Good day, ladies and gentlemen and welcome to PayPal's Third Quarter 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, this conference call 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, Sheri. Good afternoon and thank you for joining us. Welcome to PayPal Holdings' earnings call for the third 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 fourth quarter and full year 2018, our initial outlook for 2019, 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, October 18, 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. PayPal had another excellent quarter with $3.68 billion of revenue growing at 14% on both, the spot and currency neutral basis. Normalizing through the sale of our U.S. consumer credit receivables to Synchrony revenues grew at 21%. Our non-GAAP operating margin of 21.4% grew 142 basis points from last year, and we delivered $0.58 of non-GAAP EPS, up 26% year-over-year. In short, we continue to drive strong financial performance. As pleased as I am with our financials, the highlight of the quarter was our growth in net new actives and engagement. We drove a record 9.1 million net new active accounts surpassing 254 million customer accounts by the end of the quarter. We added 34 million net new actives to our platform in the past 12 months, averaging almost 3 million net new customers per month. During the quarter we drove 2.5 billion transactions growing 27%. Our engagement per active user increased 9.5% to 36.5x per year. A major driver of engagement is the use of mobile devices across our platform. Predominantly driven by our market leading checkout conversion rates with One Touch. One Touch continues to expand with 112 million consumers and 10.4 million merchants using One Touch. In Q3, we saw mobile growth of 45% with approximately 57 billion of mobile volume processed in the quarter. Mobile checkout now represents 40% of our total payment volume. Customer choice also continues to yield a meaningful lift in our engagement metrics. Today, nearly all of our customers have choice available to them, and more than 55 million PayPal customers have actively used choice in some 200 markets. Another very important outcome of choice was that it enabled PayPal to develop deep partnerships throughout our ecosystem. In just over two years we've…

Thanks, Dan. PayPal had another solid quarter in Q3, both, financially and operationally. Our targeted growth strategies and investments to strengthen both, the merchant and consumer sides of our platform continue to drive strong financial results. Our consistent growth in active accounts, payment volume, engagement in revenue demonstrates the power and resiliency of our business. In addition, our growth in operating income while at the same time delivering operating margin expansion highlights the scalability of our model. In the third quarter, we not only expanded our operating margin but also reinvested to grow users, volume and revenue. Before I go into our financial results, I'd like to provide a few highlights from the quarter. As a reminder, the sale of our U.S. consumer credit receivables to Synchrony closed in early July. Where relevant, I will provide normalized results for comparability. In addition, our acquisition of iZettle closed in late September. Our Q3 operating metrics and financial results include no impact from this transaction. Revenue grew approximately 21% in Q3 adjusting for the sale of our U.S. consumer credit portfolio. Operating income grew 22% with 142 basis points of operating margin expansion. Non-GAAP earnings per share grew 26%. And on a normalized basis, we generated $0.21 of free cash flow for every dollar of revenue. Turning to our financial performance for the quarter; total payment volume was $143 billion, an increase of 24% at spot, and 25% on a currency neutral basis. In comparison to the third quarter of 2017, on a spot basis we experienced more than five points of pressure from the lapping of TIO Networks and as a result of a stronger dollar. U.S. payment volume growth was 27% and international payment volume growth was 22% on a currency neutral basis. Merchant services volume was $127 billion, growing…

[Operator Instructions] Our first question comes from Bryan Keane with Deutsche Bank.

I wanted to ask about eBay; I know they announced the managed payments initiatives and it doesn't look like PayPal is featured as a payment option. So trying to figure out what's the impact to PayPal's model? I mean, I guess what we're trying to get at is figure out how much the weakness in eBay is due to the run rate of core eBay volumes? Were those volumes coming off of PayPal in payments to other providers?

Thanks Brian, it's Dan. I'll take a crack at that and then turn it over to John and Bill, if they've got anything else to add to it. So first of all, eBay's performance on our platform had nothing to do with intermediated payments. They announced publicly -- I think they had 20 million of TPV that moved to intermediated payments, we don't even see that as a rounding [ph] on our results. So intermediate payments has just started off for them, no impact on their performance on our platform. So let me take a step back and talk to you a little bit about what I see going forward. So I think that PayPal and eBay are going to continue to be close strategic partners for the foreseeable future. And, so why do I say that? I say that because it's not just that we have signed a 5-year term with them to display PayPal branded services on their intermediated payments or that we just signed a while ago a comprehensive 7-year deal to provide eBay shopper's with PayPal credit offers. Those things are just deals that we've done with eBay. The most important thing is that our mutual sellers and merchants demanded the consumers that we have, the sellers that eBay and PayPal share demand to have PayPal; their sales actually depend on it. And we just put out -- Bill, I think just published a market research that was done with IPSOs [ph] that was a comprehensive study, and that study showed what we've been talking about for quite some time. And in the study it said that consumers on average are 54% more willing to buy when a merchant accepts PayPal; and by the way, that's at the low-end of that. If that goes up when…

I would just add to that that eBay has responded to those comments saying that sellers have issues with the drop in sale, they can revert back to PayPal in the near-term and in the long-term they are working hard to make PayPal available as a payment option, and we're working hand-in-hand with eBay to try and make sure that's available to those customers given the strong demand from customers as Dan was describing.

Thank you. Our next question comes from Paul [ph] with Credit Suisse.

I just wanted to follow-up on Venmo, could [ph] you give us some good updates there. Just could you help us think through the contribution -- you mentioned $1 billion instant transfer volume in September; should we think of that as $1 billion monthly run rate? And then, would you say there are any other monetization activities that are starting to scale, just -- just, kind of -- I want to make sure I'm thinking about the contribution correctly.

Sure. The $1 billion in instant transfer volume was for the month of September, and that's been growing nicely, we don't see anything to disturb that trend. And instant transfer is one of the monetization initiatives that we see scaling well, as Dan mentioned in his remarks, pay with Venmo is growing very nicely. Uber, Uber Eats, Grubhub, Eat24, Seamless have all integrated pay with Venmo, that's been growing quite remarkably. I mentioned 185% month-over-month growth on pay with Venmo, and the card is seeing 320% month-over-month growth, those are early but those are the kinds of rapid growth results that we're seeing with other initiatives on Venmo, and so across all three of our major monetization initiatives instant transfer, pay with Venmo and other apps like Uber and Grubhub, and the card, we see all of those starting to really scale in a meaningful way.

And you also saw the number of Venmo customers who have now been in a monetizable act go to 24% up from 17% just one quarter ago. So as I mentioned in my remarks, it's still or late [ph] obviously but it looks like we've achieved some kind of tipping point right now, and I think both Bill and I are extremely pleased with the results of Venmo. One other thing that I would just point out is, as I mentioned, it seems repetitive but we don't take it for granted; for three quarters in a row right now we've each quarter seen record net new active signing up to Venmo. So not only are you seeing Venmo expand quite rapidly but the percent of people using the monetizable event is going up quite rapidly as well. So you combine all of those things together, you can see why we're quite pleased with the momentum as of now.

Our next question comes from George Mihalos with Cowen.

Just wanted to ask John, as we look at the initial guide for '19, how are you thinking about pricing broadly across the company from '18 and '19? I know you're anniversarying [ph] some pricing on the cross-border side, and then maybe related to that, you know, the shift in Venmo going from operating in the red to going into the black; how should we think about or ballparking that kind of contribution in the guide? Thank you.

Starting with pricing; pricing is something that -- as we've said before George, it's not a one-time thing for us where I've described it in the past as a sugar-high [ph] where you're trying to monetize something for the next quarter. We take a very long-term perspective to that and there are opportunities every year to look at pricing, and pricing sometimes can mean going out and taking advantage of where you provide significant value in the market and pricing higher. In other cases given the enormous addressable market that we have, it can be about capturing market share and be more aggressive on pricing; so that goes both ways. And certainly we have assumptions built into our plans about optimizing pricing in various areas going into 2019. One example of that is the recent announcement that we made about increasing our pricing to be more inline with where the market is on instant transfer, and so that's just one example that we're -- that we have there related to pricing. On Venmo, as we've said, this is -- it's hard not to be excited about some of the growth numbers that we're talking about today and the fact that each of the last three quarters we've seen a record number of net new customers come to the platform; but this is a long game and we're not going to -- we're going to be measured in terms of our approach to this, make sure that we optimize for the experience and profitability will certainly come, we've got a good history here in terms of what happened with PayPal as that moved from P2P to being able to monetize that in ways where one can shop at a merchant. And so that is a transition that will take place in a couple years not a couple of quarters, and so we expect to see improvement in our Venmo economics next year and each year, thereafter.

Our next question comes from Tien-tsin Huang with JP Morgan.

Thank you, and thanks for the 2019 framework, it's encouraging. Just maybe on that, just a fairly -- a steady EPS growth for '19 adjusting for the acquisitions despite some eBay degradation that you talked about and perhaps in cross border too; I'm not sure if maybe you want to comment on your outlook for cross-border specifically but I'm curious just in the aggregate; what may be getting better? What are some of the key offsets [ph] that have given you the confidence to achieve that; that steady EPS growth in '19?

Sure, I'll start and Dan and Bill can jump in as well. 2019, there is a lot of things in store as we sort of enter this next chapter post our previous relationship with eBay. And so excited about the partnership opportunities that are out there, we're excited about integrating some of the acquisitions that we've had and potential ones in the future and what that can mean to make our platform even better than it is today. As we look at parts of the P&L and the effect on sort of achieving that guidance into next year, we certainly expect to continue to realize operating leverage in our business. Tien-tsin, I didn't talk about this in my prepared remarks but you know, we often talk about the marginal economics of our business. In this most recent quarter, for every dollar -- incremental dollar of revenue that we brought in our non-volume related cost only went up $0.10; that is a model for scaling a platform. And as we've said before, we think that we can continue to do that. With respect to cross-border, that's an area that -- if you look at it in terms of the percentage of total volume for PayPal, it's down slightly from where it was in the previous quarter, that's in part because of mix in our business as we see things like Venmo growing more, Braintree growing more. But I think that the takeaway from this is that, if you were to go back three or four years ago when we were more of just a button on a marketplace, we were very dependent or I should our profitability was very concentrated in certain areas, and what you're seeing us evolve into as a platform is we have a much more diversified portfolio, both regionally, as well as product-wise, we're monetizing a lot of other aspects of our business that we haven't before. And so despite the fact that cross-border which is a lucrative part of our business, is a smaller overall piece of our portfolio; and eBay you can say the same thing about, you're seeing us expand our operating margin and continuing to grow earnings at a mid-20% growth rate. So we're very excited about that and it gives us confidence going into 2019.

Just one or two things on top of that. You saw this quarter us adding for the first time ever over 9 million net new active accounts. And interesting at the same time, engagement growing by 9.5%; for those of you who look carefully at our engagement numbers which I know many of you do, that's the highest percentage game we've had in probably two years or so. And three years ago, we guided like 3 million to 5 million net new actives per quarter, we took that up last year to 6 million to 8 million, we're clearly at the very high-end of that; and we see that continuing as we look forward as well. And when you have your net new actives growing by 30 million to 35 million a year and your engagement growing by 8% to 10%; that bodes well as we look forward. And I would say some of the new products and services that Bill and the team are introducing or have introduced into the market, some of the new partnerships that are just coming underway right now; we feel pretty good about our position in the digital payments ecosystem right now.

Our next question comes from James Fossett with Morgan Stanley.

I wanted to circle back to the Venmo commentary, particularly Dan, your comments that you're feeling like you're at a tipping point there. I'm just wondering if you can give us a little color on how we should think about efforts to drive increased acceptance of Venmo and where we may see some evidence of that? And I guess, dovetailing with that is that -- with kind of the new instant transfer fee structure; how should we -- like what should we be anticipating in terms of contribution to moving the monetization of Venmo forward from that particular initiative? Thank you.

I'd just say first of all, again, it's early but substantial progress and the numbers we gave are month-over-month numbers, not year-over-year but month-over-month growth numbers. So you can see the acceleration that's happening. We have a very strong pipeline of large merchants, the merchants you might expect who are lining up to integrate pay with Venmo buttons. We also obviously are rolling out these smart payment button capabilities into a PayPal checkout where if it is a Venmo customer we will dynamically present they pay with Venmo button and so you'll start to see that also accelerating quite a bit. And then if you look across the monetizable services that we're offering, all of those services are benefits to the Venmo consumer and I think that's a really important point. A Venmo consumer doesn't think about engaging in a monetizable act, they think about how can I use my Venmo card to spend offline, have that come right back into my Venmo feed, share/split those purchases, and it's a value-add for them being able to take your Venmo balance and be able to spend on online merchants or on Uber; that's a value-add for them just as it is to be able to instantly gain access to their balances is a value-add to them as well. And so the more services we've put out there, and we've been careful to be sure that the services we've put out are real value-added services but the more we put out the more Venmo customers use and start to engage with that. I mentioned that you're seeing the Venmo customers engage in groceries and restaurants, these are everyday types of activities and we're really just becoming an embedded part of our Venmo customer's digital financial services life. There are other things that we're looking at going forward but we're really pleased with the efforts we have so far, and very pleased with the momentum. Bill, anything you would add on that?

I would just add to that that in addition to Dan's points there around how simple we're making it for merchants to add a dedicated pay with the most recent things like smart payment buttons, the integrations we've done like with Uber for example, we're seeing tremendous growth that we're quite pleased with but they're quite pleased with it as well, they're seeing this really driving engagement on the platform and the usage of Venmo is outpacing their own expectations which are certainly quite high given how rapidly they grow. And so as we continue to make merchants happy with the engagement we're driving to them; as Dan said, we're seeing a lot of merchants really line-up for that but we're providing multiple ways for users to get great new experiences and to make money by providing them great new experience whether those pay with Venmo, the card or things like instant cash out; so all of those together are really bringing great value to the user and great growth of the monetization for us.

Our next question comes from [indiscernible].

Dan, this one is for you on the topic of partnerships which is one of the topics of the day. You have a history of converting would be enemies into friends or at least frenemies; and I'm wondering if you can comment on two groups out there that are sort of in that category, the large global merchant acquirers, and then also the Chinese digital wallets. As you think about partnerships, is there a path to converting those players? Do you see a partnership path with PayPal?

Lisa, I also consider you to be one of those partners that also turns into a friend as well. So obviously, as we've moved towards customer choice and as we've moved to being an open platform our ability to now partner, it's just night and day difference from where we were two years ago. I talked about 35 -- I think we've done 37 major partnerships in the last two years, and as you know, we've started to work with and partner with some of the leading Chinese players today whether that be [indiscernible] with their international merchants, I think where PayPal is now on over 50,000 of their merchants being accepted allowing PayPal consumers outside of China to purchase from Chinese merchants. We support some 300,000 Chinese merchants who have the PayPal mark on them today, enabling consumers outside of China to purchase from those merchants. And we're looking at doing the opposite with people like Baidu and others where Chinese consumers can seamlessly pay and buy at PayPal merchants outside of China. So we think that we can facilitate cross-border for all of those players in China and in other countries. In terms of merchant acquirers, we've had a long history actually of partnering with merchant acquirers, we're very close partners with First Data. Again, a number of years ago, there is First Data against PayPal, that is not the case anymore, we work hand-in-hand together. And so, you know -- Bill, do you want to add to that?

Wells Fargo, Chase, I mean there is a number of major merchant acquirers that we work with, we bring in tremendous amounts of volume. And it's another example as Dan was describing of how we're able to partner with others in the ecosystem as we've made our platform more open and have really gotten focused on how we can provide value to customers in partnership with others, and acquirers are certainly one of those constituents that we were closer with.

Our next question comes from Darrin Peller with Wolfe Research.

Let me just start off; I mean first, you have 9.1 million active accounts net new this quarter annualizing 36 million I guess per year. First of all, is there any reason why this quarter was unusual in terms of seasonality or is that now obviously better than 30 million run rate you had, call it a year ago? And then, there is the follow-up was just on the OVAS line, it was much higher than I know we in the street were -- if you can give us a little more color if that's either -- whether it's Synchrony revenue share or it's all the great stuff in Venmo we're seeing? That would be great.

So first on the net new actives, nothing unusual in the quarter. As John mentioned in his remarks, nothing from the iZettle acquisition that came in there, that was 9.1 million accounts that came in naturally. We also have over 20 million merchants now on the platform too and that's growing quite nicely. So, we projected being about 30 million, we thought this year it will clearly be over that, and we see no reason for these types of numbers to be our new run rate going forward.

And I would just add to that, we started seeing increased consumer adoption going back a couple of years when we started getting these reductions; is that sustainable. And for the last two years you've seen us continue to drive significant improvements in net new actives, and part of that is that there has not been anyone silver bullet to -- what's bringing those new users to the platform, it's a combination of great checkout experience with things like PayPal One Touch, P2P, Choice; all these things together are bringing more and more users onto the platform, deepening engagement with them through being a great digital engagement channel with card issuers and others, it's the composite effect of all these things together. And so as Dan said, there is nothing that we see slowing that down, it's something that we think is a new normal for us in terms of the way that we're driving increased engagement and increased new users to the platform.

And Darrin on other value-added services; there is three things probably that are influencing that and rough order of significance -- first, would be we're seeing great growth in our merchant working capital business. Recall, we've got the acquisition of Swift and we're just really pleased with how that's performing, really good growth there. Second thing that I would call out is while we sold the U.S. consumer credit portfolio we still have an international consumer credit portfolio, and that is performing very well in the entities where we've launched that. And then lastly, I would say that the profit sharing arrangement we have with Synchrony -- we still receive economic benefit depending upon the performance of that U.S. consumer credit portfolio. And we're very pleased with that, and I would venture to say Synchrony is very pleased with how it's performing as well.

Thanks. Operator, we have time for one more question.

Final question comes from Heath Terry with Goldman Sachs.

Dan, as it has been pointed out earlier, you guys have had a lot of success over the last couple of years in signing partnerships and bringing a lot of partners onto the platform. I guess it's probably too much to ask to try and kind of quantify the impact that those -- of those partnerships or how much of an impact we've seen on TPV or revenue as it relates to those? But curious if just qualitatively you can try and give us a sense of the impact that you've seen there? And then, as it relates to the Walmart and Amex deals that have been signed, how you would sort of scale those deals relative to what we've seen from partnerships thus far? What kind of potential do you think those two deals have?

So I would say just in general, we've announced quite a number of partnerships over the past couple of years. These partnerships take multiple quarters before they start to come up to speed, some of them a year plus; and so I would say we are still quite early in the impact that we are seeing from all of those partnerships. And so just from a qualitative perspective, we're beginning to see some nice momentum but I would say it's very, very early days. One example of that would be rewards points, we've got maybe four or so issuers now, major issuers who are going to be putting their reward points onto the PayPal platform. We're going to be a platform that aggregates all of those that users of our mutual customers can take those reward points, turn them into fiat currency, use the rewards points and a combination of any other financial instrument they have on board to make purchases at basically 20 million merchants across the world; it's the first time that we're giving that kind of utility, and the American Express announcement -- they are one of the -- if not the leader in rewards points and having their rewards points come onto the platform and their customers being able to use them at PayPal merchants, and the only place where they can use them at all of those different merchants, right. Amex is only integrated into a couple of merchants right now to be able to use reward points. Those are all things that are coming in the future. And I would say Walmart has a tremendous amount of potential for us, it's the largest retailer, one of the largest marketplaces, and with a lot of aspirations, and we have quite good relationship with them and a growing relationship with them. And as you see, almost every quarter we announce new partnerships and some of them can be quite large, and -- my anticipation as we look out over the next several quarters that you'll see more of those come onto play as well. This is an ongoing -- part of our strategy is to be a great partner and to be the underlying platform and the largest digital distribution channel for a lot of our partners. So we're seeing a good deal of success right now but still I would say very early innings for us in terms of the -- of what they could be and will become for us. Operator, thank you. Everybody thank you for joining us. We look forward to talking to you over the hours and months ahead. So thank you very much everyone for joining.

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.