Good day, ladies and gentlemen and welcome to PayPal's Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's call, Ms. Gabrielle Rabinovitch, Head of Investor Relations. Please go ahead.

Thank you, Sheri. Good afternoon and thank you for joining us. Welcome to PayPal Holdings' earnings conference call for the second 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 are 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 the 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 third quarter and full year 2018, our medium term guidance and the impact and timing of our acquisitions. 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 July 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. I'm pleased to report that PayPal had another strong quarter. As I said at our Investor Day, PayPal’s greatest potential lies ahead of us and I believe the moves we made this past quarter position us to win in multiple segments of our total addressable market. At the same time, we also continue to produce consistent and strong quarterly financial results. In Q2, we generated $3.86 billion of revenue, growing at 23% on a spot basis and 22% on a currency neutral basis. We delivered $820 million in non-GAAP operating income, up 24% year-over-year, driven by our non-GAAP operating margin of 21.3%, which was up 25 basis points from last year. And we delivered $0.58 of non-GAAP EPS, up 28% year-over-year. These results set us up for a strong second half of the year and consequently we are raising our full year revenue and EPS guidance. We had another quarter of strong customer growth and engagement. We added 7.7 million net new actives with new user growth up 18% year-over-year. This brings our total active accounts to 244 million. Engagement on our platform increased 9% to just under 36 times per year, up from 33, a year ago. For the first half of the year, our net new actives equaled almost 16 million and we anticipate adding over 30 million net new actives for the year. Our continued customer growth and engagement is driven in part by the success of three important areas of focus, our Customer Choice initiatives; our partnership strategy; and our focus on always being the customer champion. Our commitment to Customer Choice continues to yield strong results. Today almost 85% of our active customers have Choice available to them and more than 45 million PayPal customers have…

Thanks Dan. The second quarter was another good quarter for PayPal. We delivered strong results financially and operationally demonstrating our continued momentum and the scalability of our model. As Dan just highlighted we announced four acquisitions during the quarter, strengthening our two sided platform and further solidifying our position as a leading open digital platform for payments globally. At our Investor Day in May we laid out our longer term strategic vision raised our medium term guidance and outlined our capital allocation priorities. And in the quarter, we returned $500 million to shareholders through share repurchases. In addition, earlier this month, we announced the closing of our sale of consumer credit receivables to Synchrony for approximately $6.9 billion in total consideration. With the completion of this transaction PayPal and Synchrony have extended their existing co brand consumer credit card program and Synchrony is now the exclusive issuer of the PayPal Credit consumer financing program in the U.S. through 2028. The interim accounting reclassification of the credit portfolio to held for sale from held for investment affected the presentation of our results in the quarter. These changes in addition to the cost to transition the portfolio reduced comparability to prior periods. Where relevant to the discussion I'll provide normalized results to adjust for these changes Now for our financial performance in the second quarter. Our total payment volume was $139 billion up 27% on a currency neutral basis. Our merchant services volume grew 30% on a currency neutral basis to $123 billion. Volume associated with eBay grew 6% on a currency neutral basis to $17 billion. eBay related volumes represented less than 12% of total payment volume for the quarter versus more than 14% in Q2 2017. P2P volume which is a component of merchant services and includes volumes across core…

Thank you. [Operator Instructions] Our first question comes from James Fossett with Morgan Stanley.

Thanks very much. I wanted to just ask quickly about the engagement and certainly impressive statistics there. But wondering if you're doing anything specifically to drive that engagement or how you can continue to move that forward. And I guess is a follow up one place where we noticed that things were varied versus our model is that the year-over-year decline in tax rate seems to -- or take rate excuse me seems to have picked up pace again in the first half of the year. Can you breakout kind of what the key drivers are in take rate right now, and what our expectations should be going forward? Thank you.

So John will take that take rate James and I'll take the engagement question. I'll start off with that given the order of your questions. So first of all our net new actives and engagement we're obviously pleased with both the growth of engagement. Q2 is a seasonally low quarter for us and we did 7.7 million net new actives 16 million in H1. And we're on track to do over 30 million in 2018 which is above our 2017 full year results. And as you know, that was by far in a way our best year by a long shot. So to your point, specifically though engagement actually accelerated to 9%. It had been growing by about 8% for the previous two or three quarters and it went up to 9% and to almost now three times a month. And our view on that is we expect that to continue. We've got a number of tailwinds around engagement. First of all, I think our customer experiences are better than they've ever been before. You look at One Touch, its conversion rate at -- as you saw from some of those ComScore studies and the surveys that have been done, people want to use the service more. As a result of that, we've done a tremendous amount of enhancements around P2P. Choice is leading to more engagement. We've got a new app, and we have a whole new suite of services. The Venmo card is going to lead to more engagement. We have the PayPal Cash Card, that's going to lead to more engagement. And so I think - and then of course, we've got rewards coming on in the later part of this year with some of our key financial institution partners. And so I think we're going to continue to see engagement grow at a nice clip going forward. And I think it bodes well obviously to have both more customers coming on than ever before, using this service more than they ever have. And if you look at new cohorts versus older cohorts, our new cohorts are more engaged than our older cohorts. Most of the time, you'd expect as you grow your net new actives, you get more and more that maybe the quality of those net new actives aren't the same as what they were before. It's actually the opposite here. The new net new actives are more engaged than our previous cohorts, which by the way means, we have a potential opportunity to educate our older customers on all the new services that we have as well. So, we’re feeling pretty good about both net new actives and engagement. I'll turn it over to John to talk about take rate.

Sure. It's good to speak with you James. If you look at the composition of the decline in our take rate, just take our total take rate of 2.77% for the quarter, the 14 basis points decline, approximately 70% of that was due to two things. First is P2P. The growth in P2P, which has been a familiar story for several quarters right now. But maybe more pronounced this quarter the second thing was the year-over-year swing in hedges. That's a $42 million delta year-over-year. So that accounts for that. So I believe those were about 10 basis points of the 14 basis point decline. Beyond that, it's just the normal changes related to mix in our business.

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

Great. Thanks guys and congrats on another strong quarter. Dan, just again as you think about the competitive environment now with some newer participants going public and the like, can you maybe talk a little bit about differentiating the PayPal value proposition? And just maybe more specifically is the big differentiator really the conversion rate of the PayPal Wallet and your ability to sort of deliver that seamlessly with Venmo sort of, one integration if you will into the merchant base?

Yes. First off thanks for the question, George. So I think a couple of things on competition. First of all, obviously, we respect all of our competitors. We learn from them but we are really focused on our customers and what their needs are. And that's what we pay a tremendous amount of attention to and we feel that we can solve their pain points better than anybody else. We'll continue to win and be a leading platform in the digital payment space. Secondly I'd say it's obviously not a zero sum game. Yes, we're operating in what we think is $100 trillion total addressable market which is rapidly digitizing as online and off line is blurring. And we have a very small share of that total TAM. So it's very early innings. And that's why we said at our Investor Day that we think our greatest potential lies ahead. In terms of differentiation from the competitive set I think we have quite a number of different things that we've done. First of all with the advent of choice and becoming an open platform it did redefine the competitive landscape. We are now working with financial institutions networks and technology companies as partners. I mean, before it was much more characterized as frenemies [ph] people were - many people question whether these allies of us now we're going to move into the payment space. And really they're taking the best of our digital platform the best of their assets and we're working together to create unique value propositions that neither of us could do alone. So in many ways a lot of the competitive intensity is more benign than it was several years ago. But again there is much more it than that because this is all we do. This…

No. You covered it well. The point Dan was making about the breadth of the platform. I think that is most enhanced by the two sided nature of what we do and our ability to control the experience end to end. So that conversion rate that Dan was alluding to at the end of the day when customers are being payment today they're looking more toward how do you help acquire a customer versus how you give better access to sort of legacy dial tone or point of sale solutions. That two sided platform is what allows us to deliver that conversion rate. It's nearly double what you see from everything else out there and that that is extraordinarily difficult to replicate. Many have tried it is very difficult to do and I think we are quite distinct in that regard that stands out as one of our biggest differentiators as a key part of all those elements of our platform as we compare those up against others. And it’s a big part why we're just taking market share tremendously.

I mean, I think the whole thing we're trying to do is to be the sort of operating system for digital commerce. If you think about merchants that are creating now apps to add value add to their customers one of the biggest issues they run into is friction in terms of getting people to sign up for those apps. One of the things I talk about in my remarks is the ability for us when a customer opts in to seamlessly populate a merchant app and then not just populate with customer experience information but with the funding instrument so immediately that customer can shop. Those little types of things are incredibly valuable for merchant partners in general.

Thank you. Our next question comes from Heath Terry with Goldman Sachs.

Great. Thank you. Dan, I guess one thing on the decision to allocate as much as you have to share buybacks. Given the track record that you've got generally with your acquisitions is that reflective of the opportunity set that you see out there in potential acquisitions in the - post the four that you've done? What's the right way to read the tradeoff there particularly given the kind of growth acceleration you have been able to get out of some of the acquisitions that you made in the past? And then I guess just one area I want to make sure that we understand the right way the deceleration in growth in - particularly on the TPV side that we saw in the international business on an FX neutral basis any real distinction that you'd want to call out for the gap between that and the acceleration that you saw in the U.S?

Yeah. I'll start with the first one and then John will talk about the second one. So we're just trying to be consistent with the medium term guidance that we gave in -- at our Investor Day. We said we were going to return somewhere around 40% to 50% of our free cash flow over the next three to five years which was our medium-term guidance. In order to assure shareholders that that would be the case the board authorized a $10 billion share buyback and so that's just consistent with that. We firmly believe that there are a lot of opportunities for us to continue to acquire best in class capabilities to acquire positions in different geographies around the world through either investments or acquisitions. And as we said at the Investor Day, we are targeting $1 billion to $3 billion a year to go and do that. Now we look at hundreds of different opportunities every single quarter. And also remember that obviously our internal innovation is accelerating. I think Bill and his team have done an incredible job over the last several years in just transforming, how much product we can put out into the marketplace. Our partnerships are allowing us to do things that we might have had to acquire before or develop internally like a rewards program. Now that will happen in partnership with the financial institutions who are now our partners. But there are always capabilities out there like a Hyperwallet or an iZettle where it would take us either a lot of time or a lot of resource to develop. They are solely focused on that capability as a best in class and a good customer list and a modern platform to go and do that. And where we see that we're going to obviously be disciplined and I would think about it financially, but we will continue to be quiet acquisitive going forward. We do think we have a chance both on the merchant side from a platform perspective, but also from the consumer side as we look to be much more in the middle of how consumers manage and move their money that there are opportunities for us to continue to be acquisitive. And we're not ruling out the ability for us to do a larger acquisition if that comes around. But we're going to be much more - have a lot more scrutiny around that kind of thing. Larger acquisitions are inherently more risky and they prevent us from doing other things. So we're not ruling that out. But in our guidance that we've done in our medium-term outlook, there's that cash return to shareholders that $1 billion to $3 billion a year on average that we'll do an acquisition, so no change really from Investor Day.

Heath, this is John. As it pertains to what we're seeing internationally as it relates to TPV and revenue, there's two things maybe to call out. But the first is that anytime that - and this is what I'm about to say is very consistent with what we've seen historically. But when there are sharp changes in currencies not only is there going to be an effect on the translation of those revenues into our financial statements, but we see the effect on consumer behavior as well. And so there is – you are seeing a little bit of that with the movements in currency. There's also -- we see a little bit of weakness on the eBay part of the business. But I'll tell you that the fact that we are raising our guidance for the year despite that is I think a strong indication of the diversification of our portfolio the fact that we are much less reliant on them than we have been historically and we expect that trend to continue. So pretty excited about the trends in the business notwithstanding those couple of issues.

Thank you. Our next question comes from Darrin Peller with Wolfe Research.

Hi, Darrin.

Thanks, guys. Hey, guys. Thanks. Listen, you're trending at around 22% currently at constant currency on revenues. But if we were to add that to seven points of annualized from Synchrony in the second half it still implies a bit of a decel [ph] a couple of hundred bps for the second half of the year. And I guess a just wanted to hear if there's anything specific on that or it's just conservatism. And then just a quick follow up for I guess either Dan or Bill, and it really has to do with monetization of Venmo which looks like you guys are calling out just so many more opportunities than just Pay with Venmo now with instant deposit and with a card. Can you give us more idea what inning are we on each of those. Because it seems like a bigger opportunity than we initially thought it could be.

I'll start with revenue and then turn it over to the others. The trends in our business are strong. I want to very clearly call that out as we talked about with a guide about $100 million of our increase is related to momentum. We certainly do see an impact being a multinational company from FX headwinds and that's pretty significant in the back half of the year so that has an impact. And then Darrin there are always things that can affect one quarter to the next. One example is that we're lapping Tio from last year. That was $20 million of revenue for us in the third quarter so not an insignificant amount. And then there are other things that we put in place last year, product changes that we monetized that we're lapping. So there are a couple of comps from one period to the next. But the trends in our business are still very strong and we're actually quite excited as we get ready to step up into 2019.

Yes. And on the Venmo monetization side, we're certainly still in the early innings there for sure. We put out a great set of products that we see users really engaging with strongly. As you called out you have Pay with Venmo that is seeing really nice demand from merchants the best merchants and apps out there putting dedicated Venmo. Like Uber and Uber Eats and Grubhub, Eat24, Seamless and many others and we think we'll see a steady drumbeat of those coming on. There is a great pipeline of those adding in dedicated Venmo buttons. In addition to the two million plus merchants that are already accepting Pay with Venmo via PayPal, Instant Cash Out has seen really great pick up. The Venmo card as Dan remarked earlier on has seen really, really strong interest from our customer base. And so we see a real composite of those things like smart buttons that will allow more people easily have a dedicated Venmo buy button. We think there's a lot left in front of us there. It will be a multiyear journey. We're relieved following the path PayPal, PayPal started it out as P2P only. It was a multiyear journey as PayPal then became a broad merchant services platform with a broad set of commerce. But we see Venmo trending along nicely, really positive response of 17% of users engaging in a monetized experience so far this year. And that's what's getting these products out to market. And so we think we're very much in the early innings. There's a lot left ahead of us. And to be clear, it's a multiyear journey. We think these things will play over multiple years, but were off to a great start.

Thank you. Our next question comes from David Togut with Evercore ISI.

Thanks for taking my question. With the announcement by the U.K. payment system regulator this week that they're reviewing merchant acquiring practices in the UK, could you comment on whether you expect to be included or exempt from that? And clearly you have a unique two sided payment platform, but I'd be curious on your thoughts.

Bill you want to take that?

Yes. I think I would just say it's evolving we're watching it closely, too early to comment on that. But we work closely with regulators. And generally, we have been a great partner to the ecosystem delivering a lot of value to our customers. And so any of these kinds of regulatory movements we're hand in hand with the regulators on those things, still playing out too early to comment. But we think that there's not a particular exposure that we will call out at this time.

Thanks.

Thank you. And we do have time from one last question and that is coming from Tien-tsin with JPMorgan.

Thanks so much. I wanted to ask maybe for Bill just the new PayPal checkout smartbuttons I mean it feels like a pretty big enhancement especially overseas. I know you had a question on international earlier. How would you rank the importance of this upgrade in relation to enhancements like say One Touch? I mean, how can we gauge success? And just as my follow-up I'll ask it together on Venmo monetization. Could we see a step up in your marketing budget or a spend going to the holidays on both the cards and the commoners opportunity around Venmo? Thanks.

So I'll start with Venmo and come back with smart buttons. The really interesting thing on Venmo is that there's always been such great rally and just inherent interest from consumers on it that we historically have seen very little marketing cult dollars to get to the growth that we have. We just had our biggest quarter over ever of new users on Venmo and great growth of $14 billion and volume up 78% year-on-year. And we're basically spending next to nothing on marketing because our users to our marketing for us. Really Venmo users tell other users about the product and platform. And so that has allowed us to really not have to spend a lot on marketing. Certainly though as we see good traction with these things we will absolutely think about how we can augment that. But it's a great win. You don't have to artificially complete demand. There's a really strong demand for customers organically and then we can augment that as we need to, but we really has fantastic organic demand without us having to go do much of marketing.

Some of our partners will go marketing around it because they're excited about it.

That's exactly right. And then on smart payment buttons as we've talked about before our ability to go distribute new experiences to merchants without merchants having to do work is a key structural advantage that we have versus legacy payment platforms. And it's why we're able to deliver a greater conversion and rollout products like One Touch to 9.5 million plus merchants in 200 markets without them doing work. Smart payment buttons is an advanced to that. So we see that this really quite important at the fact that it's got a handle not only our own payment method like PayPal, PayPal Credit, Venmo dynamically presenting those when they are most relevant so that merchants don't have to worry about the confusion of too many buttons at checkout. We are also adding an alternative payment method. And we think it's quite meaningful in that it democratize is access to this long-tail of alternative payments as you go country by country. There’s been some other providers out there that have done that but those have been big heavy enterprise type solution, so it's really only a handful of merchants that can get access to those things. We think we can get that to many millions of merchants which is a game changer in terms of merchants having access to the most relevant payment methods to offer to the consumer at any moment in time. And I think this further distances us from competition in terms of how we deliver better conversion and better customer acquisition, which is really the game that we play quite differently than others where we think of ourselves as in the business of driving conversion of customer acquisition versus much of the legacy payments industry or traditional players are providing access to dial tone access to peace of the payment ecosystem versus we’re driving customer acquisition and smart paying button as a great examples of that.

Okay. Well, thank you everybody for joining us today. We appreciate your time and we look forward to speaking to all of you soon. Thanks very much.

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