Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019.



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to .

Commission file number 001-36859

PayPal Holdings, Inc.

(Exact Name of Registrant as Specified in Its Charter)



Delaware			47-2989869
(State or Other Jurisdiction of Incorporation or Organization)			(I.R.S. Employer Identification No.)
2211 North First Street	San Jose	California	95131
(Address of Principal Executive Offices)			(Zip Code)

(408) 967-1000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $0.0001 par value per share	PYPL	NASDAQ Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes☐ No ☒

As of October 18, 2019, there were 1,174,192,449 shares of the registrant’s common stock, $0.0001 par value, outstanding, which is the only class of common or voting stock of the registrant issued.

PayPal Holdings, Inc.

TABLE OF CONTENTS



			Page Number
Part I.	Financial Information		4
	Item 1.	Condensed Consolidated Balance Sheets	4
		Condensed Consolidated Statements of Income	5
		Condensed Consolidated Statements of Comprehensive Income	6
		Condensed Consolidated Statements of Stockholders’ Equity	7
		Condensed Consolidated Statements of Cash Flows	9
		Notes to Condensed Consolidated Financial Statements	10
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	55
	Item 4.	Controls and Procedures	57
Part II.	Other Information		58
	Item 1.	Legal Proceedings	58
	Item 1A.	Risk Factors	58
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	68
	Item 3.	Defaults Upon Senior Securities	68
	Item 4.	Mine Safety Disclosures	68
	Item 5.	Other Information	68
	Item 6.	Exhibits	69
Signatures			70

Table of Contents

PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

PayPal Holdings, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS



	September 30, 2019			December 31, 2018
	(In millions, except par value)
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	6,877		$	7,575
Short-term investments	3,585			1,534
Accounts receivable, net	417			313
Loans and interest receivable, net of allowances of $243 and $172 as of September 30, 2019 and December 31, 2018, respectively	3,477			2,532
Funds receivable and customer accounts	22,511			20,062
Prepaid expenses and other current assets	881			947
Total current assets	37,748			32,963
Long-term investments	2,771			971
Property and equipment, net	1,701			1,724
Goodwill	6,178			6,284
Intangible assets, net	629			825
Other assets	1,196			565
Total assets	$	50,223		$	43,332
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	193		$	281
Short-term debt	—			1,998
Funds payable and amounts due to customers	24,011			21,562
Accrued expenses and other current liabilities	2,038			2,002
Income taxes payable	98			61
Total current liabilities	26,340			25,904
Deferred tax liability and other long-term liabilities	2,436			2,042
Long-term debt	4,964			—
Total liabilities	33,740			27,946
Commitments and Contingencies (Note 13)
Equity:
Common stock, $0.0001 par value; 4,000 shares authorized; 1,174 shares outstanding as of both September 30, 2019 and December 31, 2018	—			—
Preferred stock, $0.0001 par value; 100 shares authorized, unissued	—			—
Treasury stock at cost, 102 and 91 shares as of September 30, 2019 and December 31, 2018, respectively	(6,566		)	(5,511		)
Additional paid-in-capital	15,266			14,939
Retained earnings	7,835			5,880
Accumulated other comprehensive income (loss)	(52		)	78
Total equity	16,483			15,386
Total liabilities and equity	$	50,223		$	43,332

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

PayPal Holdings, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME



	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019		2018
	(In millions, except per share data)
	(Unaudited)
Net revenues	$	4,378		$	3,683	$	12,811	$	11,225
Operating expenses:
Transaction expense	1,701			1,366		4,877		4,003
Transaction and loan losses	340			295		999		934
Customer support and operations	390			350		1,177		1,030
Sales and marketing	316			325		1,001		913
Technology and development	533			452		1,527		1,341
General and administrative	401			377		1,239		1,111
Restructuring and other charges	—			28		71		297
Total operating expenses	3,681			3,193		10,891		9,629
Operating income	697			490		1,920		1,596
Other income (expense), net	(213		)	43		224		94
Income before income taxes	484			533		2,144		1,690
Income tax expense	22			97		192		217
Net income	$	462		$	436	$	1,952	$	1,473

Net income per share:
Basic	$	0.39		$	0.37	$	1.66	$	1.24
Diluted	$	0.39		$	0.36	$	1.64	$	1.22

Weighted average shares:
Basic	1,175			1,181		1,174		1,187
Diluted	1,188			1,199		1,188		1,206

The accompanying notes are an integral part of these condensed consolidated financial statements.

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PayPal Holdings, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(In millions)
	(Unaudited)
Net income	$	462		$	436		$	1,952		$	1,473
Other comprehensive income (loss), net of reclassification adjustments:
Foreign currency translation	(90		)	(6		)	(148		)	(33		)
Unrealized (losses) gains on investments, net	(5		)	4			16			(6		)
Tax benefit (expense) on unrealized (losses) gains on investments, net	1			(1		)	(5		)	2
Unrealized gains on hedging activities, net	71			34			7			249
Tax expense on unrealized gains on hedging activities, net	(1		)	(1		)	—			(4		)
Other comprehensive income (loss), net of tax	(24		)	30			(130		)	208
Comprehensive income	$	438		$	466		$	1,822		$	1,681

The accompanying notes are an integral part of these condensed consolidated financial statements.

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PayPal Holdings, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY



	Common Stock Shares		Treasury Stock			Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings		Total Equity
	Common Stock Shares		Treasury Stock			Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings		Total Equity
	(In millions)
	(Unaudited)
Balances at December 31, 2018	1,174		$	(5,511	)	$	14,939		$	78		$	5,880	$	15,386
Adoption of lease accounting standard	—		—			—			—			3		3
Net income	—		—			—			—			667		667
Foreign currency translation	—		—			—			(67		)	—		(67		)
Unrealized gains on investments, net	—		—			—			11			—		11
Tax expense on unrealized gains on investments, net	—		—			—			(2		)	—		(2		)
Unrealized losses on hedging activities, net	—		—			—			(46		)	—		(46		)
Tax benefit on unrealized losses on hedging activities, net	—		—			—			1			—		1
Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes	6		—			(302		)	—			—		(302		)
Common stock repurchased	(8	)	(705		)	(45		)	—			—		(750		)
Stock-based compensation	—		—			256			—			—		256
Balances at March 31, 2019	1,172		$	(6,216	)	$	14,848		$	(25	)	$	6,550	$	15,157
Net income	—		—			—			—			823		823
Foreign currency translation	—		—			—			9			—		9
Unrealized gains on investments, net	—		—			—			10			—		10
Tax expense on unrealized gains on investments, net	—		—			—			(4		)	—		(4		)
Unrealized losses on hedging activities, net	—		—			—			(18		)	—		(18		)
Tax benefit on unrealized losses on hedging activities, net	—		—			—			—			—		—
Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes	5		—			(73		)	—			—		(73		)
Common stock repurchased	—		—			—			—			—		—
Stock-based compensation	—		—			235			—			—		235
Balances at June 30, 2019	1,177		$	(6,216	)	$	15,010		$	(28	)	$	7,373	$	16,139
Net income	—		—			—			—			462		462
Foreign currency translation	—		—			—			(90		)	—		(90		)
Unrealized losses on investments, net	—		—			—			(5		)	—		(5		)
Tax benefit on unrealized losses on investments, net	—		—			—			1			—		1
Unrealized gains on hedging activities, net	—		—			—			71			—		71
Tax expense on unrealized gains on hedging activities, net	—		—			—			(1		)	—		(1		)
Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes	—		—			(19		)	—			—		(19		)
Common stock repurchased	(3	)	(350		)	—			—			—		(350		)
Stock-based compensation	—		—			275			—			—		275
Balances at September 30, 2019	1,174		$	(6,566	)	$	15,266		$	(52	)	$	7,835	$	16,483

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PayPal Holdings, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)



	Common Stock Shares		Treasury Stock			Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings		Total Equity
	Common Stock Shares		Treasury Stock			Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings		Total Equity
	(In millions)
	(Unaudited)
Balances at December 31, 2017	1,200		$	(2,001	)	$	14,314		$	(142	)	$	3,823	$	15,994
Net income	—		—			—			—			511		511
Foreign currency translation	—		—			—			2			—		2
Unrealized losses on investments, net	—		—			—			(15		)	—		(15		)
Tax benefit on unrealized losses on investments, net	—		—			—			4			—		4
Unrealized losses on hedging activities, net	—		—			—			(18		)	—		(18		)
Tax benefit on unrealized losses on hedging activities, net	—		—			—			—			—		—
Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes	7		—			(226		)	—			—		(226		)
Common stock repurchased	(24	)	(1,810		)	(15		)	—			—		(1,825		)
Stock-based compensation	—		—			214			—			—		214
Balances at March 31, 2018	1,183		$	(3,811	)	$	14,287		$	(169	)	$	4,334	$	14,641
Net income	—		—			—			—			526		526
Foreign currency translation	—		—			—			(29		)	—		(29		)
Unrealized gains on investments, net	—		—			—			5			—		5
Tax expense on unrealized gains on investments, net	—		—			—			(1		)	—		(1		)
Unrealized gains on hedging activities, net	—		—			—			233			—		233
Tax expense on unrealized losses on hedging activities, net	—		—			—			(3		)	—		(3		)
Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes	7		—			(67		)	—			—		(67		)
Common stock repurchased	(6	)	(500		)	—			—			—		(500		)
Stock-based compensation	—		—			214			—			—		214
Balances at June 30, 2018	1,184		$	(4,311	)	$	14,434		$	36		$	4,860	$	15,019
Net income	—		—			—			—			436		436
Foreign currency translation	—		—			—			(6		)	—		(6		)
Unrealized gains on investments, net	—		—			—			4			—		4
Tax expense on unrealized gains on investments, net	—		—			—			(1		)	—		(1		)
Unrealized gains on hedging activities, net	—		—			—			34			—		34
Tax expense on unrealized losses on hedging activities, net	—		—			—			(1		)	—		(1		)
Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes	1		—			9			—			—		9
Common stock repurchased	(7	)	(600		)	—			—			—		(600		)
Stock-based compensation	—		—			221			—			—		221
Balances at September 30, 2018	1,178		$	(4,911	)	$	14,664		$	66		$	5,296	$	15,115

The accompanying notes are an integral part of these condensed consolidated financial statements.

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PayPal Holdings, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



	Nine Months Ended September 30,
	2019			2018
	(In millions)
	(Unaudited)
Cash flows from operating activities:
Net income	$	1,952		$	1,473
Adjustments:
Transaction and loan losses	999			934
Depreciation and amortization	685			553
Stock-based compensation	736			623
Deferred income taxes	(122		)	(34		)
Cost basis adjustments to loans and interest receivable held for sale	—			244
Unrealized gains on strategic investments	(170		)	(31		)
Other	(130		)	(48		)
Changes in assets and liabilities:
Accounts receivable	(103		)	(133		)
Changes in loans and interest receivable held for sale, net	4			1,407
Accounts payable	(51		)	5
Income taxes payable	(33		)	(21		)
Other assets and liabilities	(470		)	(623		)
Net cash provided by operating activities	3,297			4,349
Cash flows from investing activities:
Purchases of property and equipment	(530		)	(599		)
Proceeds from sales of property and equipment	17			—
Changes in principal loans receivable, net	(1,111		)	3,573
Purchases of investments	(19,808		)	(15,641		)
Maturities and sales of investments	17,390			15,947
Acquisitions, net of cash and restricted cash acquired	—			(2,136		)
Funds receivable	(1,292		)	(427		)
Net cash (used in) provided by investing activities	(5,334		)	717
Cash flows from financing activities:
Proceeds from issuance of common stock	78			83
Purchases of treasury stock	(1,106		)	(2,925		)
Tax withholdings related to net share settlements of equity awards	(473		)	(392		)
Borrowings under financing arrangements	5,471			2,075
Repayments under financing arrangements	(2,509		)	(1,101		)
Funds payable and amounts due to customers	2,376			2,767
Net cash provided by financing activities	3,837			507
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	(49		)	(89		)
Net change in cash, cash equivalents, and restricted cash	1,751			5,484
Cash, cash equivalents, and restricted cash at beginning of period	13,233			8,285
Cash, cash equivalents, and restricted cash at end of period	$	14,984		$	13,769

Supplemental cash flow disclosures:
Cash paid for interest	$	76		$	47
Cash paid for income taxes, net	$	220		$	228

The below table reconciles cash, cash equivalents, and restricted cash as reported in the condensed consolidated balance sheet to the total of the same amounts shown in the condensed consolidated statement of cash flows:
Cash and cash equivalents	$	6,877		$	8,147
Short term investments	10			16
Funds receivable and customer accounts	8,097			5,606
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows	$	14,984		$	13,769

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Note 1—Overview and Summary of Significant Accounting Policies

Overview and Organization

PayPal Holdings, Inc. (“PayPal,” the “Company,” “we,” “us,” or “our”) was incorporated in Delaware in January 2015 and is a leading technology platform and digital payments company that enables digital and mobile payments on behalf of consumers and merchants worldwide. PayPal is committed to democratizing financial services and empowering people and businesses to join and thrive in the global economy. Our goal is to enable our consumers and merchants to manage and move their money anywhere in the world, anytime, on any platform, and using any device. We also facilitate person-to-person payments through our PayPal, Venmo, and Xoom products. Our combined payment solutions, including our PayPal, PayPal Credit, Braintree, Venmo, Xoom, and iZettle products, comprise our proprietary Payments Platform.

We operate globally and in a rapidly evolving regulatory environment characterized by a heightened regulatory focus on all aspects of the payments industry. That focus continues to become even more heightened as regulators on a global basis focus on important issues such as countering terrorist financing, anti-money laundering, privacy, cybersecurity, and consumer protection. Some of the laws and regulations to which we are subject were enacted recently, and the laws and regulations applicable to us, including those enacted prior to the advent of digital and mobile payments, are continuing to evolve through legislative and regulatory action and judicial interpretation. New or changing laws and regulations, including the way laws and regulations are interpreted and implemented, as well as increased penalties and enforcement actions related to non-compliance could have a material adverse impact on our business, results of operations, and financial condition. Therefore, we monitor these areas closely to design compliant solutions for our customers who depend on us.

Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The condensed consolidated financial statements include the financial statements of PayPal and our wholly- and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Investments in entities where we have the ability to exercise significant influence, but not control, over the investee are accounted for using the equity method of accounting. For such investments, our share of the investee’s results of operations is included in other income (expense), net on our condensed consolidated statements of income and our investment balance is included in long-term investments on our condensed consolidated balance sheets. Investments in entities where we do not have the ability to exercise significant influence over the investee are accounted for at fair value or cost minus impairment, if any, adjusted for changes resulting from observable price changes, which are included in other income (expense), net on our condensed consolidated statements of income. Our investment balance is included in long-term investments on our condensed consolidated balance sheets.

These condensed consolidated financial statements and accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”) filed with the Securities and Exchange Commission.

In the opinion of management, these condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the condensed consolidated financial statements for interim periods. Certain amounts for prior years have been reclassified to conform to the financial statement presentation as of and for the three and nine months ended September 30, 2019.

Reclassifications

Beginning with the first quarter of 2019, we reclassified certain operating expenses within the condensed consolidated statements of income. Prior period amounts have been reclassified to conform to this presentation. These changes have no impact on our previously reported consolidated net income for prior periods, including total operating expenses, financial position, or cash flows for any periods presented.

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The classification changes relate primarily to the combination of costs incurred to develop and operate our Payments Platform into a new caption entitled technology and development. This new caption includes: (a) costs incurred in operating, maintaining, and enhancing our Payments Platform, including network and infrastructure costs, which were previously classified in the customer support and operations caption, and (b) costs incurred in developing new and improving existing products, which were previously classified in the product development caption on our condensed consolidated statements of income. In addition, we have eliminated the presentation of depreciation and amortization expense as a separate financial statement caption by reclassifying these expenses into financial statement captions aligned with the internal organizations that are the primary beneficiaries of the depreciation and amortization of such assets.

The following tables present the effects of the changes on the presentation of these operating expenses to the previously reported condensed consolidated statements of income:



	Three Months Ended September 30, 2018
	(In millions)
	As Previously Reported		Adjustments			Revised

Transaction expense	$	1,366	$	—		$	1,366
Transaction and loan losses	295		—			295
Customer support and operations	367		(17		)	350
Sales and marketing	326		(1		)	325
Product development	269		(269		)	—
Technology and development	—		452			452
General and administrative	354		23			377
Depreciation and amortization	188		(