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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 September 30, 2019.
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 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.
 

2


PayPal Holdings, Inc.
TABLE OF CONTENTS

 
 
 
Page Number
4
 
4
 
 
5
 
 
6
 
 
7
 
 
9
 
 
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41
 
55
 
57
58
 
58
 
58
 
68
 
68
 
68
 
68
 
69
 
70



3

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.

4

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.


5

Table of Contents


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.


6

Table of Contents


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
 
 
(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

 

7

Table of Contents


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
 
 
(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.


8

Table of Contents


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.

9

Table of Contents



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.


10



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

 
(188
)
 

Restructuring and other charges
28

 

 
28

Total operating expenses
$
3,193

 
$

 
$
3,193



 
Nine Months Ended September 30, 2018
 
(In millions)
 
As Previously Reported
 
Adjustments
 
Revised
 
 
 
 
 
 
Transaction expense
$
4,003

 
$

 
$
4,003

Transaction and loan losses
934

 

 
934

Customer support and operations
1,075

 
(45
)
 
1,030

Sales and marketing
924

 
(11
)
 
913

Product development
782

 
(782
)
 

Technology and development

 
1,341

 
1,341

General and administrative
1,061

 
50

 
1,111

Depreciation and amortization
553

 
(553
)
 

Restructuring and other charges
297

 

 
297

Total operating expenses
$
9,629

 
$

 
$
9,629



11




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 loan 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. Actual results could differ from those estimates.

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. As of September 30, 2019, 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.

Recent Accounting Guidance

In 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance on the measurement of credit losses on financial instruments. Credit losses on loans, trade and other receivables, held-to-maturity debt securities, and other instruments will reflect our estimate of the current expected credit losses and generally will result in the earlier recognition of allowances for losses. Credit losses on available-for-sale debt securities with unrealized losses will be recognized as allowances for credit losses limited to the amount by which fair value is below amortized cost. Additional disclosures will be required, including information used to track credit quality by year of origination for most financing receivables. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We will adopt the new guidance effective January 1, 2020. 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 are in the process of refining models, designing business processes and controls, performing parallel runs, and model validation testing. Based on the models developed, which incorporate forecasts of macroeconomic conditions, the overall impact of adoption of the Current Expected Credit Loss framework is estimated to be an approximate 65% to 85% increase in our allowance for loans and interest receivable as compared to the incurred loss model applied today. The largest drivers of this increase are the change to a lifetime reserve model at the time the asset is initially recorded as well as inclusion of macro-economic factors within the model. Although the timing of the recognition of losses may result in an increase in loan losses in a given period, this increased allowance is not expected to result in a change in our economic losses. Expected credit loss reserves related to our other financing receivables, available-for-sale debt securities, and other financial instruments are not expected to have a material impact on our consolidated financial statements. The extent of the actual impact of the adoption of this guidance at the effective date will depend on the amount and asset quality of our financial instruments, current and forecasted economic conditions at the time of adoption, and any further refinements made to our models.

12



Recently Adopted Accounting Guidance

In 2016, the FASB issued new accounting guidance related to accounting for leases, which requires lessees to recognize lease assets and lease liabilities on the balance sheet for the rights and obligations created by all leases with terms greater than 12 months. As we are not a lessor, other changes in the guidance applicable to lessors do not apply. Additionally, in 2018, the FASB issued codification and targeted improvements to this guidance effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted. We adopted the new guidance on January 1, 2019, using a modified retrospective basis and applied the optional practical expedients related to the transition. We recorded $511 million for the ROU assets and $521 million for the lease liabilities associated with our operating leases upon adoption. The adoption of this guidance did not have a significant impact to our consolidated statements of earnings, stockholders’ equity, and cash flows. For additional information, see Note 6—“Leases.”

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 in 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 September 30,
 
Nine Months Ended September 30,
 
2019
  
2018
 
2019
  
2018
 
(In millions)
Primary geographical markets
 
 
 
 
 
 
 
United States (“U.S.”)
$
2,327

 
$
1,962

 
$
6,811

 
$
6,135

United Kingdom (“U.K.”)
455

 
397

 
1,342

 
1,191

Other countries(1)
1,596

 
1,324

 
4,658

 
3,899

Total revenues(2)
$
4,378

 
$
3,683

 
$
12,811

 
$
11,225

 
 
 
 
 
 
 
 
Revenue category
 
 
 
 
 
 
 
Transaction revenues
$
3,955

 
$
3,343

 
$
11,564

 
$
9,858

Other value added services
423

 
340

 
1,247

 
1,367

Total revenues(2)
$
4,378

 
$
3,683

 
$
12,811

 
$
11,225

(1) No single country included in the other countries category generated more than 10% of total revenue.
(2) Total revenues include $295 million and $173 million for the three months ended September 30, 2019 and 2018, respectively, and $828 million and $973 million for the nine months ended September 30, 2019 and 2018, respectively, which do not represent revenues recognized in the scope of ASC Topic 606, Revenue from contracts with customers. Such revenues relate to interest, fees, and gains earned on loan and interest receivables, net and held for sale portfolio, as well as hedging gains or losses and interest earned on certain PayPal customer balances.

13




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 September 30,
 
Nine Months Ended September 30,
 
2019
  
2018
 
2019
  
2018
 
(In millions, except per share amounts)
Numerator:
 
 
 
 
 
 
 
Net income
$
462

 
$
436

 
$
1,952

 
$
1,473

Denominator:
 
 
 
 
 
 
 
Weighted average shares of common stock - basic
1,175

 
1,181

 
1,174

 
1,187

Dilutive effect of equity incentive awards
13

 
18

 
14

 
19

Weighted average shares of common stock - diluted
1,188

 
1,199

 
1,188

 
1,206

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.39

 
$
0.37

 
$
1.66

 
$
1.24

Diluted
$
0.39

 
$
0.36

 
$
1.64

 
$
1.22

Common stock equivalents excluded from income per diluted share because their effect would have been anti-dilutive
1

 

 
2

 



Note 4—Business Combinations

There were no acquisitions or divestitures completed during the nine months ended September 30, 2019. During the three and nine months ended September 30, 2018, we completed two and three acquisitions, respectively, reflecting 100% of the equity interests of the acquired companies, for an aggregate purchase price of $2.3 billion.

Significant Acquisitions Completed in 2018

Hyperwallet

We completed the acquisition of HWLT Holdings Inc. (“Hyperwallet”) in November 2018 by acquiring all outstanding shares for a total purchase price of approximately $400 million, consisting of cash consideration. We acquired Hyperwallet to enhance our payout capabilities and improve our ability to provide an integrated suite of payment solutions to ecommerce platforms and marketplaces around the world. The allocation of purchase consideration resulted in approximately $100 million of customer-related intangible assets, approximately $30 million of developed technology intangible assets, and approximately $2 million of marketing related intangible assets with estimated useful lives ranging from 3 to 7 years, funds receivable and customer accounts of $412 million, funds payable and amounts due to customers of $412 million, net liabilities of approximately $32 million, and initial goodwill of approximately $300 million, which is attributable to the workforce of Hyperwallet and the synergies expected to arise from the acquisition. 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.


14



iZettle

We completed the acquisition of iZettle AB (publ) (“iZettle”) in September 2018 by acquiring all outstanding shares for a total purchase price of $2.2 billion, consisting of cash consideration paid of approximately $2.1 billion (net of cash acquired of $103 million) and restricted shares of PayPal with a fair value of approximately $22 million. We acquired iZettle to expand our in-store presence and strengthen our Payments Platform to help small businesses around the world grow and thrive in an omnichannel retail environment.

The following table summarizes the final allocation of the purchase consideration to the fair value of the assets acquired and liabilities assumed:
 
(In millions)
Goodwill
$
1,600

Customer lists and user base
426

Marketing related
102

Developed technology
121

All other
1

Total intangibles
$
650

Cash
103

Funds receivable and customer accounts
47

Funds payable and amounts due to customers
(47
)
Deferred tax liabilities, net
(116
)
Other net liabilities
(55
)
Total purchase consideration
$
2,182


The intangible assets acquired consist primarily of merchant relationships, trade name/trademarks, developed technology, and existing acquirer relationships with estimated useful lives ranging from 3 to 7 years. The excess of the purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill, which is attributable to the workforce of iZettle and the synergies expected to arise from the acquisition. We do not expect goodwill to be deductible for income tax purposes. 

Simility

We completed the acquisition of Simility, Inc. (“Simility”) in July 2018 by acquiring all outstanding shares for a total purchase price of $107 million, consisting of cash consideration. We acquired Simility to enhance our ability to deliver fraud prevention and risk management solutions to merchants globally. The allocation of purchase consideration resulted in approximately $18 million of developed technology intangible assets with an estimated useful life of 3 years, net assets of approximately $10 million, and goodwill of approximately $79 million, which is attributable to the workforce of Simility and the synergies expected to arise from the acquisition. We do not expect goodwill to be deductible for income tax purposes.

Note 5—Goodwill and Intangible Assets

Goodwill

The following table presents goodwill balances and adjustments to those balances during the nine months ended September 30, 2019:
 
December 31,
2018
 
Goodwill
Acquired
 
Adjustments
 
September 30,
2019
 
 (In millions)
Total goodwill
$
6,284

 
$

 
$
(106
)
 
$
6,178




15



The adjustments to goodwill during the nine months ended September 30, 2019 are related to foreign currency translation adjustments.

Intangible Assets

The components of identifiable intangible assets are as follows:
 
September 30, 2019
 
December 31, 2018
 
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
$
1,106

 
$
(680
)
 
$
426

 
7
 
$
1,134

 
$
(623
)
 
$
511

 
7
Marketing related
293

 
(230
)
 
63

 
3
 
301

 
(207
)
 
94

 
3
Developed technology
443

 
(324
)
 
119

 
3
 
453

 
(269
)
 
184

 
3
All other
245

 
(224
)
 
21

 
5
 
245

 
(209
)
 
36

 
5
Intangible assets, net
$
2,087

 
$
(1,458
)
 
$
629

 
 
 
$
2,133

 
$
(1,308
)
 
$
825

 
 

        
Amortization expense for intangible assets was $52 million and $34 million for the three months ended September 30, 2019 and 2018, respectively. Amortization expense for intangible assets was $160 million and $90 million for the nine months ended September 30, 2019 and 2018, respectively.

Expected future intangible asset amortization as of September 30, 2019 was as follows (in millions):
Fiscal years:
 
Remaining 2019
$
49

2020
184

2021
132

2022
70

2023
70

Thereafter
124

Total
$
629



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. Our leases have remaining lease terms of less than one year to eleven years, some of which include options to extend individual leases for up to five years, and some of which include options to terminate individual leases within one year. 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. While lease liabilities are not re-measured as a result of changes to the relevant index, such changes to these indices 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.


16



The components of lease expense were as follows:
 
Three Months Ended
September 30, 2019
  
Nine Months Ended
September 30, 2019
 
(In millions, except weighted-average figures)
Lease expense
 
 
 
Operating lease expense
$
33

 
$
99

Sublease income
(5
)
 
(9
)
Total lease expense cost
$
28

 
$
90

 
 
 
 
Other information:
 
 
 
Cash paid for amounts included in the measurement of lease liabilities
 
 
 
Operating cash flows from operating leases
$
31

 
$
93

Right-of-use assets obtained in exchange for new operating lease liabilities
$
32

 
$
100

Weighted-average remaining lease termoperating leases
6.0 years

 
6.0 years

Weighted-average discount rateoperating leases
5
%
 
5
%


Future minimum lease payments for our operating leases as of September 30, 2019 were as follows:
 
Operating Leases
Fiscal years:
(In millions)
Remaining 2019
$
32

2020
120

2021
97

2022
77

2023
58

Thereafter
216

Total
$
600

Less: present value discount
(87
)
Lease liability
$
513


Future minimum lease payments for our operating leases as of December 31, 2018, prior to the adoption of new lease guidance as described in Note 1—“Overview and Summary of Significant Accounting Policies,” were as follows:
 
Operating Leases
Fiscal years:
(In millions)
2019
$
124

2020
111

2021
96

2022
81

2023
63

Thereafter
189

Total minimum lease payments
$
664



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.

As of September 30, 2019, we also have additional operating leases that have not yet commenced, primarily for real estate and data centers, with minimum lease payments aggregating to $111.5 million. These operating leases will commence between fiscal years 2019 and 2021 with lease terms of one year to seven years.

17




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 September 30, 2019:
 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Unrealized Gains (Losses) on Investments
 
Foreign
Currency
Translation
 
Estimated Tax Benefit (Expense)
 
Total
 
(In millions)
Beginning balance
$
118

 
$
8

 
$
(151
)
 
$
(3
)
 
$
(28
)
Other comprehensive income (loss) before reclassifications
141

 
(6
)
 
(90
)
 

 
45

Less: Amount of gain (loss) reclassified from accumulated other comprehensive income
70

 
(1
)
 

 

 
69

Net current period other comprehensive income (loss)
71

 
(5
)
 
(90
)
 

 
(24
)
Ending balance
$
189

 
$
3

 
$
(241
)
 
$
(3
)
 
$
(52
)

The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the three months ended September 30, 2018:
 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Unrealized Gains (Losses) on Investments
 
Foreign
Currency
Translation
 
Estimated Tax Benefit (Expense)
 
Total
 
(In millions)
Beginning balance
$
104

 
$
(22
)
 
$
(52
)
 
$
6

 
$
36

Other comprehensive income (loss) before reclassifications
41

 
5

 
(6
)
 
(2
)
 
38

Less: Amount of gain reclassified from accumulated other comprehensive income
7

 
1

 

 

 
8

Net current period other comprehensive income (loss)
34

 
4

 
(6
)
 
(2
)
 
30

Ending balance
$
138

 
$
(18
)
 
$
(58
)
 
$
4

 
$
66


The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the nine months ended September 30, 2019:
 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Unrealized Gains (Losses) on Investments
 
Foreign
Currency
Translation
 
Estimated Tax Benefit (Expense)
 
Total
 
(In millions)
Beginning balance
$
182

 
$
(13
)
 
$
(93
)
 
$
2

 
$
78

Other comprehensive income (loss) before reclassifications
187

 
15

 
(148
)
 
(5
)
 
49

Less: Amount of gain (loss) reclassified from accumulated other comprehensive income
180

 
(1
)
 

 

 
179

Net current period other comprehensive income (loss)
7

 
16

 
(148
)
 
(5
)
 
(130
)
Ending balance
$
189

 
$
3

 
$
(241
)
 
$
(3
)
 
$
(52
)

18




The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the nine months ended September 30, 2018:
 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Unrealized Gains (Losses) on Investments
 
Foreign
Currency
Translation
 
Estimated Tax Benefit (Expense)
 
Total
 
(In millions)
Beginning balance
$
(111
)
 
$
(12
)
 
$
(25
)
 
$
6

 
$
(142
)
Other comprehensive income (loss) before reclassifications
183

 
(6
)
 
(33
)
 
(2
)
 
142

Less: Amount of loss reclassified from accumulated other comprehensive income
(66
)
 

 

 

 
(66
)
Net current period other comprehensive income (loss)
249

 
(6
)
 
(33
)
 
(2
)
 
208

Ending balance
$
138

 
$
(18
)
 
$
(58
)
 
$
4

 
$
66



The following table provides details of reclassifications from accumulated other comprehensive income (loss) for the three months ended September 30, 2019 and 2018:
Details of Accumulated Other Comprehensive
Income (Loss) Components
 
Amount of Gains (Losses) Reclassified from Accumulated Other Comprehensive Income (Loss)
 
Affected Line Item in the Statement of Income
 
 
Three Months Ended September 30,
 
 
 
 
2019
 
2018
 
 
 
 
(In millions)
 
 
Gains on cash flow hedgesforeign exchange contracts
 
$
70

 
$
7

 
Net revenues
Unrealized (losses) gains on investments
 
(1
)
 
1

 
Other income (expense), net
 
 
$
69

 
$
8

 
Income before income taxes
 
 

 

 
Income tax expense
Total reclassifications for the period
 
$
69

 
$
8

 
Net income

The following table provides details of reclassifications from accumulated other comprehensive income (loss) for the nine months ended September 30, 2019 and 2018:
Details of Accumulated Other Comprehensive
Income (Loss) Components
 
Amount of Gains (Losses) Reclassified from Accumulated Other Comprehensive Income (Loss)
 
Affected Line Item in the Statement of Income
 
 
Nine Months Ended September 30,
 
 
 
 
2019
 
2018
 
 
 
 
(In millions)