0001633917-20-000093.txt : 20200507 0001633917-20-000093.hdr.sgml : 20200507 20200506193438 ACCESSION NUMBER: 0001633917-20-000093 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 152 CONFORMED PERIOD OF REPORT: 20200331 FILED AS OF DATE: 20200507 DATE AS OF CHANGE: 20200506 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PayPal Holdings, Inc. CENTRAL INDEX KEY: 0001633917 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 492989869 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-36859 FILM NUMBER: 20854107 BUSINESS ADDRESS: STREET 1: 2211 NORTH FIRST STREET CITY: SAN JOSE STATE: CA ZIP: 95131 BUSINESS PHONE: (408) 967-1000 MAIL ADDRESS: STREET 1: 2211 NORTH FIRST STREET CITY: SAN JOSE STATE: CA ZIP: 95131 10-Q 1 pyplq1202010-q.htm 10-Q Document
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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 March 31, 2020.
OR
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.

1


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 May 1, 2020, there were 1,173,981,657 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.
 

2


PayPal Holdings, Inc.
TABLE OF CONTENTS

 
 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



3


PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

PayPal Holdings, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
March 31,
2020
 
December 31,
2019
 
(In millions, except par value)
 
(Unaudited)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
7,854

 
$
7,349

Short-term investments
2,332

 
3,412

Accounts receivable, net
412

 
435

Loans and interest receivable, net of allowances of $754 and $258 as of March 31, 2020 and December 31, 2019, respectively
3,712

 
3,972

Funds receivable and customer accounts
22,817

 
22,527

Prepaid expenses and other current assets
1,057

 
800

Total current assets
38,184

 
38,495

Long-term investments
2,366

 
2,863

Property and equipment, net
1,646

 
1,693

Goodwill
9,124

 
6,212

Intangible assets, net
1,369

 
778

Other assets
1,577

 
1,292

Total assets
$
54,266

 
$
51,333

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
217

 
$
232

Funds payable and amounts due to customers
24,817

 
24,527

Accrued expenses and other current liabilities
2,276

 
2,087

Income taxes payable
139

 
73

Total current liabilities
27,449

 
26,919

Deferred tax liability and other long-term liabilities
2,839

 
2,520

Long-term debt
7,967

 
4,965

Total liabilities
38,255

 
34,404

Commitments and Contingencies (Note 13)

 


Equity:
 
 
 
Common stock, $0.0001 par value; 4,000 shares authorized; 1,173 shares outstanding as of both March 31, 2020 and December 31, 2019

 

Preferred stock, $0.0001 par value; 100 shares authorized, unissued

 

Treasury stock at cost, 113 and 105 shares as of March 31, 2020 and December 31, 2019, respectively
(7,672
)
 
(6,872
)
Additional paid-in-capital
15,501

 
15,588

Retained earnings
8,258

 
8,342

Accumulated other comprehensive income (loss)
(120
)
 
(173
)
Total PayPal Stockholders’ equity
15,967

 
16,885

Noncontrolling interest
44

 
44

Total equity
16,011

 
16,929

Total liabilities and equity
$
54,266

 
$
51,333

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

4


PayPal Holdings, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
Three Months Ended March 31,
 
2020
 
2019
 
(In millions, except per share data)
 
(Unaudited)
Net revenues
$
4,618

 
$
4,128

Operating expenses:
 
 
 
Transaction expense
1,739

 
1,549

Transaction and credit losses
591

 
341

Customer support and operations
399

 
388

Sales and marketing
371

 
329

Technology and development
605

 
511

General and administrative
486

 
419

Restructuring and other charges
29

 
73

Total operating expenses
4,220

 
3,610

Operating income
398

 
518

Other income (expense), net
(135
)
 
199

Income before income taxes
263

 
717

Income tax expense
179

 
50

Net income
$
84

 
$
667

 
 
 
 
Net income per share:
 
 
 
Basic
$
0.07

 
$
0.57

Diluted
$
0.07

 
$
0.56

 
 
 
 
Weighted average shares:
 
 
 
Basic
1,173

 
1,171

Diluted
1,185

 
1,188

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


5


PayPal Holdings, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months Ended March 31,
 
2020
 
2019
 
(In millions)
 
(Unaudited)
Net income
$
84

 
$
667

Other comprehensive income (loss), net of reclassification adjustments:
 
 
 
Foreign currency translation adjustments (“CTA”)
(171
)
 
(67
)
Net investment hedge CTA gain
71

 

Unrealized gains (losses) on cash flow hedges, net
144

 
(46
)
Tax (expense) benefit on unrealized gains (losses) on cash flow hedges, net
(2
)
 
1

Unrealized gains on investments, net
15

 
11

Tax expense on unrealized gains on investments, net
(4
)
 
(2
)
Other comprehensive income (loss), net of tax
53

 
(103
)
Comprehensive income
$
137

 
$
564

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


6


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
 
Noncontrolling Interest
 
Total 
Equity
 
 
(In millions)
 
(Unaudited)
Balances at December 31, 2019
1,173

 
$
(6,872
)
 
$
15,588

 
$
(173
)
 
$
8,342

 
$
44

 
$
16,929

Adoption of current expected credit loss standard

 

 

 

 
(168
)
 

 
(168
)
Net income

 

 

 

 
84

 

 
84

Foreign CTA

 

 

 
(171
)
 

 

 
(171
)
Net investment hedge CTA gain

 

 

 
71

 

 

 
71

Unrealized gains on cash flow hedges, net

 

 

 
144

 

 

 
144

Tax expense on unrealized gains on cash flow hedges, net

 

 

 
(2
)
 

 

 
(2
)
Unrealized gains on investments, net

 

 

 
15

 

 

 
15

Tax expense on unrealized gains on investments, net

 

 

 
(4
)
 

 

 
(4
)
Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes
8

 

 
(382
)
 

 

 

 
(382
)
Common stock repurchased
(8
)
 
(800
)
 

 

 

 

 
(800
)
Stock-based compensation

 

 
295

 

 

 

 
295

Balances at March 31, 2020
1,173

 
$
(7,672
)
 
$
15,501

 
$
(120
)
 
$
8,258

 
$
44

 
$
16,011


 
Common Stock Shares
 
Treasury Stock
 
Additional Paid-In Capital
 
Accumulated Other
Comprehensive Income (Loss)
 
Retained Earnings
 
Noncontrolling Interest

 
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 CTA

 

 

 
(67
)
 

 

 
(67
)
Unrealized losses on cash flow hedges, net

 

 

 
(46
)
 

 

 
(46
)
Tax benefit on unrealized losses on cash flow hedges, net

 

 

 
1

 

 

 
1

Unrealized gains on investments, net

 

 

 
11

 

 

 
11

Tax expense on unrealized gains on investments, net

 

 

 
(2
)
 

 

 
(2
)
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

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


7


PayPal Holdings, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended March 31,
 
2020
 
2019
 
(In millions)
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income
$
84

 
$
667

Adjustments:
 
 
 
Transaction and credit losses
591

 
341

Depreciation and amortization
293

 
230

Stock-based compensation
283

 
247

Deferred income taxes
(79
)
 
74

Unrealized losses (gains) on strategic investments
151

 
(180
)
Other
(32
)
 
(44
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
77

 
(96
)
Changes in loans and interest receivable held for sale, net

 
4

Accounts payable
(21
)
 
(3
)
Income taxes payable
51

 
14

Other assets and liabilities
106

 
(227
)
Net cash provided by operating activities
1,504

 
1,027

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(206
)
 
(218
)
Proceeds from sales of property and equipment
119

 

Changes in principal loans receivable, net
(386
)
 
(357
)
Purchases of investments
(3,593
)
 
(8,138
)
Maturities and sales of investments
5,511

 
6,028

Acquisitions, net of cash and restricted cash acquired
(3,612
)
 

Funds receivable
(401
)
 
(2,175
)
Net cash used in investing activities
(2,568
)
 
(4,860
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock
1

 
7

Purchases of treasury stock
(800
)
 
(756
)
Tax withholdings related to net share settlements of equity awards
(402
)
 
(309
)
Borrowings under financing arrangements
3,000

 

Funds payable and amounts due to customers
457

 
2,560

Other financing activities
(15
)
 

Net cash provided by financing activities
2,241

 
1,502

Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(178
)
 
1

Net change in cash, cash equivalents, and restricted cash
999

 
(2,330
)
Cash, cash equivalents, and restricted cash at beginning of period
15,743

 
13,233

Cash, cash equivalents, and restricted cash at end of period
$
16,742

 
$
10,903

 
 
 
 
Supplemental cash flow disclosures:
 
 
 
Cash paid for interest
$
11

 
$
20

Cash paid for income taxes, net
$
30

 
$
22

 
 
 
 
The below table reconciles cash, cash equivalents, and restricted cash as reported in the condensed consolidated balance sheets to the total of the same amounts shown in the condensed consolidated statements of cash flows:
 
 
 
Cash and cash equivalents
$
7,854

 
$
4,515

Short term investments
17

 
15

Funds receivable and customer accounts
8,871

 
6,373

Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows
$
16,742

 
$
10,903

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

8

PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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 merchants and consumers 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 merchants and consumers 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 and services and simplify and personalize shopping experiences for our consumers through our Honey Platform. Our combined payment solutions, including our PayPal, PayPal Credit, Braintree, Venmo, Xoom, and iZettle products and services, 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. Noncontrolling interest reported as a component of equity on our condensed consolidated balance sheets represents the equity interests not owned by PayPal and is recorded for consolidated entities we control and of which we own less than 100%. Noncontrolling interest is not presented separately on our condensed consolidated statements of income as the amount is de minimis.
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, 2019 (the “2019 Form 10-K”) filed with the Securities and Exchange Commission on February 6, 2020.
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 months ended March 31, 2020.


9

PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to provisions for transaction and credit losses, loss contingencies, income taxes, revenue recognition, and the valuation of goodwill and intangible assets. We base our estimates on historical experience and various other assumptions which we believe to be reasonable under the circumstances. These estimates may change as new events occur, and as additional information surrounding the impact of the novel coronavirus pandemic is obtained. Actual results could differ from these estimates and any such differences may be material to our financial statements.

Investments

Short-term investments include time deposits, government and agency securities, and corporate debt securities with original maturities of greater than three months but less than one year when purchased or maturities of less than one year on the reporting date. Long-term investments include government and agency securities and corporate debt securities with maturities exceeding one year, and our strategic investments. Government and agency securities and corporate debt securities are classified as available-for-sale and are reported at fair value using the specific identification method. Unrealized gains and losses are reported as a component of other comprehensive income (loss), net of related estimated tax provisions or benefits. Accrued interest receivable on available-for-sale debt securities totaled $45 million and $54 million, respectively, at March 31, 2020 and December 31, 2019 and is included in other current assets on our condensed consolidated balance sheets.

We elect to account for foreign currency denominated available-for-sale investments underlying funds receivable and customer accounts, short-term investments, and long-term investments under the fair value option as further discussed in “Note 9—Fair Value Measurement of Assets and Liabilities.” The changes in fair value related to initial measurement and subsequent changes in fair value are included in earnings as a component of other income (expense), net.

Our strategic investments consist of marketable equity securities, which are publicly traded, and non-marketable equity securities, which are investments in privately held companies. Marketable equity securities have readily determinable fair values with changes in fair value recorded in other income (expense), net. Non-marketable equity securities include investments that do not have a readily determinable fair value and equity method investments. The investments that do not have readily determinable fair value are measured at cost minus impairment, if any, adjusted for changes resulting from observable price changes in orderly transactions for an identical or similar investment in the same issuer (the “Measurement Alternative”). All gains and losses on these investments, realized and unrealized, are recorded in other income (expense), net on our condensed consolidated statements of income. Our investments where we have the ability to exercise significant influence, but not control, over the investee are accounted for as equity method investments and our share of the investee’s results of operations is included in other income (expense), net.

We assess whether an impairment loss on our non-marketable equity securities and an other-than-temporary impairment loss on our equity method investments has occurred due to declines in fair value or other market conditions. If any impairment is identified for non-marketable equity securities or impairment is considered other-than-temporary for our equity method investments, we write down the investment to its fair value and record the corresponding charge through other income (expense), net in our condensed consolidated statements of income.

Our available-for-sale debt securities in an unrealized loss position will be written down to fair value through a charge to other income (expense), net in our condensed consolidated statements of income if we intend to sell the security or it is more likely than not we will be required to sell the security before recovery of its amortized cost basis. For the remaining available-for-sale debt securities in an unrealized loss position, if we identify that the decline in fair value has resulted from credit losses, considering changes to the rating of the security by rating agencies, implied yields versus benchmark yields, and the extent to which fair value is less than amortized cost, among other factors, we will estimate the present value of cash flows expected to be collected. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.


10

PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Loans and interest receivable, net

Loans and interest receivable, net represents merchant receivables originated under our PayPal Working Capital (“PPWC”) product and PayPal Business Loan (“PPBL”) product and international consumer loans originated under our PayPal Credit products. In the U.S., we partner with an independent chartered financial institution that extends credit to merchants using our PPWC product or PPBL product and purchase the related receivables extended by the independent chartered financial institution.

For our international consumer credit products, we extend credit through our Luxembourg banking subsidiary. For our merchant credit products outside the U.S., we extend working capital advances in the U.K. and loans in Germany through our Luxembourg banking subsidiary, and we extend working capital loans in Australia through an Australian subsidiary.

As part of our arrangement with the independent chartered financial institution in the U.S., we sell back a participation interest in the pool of merchant receivables. For this arrangement, gains or losses on the sale of the participation interests are not material as the carrying amount of the participation interest sold approximates the fair value at time of transfer. The independent chartered financial institution has no recourse against us related to their participation interests for failure of debtors to pay when due. The participation interests held by the chartered financial institution have the same priority to the interests held by us and are subject to the same credit, prepayment, and interest rate risk associated with this pool of merchant receivables. All risks of loss are shared pro rata based on participation interests held among all participating stakeholders. We apply a control-oriented, financial-components approach and account for the asset transfer as a sale and derecognize the portion of the participation interests for which control has been surrendered.

Loans, advances, and interest and fees receivable are reported at their outstanding balances, net of any participation interests sold and pro rata allowances, including unamortized deferred origination costs and estimated collectible interest and fees. We maintain the servicing rights for the entire pool of consumer and merchant receivables outstanding and receive a fee approximating the fair value for servicing the assets underlying the participation interest sold.

The terms of our consumer relationships require us to submit monthly bills to the consumer detailing loan repayment requirements. The terms also allow us to charge the consumer interest and fees in certain circumstances. Due to the relatively small dollar amount of individual loans and interest receivable, we do not require collateral on these balances.

U.S. Consumer Credit Portfolio

In November 2017, we reached an agreement to sell our U.S. consumer credit receivables portfolio to Synchrony Bank (“Synchrony”). Following the closing of this transaction in July 2018, Synchrony became the exclusive issuer of the PayPal Credit online consumer financing program in the U.S. We no longer hold an ownership interest in the receivables generated through the program and thus, no longer record these receivables on our condensed consolidated financial statements. PayPal earns a revenue share on the portfolio of consumer receivables owned by Synchrony, which includes both the sold and newly generated receivables, and it is recorded in revenue from other value-added services on our condensed consolidated statements of income. See “Note 11—Loans and Interest Receivable” for additional information related to this arrangement.

Through the closing of the transaction with Synchrony, we continued to work with an independent chartered financial institution to extend credit to U.S. consumers using our PayPal Credit product. We purchased the related receivables extended by independent chartered financial institutions until July 2018. As part of the arrangements we had with the independent chartered financial institutions in the U.S., we sold back a participation interest in the pool of U.S. consumer receivables outstanding under PayPal Credit consumer accounts. For these arrangements, gains or losses on the sale of the participation interest were not material as the carrying amount of the participation interest sold approximated the fair value at time of transfer.

Allowance for loans and interest receivable

The allowance for loans and interest receivable represents our estimate of lifetime expected credit losses inherent in our portfolio of loans and interest receivables. Increases to the allowance for loans receivable are reflected as a component of transaction and credit losses on our condensed consolidated financial statements. Increases to the allowance for interest and fees receivable are reflected as a reduction of net revenues on our condensed consolidated statements of income, or as a reduction of deferred revenue when interest and fees are billed at the inception of a loan or advance. The evaluation process to assess the adequacy of allowances is subject to numerous estimates and judgments.


11

PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The allowance for loans and interest receivable is primarily based on expectations of credit losses based on historical lifetime loss data as well as macroeconomic forecasts applied to the portfolio that is segmented by geographic region, delinquency, and vintage, among other factors. Loss curves are generated using historical loss data for each loan portfolio and are applied to segments of each portfolio, categorized by geographic region, first borrowing versus reuse, delinquency, credit rating and vintage, among other factors, which vary by portfolio. We then apply macroeconomic factors such as forecasted trends in unemployment and benchmark credit card charge-off rates, which are sourced externally, using a single scenario that is most appropriate to the economic conditions applicable to a particular period. Projected loss rates, inclusive of historical loss data and macroeconomic factors, are applied to the principal amount of our consumer and merchant receivables. Our consumer receivables, which are primarily revolving in nature, do not have a contractual term; however, the reasonable and supportable forecast period we have included in our projected loss rates based on externally sourced data is approximately seven years. Our merchant receivables vary in contractual term; however, the reasonable and supportable forecast period considered for projected loss rates is approximately 2.5 to 3.5 years, depending upon the product. The allowance for losses against the interest and fees receivable is determined primarily by applying loss curves to each portfolio by geography, delinquency and period of origination, among other factors.

In connection with our agreement to sell our U.S. consumer credit receivables to Synchrony and the designation of that portfolio as held for sale in November 2017, we reversed the corresponding allowances against those loans and interest receivable balances. Such allowances on any newly originated U.S. consumer loans and interest receivables, held for sale were not established. Adjustments to the cost basis of this portfolio until the sale was completed, which were primarily driven by charge-offs, were recorded in restructuring and other charges on our consolidated statements of income.

Leases

We determine whether an arrangement is a lease for accounting purposes at contract inception. Operating leases are recorded as right-of-use (“ROU”) assets, which are included in other assets, and lease liabilities, which are included in accrued expenses and other liabilities and other long-term liabilities on our condensed consolidated balance sheets. For sale-leaseback transactions, we evaluate the sale and the lease arrangement based on our conclusion as to whether control of the underlying asset has been transferred and recognize the sale-leaseback as either a sale transaction or under the financing method. The financing method would require the asset to remain on the consolidated balance sheets throughout the term of the lease and the proceeds to be recognized as a financing obligation. As of March 31, 2020, we had no finance leases.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Our leases do not provide an implicit rate; we use an incremental borrowing rate for specific terms on a collateralized basis based on the information available on the commencement date in determining the present value of lease payments. The ROU asset calculation includes lease payments to be made and excludes lease incentives. The ROU asset and lease liability may include amounts attributed to options to extend or terminate the lease when it is reasonably certain we will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term.

We have lease agreements with lease and non-lease components. We have elected to apply the practical expedient and account for the lease and non-lease components as a single lease component for all leases. In addition, we have elected the practical expedients related to lease classification, hindsight, and land easement. We apply a single portfolio approach to account for the ROU assets and lease liabilities.


12

PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Allowance for transaction losses

We are exposed to transaction losses due to credit card and other payment misuse as well as nonperformance from sellers who accept payments through PayPal. We establish an allowance for estimated losses arising from completing customer transactions, such as chargebacks for unauthorized credit card use and merchant-related chargebacks due to non-delivery of goods or services, buyer protection program claims, and account takeovers. This allowance represents an accumulation of the estimated amounts necessary to provide for transaction losses incurred as of the reporting date, including those which we have not yet identified. The allowance is monitored regularly and is updated based on actual data received, including actual claims data reported by our claims processors. The allowance is based on known facts and circumstances, internal factors including experience with similar cases, historical trends involving loss payment patterns, the mix of transaction and loss types, as well as macroeconomic factors, as applicable. Additions to the allowance are reflected as a component of transaction and credit losses on our condensed consolidated statements of income. At March 31, 2020 and December 31, 2019, the allowance for transaction losses totaled $120 million and $136 million, respectively, and was included in accrued expenses and other current liabilities on our condensed consolidated balance sheets.

Allowance for negative customer balances

Negative customer balances occur primarily when there are insufficient funds in a customer’s PayPal account to cover charges applied for ACH returns, debit card transactions, and merchant-related chargebacks due to non-delivery or unsatisfactory delivery of goods or services, which are generally within the scope of our protection programs. Negative customer balances can be cured by the customer by adding funds to their account, receiving payments, or through back-up funding sources. We also utilize third-party collection agents. For negative customer balances that are not expected to be cured or otherwise collected, we provide an allowance for lifetime expected losses. The allowance represents expected losses based on historical trends involving collection and write-off patterns, internal factors including our experience with similar cases, other known facts and circumstances, and reasonable and supportable macroeconomic forecasts, as necessary. Loss rates are derived using historical loss data for each delinquency bucket using a roll rate model that captures the losses and the likelihood that a negative customer balance will be written-off as the delinquency age of such balance increases. The loss rates are then applied to the outstanding negative customer balances. Once the quantitative calculation is performed, we review the adequacy of the allowance and determine if qualitative adjustments need to be considered. We write off negative customer balances in the month in which the balance becomes outstanding for 120 days. Write-offs that are recovered are recorded as a reduction to our allowance for negative customer balances.

Negative customer balances are included in other current assets, net of the allowance on our condensed consolidated balance sheets. Adjustments to the allowance for negative customer balances are recorded as a component of transaction and credit losses on our condensed consolidated statements of income. The allowance for negative customer balances was $276 million and $263 million at March 31, 2020 and December 31, 2019, respectively.

Recent Accounting Guidance

In 2020, the Financial Accounting Standards Board (“FASB”) issued amended guidance that provides transition relief for the accounting impact of reference rate reform. For a limited period, this guidance provides optional expedients and exceptions for applying GAAP to certain contract modifications, hedging relationships, and other transactions affected by a reference rate expected to be discontinued due to reference rate reform. The amended guidance is effective through December 31, 2022. Our exposure to LIBOR is limited to an insignificant amount of fixed rate investment securities and, therefore, we do not expect the impact from reference rate reform to be material.
 
Recently Adopted Accounting Guidance

In 2019, the FASB issued amended guidance for simplifying certain aspects for the accounting for income taxes. This amended guidance is intended to remove certain exceptions to the general principles in current GAAP, reduce the cost and complexity in accounting for income taxes, and improve financial statement preparers’ application of income tax-related guidance. This guidance does not create new accounting requirements. It is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020, with early adoption permitted. We early adopted this guidance in the first quarter of 2020. Adoption of this guidance did not have a material impact on our condensed consolidated financial statements.


13

PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

In 2016, the FASB issued new guidance on the measurement of credit losses on financial instruments. Under the new guidance, credit losses on loans, trade and other receivables, held-to-maturity debt securities, and other instruments reflect our current estimate of the expected credit losses and generally result in the earlier recognition of allowances for losses. Credit losses on available-for-sale debt securities with unrealized losses are recognized as allowances for credit losses limited to the amount by which fair value is below amortized cost. Additional disclosures are required, including information used to track credit quality by year of origination for most financing receivables. We are required to apply the provisions of this guidance as a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted with impairment of available-for-sale debt securities applied prospectively after adoption. We adopted the new guidance effective January 1, 2020. For additional information, see “Note 11—Loans and Interest Receivable.”

There are other new accounting pronouncements issued by the FASB that we have adopted or will adopt, as applicable, and we do not believe any of these accounting pronouncements have had, or will have, a material impact on our condensed consolidated financial statements or disclosures.

Note 2—Revenue

PayPal enables its customers to send and receive payments. We earn revenue primarily by completing payment transactions for our customers on our Payments Platform and from other value added services. Our revenues are classified into two categories: transaction revenues and revenues from other value added services.
Disaggregation of Revenue

We determine operating segments based on how our chief operating decision maker (“CODM”) manages the business, makes operating decisions around the allocation of resources, and evaluates operating performance. Our CODM is our Chief Executive Officer, who reviews our operating results on a consolidated basis. We operate as one segment and have one reportable segment. Based on the information provided to and reviewed by our CODM, we believe that the nature, amount, timing, and uncertainty of our revenue and cash flows and how they are affected by economic factors are most appropriately depicted through our primary geographical markets and type of revenue categories (transaction revenues and other value added services). Revenues recorded within these categories are earned from similar services for which the nature of associated fees and the related revenue recognition models are substantially the same.

The following table presents our revenue disaggregated by primary geographical market and category:
 
Three Months Ended March 31,
 
2020
  
2019
 
(In millions)
Primary geographical markets
 
 
 
United States (“U.S.”)
$
2,469

 
$
2,187

United Kingdom (“U.K.”)
478

 
433

Other countries(1)
1,671

 
1,508

Total revenues(2)
$
4,618

 
$
4,128

 
 
 
 
Revenue category
 
 
 
Transaction revenues
$
4,215

 
$
3,731

Other value added services
403

 
397

Total revenues(2)
$
4,618

 
$
4,128

(1) No single country included in the other countries category generated more than 10% of total revenue.
(2) Total revenues include $247 million and $257 million for the three months ended March 31, 2020 and 2019, respectively, which do not represent revenues recognized in the scope of Accounting Standards Codification Topic 606, Revenue from contracts with customers. Such revenues relate to interest, fees, and gains earned on loans and interest receivable, as well as hedging gains or losses, and interest earned on certain PayPal customer balances.


14

PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Net revenues are attributed to the country in which the merchant is located, or in the case of a cross-border transaction, may be earned from the country in which the consumer and the merchant respectively reside. Net revenues earned from other value added services are typically attributed to the country in which either the customer or partner reside.

Note 3—Net Income Per Share

Basic net income per share is computed by dividing net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding for the period. The dilutive effect of outstanding equity incentive awards is reflected in diluted net income per share by application of the treasury stock method. The calculation of diluted net income per share excludes all anti-dilutive common shares.

The following table sets forth the computation of basic and diluted net income per share for the periods indicated:
 
Three Months Ended March 31,
 
2020
  
2019
 
(In millions, except per share amounts)
Numerator:
 
 
 
Net income
$
84

 
$
667

Denominator:
 
 
 
Weighted average shares of common stock - basic
1,173

 
1,171

Dilutive effect of equity incentive awards
12

 
17

Weighted average shares of common stock - diluted
1,185

 
1,188

Net income per share:
 
 
 
Basic
$
0.07

 
$
0.57

Diluted
$
0.07

 
$
0.56

Common stock equivalents excluded from income per diluted share because their effect would have been anti-dilutive
2

 
3



Note 4—Business Combinations

Honey Science Corporation

We completed our acquisition of Honey Science Corporation (“Honey”) in January 2020 by acquiring all outstanding shares for total consideration of approximately $4.0 billion, consisting of approximately $3.6 billion in cash and approximately $400 million in assumed restricted stock, restricted stock units, and options, subject to vesting conditions. We believe our acquisition of Honey will enhance our value proposition by allowing us to further simplify and personalize shopping experiences for consumers while driving conversion and increasing consumer engagement and sales for merchants.


15

PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table summarizes the preliminary allocation of the purchase consideration to the fair value of the assets acquired and liabilities assumed:
 
(In millions)
Goodwill
$
2,959

Customer lists and user base
115

Marketing related
30

Developed technology
572

Total intangibles
$
717

Accounts receivable, net
55

Deferred tax liabilities, net
(76
)
Other net liabilities
(18
)
Total purchase consideration
$
3,637



The intangible assets acquired consist primarily of customer contracts, trade name/trademarks, and developed technology with estimated useful lives of three years. The excess of the purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill, and is attributable to the workforce of Honey and the synergies expected to arise from the acquisition through continued customer acquisition, cross selling initiatives, and product enhancements. We do not expect goodwill to be deductible for income tax purposes. The allocation of the purchase price for this acquisition has been prepared on a preliminary basis and changes to the allocation to certain assets, liabilities, and tax estimates may occur as additional information becomes available.

In association with the acquisition, we assumed restricted stock, restricted stock units, and options with an approximate grant date fair value of $400 million, which represents post business combination expense. The equity granted is a combination of shares issued to certain former Honey employees subject to a holdback arrangement and assumed Honey employee grants, which vest over a period of up to four years and are subject to continued employment.

We have included the financial results of the acquired business in our condensed consolidated financial statements from the date of acquisition. Revenues and expenses related to the acquisition for the three months ended March 31, 2020 were not material. Pro forma results of operations have not been presented because the effects of this acquisition were not material to our financial results.

There were no acquisitions or divestitures completed during the three months ended March 31, 2019.

Note 5—Goodwill and Intangible Assets

Goodwill

The following table presents goodwill balances and adjustments to those balances during the three months ended March 31, 2020:
 
December 31,
2019
 
Goodwill
Acquired
 
Adjustments
 
March 31,
2020
 
 (In millions)
Total goodwill
$
6,212

 
$
2,959

 
$
(47
)
 
$
9,124



The goodwill acquired during the three months ended March 31, 2020 was associated with the acquisition of Honey. The adjustments to goodwill during the three months ended March 31, 2020 pertain to foreign currency translation adjustments.


16

PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Intangible Assets

The components of identifiable intangible assets are as follows:
 
March 31, 2020
 
December 31, 2019
 
Gross Carrying Amount  
 
Accumulated Amortization 
 
Net Carrying Amount
 
Weighted Average Useful Life (Years)
 
Gross Carrying Amount 
 
Accumulated Amortization 
 
Net Carrying Amount
 
Weighted Average Useful Life (Years)
 
(In millions, except years)
Intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer lists and user base
$
1,205

 
$
(713
)
 
$
492

 
6
 
$
1,114

 
$
(700
)
 
$
414

 
7
Marketing related
321

 
(247
)
 
74

 
3
 
294

 
(239
)
 
55

 
3
Developed technology
999

 
(388
)
 
611

 
3
 
445

 
(343
)
 
102

 
3
All other
433

 
(241
)
 
192

 
7
 
436

 
(229
)
 
207

 
7
Intangible assets, net
$
2,958

 
$
(1,589
)
 
$
1,369

 
 
 
$
2,289

 
$
(1,511
)
 
$
778

 
 

        
Amortization expense for intangible assets was $114 million and $57 million for the three months ended March 31, 2020 and 2019, respectively.

Expected future intangible asset amortization as of March 31, 2020 was as follows (in millions):
Fiscal years:
 
Remaining 2020
$
335

2021
398

2022
336

2023
98

2024
96

Thereafter
106

Total
$
1,369



Note 6—Leases

PayPal enters into various leases, which are primarily real estate operating leases. We use these properties for executive and administrative offices, data centers, product development offices, and customer service and operations centers. Many leases include one or more renewal or termination options. These options are not included in our determination of the lease term at commencement unless it is reasonably certain the Company will exercise the option. When we reach a decision to exercise a lease renewal or termination option, we recognize the associated impact to the ROU asset and lease liability.

While a majority of lease payments are based on the stated rate in the lease, some lease payments are subject to annual changes based on the Consumer Price Index or another referenced index. In the event of changes to the relevant index, lease liabilities are not re-measured and instead are treated as variable lease payments and recognized in the period in which the obligation for those payments is incurred. All of PayPal’s variable lease payments are based on an index or rate.

The short-term lease exemption has been adopted for all leases with a duration of less than 12 months.

PayPal’s lease portfolio contains a small number of subleases. A sublease situation can arise when currently leased real estate space is available and is surplus to operational requirements.


17

PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The components of lease expense were as follows:
 
Three Months Ended
March 31, 2020
 
Three Months Ended
March 31, 2019
 
(In millions)
Lease expense
 
 
 
Operating lease expense
$
38

 
$
34

Sublease income
(1
)
 
(2
)
Total lease expense cost
$
37

 
$
32

 
 
 
 
Other information:
 
 
 
Cash paid for amounts included in the measurement of lease liabilities
 
 
 
Operating cash flows from operating leases
$
35

 
$
31

Right-of-use assets obtained in exchange for new operating lease liabilities
$
244

 
$
5

 
 
 
 
 
Balance at March 31, 2020
 
Balance at December 31, 2019
 
(In millions, except weighted-average figures)
Operating lease right-of-use assets
$
687

 
$
479

Other current lease liabilities
122

 
104

Operating lease liabilities
608

 
403

Total operating lease liabilities
730

 
507

Weighted-average remaining lease termoperating leases
7.3 years

 
5.8 years

Weighted-average discount rateoperating leases
4
%
 
5
%


Future minimum lease payments for our operating leases as of March 31, 2020 were as follows:
 
Operating Leases
Fiscal years:
(In millions)
Remaining 2020
$
114

2021
139

2022
107

2023
94

2024
86

Thereafter
300

Total
$
840

Less: present value discount
(110
)
Lease liability
$
730


Operating lease amounts include minimum lease payments under our non-cancelable operating leases primarily for office and data center facilities. The amounts presented are consistent with contractual terms and are not expected to differ significantly from actual results under our existing leases.

In February 2020, we entered into a sale-leaseback arrangement as the seller-lessee for a data center as the buyer-lessor obtained control of the facility. We sold the data center and simultaneously entered into an operating lease agreement with the purchaser for the right to use the facility for 8 years. The Company received proceeds of approximately $119 million, net of selling costs, which resulted in a de minimis net gain on the sale transaction.

As of March 31, 2020, we also have additional operating leases that have not yet commenced, primarily for real estate and data centers, with minimum lease payments aggregating to $151 million. These operating leases will commence between fiscal years 2020 and 2021 with lease terms of 3 years to 10 years.

18

PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 7—Other Financial Statement Details

Accumulated Other Comprehensive Income (Loss)

The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the three months ended March 31, 2020:
 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Unrealized Gains (Losses) on Investments
 
Foreign
Currency
Translation Adjustment (“CTA”)
 
Net InvestmentHedge CTA Gain (Loss)
 
Estimated Tax Benefit (Expense)
 
Total
 
(In millions)
Beginning balance
$
6

 
$
2

 
$
(150
)
 
$
(31
)
 
$

 
$
(173
)
Other comprehensive income (loss) before reclassifications
186

 
15

 
(171
)
 
71

 
(6
)
 
95

Less: Amount of gain reclassified from accumulated other comprehensive income (“AOCI”)
42

 

 

 

 

 
42

Net current period other comprehensive income (loss)
144

 
15

 
(171
)
 
71

 
(6
)
 
53

Ending balance
$
150

 
$
17

 
$
(321
)
 
$
40

 
$
(6
)
 
$
(120
)

The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the three months ended March 31, 2019:
 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Unrealized Gains (Losses) on Investments