Good day, ladies and gentlemen, and welcome to PayPal's First 2018 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 follow at that time. [Operator Instructions] As a reminder, today's call may be 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, Sherrie. Good afternoon and thank you for joining us. Welcome to PayPal Holdings' earnings conference call for the first quarter 2018. Joining me today on the call are Dan Schulman, our President and CEO; John Rainey, our Chief Financial Officer and EVP Global Customer Operations; and Bill Ready, our EVP 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. Earlier this month, we announced updated definitions of active accounts and total payment volume or TPV to capture the diversification of PayPal's products and services through strategic partnerships, new products and acquisitions. The rates of growth discussed on this call related to these metrics reflect revised results from prior year periods for comparability. We do not consider the historical impacts of the updated definitions to be material. 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 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, April 25, 2018. 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 joining us on today's call. I'm pleased to say that PayPal had another quarter of strong results and we are off to a great start for the year. We generated 3.69 billion of revenue in Q1, growing at 24% on a spot basis and 22% on a currency neutral basis. We delivered 829 million in non-GAAP operating income, that's up 29% year-over-year, driven by 90 basis point increase in our non-GAAP operating margin, which was 22.5% for the quarter. As a result, we delivered $0.57 of non-GAAP EPS, up 29% year-over-year. We also had another quarter of strong customer growth and engagement. We added 8.1 million net new actives, up 35% year-over-year, bringing our total active accounts to 237 million. This strong performance was driven by continued growth of core PayPal and Venmo users and our Customer Choice initiative. Choice continues to produce strong customer activations and the year-over-year reduction in our overall churn rate. We expanded the global roll out of Choice by launching in China and nine additional countries across Southeast Asia and further expanding and further expanding into Europe by launching in France, Germany, Italy and Spain. Following the addition of a record 29 million net new actives in 2017, we're pleased to see continued strength in our customer acquisition. We remain confident that net new actives for this year will be in line with the record additions we experienced last year. And as our consumer base expands, the growth of merchants signing up to our platform is also accelerating. Our merchant base now totals 19 million accounts. This powerful network effect along with continued improvements to our technology platform and enhancements in our product experiences continues to drive increasing engagement. PayPal ended the first quarter with 34.7 transactions per…

Thanks Dan. In the first quarter we outperformed on both revenue and earnings, building on our momentum from 2017. [indiscernible] across active accounts, payment volume and revenue demonstrates the strength of our two sided platform. And our ability to grow operating income while expanding operating margin highlights the sustainable scalability of our model. During the quarter, we continued to invest in our strategic initiatives and at the same time delivered strong earnings growth. Before I go into detailed financial results, a few highlights for the quarter, revenue was $3.69 billion, growing 24% on a spot basis and 22% on a currency neutral basis. Non-GAAP EPS grew 29% to $0.57. During the quarter we also returned $1.8 billion to shareholders, repurchasing approximately 23.6 million shares as part of our buyback program. Consistent with Q4 '17 as a result of the sale of our US consumer credit receivables portfolio to Synchrony Financial and the associated reclassification of the receivables to held for sale, there are changes to the presentation of our results. These changes reduce comparability to prior periods. Where relevant to the discussion, I'll provide normalized results to adjust for these changes. Following the closing of the transaction, which we expect to occur early Q3, the US consumer credit portfolio will no longer sit on our balance sheet. We will no longer incur any direct cost related to the charge offs of principal for interest. This reclassification affects three areas on our income statement. First, revenue from other value added services benefited by approximately $38 million in the quarter as a result of no longer recognizing reserves on interest receivables; second, transaction and loan losses benefited by approximately $111 million from no longer recognizing reserves on principle receivables and third, non-transaction related expenses were negatively impacted by approximately $128 million from…

Thank you. [Operator Instructions] Our first question comes from Tien-tsin Huang from JP Morgan.

Thanks so much. So that for me was the level of buyback that you guys executed in Q1. It looks like it was mostly 80% or more than what you bought in all of '17. So I'm curious is this PayPal just being more opportunistic or is this sort of a signal of your capital allocation priorities, maybe shipping the buyback or you are not seeing the adequate returns on potential M&A, any kind of comment there would be great? Thanks.

Sure, Tien-tsin. This is John. Our priorities have not changed. We still prioritize capital allocations first as investing for growth and that can be either organically or through M&A activity, but we also believe in returning cash to shareholders. This so happens that in the first quarter we had clarity on a couple of important issues. One is tax reform. The other is the transaction that we announced with Synchrony and that allowed us to do more than what we have done in the past. But very importantly, a strong balance sheet for us is a strong competitive advantage. It's an asset that a lot of our peers don't have and we believe as a management team improving that cash to use to create shareholder value and you'll continue to see us allocate capital in that manner whether it's returning cash to shareholders and going out and looking at the M&A landscape. I would not read anything into the amount of the share buyback as to suggest if there are not opportunities for us to go acquire companies. As you can appreciate those take time to complete a deal if not as if you can just start something and close the transaction in the quarter and so we will be measured and do what's right for PayPal and allocate capital in a manner that create shareholder value.

Got it. Thanks for that. Just my quick follow-up then maybe just on the - Dan listed a bunch of bank promotions. Just curious are you funding some of these initiatives with the banks and I'm curious what kind of early returns you might be seeing that maybe hasn't shown up in the P&L so far in Q1?

Bill?

Yeah, this is Bill. Hi, Tien-tsin. So we don't disclose the details of any one of those partnerships specifically. However, what we are seeing is tremendous receptivity from our banking partners to really drive their customers into PayPal because of the great source of digital transaction growth which was the primary place where issuers are growing right now and we are seeing really good response from the programs that are out there and they've been a tremendous support for us as well as for our issuing partners and so we are not committing any kind of unnatural acts to get those things to happen. In fact, our banking partners have found it very much to be in their interest to promote their customers to use PayPal. So we see that as something that is certainly indicative of the partnership, but also something we are not committing unnatural acts to make those things happen.

Great, thank you so much.

Thank you. Our next question comes from Bryan Keane with Deutsche Bank.

Hi, guys. Just wanted to ask about the move to the unreserved or, to go after the unbanked, what are some of the puts and takes on revenue and cost resulting from offering more comprehensive financial services?

Yeah, maybe I'll start off Byan with the answer on that and thanks for the question and then I'll turn it over to Bill on that. So first of all, we firmly believe as a company that everyone should have access to affordable convenient secure and low cost financial services. I mean that is our vision of marketizing financial services and we are working closely with the rest of the financial services ecosystem to do that. I mean think about the partners we have in there right now, MasterCard, Wells Fargo, Bank Corps just to name some of them. And I think what we are trying to do is not try to compete or replace what's going on with banks, but work with the financial system to fill in the gaps in the current system, so that everyone can afford the opportunities that the digital economy is extending. If you think about the way that we are putting services into place, we are trying to be a consumer champion, provide for instance our PayPal Cash MasterCard with no monthly fee, no minimum, because that is being differentiated in the marketplace. And the money we make from that is on transactions that occur at merchants just like we do typically. So we think that we can use technology reimagine financial services for sort of a mobile first customer and provide not only a great consumer value proposition but also a great proposition from merchants and the rest of the ecosystem as we bring people into the digital economy. Bill, do you want to?

Yeah and I would just add to that to your question on what it means for us on economics. We've had some products in market for a while that give us exposure to how these products are, one, used by customers and, two, what those mean to us financially both prepaid cards we've had in market for a while, merchant debit cards, things like that. And so there is no material difference in the way we would look to go monetize those customers and we've also had things for the unreserved such as being a little walk-in to a retail location like [indiscernible] for example and the cash onto PayPal accounts for somebody in the unreserved or unbanked community to participate in the digital economy. We've had exposure to those things and we don't see this as being any material difference in the way we would monetize on those customers versus how we monetize across the rest of our business.

Okay, helpful. And then just as a follow-up, the increase in the merchant count, is there something you guys are doing recently that's driving up merchant acceptance up to 19 million or just more a function of Venmo getting out more, PayPal getting out more and being kind of a separate paying entity has got the attention of numerous additional merchants?

Yeah, I think, look, probably the number one thing there is really a tipping point that we've reached from kind of a network effect perspective and we now have 237 million people on the platform. And as John mentioned, some 900,000 merchants this quarter signed up. We've been seeing that run rate as you have been hearing us talk about the number of merchants and so there is a great flywheel effect that happens. The other thing that I would point out is that more and more consumers are using mobile as their primary device to shop. And the real big issue for merchants with mobile is that mobile conversion with a mobile phone is typically low. These people have to add in a ton of information on that small phone factor, but with our One Touch and our conversion rate now at 89% from mobile checkout and then One Touch is two times, maybe two times plus, the industry average and that obviously is a great thing for consumers, but an essential thing for merchants. And I think that combination of those things, plus we are obviously adding more and more capabilities for small and midsize merchants, working capital being one that I talked about that, but we have a whole host of services that we are expanding through our platform as being just - as opposed to being just a payment button that is attracting not just consumers but an acceleration of merchants as well.

Okay. Thanks so much. Congrats on the solid results.

Thank you.

Thanks, Bryan.

Thank you. Our next question comes from George Mihalos with Cowen.

Hi, George.

Hey guys. Let me add my congrats on the strong results. Dan, just wanted to start off, there's obviously been a lot of - I really wonder on the market around the networks Visa MasterCard perhaps embracing sort of their own universal checkout button if you will. Maybe you can kind of address that as it relates to PayPal's positioning.

Yeah. Let me first [indiscernible] on this. Our relationships with the networks could not be stronger. We - just every single quarter we find more and more places where we can work together, combine their services and capabilities with our platform and offer incremental value to both merchants and consumers and very importantly throughout their issuing partners and financial institutions. And you are seeing that through all of the partnerships that is just reflecting as I was writing my script on just this one quarter you've seen all of those banking partners working as Bill said very closely with us observing the firsthand the benefits that come from working hand in hand together for our mutual customers and so it's been a great partnership, a strong partnership and a growing partnership. In terms of the button specifically, I think Bill can talk a little bit about that and then I have a couple of comments on them.

Sure. On the specific new news there, it was really about sort of interoperability between the paying buttons offered by the networks. And we have for quite a while now talked about how we want to go help power the complete move to digital buy button experiences and not only do we have PayPal and Venmo as those widely used for digital payment forms in the world, we also are one of the largest providers to other digital wallet form of the payment whether that's Visa Checkout or MasterPass or Apple Pay and Google Pay. So we work with those others. Even as we work with those others, we are seeing that our own buy buttons continue to accelerate and so we really want to power the entire movement towards seamless digital wallet buying experiences and happy to partner those to do that. And this new news around interoperability is sort of a new technical specification. But interoperability between Visa Checkout and MasterPass and some of these existed previously that you can put a MasterCard into Visa Checkout or Visa card into MasterPass. So there is a new technical certification there. But interoperability between those checkout forms is not meaningfully different than how we have seen those previously and we are excited to continue working with our network partners to help them with those efforts, as well as the many ways we're partnering on how we each advance digital payments.

Great, I appreciate that. And then John, maybe just a quick follow-up, I think margins expanded, call it about 90 bps year-over-year in the first quarter, should we expect that to come down a little bit just looking at the $0.56 high end of the EPS guide for 2Q?

With any one period there is going to be seasonality or things in the business move around. I would really point you to the full year results. We do make discretionary investments from one period to the next, but if you look at the implied guidance for our full year it still shows us expanding margins at a nice rate. I think it's reflective of the overall progress in the business. This is, as I noticed in my prepared remarks, we had a record operating margin in the quarter. We've had four consecutive quarters of accelerating revenue growth. For the last three quarters, we've averaged 30% EPS growth and 25% growth in transactions. So I'm really pleased with how the business is doing.

Thank you.

Thank you. Our next question is from [Indiscernible].

Thanks for taking my question. Could you give us a little more color or granularity on Venmo? You've mentioned a couple of times including on this earnings call that it's tracking sort of above your expectations. If you had to adjust the input in your full year guidance, is that any type of a driver in the near term or any incremental color you can give us around Venmo monetization would be appreciated?

Sure. This is Bill. So as was mentioned, we saw continued strong growth in Venmo up 80% on the quarter to $12.3 billion in volume and our biggest new year's quarter ever for Venmo. In addition to that, as you were calling out, we are quite pleased with our monetization efforts there and those really are along multiple fronts. One in adding new merchants that accept Venmo, we saw some great brands come into the pool with Grubhub, Seamless, Eat24, Williams-Sonoma, [indiscernible] and many others in addition to the 2 million plus retailers that we had already brought in through linking Venmo into its broader PayPal network. So we are really feeling great about what we are seeing in terms of merchants' receptivity and desire to connect to the demographics that love them so much, as well as the other aspect is our monetizing through things like instant cash out where we earn $0.25 fee for giving instant access to funds out to a participating Visa or MasterCard debit card. So those things are tracking better than our expectations. We're quite pleased overall. I defer to John in terms of the guidance question, but very much tracking, better than our prior expectations.

Yeah. And with respect to the increase in both our revenue and our earnings guidance, guide is not directly attributable to Venmo. It's simply too early on at this point to get out of ourselves. And as - and Bill and Dan and I have talked about many times. We believe that what's important here is the long game. This is a tremendous opportunity to connect with this demographic and monetize it, but we don't want to be so impatient about that that we totally experience long term and so we have the luxury of being able to invest in this and get the experience right given our overall financial performance. The increase in guidance for earnings and revenue was really a reflection of the overall strength in the core business.

Yeah. And I would just add to it. I mean we've talked a lot about this, but I think the best metaphor for Venmo is PayPal. I think PayPal has started off as a P2P service, then expanded in the eBay merchants and then into merchants around the world. I think what we are seeing is adoption by merchants and by consumers that's ahead of what we were expecting. But as John said, we think there is a lot of room here on Venmo and we would be cautious with our expectations around that so far. I have to say we are all pretty pleased with what we are seeing.

Okay. A quick follow-up and maybe this one is for John. In the context of the changes to your GAAP earnings guidance, can you just comment on your go forward trends with stock-based compensation? Are you expecting any changes of cadence or any changes to your prior thinking around that level going forward?

Sure. I appreciate the question. We don't other than what we have already noted and just as a reminder we made some changes when we separate from eBay to have our own compensation program, not eBay's compensation program. The effects of those changes were mostly realized in last year with the exception of the change in the vesting cycle related to that. So that is - you do see that a little bit in our results. But if you take - if you just look at the guidance range we provided for share based compensation this year, I think it's assuming around 18% growth. By the same token if you look at our GAAP operating income growth and I'm adjusting for held for sale, because that just creates noise. That's closer to 26% growth for the year. So some of the bigger impacts we were seeing last year and directly to answer your question, we are not anticipating further changes going forward.

Thanks so much.

You bet.

Thank you. Our next question comes from Jeff Cantwell with Guggenheim Security.

Hi, good afternoon.

Hi, Jeff.

Good results and I just wanted to ask you about your bank partnership strategy that you called out this quarter and over the past few quarters or so. Can you just remind us is there provision of a strategy to lower your customer acquisition cost or your funding costs, or maybe you can just talk to us a little bit about what the pieces about bank partnership strategy that you find most important? Thanks.

Yeah. I'll start off and then Bill can fill in the color. I think first remember Jeff, the start of a choice where we are giving consumers full optionality to choose on every transaction how they want to pay and as a result of that really opened up the opportunity to work very closely with all the financial networks and the financial institutions issuing partners. Everybody is routed around choice. That's the right thing for consumers and everybody agrees that's the right strategy. As a result of that, as you can see in our TPV growth of, what's called 30%, that's very, very attractive to the issuing partners. There is no reason as many of them have said directly to Bill and I when we were in conversations at the very highest levels of management within those institutions. There is no reason why we shouldn't be the largest digital distribution partner on that because we can drive incremental growth for them on mobile checkout. Statistics are two times the industry average and our growth is multiple times out of the industry average and as a result of that they are actively linking their customers and encouraging them to get PayPal to go either established PayPal account or link their cards into an existing PayPal account. So obviously that drives acquisition for us, very low cost acquisition. At the same time, remember, they were signed to add additional capabilities to us as well. Most of those deals not all of those deals include access to tokens as well, so that you can start to move offline. We have network tokens and the issuing tokens for the instruments so that we can start to embed tokenization in an offline capability within our application and as we've mentioned before you can assume that that's going to be something that we will do as we look forward. They are also doing things that I think are really powerful for our mutual ecosystem by putting rewards points into their PayPal balance. What does that do for their consumers? It allows them to spend their rewards points at our 19 million merchants. For consumers it's a simple easy way to utilize those reward points or maybe there are other ways that were less easy for them. And for us it's a low cost funding mechanism and a real value add for our consumers. And so there are multiple different ways that this partnership works and it really - it's moved from being kind of an uneasy front of me environment two years ago to really being one in which we are all, I would say, very close allies in more of the war on cash and the advancement of digitization together. Anything to add?

Great and then can you just talk to us a little bit about PayPal and bitcoin functionality in the wallet? I'm trying to understand what the big picture thinking is with bitcoin and blockchain, so you can file some blockchain related patents recently. Maybe you can just give us a sense of your blockchain strategy and what the longer term to think in this way? Thanks.

Yeah, of course. Thanks for the question. Obviously hot topic that everybody talks about, here is what I would say on that. I would say we are excited about the long term potential blockchain and what it might be able to do in terms of distributed trusted applications and when I say that I don't just mean crypto. I mean things like identity and how to protect identity in different and new ways using things like blockchain. So as you saw from our patent filing, we have a number of initiatives underway where we are exploring from a long term perspective how we might utilize blockchain in innovative ways to create value propositions that may be even better than what we have today. But I'll tell you blockchain is still in the very first standings. I mean it's just realized at - for many of these things there are limitations not just in sort of the cryptocurrencies on top that are quite still volatile, which doesn't make for a good currency when things are volatile. And there are also limitations in things like transactions process per second in terms of blockchain and how fast you can process those transactions, how long it takes to wait for the completion of that transaction. So we've experimented with coin base and others in terms of direct connection to crypto currencies. Right now we do not support directly crypto currencies. We don't see the demand for it from our merchants or our consumers. But that should not be any indication that we don't see nor are we excited about the potential of blockchain in the long run. Bill, anything you would add to that?

Thanks very much. I appreciate it.

Yeah, you bet.

Thank you. And we have time for one last question and that is from Heath Terry with Goldman Sachs.

Great, thank you. Looking at the growth that you saw, the upsize growth you saw in P2P this quarter, I'm wondering if you can give us a sense of sort of how this is impacting your funding mix, what kind of benefits that you are seeing from that when we look at the relatively stable cost of funding over the - on a year-over-year basis and in the financials how we should think about what's going on with mix there and the individual costs of the different funding channels you have?

Sure. Heath, this is John. So you are framing the question I think in the appropriate way and that we are seeing - there is a lot of puts and takes to funding mix, but very importantly where there is inflation in the wallet that's being offset by more P2P usage. That said, if we were to look at this even stripping out P2P just looking at the rest of PayPal, there is not big swings. We are talking about a basis point or two here or there. So even adjusting for the growth in P2P, we are still pretty comfortable with this level of transaction expense from a BPD basis and you will probably remember I noted I believe it was the second quarter last year that we had a high point about 100 basis points and I said that I expected it to come down to this range and really giving everything that we have going on in the business, we will expect it to kind of stay in this range for certainly the next year to two sort of the - for us we have good line of sighting too and not change principally.

Thank you, Heath for that question. Thanks everybody for joining us today. We really appreciate your time. We know there's a lot going on today and look forward to speaking to all of you soon. Thank you.

This concludes today's question-and-answer session. Ladies and gentlemen, thank you for participating in today's conference call. This concludes the program and you may now disconnect. Everyone have a great afternoon.