact of the stronger dollar which negatively impacted Q1 revenue by approximately $30 million since the guidance we provided in January. Non-GAAP EPS was $0.77, up 10%. EPS growth was driven by a strong FX-neural revenue growth, good operating leverage across the company and a lower share count. Operating expenses were 41% of revenue in the quarter, down 120 basis points, driven primarily by the benefits from the steps both Dan and Devin took to streamline their respective businesses, partially offset by provision for transaction loan losses and increased regulatory cost for PayPal. We generated free cash flow of $829 million in the quarter and CapEx was 7% of revenue. From a balance sheet perspective, we ended the quarter with cash, cash equivalents and non-equity investments of $14.1 billion, including approximately $4.1 billion in the U.S. EBay ended the quarter with $11.7 billion and PayPal with $2.4 billion in cash. We are taking steps to continue to strengthen our balance sheet to provide both businesses with the financial flexibility to pursue their strategic and capital priorities. First, we continue to find an increasing portion of our loan portfolio balance with offshore cash, currently at 78% of total. Second, as part of internal structuring, we plan to move approximately $3.5 billion of cash to PayPal in a tax efficient manner prior to separation. And third, we announced the sale of an 85% participation interest in a pool of U.S. PayPal credit receivables which will free-up approximately $700 million of incremental capacity in the U.S. to fund PayPal's growth. As a technology enabled lender, credit is an important driver of our business, but does not need to be funded by our balance sheet. As a result of this transaction, 2015 operating income will be negatively impacted by approximately $20 million. eBay Inc. has an excellent balance sheet. As a result of these actions, both eBay and PayPal will be well capitalized at separation. Now, let's take a closer look at our segment results. PayPal had a strong quarter; revenue in Q1 was $2.1 billion, up 17% on an FX neutral basis, driven by strong Merchant Services growth and rising engagement per user, which reflects the growing popularity and relevance of the PayPal value proposition throughout the world. A few quick highlights on PayPal operating metrics. TPV on an FX neutral basis grew 25%. Merchant Services FX neutral TPV increased 33%. Transaction margin was down 80 basis points, driven by the rapid growth in Braintree volume and continued penetration of large merchants. Segment margins declined 40 basis points, less than the drop in transaction margin. PayPal generated strong leverage from Dan steps to streamline the business while still investing in Braintree, the PayPal brand and credit. Now let's turn to the marketplaces business. As Devin indicated, marketplaces showed signed of stabilization in Q1; trailing three months active buyer growth and FX neutral GMV were both 5% flat with Q4 results. Marketplaces delivered $2.1 billion in revenue, up 3% on an FX neutral basis. FX neutral transaction revenue grew 3%, while Marketing Services revenue grew 5%, held by strong growth of our global classifieds business. A few quick highlights on marketplaces operating metrics. 12 months active buyer growth was up 8% and sold items growth increased to 9%. Total GMV grew 5%, with U.S. GMV up 2% and international GMV up 7% on an FX neutral basis. We saw an acceleration of U.S. GMV, which is a measure of consumer buying which accelerated by one point versus the fourth quarter. However, this acceleration was offset by a decline in cross-border trade due to the stronger dollar. Segment margin was down 50 basis points from last year. Devin took stretches steps to streamline his organization in the first quarter and is reinvesting in the three priorities he highlighted, a robust commerce platform, a vibrant marketplace, and exceptional customer experiences. Now let's turn to eBay Enterprise. eBay Enterprise generated $1 billion in gross merchandise sales for its clients. GMS grew 8% and same-store sales grew 10%. Revenue was $288 million, up 7%. We continued to expand the Enterprise relationships and are pleased to announce that Enterprise is now the number one ecommerce platform as measured by the 2015 Internet Retailer Top 500 Guide. Segment margin for Enterprise came in at 4.8% relatively flat from last year. We continue to explore strategic alternatives for eBay Enterprise including a full or partial sale or IPO and we'll update you as appropriate. Now let me turn to guidance. We're off to a great start for the year. We are maintaining our full year guidance for FX neutral revenue growth and non-GAAP EPS. However, the first quarter momentum will be offset by the impact of a strengthening U.S. dollar which will cost us approximately $250 million in revenue and $0.05 in non-GAAP EPS versus the full year guidance we provided in January. We're projecting 2015 revenues of $18.35 billion to $18.85 billion, representing growth of 3% to 5%. And we're projecting 2015 non-GAAP EPS of $3.05 to $3.15, up 3% to 7%. And we continue to expect to generate approximately $4 billion in free cash flow for the year with CapEx of 8% to 10% of revenue. CapEx in 2015 will be higher due to one-time costs associated with separating the businesses. Let me provide a little more context on how the U.S. -- the stronger U.S. dollar will impact our full-year results. As you know, we have a very global business with 52% of our revenue and even a greater portion of our net income coming from outside the U.S. Additionally, the U.S. dollar has strengthened versus the euro, pound and Australian dollar by 7%, 1%, and 5% respectively versus when we guided in January. This is driving the impact on our guidance for the year. The marketplace business will bear the brunt of the impact from a stronger dollar with greater than two-thirds of the $250 million or $175 million impacting marketplaces revenue. Going forward, our earnings for the full year are reasonably well hedged, but marketplaces revenue will continue to be exposed if the dollar continues to strengthen. With that full year context, here's a closer look by business unit. The short story, on an FX neutral basis there is no change to the guidance we gave you in January. However, we wanted to provide you with additional details that would allow you to start to model the independent companies. First, a quick housekeeping item. Historically, we have provided segment margins by business unit. As we look to stand up to independent companies, we will transition to providing fully allocated operating margins which include corporate costs, dissynergies associated with the separation and the value transfer associated with the operating agreements. Earlier John discussed the details of the operating agreements. We anticipate the financial implications to be an estimated value transfer of approximately $25 million to $50 million on an annualized basis from PayPal to eBay. So, what does that mean for full year guidance by business unit? For PayPal we continue to expect 15% to 18% revenue growth on an FX neutral basis. We expect that reported revenue at spot rates will be negatively impacted by approximately three points from the stronger U.S. dollar net of hedges. We expect a 19% to 21% fully allocated non-GAAP operating margin, flat to up one point from 2014, which includes four to five points impact from cost to stand up PayPal as an independent company. And as Dan mentioned, we expect free cash flow of $1.7 billion to $1.9 billion. For eBay, we continue to expect FX neutral revenue growth between zero and 5%. We expect that reported revenue at spot rates will be negatively impacted by approximately eight points from the stronger U.S. dollar. We expect fully allocated non-GAAP operating margin of 32% to 34%, flat with 2014 and this also includes four to five point impact from stand up costs. And as Devin mentioned, we expect free cash flow of $2.1 billion to $2.3 billion. In summary, we're off to a great start to the year. We have streamlined the organization and had better execution with strength across all three businesses. The full year FX neutral revenue outlook is on track but our strong Q1 momentum will be offset by the negative impact of a stronger dollar. We're making excellent progress on our plans to stand up to independent companies and we expect to conclude the separation in the third quarter. And now we would be happy to answer your questions. Operator?

Thank you. [Operator Instructions] Our first question comes from the line of Carlos Kirjner of Bernstein. Your line is now open. Your line is now open.

Hi. Thank you for taking my question. I have two questions. First, can you ask some caller to what specifically we need to do to rebuild your SCO and if it's category-by-category exercise, for example, dependent on the structured catalog, have you made significant progress in some categories that give you confidence that these will work? Second, on PayPal, you said PayPal has a lot of opportunity and is still relatively small user base and its addressable market. In an environment of similarly increasing competition, why is right term for the business to focus on growing free cash flow instead of reinvesting more aggressively in product and user growth? Or in other words why do you think that maintaining 25% margin versus investing in new products and customer acquisition to accelerate user topline growth is now the right answer? Thank you.

So why don't -- Devin, why don't you take the first part, Dan, you take the second question.

So, let me take the SCO and structured data question. Maybe I'll go back in history just a second. We grew up as a marketplace and eBay looks at the world historically through listings rather than products. Listings have gave eBay a tremendous selection advantage, it’s why we have the most things for sale of any marketplace in the world, but listings are also transient, they come and go. They don’t have link equity and they are hard to attach content to. So if you go back over eBay’s history there is been a pattern of SEO disruptions across various search engines. We now believe that the state of our business and our technology is that we can maintain the advantage given to us by our marketplace business model, but include a structured data catalog which gives us persistence and link equity and makes our seller’s inventory more discoverable both on and off eBay. The way we are approaching that is, it is a deep transformation. It’s a multi-year process. We are approaching it by category, but horizontally, but also focusing on the vertical areas where we believe we can have the most impact early on. I would say we are off to a good start, but it’s an early start, and it will take -- it is a multi-year transformation. But we do know where we structured and cataloged our inventory. Those items are more discoverable on eBay and they are more persistent and generate more traffic through search engines and other digital channels. So we feel good about the approach, but it is not a short-term fix.

Thanks Devin. Dan?

Yeah, thanks for the question Carlos, appreciated. So you are right. It is a very exciting opportunity in front of us with a addressable market that is expanding dramatically for us. Cash is digitalizing, the world of money is digitizing. The way consumers manage and move their money is transforming technology platforms and fundamentally redefine that and merchants are moving towards digital commerce where they can use mobile to get ever closer to their customer, drive engagement, drive incremental sales. And I think that PayPal is very well positioned to take advantage of those opportunities. There are number of assets that we bring to that site from our brand to our scale, to our platform, to our service and I can talk about that in more detail later. So what we have said is that we will grow our segment margins this year by 1% to 2%. We feel very comfortable with that. We feel very comfortable that with the operating leverage that we have in this business, in the cost action that I took earlier this year, reducing headcount to really focus our costs, as well as increased economies of scale as we grow larger, are going to allow us to grow free cash flow in a disciplined fashion and yet have the investment dollars to invest in the opportunities that we see ahead. As opportunities can be increased investments in our platform to speed up our ability to deliver capabilities, enhance capabilities, which you will see us rolling out even this quarter, going forward new markets that we move into. And so we feel as we look at our model, that we have the operating level to maintain consistent margins and invest to take advantage of the opportunities that we see in front of us and I feel comfortable with that as investment dollars. I’d also points out one other thing that Bod mentioned. He said PayPal is going to be extremely well funded on its balance sheet as we go forward with perhaps some approximately $6 billion of funding of cash on our balance sheet, enabling us to look at not just organic growth but inorganic growth as well. And so when I look at all those things together, I feel very comfortable with the guidance that we've given and the investment opportunities we see.

Thank you.

Yeah.

Thank you. Our next question comes from Eric Sheridan of UBS. Your line is now open.

Thanks for taking the question. Just one. You made quick mention of it. But it too want to deal with the deeper in the rationale for the PayPal Paydiant transaction. When we think that delivers long-term in terms of merchant relationships? What some of the ancillary benefits might be lower term in terms of credit and how far that asset might expand the PayPal footprint today in terms of playing a role in somebody’s lives? Thanks so much.

Dan?

Yeah. Eric thanks for the question. We are very excited about the Paydiant acquisition. Paydiant is not necessarily a name that lot of people recognize from a brand perspective, but very leading merchant in the country sure do recognize it. But it is a mobile base platform that provides merchants who want to write their own applications to engage and connect with their customers, to use that underlying platform to power those applications, whether that be through rewards, through payment processing or through QR codes at the point of sale. When you combine the Paydiant platform with our platform at PayPal you have probably in my estimation the world’s leading mobile payments platform and as I mentioned as the online and the offline world continue to coverage together, driven by the confluence of mobile at the heart of that. The Paydiant acquisition enables us to move much more aggressively into that converged space, so into that offline space. It also provides on the consumer side the ability to utilize things like private label cards, rewards. So it’s kind of a host of capabilities that supplement what we had on the PayPal platform. So for both merchants and for consumers it was an acquisition that enabled us to more aggressively and more quickly address that expandable market.

Thanks so much.

Yeah, you bet.

Thank you. Our next question comes from Gil Luria of Wedbush Securities. Your line is now open.

Yeah. Thanks for taking my question. I wanted to ask about -- Dan, I wanted to ask you about the progress in terms of your technology and in the important mobile technology that are being deployed right now, so in the card present context Venmo, One Touch and deploying that or the Venmo inspired One Touch in deploying that more retailers and via fingerprint reader. When do those technologies become mature enough and integrate enough in your products that you will be able deploy them? And then off the line when you will feel comfortable enough with NFC penetration on phones and in terminals in order to deploy that? And then to Devin, maybe I missed it. But impact do you expect from the most Google algorithm changes to mobile. Isn’t that a big advantage for you in terms of prioritizing mobile-ready websites? Yours has been ahead of the pack for the long time?

So maybe I can start and turn it over to you Devin. So thanks for your question Gil, its insightful. So the first thing that I'm just going to take one step backwards and tell you as you probably have seen is we've kind of reorganized PayPal around merchants and consumers. And when we did that we put Bill Ready in charge of the merchant segment. Bill as you know was the CEO of Braintree and what we really did by putting that together is really combine the Braintree platform and the PayPal platforms much more closely together so that we are able to being able things like One Touch not just on full stack integrations and on mobile, but into the PayPal base. We think that the world is moving increasingly towards mobile payments that we have with the combination now of Paydiant, Braintree and the PayPal platforms, the leading mobile payments platform in the world. We did over a 1 billion mobile payments transactions last year. You heard that this quarter you we’re up 40% year-over-year. We are taking things like One Touch and we want to put it right into our merchant onboarding process that we have for PayPal. And so we are taking the things that we've learned through both Venmo and Braintree, putting them together with some of our other acquisitions to provide to our PayPal embedded base, not only the services that you see now, but services that we will introduce even as of this quarter that will take us to a whole different level as a result of that integration together. That’s question number one that you asked and I feel really about that and excited about it. Number two was on NFC and I do I feel like NFC is embedded enough to go after, we are obviously doing trials around NFC ourselves at this point. But I think the real key and the thing I believe in is that any great open technology payments platform has to have its heart, this idea being technology agnostic at the point of sale. Even though NFC is beginning to gain some momentum, it’s still probably 2% to 5% of the point of sales terminals out there in the marketplace, maybe more on a transactional basis. But it’s a small part. And I have seen many a times where we think one technological standard is going to emerge and it’s eclipsed by something else. And so what I would like the PayPal platform to be and what we are building towards and have a lot of capabilities already, is the ability to be able to utilize your mobile phone, but not just via NFC, but QR codes, Bluetooth, HCE, really depends on what the merchant has upgraded towards. I think if you bet on a single technology, it’s a risky proposition and it takes a lot longer to move into the marketplace. The second thing is I'm a big believer that you don’t want to just enable a form factor change. We don’t want to just substitute a card swipe for a phone tap; you really want to think about what is the value proposition change that you are going to do. How can you with that phone tap enable a merchant to get ever closer to their consumers through rewards loyalty, couponing offering and associate that with the payment choice of type a consumer wants to pay with, whether it be a debit card or credit card, private label, Bill Me Later, whatever it may be, that's what we want to provide. And so you are seeing us look at our platform and our goals are to be the world’s largest open digital payments platform. And to do that we have to build with those tenants in line.

And Gil to your question about a sea of algo changes, we find out along with everybody else. We've heard what everyone has heard which is that recent changes will favor mobile optimized sites. All I would say and it’s a recent change, so it’s too soon to know fully what will happen. But I would say that we've been a leader in mobile commerce for multiple years. We've been working on optimizing our sites, our apps and our mobile properties for years. And a huge percentage of our business now, close to 40%, is mobile. That's $8 billion this quarter. So you would hope that any change that favors mobile optimized properties would ultimately help us.

Great. Thank you.

Thank you. And our next question comes from line of Heath Terry of Goldman Sachs. Your line is now open.

Great. Thanks. Bob or Devin, can you give us a sense of what contra revenue was from our Marketplaces this quarter. And how a level of that now compares with the levels since you started using those promotions more aggressively following the breach in algorithm changes? And then one just quick one from Dan. Dan I know you touched on offline a bit here. But I'm wondering if you could just give us a sense of how important offline is for your vision of PayPal? Sort of where it ranks in the opportunities and how you see the strategy in front of PayPal differing from the one that the company has been pursuing offline for the last couple of years?

So -- hey, Heath how are you? First contra revenue, there is no dramatic change in terms of how we use contra by year-on-year. We have -- as you see we have a two point gap between GMV and revenue and underneath that no dramatic changes in our take right over time. So contra revenue continues to be a source of driving traffic and engagement from our users. But not dramatic change in terms of the magnitude year-on-year.

Maybe I will just add quickly, Health, philosophically we are very rigorous about how we deploy contra revenue and when we do. It is not part to grow any e-commerce if you use your balance sheet. It is hard to create value. And we are very tough on ourselves about when we deploy contra revenue, when we deploy deals, when we spend to acquire customers. It has to be because there is a customer lifetime value that makes sense that will get that second or that third sale that is not subsidized. So contra is a lever it will continue to be a lever. But we are not spending simply to drive growth. We are spending to drive value and acquire in a healthy manner new customers.

Got it.

Thank you. Our next question comes from the line of Douglas Anmuth…

Operator we have the second half of the….

Yeah, sorry, Heath, we weren’t going, we got jumped there.

No problem.

So in terms of your question, I think first of all, if I say we are operating in an incredibly healthy, growing dynamic market in itself. Online is still exploding. It’s -- what is it 10% to 12% of overall commerce right now, growing at double-digit percentages. We've got165 million consumers but they are huge swaths of the market where we are not even present right now. And you can be sure that we are looking at that, because I think there is tremendous opportunity for us to take advantage of this online growth that's going on all over the world right now. At the same time interestingly you see retailers and merchants starting to think about how can they use mobile to dramatically change the way that they interact with their customers. And I call that really sort of digital commerce, how can retailers more personalize the experience per customer when they walk into their store, and mobile can enable that. But it’s difficult to do that. The merchant can certainly write the right application to talk with their customers, to engage with their customers. But underneath that they need a platform to power that. Whether it be to power their loyalty and rewards programs, to power any payment type that comes and we've talked about recently this vision of us becoming much more of a partner or retailers and becoming sort of what we call the operating system for digital commerce, to be able to enable them to move into this digital commerce world. The advent of Paydiant, Braintree and PayPal call coming together is a real head start for us moving into that. And it’s not so much that we want to move into the offline world, it’s that the offline and online worlds are moving that way naturally and they are moving that way through mobile. And that plays right into a strength that we have right now. And I think that's one element and then on the consumer side, consumers are going to look to manage and move their money in different ways than they ever have before. Our transactions per active account are going up. The amount that people are spending with us are going up. We have a nice engaged base. But I believe that we can do so much more on that as we become a part of how consumers manage and move their money. We can move from being much more transactional and much more relational with them and that is our aspiration and vision on that. So I think a lot of opportunities in numerous places here.

Thanks.

Operator, I think we have time for one last question.

Okay. Our next question comes from the line of Douglas Anmuth of JP Morgan. Your line is now open. Again, Douglas Anmuth, your line is now open.

Doug if you are there, you are on mute. So…

If your line is on mute, please unmute.

All right, we will go to the next. We will just go the next. Operator lets go to the question and list it last question.

All right. Our next question comes from the line of Sanjay Sakhrani of KBW. Your line is now open.

Thank you. I guess I have questions for Dan on PayPal. First, just as far as PayPal credit is concerned, has going forward is the expectation that you guys are going to use the capital markets or use your balance sheet to fund those loans? And I guess secondly on the regulatory side, two questions, one is, all the stuff that's happening in Europe, how does that really affect the PayPal business model? And secondly, could you just give us an update on the CFPB CID [ph]? Thanks.

That last question was three questions. Okay. So, on PayPal credit, Sanjay, we're a technology-enabled lender and we do that because it makes sense for the partnership that we're enabling with merchants, it provides them additional value, they get to close more sales as a result of that. If we extend PayPal working capital to them, it obviously enables them to expand their business. When we do that, we see our customer satisfaction scores jump dramatically as a result of that. We see more volume come through those merchants, we see much lower churn with that and so for merchants who avail themselves of that, it's a tremendous benefit and for consumers they get to complete a transaction that they might not have otherwise completed. For us, it takes a cost and converts it into a revenue and so it's a win all the way around for that entire ecosystem. So, we think providing credit makes sense in terms of what we are trying to do from a platform perspective. But just because we do that, as Bob articulated in his remarks, doesn't mean that we need to fund that through our own balance sheet. And so we think that providing the service is the right thing, but having the flexibility to opt whether we want to do that through our balance sheet or not, there are multiple ways that we can look at that. What we just did is one example of funding that loan portfolio with other people's money and that having the return of $700 million of cash to us on our domestic balance sheet, which obviously opens us up to being able to do other things with that. So, that's question number one. Question number two, on the EU stuff, look, there are regulatory changes that go on throughout the world. The European ones are ones that are on everybody's minds right now. Some of those regulatory impacts affect our cost structure, some of those can affect pricing on certain -- some of them can affect how you do business in certain ways. And so we look at each and every one of those changes on a market-by-market basis and react accordingly to those. The one thing we definitely don't do is react publicly to those. We think about them and then we decide what the right way to react is on that. But this is nothing new as you well know, Sanjay, as you're an expert in all of this, there are changes going on all the time, all over the world and one of the assets I think PayPal brings to this world is we're 100% focused on digital payments and one of the core competences we have is our regulatory and compliance oversight and so we're on top of all of these things all the time. In terms of the CFPB, we work with regulators all over the world and I will say this and this is probably the most important thing, is that there's no difference between what a regulator wants and what PayPal wants. We pride ourselves on being a customer champion and regulators only want what's best for consumers and customers in general and so we're very aligned philosophically on what we both want to provide. As CFPB comes in and looks at the ways that we've done business, they may have suggestions on how we can do that better and we certainly work with them to try and provide the best alternative to our consumers to make sure that we're as clear as possible in our communications and fully compliant with all regulations. And we, as in every single quarter take a look at what exposures might be, we reserve for them appropriately and that's a thing that we do every single quarter. So, hopefully that helps to answer all of your questions.

Thank you. Appreciate it.

Yes.

Great. Thanks very much, everyone. And we'll see you next quarter.

Thank you.