PayPal Holdings, Inc. (PYPL) Q1 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to PayPal’s First Quarter 2017 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 maybe recorded. I would now like to introduce your host for today’s conference, Ms. Gabrielle Rabinovitch, Head of Investor Relations. Please go ahead.

Thank you, Andrew. Good afternoon and thank you for joining us. Welcome to PayPal Holdings’ earnings conference call for the first quarter 2017. Joining me today on the call are Dan Schulman, our President and CEO; John Rainey, our Chief Financial Officer; and Bill Ready, our Chief Operating Officer. We’re providing a slide presentation to accompany our commentaries. 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. We will discuss some non-GAAP measures in talking about our company’s performance. In discussing certain historical year-over-year comparisons, we have chosen to present non-GAAP pro forma measures because we believe that these measures provide investors a consistent basis for reviewing the company’s performance across different periods. You can find a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures 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 the second quarter and full year 2017. 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 most recent 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 26, 2017. We disclaim any obligation to update the information. With that, let me turn the call over to Dan.

Thank you, Gabrielle. I’m pleased to report that PayPal began 2017 with an exceptional quarter. This continues a string of consistently strong performance since our separation from eBay in July 2015. We delivered solid operating and financial results this quarter. PayPal gained 6 million net new active accounts, a 35% increase from the 4.5 million net adds in Q1 a year ago. This represents largest organic quarterly increase in this important metric over the past three years. We ended the quarter with 203 million active accounts. We expect that our net adds will increase by more than 20 million in 2017 and once again our transactions per active account increases, growing in Q1 to 32 up from 28 a year ago. We reported $2.975 billion in revenues, an increase of 19% on an FX neutral basis, above the high end of our guidance, driven predominantly by stronger core PayPal growth. PayPal delivered $.44 of non-GAAP EPS, which is $0.02 above the high end of our guidance as we are beginning to realize the sustainable benefits of our scale and we generated $603 million in free cash flow. This strong customer results clearly demonstrate our progress towards becoming the worlds leading open digital payments platform. We continue to build on our strategies of reimagining and democratizing the management and movement of money for our consumers. Helping drive the global transition from cash to digital payments and positioning our millions of merchants to benefit from the noble revolution at move to an all-digital cross-context retail environment. Our powerful two-sided network engages both consumers and merchants and the larger our scale the stronger our network effect becomes. We have made meaningful progress in advancing merchant adoption of PayPal in the quarter. At the end of March the number of active merchant accounts on our platform increased to 16 million. The size of our merchant base is a formidable competitive advantage and is extraordinarily difficult for others to replicate. We have provided one of the new brands at the PayPal platform including online fashion retailer with Vente-Privee in France, Papa John’s and Groupon in U.S., leading Mexican department store chains, Coppel and Liverpool, and we made meaningful strides in the travel and tourism vertical in India with the addition of access rooms, Vista Rooms and MakeMyTrip. In addition, over 5 million merchants and 75% of the IRR 100 now offer our industry-leading One Touch checkout solution on their mobile and desktop shopping experiences. We expect the number of merchants accepting One Touch to increase noticeably throughout the year. We finished the quarter with 53 million consumers opted into One Touch. We couldn’t be more pleased with this transformative product experience and the engagement that’s driving with our customers. One Touch provides a powerful connection between our merchants and our consumers in a mobile first world. In the quarter, 32% of our payment volume came through mobile device and mobile payment volume increased 51% over the same period last year to approximately $32 billion. In the quarter, we also continue to innovate and transform how people send money to each other through P2P and remittent services. We continue to expand the functionality of our global remittent service Xoom. In the quarter we launched the Xoom service within the PayPal mobile app in the U.S. and plan to increase spending limits to $10,000 per transaction in the second quarter. We opened up the Japanese market in Q1 making Xoom now available in 56 different countries around the world. In the quarter Venmo continue to transform our millennials managed and engage with their money. In addition to being named is one of fast company’s most innovative brands, the social P2P app process 6.8 billion in payments in the quarter. This more than double the volume processed year ago. Importantly, beginning in Q2 we plan to significantly enhance the social P2P payment experience that has made Venmo environment phenomenon. PayPal made Venmo available as a payment option on the brand three platform. We have the opportunity to test and learn as preserved unique nature of Venmo as we move the experience into new context. Today we are announcing the opening of our data for select U.S. PayPal merchants who accept Venmo as a mobile payment option. We anticipate the ability to pay with Venmo will be widely deployed across millions of our U.S. PayPal merchant base by the end of this year. Investments we have made in our platform architecture now allow us to enable Venmo as a payment method for our PayPal merchants without any additional integration work on their end, mirroring the approach we use to successfully rollout One Touch. While we continue to drive innovation inside PayPal, we are also always looking to acquire innovative companies that can bring great product experiences and technology talent to PayPal like we delivered entering, Venmo, Paydiant and Xoom. In the first quarter we announced our agreement to acquire Tio Networks which will expand our two-sided network by adding bill payment is another key service to drive engagement and value to our consumers. On April 10th Tio shareholders approved our transaction and we expect to close the transaction in the second half of 2017. Tio is a leading multichannel bill payment processor in North America and processed more than 7 billion in bill payment in its fiscal 2016. The company’s digital platform and physical network of agent location make paying bill simpler, faster and more affordable. And importantly, gift consumers may not have access to digital financial services, the ability to easily migrate cash into a digital network and as a result benefit from the convenience and speed of digital bill payments. With its network of 10,000 supported billers, Tio will meaningfully expand our ability to offer digital financial services to tens of millions of underserved consumers. Reinventing the management and movement of money for people across the global creates opportunities for close partnerships with companies across our ecosystem. We continue to strengthen and forge additional strategic alliances with leading brands around the world. We just announced the partnership agreement with Wells Fargo, adding another strategic issuer to the growing list of companies working with PayPal to expand our services at the point of sale. As a result of this partnership Wells Fargo customers will be able to use their debit and credit cards to make contactless mobile payments at millions in store merchants. This expands our longstanding relationship with Wells Fargo and build on the product capabilities. These are made available to PayPal as part of our strategic partnership. We also extended our partnership with Visa into the Asia-Pacific region and in January we finalized a comprehensive strategic partnership with Discover. Along with Citi and FIS, these partnerships will make it easier for PayPal customers to find and choose the preferred financial instruments inside the PayPal Wallet and use the PayPal account in multiple context. Our conversations with other leading issuers continue to be positive and constructive. Over the past nine months we have rolled out consumer choice against across our on boarding, servicing and checkout experiences. Multiple millions of our consumers have already opted into choice and have formatted the payment option best suited for their particular checkout experience. Consequently, we now have additional visibility into the early results of choice and we are quite pleased that what we are seeing. First, choice is having a notable positive impact on our net active adds. Second, it is driving higher spend per customer. Third, we are experience a reduction across into our customer service centers leading to cost reductions in our global operations. And finally, the impact of choice on our transaction margins is well within our expectations. In summary, we couldn’t happier with our strategic move to choice and the corresponding benefits we are seeing. We plan to rollout choice in the United Kingdom, Canada and Australia, beginning in Q2. We also announced a meaningful expansion of our growing relationship with Google. PayPal will be available within Android pay in United States and will be accepted as a way to pay both in app and at the millions of retailers that accept Android pay at the point of sale. We are pleased to offer our customers another exciting way to pay with PayPal further expanding the choices and context within which they can use their PayPal Wallet. We expect that our relationships with technology companies like Google and Facebook will continue to grow and expand into additional context as we move through the next several quarters. 2017 continues the strong efforts we have undertaken to create strategic partnerships across multiple ecosystems. We have seen the transformative power of these partnerships across our business. It’s hard to overstate the difference in the relationships we now have with companies across the multiple sectors who were previously viewed as potential competitors. We are now collaborating a strong and supportive allies to create value for our mutual customers. As this quarter’s results clearly demonstrate we are executing against our vision in a disciplined fashion. We operate one of world’s most exciting and dynamic industry which energizes and inspires our entire team. We still have much to accomplish, but I would like to take a moment and thank the entire PayPal team for another quarter of dedication and hard work on behalf of our customers. It is making a real difference in the value we can drive to consumers, merchants and to our shareholders. And with that, I will turn the call over to John.

Thanks Dan. I also want to thank all of PayPal’s customers and our employees worldwide for making this another great year. We outperformed in the first quarter on both revenue and earnings, building on our momentum for 2016. Solid growth across active accounts, payment volumes and revenue demonstrates that our customer first strategy coupled with our strategic partnerships are yielding results. Before I go into the detail financial results, a few highlights for the quarter, revenue was $2.98 billion, growing 17% on a spot basis and 19% on a currency neutral basis. Non-GAAP EPS grew 19% to $0.44. We generated $751 million of operating cash flow and $603 million of free cash flow and we returned $517 million to shareholders during the quarter. For the first quarter, our total payment volume was $99 billion, up 25% on a currency neutral basis, including U.S. payment volume growth of 27% and international volume growth of 23%. Our merchant services volume grew 30% on a currency neutral basis to $84 billion. Merchant services represent approximately 85% of our total volume in the quarter. Volume associated with eBay represented approximately 15% of the total compared to 16% in the prior quarter and 18% in the first quarter of 2016. In the first quarter, we added 5 million net new active accounts, ending with 203 million active accounts, representing growth of 11% from Q1 last year. Active account growth was predominantly driven by our PayPal core business. The number of payment transactions per active accounts increased 12% year-over-year, continued solid growth of customer engagement in active accounts resulted in a 23% year-over-year increase in payment transactions to $1.7 million. In the first quarter 17% revenue growth resulted from a 60% in transaction revenue and a 23% increase in revenue from other value added services. Transaction revenue was driven by core PayPal and Braintree businesses and revenue from other value added services was predominantly driven by credit. For Q1 our total take rate was 3% and our transaction take rate was 2.62%, both of these metrics reflect sequentially and down approximately 14 basis points from a year ago. Continuing a trend, our P2P businesses contributed meaningful in take rate decline in the quarter. Again, I would like to point out the growth in our Venmo and our core P2P platform increases our ubiquity, strengthens our value proposition and support higher levels of engagement and reduce levels of churn across our consumer base. These businesses are important to our long-term success and we remain committed to both investing it and monetizing these high growth opportunities. Our volume based expenses were up 28% year-over-year. Transaction expense was $987 million, up 31% year-over-year, driven primarily by increase funding cost across our core PayPal platform, as well as business mix from strong growth in Braintree. On choice we are in the process of rolling this experience to all of our customers here in U.S. and as Dan articulated, we are pleased with the early success of this initiative. To date, the increase card based cost have been well within our expectation. Transaction loss in the quarter was $171 million or 5.7% of revenue, representing 40 basis points of leverage. In the quarter loan losses for both the consumer and merchant credit finance were $129 million or 4.3% of revenue. Our consumer credit portfolio continues to perform in line with our expectations. The net charge-off rate was 6.9% in the first quarter. We ended the quarter with an aggregate gross receivable balance including both principle and interest of $5.7 billion in our consumer and merchant loan portfolio and a total reserve of $360 million. Other operating expenses increased 4.5% to $1.05 billion or 35% of total revenue, representing 420 basis points of operating leverage year-over-year. This marks the lowest favored growth in operating expenses that we achieved as an independent company. We are very encouraged by the early progress of our initiatives to operate more efficiently. Looking forward we will continue to seek opportunities to drive sustainable efficiencies and cost discipline, while at the same time foster innovation, reducing complexity in our processes and improving our service to our customers. We are positioning PayPal to operate and scale more profitably over the long-term. Associated with these initiatives we recognize a $14 million restructuring charge in the first quarter, primarily related to strategic headcount reductions across our global organization. Less than 3% of our global work force will be affected and based on current plans we do not expect a net decrease in headcount for the year. We expect to realize annualized savings of approximately $75 million, of that majority of which will be reinvested in our growth initiatives. We believe the changes we are making to how we are organize and how we run the business will allow us to deliver sustainably stronger results. Non-GAAP operating margin in the first quarter was 21.6%, an increase of 50 basis points versus the same period last year. This is our best operating margin performance since separation. In addition, non-GAAP operating income grew 20% year-over-year to $643 million, resulting in non-GAAP EPS of $0.44 in the quarter. I would now like to spend a moment discussing how changes in foreign currency impacted our results in the quarter. While we recognize hedge gains of $40 million in the first quarter, these gains were more than offset by the translation effect of the strong U.S. dollar. The effect of translation net of our hedge gains created revenue headwind of approximately $16 million. Our hedging program is decided to minimize the operating income effect from changes in the currencies to which we have the largest exposure. On an operating income basis, fluctuations in foreign exchange rates were immaterial to our results in the quarter. We ended Q1 with cash, cash equivalents and short-term investments of $6.3 billion. We generated $751 million of operating cash flow in the quarter. Capital expenditures were $148 million or 5% of revenue, resulting in $603 million of free cash flow in the quarter, representing $0.20 of free cash flow for every dollar of revenue. In addition to an already strong balance sheet, our balance generates substantial free cash flow. Effective capital allocation is an additional leverage to drive long-term value creation. We take a comprehensive view of our sources and uses of cash to ensure that we allocate resources and capital to what we consider to be the highest return on alternatives. We are fortunate and we have many great options for the use of our free cash flow. Part of that is how we deploy the capital on our balance sheet to highest returning investments. We currently have $5.1 billion of consumer credit receivables on our balance sheet and are exploring different options including asset sales and partnership opportunities to free up cash for higher returning investments. In the first quarter, we returned $517 million to shareholders in the form of stock repurchases. We now have approximately $500 million remaining on our buyback authorization further reinforcing our ongoing commitment to capital return and discipline capital allocation. Today we are announcing a new buyback authorization in the amount of $5 billion. We are confident that the cash generated potential of our business will continue to allow us to invest organically, be equatative and return cash to shareholders. We are pleased that we are positioned to increase the repurchase authorization and view this as the next step in providing a more comprehensive longer range plan for capital allocation. Consistent with the execution of our existing authorization we plan to repurchase share to offset the dilution from stock based compensation and use the remainder for opportunistic repurchases. I would now like to discuss our guidance for the second and updated guidance for the full year 2017. For the full year, we are ranging our revenue guidance and now expect revenue between $12.52 billion and $12.72 billion, representing currency neutral growth of 17% to 19%. We are pleased that raising this outlook relative to the guidance that provided in January because of the momentum you are seeing across our business and initiatives. At current exchange rates for the full year we expect currency translation to impact revenue by approximately 200 basis points, resulting in spot growth of 15% to 17%. We are also raising our full year EPS number and now expect non-GAAP EPS to be in the range of a $1.74 to $1.79. We expect the sequential trends in our quarterly revenues and earnings to be very similar to 2016. For the second quarter we expect revenue to be between $3.05 billion and $3.1 billion and we expect non-GAAP EPS to be between $0.41 and $0.43. In closing we have started 2017 from a position of strength. We delivered strong results in the first quarter, executed successfully across our plans and achieve important goals both operationally and financially. We see substantial opportunity in the markets we are currently serving and those that are part our longer term addressable market. We will continue expand and build on our market leadership position and remain focus on balancing investments in growth with profitability and discipline capital management, creating shareholder value for the long-term. With that, let me turn it back over to the operator for questions. Thank you.

Thank you. [Operator Instructions] And our first question comes from Darrin Pellar from Barclays. Your line is now open.

Thanks guys. Thanks John. Just – it’s great to see more operating leverage in the model, just wanted to be clear first, John, the $40 million in restructuring is more one-time nature? And then, perhaps, you can give us a bit more detail moves you are making to improve that operating expense growth, I think, you mentioned, you said 5% in other expense, where can that get you here, I mean, clearly showing more of the past due in operating leverage this quarter than in the past? Thanks.

Yes. Thanks, Darrin. Good question both. The $40 million restructuring charge is a result of a very targeted initiative here which actually goes into your second quarter that is really design to help us move forward in a very efficient manner as we scale our business. It is not what I would describe as your typical headcount reduction. It’s a target reduction that really drives towards the efficiency of the business and in doing so is in a very customer centric fashion. So we don’t expect that in the future necessarily that’s one-time effect. With respect to operating leverage, you are right, you could go back and look at the last several quarters and you have seen sequential declines in our operating expense growth rate each of those quarters. And to your point we grew 4.5% this quarter and even if you look at that on kind of an incremental margin basis, for every dollar of revenue that we brought in this quarter our operating expenses increased $0.10 and that’s the best performance that we have ever seen as a company. You can go back to prior years and that number would have been as high as $0.50 in some cases. So this is a demonstration of how we are going to operate moving forward and it really is across all aspects of our business. It’s not specific to what you may think of generally as overhead. It’s how build sales group and product development. How we build our product. How we sell to our customer. So it’s a muscle that we are developing and we certainly hope that we can share more of these results going forward.

All right. Nice job guys. Thanks.

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

Thank you for the results. Just want to ask on the acceleration in active accounts and also in the U.S. payment volume metric looks like acceleration as well, is that the result of the customer choice or there are other factors to consider, just trying to segregate customer choice from the rest of the business if possible?

Yes. Tien-tsin, thanks for the question. I think, there are a couple of things that drove overall results. And I think one of the things is au (3144) around these things. It is the result of cumulative effect of lots of actions that we have been taking. Certainly, customer choice is being very helpful. We are seeing not only increase on board – on boarding is more streamlined but reduction in churn, which to me is a great checkmate for what we were trying to do with the choice. But that’s still early days on that. We are really seeing momentum across all regions right now. I think a lot of that is because over the past 18 to 24 months Bill and his team, the risk teams others around the company have really looked at our core value proposition. Things that you may not think about like availability and performance of our network are up time. We spent a tremendous amount of energy and resource to make sure that our platforms perform the way that our customers expect for us. We obviously couldn’t think like One Touch. One Touch is driving more engagement. More engagement typically means with our churn, which is held for on our net adds. I think, if you look at our noble performance and it’s arguable that we are only not global checkout experience right now. I look at things like our consumer app we put out, the merchant app we put out, new invoicing things, smaller things have the ability to recover passwords more easily, all of these things are starting to hit in the marketplace in quite impactful way. And I would say we are just beginning on this as well. I mean, if you think about choice for the first time, we are actually beginning to see banks that, we have even mentioned in our remarks, our press announcements that our marketing pays off to their consumers because if they can put their debt or credit into the PayPal Wallet, they know they are going to drive additional digital spend by doing that. We have a lot more that we have got planned in the funnel whether that’s additional functionality for Venmo users, whether that’s international expansion, upticks in our consumer value proposition or all of the things we are doing with multiple partners across world, that’s also helping to drive our net adds. So as I mentioned in our remarks, we are now expecting more than 20 million net adds for the year since substantial step up from where we are and hopefully we will continue to see that momentum moving forward. We are certainly encourage by what we are seeing.

And our next question comes from the line of Bryan Keane with Deutsche Bank. Your line is now open.

Hey, guys. Solid results. Just kind of a two part question, I guess, what came in better than previous guidance that cause the revenue and EPS guidance raise from fiscal year ’17? And then just secondly on the Android paid partnership announcement, that seems like a unique deal. My understanding is PayPal will generate a fee on all transactions at the point of sell regardless of tender types, so even if it is a credit card. So maybe you can help us understand the economics that PayPal earns on those transactions? Thank so much and congrats on the quarter?

Thanks, Bryan. I will take the first part of the question then turn over to Bill for Android. Actually, Bryan, this is one of these quarters where we just hit on all cylinders. If you start at the top of the funnel you see that the 6 million net new adds, which is highest we have had in several years and then you walk away down, revenue came in and really all – across all regions came in better than what we have expected in core PayPal. And then as I alluded to you in my prepared remarks, we are really pleased with what we are seeing in around discipline on the cost side of the business. We have got – we just -- we are changing our way that we operate as a company and this is Bill’s evolution, but we are pretty excited and then we are beginning to seeing the results of what we are capable up here.

Yeah. The Android pace probably just, the thing we are doing there, I mean, it’s good to sort of take a step back a little bit and talk about some of the broader partnership that we are doing, be more specific your question on Android, hey Bryan is, what you are seeing happen on mobile that our two sided platform is allowing to connect consumers and merchants very efficiently across many different context and if you have seen people on ecosystem partner with us because we can help line up new experiences that they want to create for their customers and so that’s across the number of partnerships that we have. With Android Pay and PayPal becoming a payment options inside of Android Pay, number one, we are going to give the consumer great ability to access mobile app to pay transactions by be able to sign up at One Touch to be able to have a friction of on boarding into that experience. We have a great customer journey into mobile app to pay. And then at the end of that the economics of that we are starting with PayPal balance only and for those we will make money on those transactions must like it would any other transaction. As we work through other payment methods we will use Visa, Mastercard tokens, tokens from other and this is one of the interesting things about deals we did there that the token that we import from Visa and Mastercard we – when we token out the estimate of an issuer, we will pass through a card present rates to the merchants, the merchant is card presently, and we only cost on those things. It also means that we are not necessarily have revenue on all those transactions, but we don’t have cost either and that let us have some of our transactions where we will make good margin on those, others basically are zero revenue and zero costs for us and the benefit of that is that we can drive engagement across our consumer base and you see that’s across other parts of our business where take P2P as a good example we did tremendous volume on P2P. And in many situations those are free transactions but those consumer engage with us on P2P are more engaged overall and we find that some of our most profitable customers because we have higher engagement them overall across other transactions where we monetize. And we think about in store in a very similar way, with Android Pay in similar way that we will have some of those transactions that we monetize directly, others that are pass through for us but we expect it will drive overall engagement higher as we have more and more opportunities to engage with our PayPal users.

Yeah. Just to build on that a response though, one of the long-term aspirations we have with consumers is that, we first started this that they were transacting with us one to two times a month. We are now approaching almost three times a month, that’s what we can say it for us that our long-term aspiration is that a PayPal consumer engagement with us one to two times a week. And as Bill mentioned, the way to do that is to be much more involve in the everyday management and movement of money of the consumer, which means that we want to give them this optionality of not only what instrument they want to use and how they want to spend, but where they want to spend. So whether that the international remittance, whether that be bill pay, whether that be a tax to pay in app or in store, we are trying to open up the PayPal Wallet through these partnership in multiple context and multiple different functions for our consumers to be much more engage with PayPal Wallet and we are beginning to see the early payoffs of that.

And our next question comes from the line of Paul Condra with Credit Suisse. Your line is now open.

Hey, guys. Thanks. Good afternoon, everybody. John, I guess, on, just on the guidance, does that include any contribution from Venmo or Tio, just on Tio can you talk a little bit about margin profile, growth rate or anything just to help understand that, the way that business looks a little more? Thanks.

Sure. As Dan alluded to you in his remarks, we are beginning to expand pay with Venmo and we have got some improvement in the contribution assume there, but I wouldn’t by any stretch the imagination suggested aggressive or that were dependent upon that for our results this year. We are going to be measured in this as Bill has said many times before this is something where we – it’s too precious to get Venmo and we want to get the experience just right. So if that requires us taking more measured approach that’s absolutely fine with us. And so we are – we do expect to have daily improving economics with Venmo as we go forward. But there is not, I wouldn’t describe our 2017 guidance is depending on the comp that is going to happen within that.

Yeah. As I mentioned in my opening remarks on Venmo side, we are really trying to take same approach with One Touch. We have now been able to engineer our platform just like with One Touch recently got such quick merchant acceptance as the merchant have to do no work on their part to be able accept our One Touch transaction. We have that initial on Braintree with automobile customers and we tested Venmo to see I take that experience, that’s a social experience of payments and move it into a social experience for purchases as well. And we now have the platform to be able to turn on PayPal merchants which obviously is the vast majority of base here in the U.S. to accept payment from Venmo as an option. And so that will roll out over the year but that will roll out more towards the back half of the year and so we will Venmo this year and as John said, we will start to see that improve as we look forward in our medium-term guidance. On Tio, Tio is a publicly traded company right now, you can see the results that did about $80 million or so last year in their past quarter, this last quarter that they just reported. Obviously, we will look at with synergies are there. We are quite excited about having Tio come in. Bill payment is a very sticky solution. We are really trying to build out how we can help underserved consumers manage and move their money and that can be done in a very profitable way for us and a very consumer friendly way for consumers as well. So we are really excited to close that acquisition. Again, we expect that to close in the second half of this. But in our overall results, it’s a pretty small number in general.

And our next question comes from the line of Sanjay Sakhrani with KBW. Your line is now open.

Thanks. Dan you mentioned like discussions with other banks continue and you have some good experiences. I guess, what’s holding some other announcements up when you have your discussions with banks? And then, just one for John, as part of the asset life strategy, is there any sense of timing? Thanks.

Yeah. So, Sanjay, just, we are actually announcing all of the different issuers and banks that we are working with, because we don’t active, we don’t -- they don’t necessarily make the announcement. We don’t need the announcement and so there are lot that adjusting to that end. Some of the very big ones take time to work with. That’s really just take time to work through. I think there is a single conversation that we are having right now that I feel, but optimistic about that everything being done with an eye from both parties to get deal done and these are big banks. They have a unique, some of them are very unique situations and we just need to work through large different documents with each of them. We want to make sure that when we sign up with the bank that the product flows are right, that we exactly have experience right to make it as I mentioned in my remarks, mutually advantageous for our mutual customers. So, not really to read on that, just take some time to work through these things.

Sanjay, on asset life, I want to start by reminding everyone that we have no intention to start offering a credit product. Credit today compliments a holistic suite of payment offerings that we provide for our merchants and consumers and they find great value of that. What we do want to do though is put that that credit offering in a less capital intensive manner than what we do today, so that we can free up that cash potentially as much as $5 billion for higher returning investment. We have got various options there, some are more partnerships like opportunities, others are pure asset sale, some combination of the two. Our preference that you do question on timing is to do something sooner, but we are not going to add on the side of experience that means giving a sale optimal deal for PayPal. So we are not under a self-imposed timeframe. We are going to take our time will be measured and do what is best for creating long-term shareholder value for PayPal.

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

Thank you. Good afternoon. Dan, I know you have said that you are pleased with the consumer choice results that you have seen far, but can you give us a little bit more detail around what’s driving your confidence level over being able to continue to offset the increase in transaction margin compression with TPV growth and operating leverage? And John, separately for you, could we see the growth rate and other expenses turn negative for a time or is the goal just to keep other expenses growing more slowly than revenues? Thanks.

Yes. Thanks for your question, Bill. So, I will just take one step back on choice. We want the choice, because we really felt that into our long-term stage to be the ultimate customer champion company focused on customers and what their pain points are, what they need that offering them optionality of how and where they want to pay, giving them flexibility and transparency and powering them with essential for us to remain the market leader in digital payments. And it also had the benefit which was great, enabling us to team with networks, financial institutions, carriers, tech companies to drive digital payment, we are all aligned and wanted to do that. And then remember that the partnership arrangements that we had enabled us to get certain things that we didn’t have before cost certainty, elimination of digital wallet, sees what something that was hanging out in the market, we got access as Bill mentioned to industry standard tokens, card present rates. We have network volume discounts that came back to us because we obviously drive a ton of volume over the various networks and we had instant access to funds coming off of the platform which was a – today which we have in our P2P product and we fill all of those gaps with this field. So we assume right now that we are now rolled out basically into across our on boarding, a servicing and our checkout experiences. And we are not now looking at tens of thousands of data test and after test for hundreds of thousands of early adapters, we are looking at multiple millions of consumers that is opted into choice and the results we are seeing are, a frank and very pleasant as we see them. As I mentioned, we are going to see an increase in net adds and a notable part of that is going to be driven through choice and we are just beginning on that piece of it. Our order sizes are up as people can figure out, so this order allows them to use our debit or credit cards, this transaction they wanted to use their ACH or debit card. And so people can now talk about for in fact nearly it’s those who use PayPal less to finding the most value in choice right now and that is driving engagement and higher order sizes and we see our cost coming down as we expected, because people were confused about funding choices and we expected a reduction of course coming in the call center and that’s exactly what we are seeing and that’s sustainable cost reductions for us. And then the transaction costs are well within the expectation, so we have well within that and so we had model all of these reasonably conservatively what we looked at our guidance and our medium-term guidance and all of them. We are quite pleased by what we are seeing and we are just getting start the marketing for the banks. In fact that we get additional funding options coming in like rewards points that will start to come in early next year as our another funding mechanism, all of these things are sort of begin early days on choice, but we were always sure that over the long-term this would make sense for us, we are frankly see any playing out much earlier than we expected.

Hey, Bill, the second part of your question, in terms of whether we would expect to see OpEx turn negative. I would reemphasis that this is not a one-time cost take out approach on cost. We are reengineering the way we work and so from one quarter to the next we certainly have seasonality in our business we may invest more in certain quarters versus other quarters, but at the end of day we are growth company and we are going to continue to add cost, where we think it generates value for us. And we don’t overly rotate towards one metric like other operating expense or like transaction margin, the thing that drives us is being a customer champion and create shareholder value and so we are going to make decision whether it would be around revenue or costs that we think results in strong performance in both of those metrics.

I would say, senior leader shifting though, there has been a tremendous amount of focus kind of how we do that in a way that enables us to make decisions quickly, to innovate more rapidly, to do so in a much more efficient way and so when you think about costs, this is not necessarily taking cost out but it’s eliminating cost. So for instant in global ops, our global ops growth least than that that it has come forward. The reason for that is predominantly caller statement. That means calls are not coming in our customer care, because our product experience is better, since we have choice and so those are sustainable benefits that we have as a result of actions we are taking that and we are very focused on being both – focus on what customer pain points are. How we solve it. How we keep our lead in the marketplace that are operating in very efficient and effective way.

And Bill, I would add to that, maybe a better to think about the cost trajectory going forward with other operating expense is mid-single digits growth.

Great. Thank you both for the very detailed responses. That’s very helpful. Thank you.

You bet. Thank you.

Your next question comes from the line of Ashwin Shirvaikar with Citi. Your line is now open.

Thanks. Hi, Dan, John, Bill. Solid quarter. Congratulations on that. My question is, now we have had obviously a number of initiatives one is consumer choice, you both acquired Xoom, contextual commerce, almost then sort of a kind of design to increase the size of the funnel, you draw more transactions and accounts on to the PayPal platform, you are having good payment now, banking other relationships. I guess, the question becomes, are you done buildings, what you could be building in terms of pulling transactions in, it become an execution story from now on, is that, I mean, what else could you be adding to the platform here strategically?

Hi, Ashwin, it’s Bill. One other things we really think a lot about is, how rapidly the consumer is moving into new context with MA transact and the interesting thing about PayPal, we talked about this the previously, it will really make PayPal is that we are one of the only player to operate on both the consumer merchant side of the payment ecosystem. They will do so globally and control the experience end-to-end. And so what that means is that, every time consumer emerge they start to meet one and another in new context or consumers want to transact in the new context. We are able to light those up often times in far better late than what others could. And so on one hand, we – our cost are looking how we evolve the platform to make sure that as those new context emerge that we can serve customers. However, we have a structural difference in our company that naturally allows us to be a primary player, enabling those transactions, because of the way that we operate on both the consumer and merchant side of the payment ecosystem and in fact that we can do so globally and control end-to-end experiences. And I think you see that happening in what’s going on in the ecosystem that you see in terms of mobile commerce, at 32 billion dollars in volume this quarter, more than $100 billion last year and what we are doing with the One Touch rollout and with 5 million plus merchants and 75% IRR 100, you are seeing that increasingly, our consumers, our merchants and others in the ecosystem are looking at us as the preferred partner to light up these types of experience for them. So your question was around how much we are building, we continue to think on building for those new contexts, but we also have our platform is really set up to be a great way to connect consumers and merchants whenever they meet one another in new context. And then some of those specifically where on the consumer side, Dan, talks a lot about things that we want to do and become a part of the way people manage and move their money every day. Those are places where we are just beginning our endeavors and look at the kind of growth, and Dan touched how we are approaching three transactions a month, while we had great growth overall. We think there is so much more of the consumers overall experience and we can help them with and the industry is moving toward us, that you have seen more and more transactions are moving towards e-commerce and to mobile and we are increasingly a preferred partner to our consumers, our merchants and others in the ecosystems as that happens.

I just like to add to that, if you think about the merchant side and you think about our strategy around the merchant side, as we move fundamentally over the last three or four years from predominantly being a button on our website to really now being a fundamental underlying platform provider to merchants as they think about how did they take advantage of mobile and that means that we are offering a host of services across a common platform that we never did before. Full checkout type of capabilities, credit capabilities, contextual commerce toolsets, rewards integration through API sets and the list goes on and on and so invoicing capabilities. So if you think about the mission of PayPal of both on the consumer side as Bill just articulated and on the merchant side. It is a much more expansive mission and vision than we have ever had before and so I think that we obviously can grow in a couple of different ways going forward and this is fully what we expect. One is we are going cross sell more products and services to existing customers. We have a whole suite both on the consumer side and on the merchant side and we can tremendously expand the amount of services we provide to each and every customer. Second thing though is we are just beginning on this journey here. We are beginning to see acceleration of our net ads coming consumers are beginning to recognize sort of network effect and we have merchants are beginning to see that and we have huge international expansion opportunities which is better performance and we can do on that side. So it’s not just a matter of due coming in, it’s a matter of taking what we have and be able to cross sell into existing as well. So that sort of combination of this two things, time gives us a lot of excitement about our growth prospect as we look forward.

And we have time for one last question from James Cakmak with Monness, Crespi, Hardt. Your line is now open.

Hi. Thanks. Just one quick one, does your guidance contemplate any kind of incremental marketing expense build awareness on the pay with Venmo side as we progress with that. I guess is the look towards at the end of year is what?

Hi, James, thanks for the question. First of all, I think, one of the areas that as we have seen a bunch of fundamental really efficiency and improvement is in our whole marketing spend. We took what we are previously very desperate marketing functions in each of our regions either in headquarters, we put them all together and that group is both regions and I think central looking at our spend, figuring out how do we spend that in the most efficient manner. We have ton of data and analytics around if you look at things both through an ROI perspective and we are not just more efficient but way more effective on our marketing spend and I can’t say enough good things about what that team has done. And by being more efficient we are actually getting more spend out of the existing dollars that we have. With pay Venmo for all of our growth initiatives, you heard John talk about we are going to take the money that we are saving and reinvest it back into our group initiatives, pay with Venmo where we a part of that that gets additional investment for us.

Yeah. I would just add to that, while, as just Dan mentioned, we have great efficiency around marketing and billing considering the ability to assist, pay within what’s marketing, the $6.8 million a month we did in the quarter and 114% year-over-year growth came with almost no marketing for Venmo. It’s a product that have been inherently viral and so we certainly think about how we will support the product going forward, but it is a great place to be when you have a product that customers truly love and is inherently viral and grows without having to go through tons of marketing dollars added and so that is something we think about with that as we build pay with Venmo the social aspect of that we have kept very much at the core of what we are doing and we think that can really help to build upon the virality of the core product. So it’s not a product that we have to go support with massive amounts of marketing. It’s a product that is inherently viral and that we can complement with couple marketing.

Yeah. Great.

So, James, thank you for that question. And thank you to everybody for joining us today. We really appreciate your time and we look forward to speaking with you soon. Thanks a lot.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone have a great afternoon.