Good day, ladies and gentlemen and welcome to PayPal’s Third 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 is being 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 third quarter of 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 commentary. This conference call is also being webcast 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. 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 fourth quarter and full year 2017 as well as our initial outlook for 2018. Our actual results may differ materially from these statements. You can find more information about risks, uncertainties and other factors that could affect our 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, October 19, 2017. We expressly disclaim any obligation to update the information. With that, let me turn the call over to Dan.

Thank you, Gabrielle and thanks everyone for taking the time to join us today. I'm pleased to share that PayPal delivered what is perhaps our strongest quarter since our separation from eBay. Our revenues were up 22% on a currency neutral basis, coming in at 3.24 billion. Revenue growth accelerated for second consecutive quarter and was once again driven by strong PayPal core growth. We continued to drive operating leverage across multiple areas of our business. As a result, our non-GAAP operating income grew by 32%, while our operating income margin increased approximately 160 basis points from Q3, 2016. Consequently, we delivered $0.46 of non-GAAP EPS, up 31% versus last year. Free cash flow grew by 36% to a record 841 million in the quarter and it’s worth noting that we now expect our free cash flow for the year to be greater than $3 billion. Our customer metrics, which include net new active accounts and engagement for active accounts were record setting. I pay particular attention to these measures as they represent a direct form of feedback on our value proposition, customer experiences and brand. We acquired 8.2 million net new active accounts this quarter. That is up almost 90% year-over-year and is a record number in our recent history. We ended the period with 218 million active customer accounts with over 200 million consumers now shopping at our more than 17 million merchants. We now expect we will acquire close to 30 million net new active accounts in 2017. Even with this record breaking net new active growth in our denominator, engagement per active account continues to improve, increasing to 32.8 times for the year, up from approximately 30 in the third quarter of 2016. The combination of our growing base and continued growth in engagement drove year-over-year…

Thanks, Dan. We're reporting another solid quarter with results ahead of our expectations. Our operational metrics for the quarter in addition to the financial results that we delivered demonstrate the strength of our position as the world's largest open digital payments platform. There is great momentum in our business as we approach the end of 2017. First, I will walk you through the financial highlights for the third quarter, followed by a more detailed discussion of the drivers of our financial performance. And then I will provide a framework for how we’re thinking about 2018. For the third quarter, revenue was $3.24 billion, growing 21% on a spot basis and 22% on a currency neutral basis. Non-GAAP operating income grew 32% to $646 million and non-GAAP EPS grew 31% to $0.46. We generated more than $1 billion in operating cash flow and free cash flow grew 36% to $841 million. For the third quarter, our total payment volume was $114 billion, up 30% on a spot basis and 29% on a currency neutral basis, consisting of US payment volume growth of 31% and international volume growth of 27%. Our merchant services volume grew 34% on a currency neutral basis to $98.6 billion. This represented 86.5% of our total volume in the quarter. Volume associated with eBay represented 13.5% of the total compared to 16% for the third quarter of 2016 and 20% two years ago. P2P volume, which is a component of merchant services, grew 47% to $24 billion and represented approximately 21% of total payment volume. During the third quarter, growth in active accounts was 14% and we ended the quarter with 218 million customer accounts. Account growth was driven by the strength of our core PayPal business, followed by growth on the Venmo platform. Improvements to our on-boarding…

[Operator Instructions] The first question comes from the line of Jason Kupferberg with Bank of America. Your line is now open.

So just wanted to ask a question, if we go back to the Analyst Day in 2016, you guys had indicated at that point that the credit business was about almost 10% of revenue and a little bit more than that as a percentage of operating profit. So I wanted to see if those numbers are still valid today. And then just related, can you give us an idea of what percent of your operating profit currently comes from eBay.

Sure, Jason. I'll take that. So the way you think about credit is, it has more or less grown in line with the rest of our business since we gave that guidance at that point in time. Credit represented - depending upon the quarter about 2% or 2.5% of TPV. And that was the case when we gave that guidance on revenue and profit at that Analyst Day. So it's fair to conclude that it represents a similar portion today. To be clear on asset-light, what we'd like to do is continue to very much be in the credit business for our merchants and our consumers and provide all of the benefit that they derive from that. But we can do that in a much more asset-light way where we can free up that capital to utilize for other maybe seemingly higher turning alternatives. At the same point in time we would continue to share in the economics of that business if we were to elect to pursue a partnership type of arrangement there. And then the second part of your question was eBay. eBay - we hadn’t disclosed what percentage of our business that represents in terms of profit. As I said in my prepared remarks, we've - that's about 13.5% of our volume today that’s come down from 20% just a couple of years ago. And whether it's TPV or revenue what you've seen is that that declined 300 to 400 basis points each year in terms of the percentage of our overall volume in the business and revenue in the business in this case maybe.

And our next question comes from the line of James Fawcett with Morgan Stanley. Your line is now open.

I just had a question on account adds those have been very strong 30 million or 25 expectation. What's driving that strength and how much benefit are you getting from recent partnerships and I guess a little color on how many accounts has Venmo have and how is that growth versus the core PayPal? Thanks.

This is Dan, I’ll take that question and Bill you can jump in on this. So this is not any one thing that’s driving our growth, it’s multiple initiates that we’ve launched. In general as we get bigger we’re seeing a network effect start to take haul, we have over 17 million merchants on a network now, now over 200 million consumers and there is distinctly a network effect. We've also seen all the core experiences that Bill and his team and others in the company that worked on whether that be availability, latency, One Touch, choice, our new mobile app out there that are all kind of bending multi-year curves now with all of our product curves bending upwards reversing a many year trend line that we had before. That’s reducing churn and also attracting a lot of new customers. We’ve got a bunch of new products out there right now from bill pay to international remittances to new services on P2P, new flows on P2P and so those are driving a ton of net new adds as well. Really interesting thing right now is obviously choice has streamlined the sign-up process and we’re seeing good benefit from that. But I would say on the partnership front, we are at the very beginning of that. There is much more ahead of us than behind us. We've had some marketing campaign launched within financial institutions to drive card linking to PayPal, but the vast majority of that is still ahead us. In terms of the ratios of Venmo to the core, we never really announced those specifically. What I would say again as I said in my remarks is Venmo had a record net new active quarter. But the core had an even stronger, a record net new actives. So you see more than a majority coming from core PayPal as opposed to Venmo on this. Anything else, Bill, you'd add. Hope that answers your question, James.

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

Wondering if you can kind of give us a bit of a sense as you sign more and more merchants up to the platform. Kind of where you are both from a partnership and a technology standpoint on in-store transactions. And then one just sort of quick follow-up on the comments that were made around transactional margins, you called out several things that are sort of driving the modest pressure that we're seeing there. Unless I missed it, funding mix wasn't one of them. Given what you're seeing in choice, I'm assuming that was intentional, but just wanted to confirm.

So you have a couple of questions there, Heath, as usual we respect. So let met talk a little bit about some of our purchase, turn it over to Bill and then John will address the last part of your question. So, we are increasingly turning from being a product company into a platform company and what we mean by that is we’re moving well beyond just check out as a button to really offering a full suite of capabilities and services that enable merchants to move into digital commerce to take advantage of mobile which is something every single one of our retailers from small merchants to the very largest are thinking about right now. Because the face of commerce is rapidly changing driven by mobile, and mobile as I mentioned is blurring that distinction between online and offline. Because it’s blurring that distinction our platform capabilities are increasingly omni in nature. Now one of the things that still ahead of us and one of the things that accrued to us as part of our network agreement that we had with Mastercard and Visa and Discover as well as all of our relationships with financial institutions is access to tokens. We're not going to do bespoke customization coming into the offline world, but we can use industry standard tokenization and add that capability into our app which we expect to do next year to start to move into the offline marketplace. Again, we think that a lot of what’s going to happen at offline will be value proposition driven not form factor driven. But our PayPal digital wallet will have the ability for somebody to use their mobile phone eventually at a point of sale expect NFC solutions. Bill, anything you’d add on top of that.

I would just say on in-store one of the fantastic things that’s happening on top of what Dan was describing where we have great partnerships both with networks as well as Google and Android Pay and Vodafone and others that allow us to do in-store point of sale. We’re also seeing just amazing momentum on e-commerce style experiences coming into the store, which really plays to our strengths. So things like buy online pick up in-store, you can witness in most major retailers around the country are starting to carve off sections of the stores that are specifically devoted to buy online pick up in-store as you see more and more of that happening. That’s really home field advantage for us that we are becoming the primary way that consumers think about accessing great new digital experiences like that. So we certainly see growth across the board in mobile, but this is a really interesting area for us where we see mobile starting to really come into the stores to buy online pick up in-store and those types of things in addition to the way that folks thought about it traditionally of using the mobile device at point of sale where you’ve got great partnerships as Dan describes that help get us into those.

And Heath, this is John, just on the last part of your question with respect to transaction expense. You’re right, while it’s a small year-over-year increase. This was down on a unit basis in terms of TPV from what we saw in the first half of year. And we indicated that would be the case. At 97 bps this quarter, it’s down from the high watermark of 100 bps in the second quarter. It’s a result of couple of things. But one we talked about before as our customers are opting into choice. There is much more balance across the various funding instruments that they choose than what our initial expectations were. At the same point in time with great growth on platforms like Venmo, which come at a very low expense rate that actually helps suppress the rate of growth in that unit level. A good way to think about this even going to the fourth quarter and into 2018 is this is more or less for that period of time the level that we expect. I did note again 100 basis points was the - at least the high watermark for the foreseeable future for us in this areas. So we expect to contain the inflation in this area going forward.

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

Dan, during the quarter there were some press articles implying you guys were on the lookout for acquisitions. I know you made a bunch already, but I assume you might have been talking about something larger or more transformative. Could you just talk about where you guys might feel like you lack and some areas that you're looking at in size. Thanks.

So yeah I did read some of those articles that were out there. Look I start off by saying that I really need pleased and I'm happy with the set of assets and capabilities we have today. We've got a leading market position in those. I feel really good about where we stand. We have a very robust product pipeline and roadmap. And we're ready with the assets we have to compete as a leader in the market today. I think we're playing from a position of strength as we go into the market and look at what’s available. Obviously we have a very strong balance sheet and it's a potential weapon for us as we think about competing going forward. We’ve got some $7 billion on our balance sheet. As John mentioned over $3 billion of free cash flow that we’ll have this year. And our intention is to stay acquisitive and be a consolidator in the industry. We look at hundreds of opportunities every single quarter from small investments we make in some interesting start ups to much larger. And we look at the whole gamut of that. Now the criteria we look at this it got to fit into the vision and mission that we've set out for ourselves, it needs to accelerate our progress, I’m going to talk about that in a second, across key vertical like a Bill Pay would be an example of that, a geography or some technology that could be a security bolt-o something like that helps our platform overall. And we look at all of that through the lens of build, partner and buy. And on the build side as I’ve not mentioned before and Bill has talked about, we are so much more productive and innovative internally than we've ever been before. We had something like 300% increase in releases that we're doing now in what used to be a necessity for us to buy several years ago to innovate. Is now quite well covered by what we built internally. The other thing obviously is we've created a fundamentally different technological architecture an open-platform that allow us to partner in ways that we've never been able to go do before and so there used to be capabilities we need that now we can merge the assets of a partner into our platform and vice a versa without needing to acquire. And then obviously there's buying. And as I mentioned we look at that across the world and at all levels of different investment that we might make on that. But we're very disciplined in a way we look at that. Honestly we don't mind if it’s small or a large acquisition but it’s got to make sense to us on the criteria that aligned above and it’s got to make sense to us from a cost basis. And so you can expect us to be acquisitive, but in a disciplined and thoughtful manner.

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

Just wanted to ask on the 2018 guidance. Does that include any Venmo monetization and if not, how are you thinking about that the size and timing of the Venmo monetization opportunity. And then just a quick on ’18, the ’18 numbers, does it include and how much FX and acquisitions? Thanks.

Bryan, it’s John. Good to speak with you. We do have some modest assumptions about monetizing Venmo going into next year. We’re courage by the launch of Pay with Venmo with 2 million merchants right now. We’ll continue to expand that. But as we said before this is has been an area of investment for us. We're looking forward to being able to monetize this. But we've got pretty measures expectations around this. So we don't want to get too far out in front of ourselves. This is a pretty precious experience. So we’re going to make sure that we get it right. And so given in the guidance that we gave approximately 20% revenue growth and 20% earnings growth that does include some assumptions about Venmo. But this is a leg of growth for us, profitable growth into the future. And we've got a multi-year outlook on what this will be. In terms of the guidance that we gave with respect to FX that basically assume the currency environment that we're in right now. That answers your question.

And then acquisitions, is there any acquisitions in that?

No, that’s an organic assumption say for the two acquisitions that we already acquired in the third quarter this year.

And our next question comes from the line of Bob Napoli with William Blair. Your line is now open.

The actives, want to dig in that a little bit more. Dan, when you - John, Bill, when you guys spun off you were targeting 3 to 5 million net new ads per quarter and obviously you haven't updated that guidance and that guidance is old. The 8 million the new substantial ramp up, how much of that is from customer choice. I think John you had said at one point there were a million customers a month that were signing up and not activating because - you thought because they didn't - you didn't have customer choice. How much of that is coming from customer choice and what is - going into next year, where there some low hanging fruit this year that we should see a big [indiscernible] in active account growth going into next year.

I’ll start off and then it over to either John or Bill as we go into this. So obviously we hit a different level in terms of acquisition and that 3 to 5 million is outdated. We did talk about this year that we expect to acquire close to 30 million net new actives. A part of that is driven by choice and a part of it is driven by new experiences, our P2P flows, reduction in churn that’s going on. So there is really not one thing that I would point to, you are right, we were losing out on a million or so activations a month that had put in a funding instrument but did not do a transaction with us because we also asked for additional information post that and that's not occurring right now. So I think we are at a different level in terms of the net new actives going forward. We’ll update that as we look at updating our overall 2018 guidance for you. So stay tuned on that but obviously 3 to 5 million is an old number now.

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

Just one last, Bill, just on Braintree performance and maybe give us an update on when share there anything new on PayPal share, a checkout or on the merchant ads side is that still primarily be driven by Braintree or core PayPal, has that mix changed? Thanks.

We continue to see great performance across our merchant segments. Braintree continues to perform really well in line with what we discussed previously. And share of checkout driven by One Touch and industry leading conversion rate in addition to us having strong consumer growth, our share of checkout continues to increase. When you look at our merchant services volume growth that is significantly beyond the growth of the e-commerce industry which means that we continue to take share. And that taking of share is both in new merchant sign-ups that are really across small businesses, mid-market as well as a large enterprise, so across every segment we continue to add merchant. And then within each of those merchants we continue to see expansion of our share of checkout as consumers more and more gravitate towards PayPal given that we have conversion rate that is nearly twice that of entering a card and online. So it's broad-based across those but we see each of those segments performing well inclusive of the Braintree segment.

And our next question comes from the line of Darrin Peller with Barclays. Your line is now.

Just if we could follow up quickly on the outlook for ‘18. Maybe John if you could touch on pricing and how that's going highs. Some of the updates you're doing now and then what’s included in that and your outlook. And then really just on top of that your guidance on margins, I just want to make sure we're clear on it. Now you’re talking about it being in line with GAAP operating income growth which it sounded like was also 20% I think among revenue growth. I mean is that - what is the margin expectation, your expansion or anything impacting next year versus this year. Thanks.

First on pricing, as you are aware we've made a few different price changes this year positive and negative, try to optimize for certain corridors where we operate. But the main thing to take away from pricing is that we want to price in areas to where we can clearly attribute that price to value that’s being added to the customers experience. And so to your question about whether that assumes anything in 2018, yes it does. This is a pricing in any business is an ongoing driver of value that you need to be responsive to the broader market and competitive set in which you operate. So we've seen some benefit from that in 2017 and we would expect that to continue not only in 2018, but into further years. On the second part of your question, with respect to margin expectations in 2018. We do still expect to have sort of the same guidance that we said before as stable to growing operating margins and that’s whether you're talking about 2018 or the next few years after that. As I noted in my prepared remarks we are integrating to acquisitions next year. And so there's always integration and investment around that. If you were to normalize for that, you would certainly see that organically there is margin expansion in the business. And importantly as I noted in my remarks and has been quite a focus this year that the GAAP operating margin is also expanding in line with non-GAAP operating margin next year. Again some of the changes that we made with respect to share-based compensation this year we said were specific to this year, we do not expect that to continue at that level in the future.

Okay. Our last question please operator.

Our last question comes from the line of George Mihalos with Cowen. Your line is now open.

If I could just ask a question around Pay with Venmo from a margin perspective. If we think about the funding sources there and I know you guys are encouraging people linking credit cards to the Venmo wallet. But a substantial portion of that is still going to be funded through sort of cash on hand. Is there any reason why we shouldn't think that Pay with Venmo won't be accretive to your overall transaction margin and not sure if you're willing to provide any color as to how much of an uplift that might provide for ’18. Thank you.

I’ll describe Pay with Venmo with a little more detail. One of the beautiful things about what we have done with the Pay with Venmo deployment is that we're making that automatically available to PayPal merchants over the same distribution rail that we used to have such a rapid deployment of PayPal One Touch. And so while that makes it really easy for the merchant to adopt and really easy for the consumer to have more places to use it, it means that those merchants are accepting Venmo on the exact same terms that they would accept PayPal. So our revenue on those transactions when somebody uses Venmo to pay at one of those PayPal merchants, our revenue on that transaction would be exactly the same as if that user had paid with PayPal. As you rightly noted Venmo tends toward predominantly lower cost funding instruments so the cost of those transactions it would be reasonable to assume is going to less than the average across the PayPal base. And so I think your assumptions there are directionally correct. We are not providing guidance on how much of that or any of those types of things. But at a unit level you're exactly right that is the same revenue per transaction for us but with a wallet that is loaded with on average lower cost funding instruments for us.

Thank you, George, for that question, and thank you everyone for joining us today. We really appreciate your time and we look forward to speaking to all of you soon. Thanks a lot.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone, enjoy the rest of your afternoon.