Good day, ladies and gentlemen, and welcome to the PayPal's First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Ms. Gabrielle Rabinovitch, Senior Director of Investor Relations. Ms. Rabinovitch, you may begin.

Thank you, Andrea. Good afternoon and thank you for joining us. Welcome to PayPal Holding's earnings release conference call for the first quarter 2016. Joining me today on the call are Dan Schulman, our President and CEO; and John Rainey, our Chief Financial Officer. We're providing a slide presentation to accompany our commentary. This conference call is also being broadcast on the Internet and both the presentation and call are available through the Investor Relations section of our website. In discussing year-over-year comparisons, including guidance growth rates for the second quarter and full year 2016, we have chosen to present non-GAAP pro forma metrics. We believe that these metrics provide investors a consistent basis for reviewing the company's performance across different periods. We will also discuss some non-GAAP measures in talking about our company's performance including the non-GAAP pro forma metrics mentioned above. You can find a reconciliation of these metrics to the most directly comparable GAAP metrics in the presentation accompanying this conference call. In addition, management will make forward-looking statements that are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. These statements include our guidance for second quarter and full year 2016. Our actual results may differ materially from those discussed in this call. You can find more information about risks, uncertainties and other factors that could affect our operating results in our annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC and available on the Investor Relations section of our website. You should not rely on any forward-looking statements. All information in this presentation is as of today's date, April 27, 2016. We disclaim any obligation to update the information. With that, let me turn the call over to Dan.

Thank you, Gabrielle. Before I start my remarks, I want to take a quick moment to officially welcome you. We're thrilled to have you join PayPal as our new head of IR. And I want to thank all of you on the call for joining us. We know how busy your schedules are, so we appreciate your time. I'm very pleased to report that PayPal delivered strong financial results for the first quarter of 2016. In many ways, this was our best quarter in the time since I joined PayPal and it's gratifying to see the company execute against our goals. The mission of PayPal is clear. We want to become an everyday essential financial service for consumers and provide a full service solution and platform that enables digital commerce for merchants around the globe. And we continue to make tangible and consistent progress towards that vision. We are showing strong growth across all of our operational metrics. We ended the quarter with 184 million active accounts, up from 179 million last quarter. Our enhanced value proposition is attracting new users at an accelerating rate and in turn, attracting new partners, and new merchants. The larger our scale, the more important and relevant we become in the ecosystem as our network effect becomes ever stronger. Our increased scale combined with continued growing engagement resulted in some of the strongest payment volume and revenue growth rates in our recent history, and clearly demonstrate our leadership in digital and mobile payments around the world. Our total payment volume growth, or TPV, accelerated to 31% on an FX-neutral basis. And our merchant services volume grew a record 39%, leading to revenue growth of 23% on an FX-neutral basis. We ended the quarter with over 14 million merchant accounts. I just pause on that…

Thanks, Dan. I also want to thank all PayPal's customers and our 17,000 employees worldwide for making this another great quarter. Transactions, payment volume and revenue growth, all accelerated from the previous quarter. Total payment volume was $81 billion, an increase of 31% on a currency-neutral basis. Of that, U.S. payment volume grew 30% while international growth was 32%. We grew faster than e-commerce market and continue to gain market share. Our share gain demonstrates that our strategy is working as we focus on being the customer champion and move from being a payment button to an end-to-end payment solution for merchants of all sizes. We added 4.5 million new active accounts, ending the quarter with 184 million. We continue to extend our global reach with 56% of the total active accounts outside of the U.S. The number of payment transactions in the quarter increased 26% year-over-year, driven predominantly by the increasing relevance and ubiquity of our platform, as we continue to have strong growth in our core business and Braintree. In addition, PayPal is driving the growth of mobile payments and an increasing amount of our business is conducted on mobile devices. During the quarter, we processed $21 billion of mobile payment volume, which was up 54%. With capabilities and services like peer-to-peer, credit, and remittances, as well as strong mobile growth, we are becoming more relevant in our customers' daily lives. As a result, the number of payment transactions per active account increased to 28, up 12% from a year ago. We generated more than $2.5 billion of revenue in the first quarter, up 23% on a currency-neutral basis. Of that, transaction revenue increased 21%, which benefited from rising engagement as reflected by the increase in the number of payment transactions for active customer account. This increase also…

Thank you. [Operator Instructions] Our first question comes from the line of Sanjay Sakhrani with KBW. Your line is open.

Thanks. You guys spoke to the decline in the transaction margin and it was pretty significant year-over-year. I guess two related questions. One is how should we think about the trajectory of that margin going forward in terms of the declines related to mix? And then second, as far as lower European Interchange is concerned, should we assume that the first quarter is fully loaded for that impact? Thanks.

Sanjay, this is John. How's it going? First, with respect to transaction margin, as we've seen for a couple quarters now, there's definitely pressure there. But I would remind you that's a deliberate part of our strategy as we're trying to increase the ubiquity of PayPal and allow our customers to use PayPal at larger merchants where we're going to see pressure on take rate. Fortunately for us, we have the ability to offset that with the operating leverage in our business. And as a management team, we're focused on our margins, our generation of free cash flow and growing EPS and not getting so focused on just one aspect of the P&L being the transaction margin. So, you'll continue to see us demonstrate the ability to offset some of that decline. With respect to mix, as we said before, we expected the impact of that 2016 to be relatively de minimis and our first quarter results actually validated that. It was fairly negligible in the quarter and we would expect, to your question, a similar impact for the balance of the year.

I'd just add a couple of things.

And my follow-up...

Just [indiscernible]…

Just around the new account growth, maybe you can just parse out which channels you're seeing the most success in terms of growth? Thanks.

Yeah, let me first jump on a little bit of John's answer and just supplement it. First of all, as we've said all along, the margins in this business tend to want to go up. In fact, if you excluded Xoom from our results in the quarter, our margins would have gone up year-over-year. The take rate is a direct result of the strategy that we're implementing. First thing is we want more ubiquity for PayPal consumers. The more ubiquity there is for them to shop, the more they use us, the more engagements they have, the more satisfied they are with the service and it gives us a flywheel effect. And as John mentioned, every one of those dollars that come in from our merchants are obviously profitable dollars for us. The large merchants have lower take rates. That's just the way of the world, more volume, more pricing leverage. The second piece is we are trying to become a full services platform to enable merchants to move into digital commerce. That means we want to do 100% share of their payment processing. We want to be a strategic partner with them. We want to enable their business strategy. And the more we do that, the closer we get to our merchants, the better off that is for us. Churn goes down, more branded business comes towards us. But of course, as we go move more towards that product mix, you also see some margin because that mix of product has a lower margin set as well. But overall, when we include our branded on that, that's a net positive for us. So we're really comfortable with the strategy. It inevitably leads to at least for now because we are penetrating a lot of that larger merchant base and we'll start to see more normalized stuff come out of that. But for now, that is the right strategy for us and it is paying off in all sorts of benefits for us. In terms of net new account growth, we are seeing that throughout the world right now. As John mentioned, over half of our actives are outside of the U.S. So we're seeing good growth across the world. We're obviously seeing very good growth in our core PayPal acquisition as well as in Venmo. So I would basically say we've got good, consistent growth that spans from our newer services to our core business. I think a lot of that has to do with the fact that our value proposition has significantly improved over the course of the last year, year and a half or so and consumers are beginning to see that.

Thank you.

Yeah.

Thank you. And our next question comes from the line of Tien-tsin Huang with JPMorgan. Your line is open.

Great, thanks. Good results here. Just wanted to dig into what's driving the TPV acceleration. I think you called out a mixed retail landscape. So how much of the acceleration is from, say, merchant additions you called out, the backlog of full service deals, et cetera?

Yeah, I'll take that. I think what's really driving the TPV growth is obviously and no surprise here, our net new actives have grown by some 19 million, 20 million net new active additions over the past year. Over the last two quarters, you've seen acceleration in the number of net new ads that we put on to the business. Engagement is growing. Engagement is growing because our value proposition is getting better. One Touch is increasing engagement, our new mobile app is increasing engagement and conversion is also going up because of those value propositions. We obviously are also expanding partnerships right now. All the investment that we've done in the tech stack over the course of the last three plus years is really paying off in our ability to work with the most technically savvy and sophisticated partners and be able to deliver digital and mobile payment experience that we think is best-in-class. So these new partnerships are helping. And the more merchant – consumers we get, more merchants want to come onboard and you saw some of those in my remarks. But we're now over 14 million merchants. So it's a combination of a better value proposition, more partnerships, expanded merchants and then really driving our net new consumers and the engagement per consumer; all of that is adding up to very strong volume growth.

Got it, that's helpful. Just as my follow-up, just on Xoom, I think last call you talked about how you still see a line of sight to that becoming margin accretive. How much of the current drag is driven by your accelerated country expansion efforts and maybe some integration caused that you'll maybe lap sooner rather than later? Thanks.

Yeah, we've said that we expect Xoom to be margin dilutive this year. And I wouldn't expect necessarily the back half of the year to look that much different than the front half. But it's – to your point, as you can see from and hear from Dan's prepared remarks, this is an area that we're investing in and we would expect it to start generating more significant profits in 2017.

Great. Thank you.

Yeah.

Thank you. And our next question comes from the line of Bill Carcache with Nomura. Your line is open.

Thank you. Dan and John, I wanted to follow up on your comments about PayPal Credit. You've made it clear that credit is important because it helps fuel growth and has the flywheel effects that you described. But how much do you worry about the lower valuation multiple that the market ascribes to businesses that face credit risk? And is that really the reason why you are exploring asset-light to basically identify a partner with a strong balance sheet so that they could help you retain all the benefits of the credit product without taking on the credit risk?

Yeah, hey, Bill. It's a great question. So as we've said pretty consistently, we are not in credit for credit sake. We are in credit because it drives both consumer benefits and merchant benefits and drives the overall flywheel for PayPal. Any which way you look at it, it drives increased basket size, increased conversion, PayPal Working Capital, significantly increases the volume that we see coming on to PayPal, significantly increases the NPS scores. So we see a lot of benefit in the overall PayPal ecosystem. But we can do this, and will continue to do this in an asset-light manner. Credit is a small part of our overall business. It will likely remain a small part of our overall business. And ways of figuring out how to do that in asset-light and capital efficient manners are a goal of ours. Synchrony, the partnership we have with them is a good example of that. I think you can expect us to be looking at those kinds of things to become increasingly asset-light. We don't need to do all of this or even a great portion of this necessarily on our own balance sheet. We can work with partners because the important thing to us is the flywheel effect.

I would just – I would add to that, Bill, that another aspect that we look at is the volatility or – and one of the things that we really try to focus on is reducing the volatility of our earnings. And I think it's important that you understand that we have a lot of ways that we can manage any volatility irrespective whether it comes from credit or other aspects of our business. But to Dan's point, credit is about 2% of our volume today. And if you were to just take 2015 growth rates of credit and the rest of our business, it would take a couple decades before credit even got to 20% to 25% of our overall revenue. So this is something that, to Dan's point, we want to utilize it because it complements our platform, but I'd like to allay some of the concerns that are out there right now around this because it's not something that I think is going to have any kind of dramatic impact in terms of the volatility to us.

Thank you. I wanted to also follow up on your comments around partnering with other players in the ecosystem. You guys have previously said that steering and data sharing were two issues that were at the center of your discussions with other players, but that those were very solvable. Maybe could you talk about whether there have been any changes in philosophy around how you think about the sharing of data, and perhaps any commentary around the steering issue? It was interesting to hear MasterCard say at a recent conference that they're okay with the notion that PayPal has been – has thrown out around customer choice, and that's something that they could live with. I was hoping – there's a lot there, but just around those topics, just hoping you could give a little bit of color and that's it. Thank you.

Yeah. Sure, of course. So we're in good and meaningful discussions across the entire ecosystem right now. And I'm hopeful that that leads to a win-win for a number of parties. Just take a step back and give a little bit of context. One of the things that we talked about inside PayPal all the time now is how do we become the ultimate customer champion company. And being a customer champion company means providing the very best experience to our customers. And when we think about the very best experience; that means giving our customers full choice and optionality about where they want to pay and how they want to pay. And to us, that just makes a ton of sense and we've done a lot of work around this as you can imagine and a lot of research and a lot of experimentation. And here's what we see. When we do that, we drive a heck of a lot of more net ads than we have in our traditional signup process. And engagement and conversion go up meaningfully. So that obviously drives increased revenues and volumes for us. Funding mix may shift slightly but the difference between ACH and debit has narrowed substantially over the last couple of years. Different regulatory environments have narrowed a lot of the payment option tightened. So – and we would also expect some tradeoff with incremental volumes that we could drive on to networks and pricing that we would receive from potential partners. In addition, we are very willing to share data back with the issuers and the networks. That really is a legacy of the past as best as I can see. And this sort of new model of customer choice of data sharing, and all of us having a common foe in cash transactions. We all want to electronify more and more payments and that's all attractive and additive to the entire ecosystem. And so that eliminates a lot of the previous perceived friction that might have been out in the ecosystem. And furthermore, we want a partner. We think that's the right thing to go and do. And so we'll see where all this goes but as I said, it has the opportunity to be a win for all of us in the ecosystem.

Thank you.

Yeah. You bet.

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

Great. Dan, you've talked in the past and provided some specifics around the state of the pipeline of business or merchants that you're on-boarding. Just wondering if you could give us a bit of an update on that [indiscernible] how it compares to where you were back when you last updated in January or the business that you did last year? And then just as we – as you talk through the improved engagement around One Touch, is there any way that you can quantify that for us, either in the amount of TPV that One Touch users use or are using after they sign up for One Touch or their engagements in a specific period that would provide some additional color around that benefit?

Yeah, yeah. Thanks for the question, Heath. So first thing in terms of pipeline, we're improving our capabilities as rapidly as we can to onboard live to site that pipeline of sales that we have for Braintree and in our core business. So that's improved quite a bit, but I will say despite the improvement, we are still seeing a large demand and pipeline of additional sales coming in for our platforms. Yeah, I'd say it's a high class problem to have. And the value proposition of Braintree is, I think, the whole team there is doing a great job in driving that. The core propositions of PayPal are getting better really. They're really starting to execute against this idea of being a full services platform, really being almost the underlying operating system for digital commerce. And then that is – that's resonating with the merchant population and so we still have a very strong pipeline being – waiting to go live to site and a strong pipeline of merchants that we're talking to in the middle of the sales process with them as well. In terms of One Touch, we've said from the very beginning that we see meaningful lift in not just conversion vis-à-vis our other products but also engagement in terms of how often a consumer uses PayPal because really as you can imagine, taking friction out of the checkout experience is just a really positive thing. It's really positive for consumers and it's really positive for merchants. And seeing that comScore study that basically, as you know, our nearest alternative service at 51% and us at 87% can give you an idea of the lift in conversion. The other place that I would point to is you can see kind of where PayPal conversion was before One Touch and other comScore studies and where it is now and you can get a sense of some of the lift for that by looking at some of those external studies. But you'll see it's a meaningful lift in conversion overall. That's obviously beginning to help us in our results. And hopefully as we continue to onboard more and more consumers on that, we'll continue to help drive some of our future growth.

Great. Thanks, Dan.

You're welcome, Heath.

Thank you. And our next question comes from the line of Lisa Ellis with Bernstein. Your line is open.

Hi. Good afternoon, guys. All right, very quickly, can you just illuminate a little bit what drove the couple of basis point uptick in transaction expenses? Is it mix in Braintree or is it actually underlying card mix in the core PayPal platform? And then similarly, it looked like transaction and loan losses upticked again, even though you said that PayPal Credit is holding steady at 2% of TPV. So, can you just give a little color around those drivers? Thanks.

Sure, Lisa. So the first – the answer to your first question about the increase in transaction expense is related to mix of Braintree. Of course, that being more card-based, but that as opposed to what we're seeing in the core business on the transaction and loan losses, that's actually a result of increased risk pressures that we saw in the quarter as opposed to anything that we saw specific to credit.

Terrific, thanks. And then one real quick follow-up. You've mentioned that you've got some initiatives underway to drive use of the stored balances in PayPal, so meaning being able to deposit paychecks, et cetera. But it looked like the balance sheet line item there only grew about 6% year-on-year. So can you just give a little color around usage of stored balances in your initiatives there?

Yeah, first of all, Lisa, welcome to the coverage universe of us and glad to have you.

Thank you.

Yeah. In terms of additional funding sources, I think, is what you're talking about in there. We have not introduced additional funding sources coming in. You can now add cash into your balance at several thousand retail stores across the U.S. But this idea about us opening our platform up to more funding types to be more in the middle of how people manage and move their money is still a future initiative for us. So you wouldn't have seen that in today's results.

Yeah. And with respect to the customer balances, Lisa, recall that in my prepared remarks I suggested that we moved $800 million from our customer balances to our cash to help fund some of the European originated credit.

Yeah. Yes. I got that. I was looking actually at the liabilities line item.

Yeah.

Thank you.

Thank you, Lisa.

Andrea, we have time for one last question.

All right. Our last question comes from the line of Bryan Keane with Deutsche Bank. Your line is open.

Hi, guys. Congrats on the good, solid results here.

Thanks, Bryan.

I just want to go back to the whole question around funding mix since that's a popular one. You guys did mention that there's not a lot of difference between ACH and debit, although to us, we think of ACH as being only $0.02 and debit being a little north of $0.21. So just exactly what do you mean on that? On a funding mix change there, wouldn't there be an extra cost? And then secondly, on credit, there is a worry that if there is more transactions on the network's credit cards that you will make zero money or less money, obviously, if you open it up to consumer choice. Thanks.

Yeah. So we've done – as I mentioned, we've done a ton of experimentation on this and what we have seen with consumer choice is a much better experience for consumers, much more engagement, much more conversion and many more incremental net adds to that. And on the mix, when you look at ACH you also need to look into not just the cost of ACH, but when we take from an ACH balance, there's risk associated with that. And so as we look at the environment and we look at the differences in mix shift, we look at the advantages of choice, we look at the partnering with the ecosystem, we think this is a net positive not just for us but for other players in the ecosystem as well. And that's what has us cautiously optimistic about this. Any time that you can find solutions that actually provide a win for all players in the system, that's a real positive. And I think that's what we're finding in our conversations. It doesn't mean that things lead to one thing or another but it does mean that there's a lot more understanding and a lot more commonality in what we're trying to do than before.

Okay. And since I'm the last one to ask a question, let me ask the follow-up on just PayPal's new mobile app. What's the change in value proposition for PayPal in-store for both merchants and consumers? Because obviously you guys sound excited about that, and it looks like PayPal in-store could be a big part of this. Thanks so much.

Yeah, you bet. Well, first of all, the mobile app is a fundamentally redesigned app. It really brings us into the mobile world. It puts up front the things that customers want to go out and do, it doesn't clutter it up. It's simple, easy. As I mentioned, it's driving increased consumer engagement. And it also enables us for consumers to now be able to use their mobile phone in-store whether that be through NFC or QR codes. And the way that I think about in-store is really in-store, online, in-app, they're all coming together. It's just commerce is the way to think about it. It's all moving towards mobile. And we basically want to be able to utilize for merchants this underlying platform so that we can be their OS, do 100% share of checkout, enable merchants to create their own application, tie in their rewards into our platform, do things like split tender at checkout and create a real value proposition change for consumers so that merchants can use mobile to get closer to their customers. And we're trying to power that experience there. We want to be OS agnostic. We want to be POS, point-of-sale, agnostic as well. And then we want to use our PayPal wallet, which, as we mentioned now, is growing quite quickly to basically light up that merchant app. Part of the issue with merchant apps is when they can create a good value proposition, they need somebody to help power that. But then they need volume on that application. And with things like our One Touch technology, our new re-platforming, as long as a consumer opts in, we can credentialize their IDs and make that signing up for that app much more friction-free than previously. And so not only can we provide the underlying infrastructure for that merchant, but we can then light up that application with our consumer base. We've had great success with Shell in the U.K. They're doing a trial now in Brazil with Subway, with Burger King, with Dollar General, with Macy's, with Papa John's. We have thousands of retailers that now are part of our order-ahead application on our mobile app where you can just order ahead, pay with PayPal and then pick up in store. And so this is what I mean. Basically you have mobile, bridging the gap between online, in-app and in-store and we're really pleased with the initial results, it's obviously early on but a lot of potential for us there. So thank you for that question.

Thank you for that color.

And thank you, everybody, for joining us today. We appreciate your time.

And this concludes today's Q&A session. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.