Good day, ladies and gentlemen, and welcome to PayPal's Second Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Ms. Gabrielle Rabinovitch, Senior Director of Investor Relations. Please go ahead.

Thank you, Keith [ph]. Good afternoon and thank you for joining us. Welcome to PayPal Holding's earnings release conference call for the second quarter of 2016. Joining me today on the call are Dan Schulman, our President and CEO, and John Rainey, our Chief Financial Officer. We're providing a slide presentation to accompany our commentary. This conference call is also being broadcast on the Internet and both the presentation and call are available through the Investor Relations section of our website. In discussing year-over-year comparisons, including guidance growth rates for the full year 2016, we have chosen to present non-GAAP pro forma metrics because we believe that these metrics provide investors a consistent basis for reviewing the Company's performance across different periods. We will also discuss some non-GAAP measures in talking about our Company's performance including the non-GAAP pro forma metrics mentioned above. You can find a reconciliation of these metrics to the most directly comparable GAAP metrics in the presentation accompanying this conference call. In addition, management will make forward-looking statements that are based on our current expectations, forecasts and assumptions, and involve risks and uncertainties. These statements include our guidance for second quarter and full year 2016. Our actual results may differ materially from those discussed in this call. You can find more information about risks, uncertainties and other factors that could affect our operating results in our annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC and available on the Investor Relations section of our website. You should not rely on any forward-looking statements. All information in this presentation is as of today's date, July 21, 2016. We disclaim any obligation to update the information. With that, let me turn the call over to Dan.

Thanks, Gabrielle. Good afternoon everyone, and thank you for joining us on the call today. I'm pleased to say we had another strong quarter, with our financial results at the high end of our guidance, and in many cases exceeded our own expectations. And of course we announced earlier a multiyear partnership with Visa. But before I discuss our results, I'd like to point out that it's been one year since PayPal became a publicly traded company for the second time. In many ways, our listing last year was a full circle moment for PayPal. It allowed us to return to the core mission of our founders, the mission they were pursuing when they took PayPal public in 2002. Even with the Internet in its infancy, they saw the opportunity for technology to democratize money. Today our purpose is the same, but our opportunity is much greater, with the digitization of money accelerating and the adoption of mobile devices continuing its rapid pace globally. PayPal's total addressable market has grown to include all of digital commerce and digital money, a $100 trillion opportunity. Today's announcement with Visa brings us closer to capitalizing on that opportunity. The mission of PayPal is clear. We're striving to become an everyday essential financial service for underserved customers. And for our merchants, we want to provide a full service solution and platform that enables digital commerce. We were making tangible and consistent progress towards achieving these twin goals, while consistently delivering strong financial performance. I'm proud that Q2 was another strong quarter for PayPal, both financially and strategically. Our partnership with Visa will help drive consumer choice and provide enhanced value to the larger payment ecosystem. But first let's look at the financial metrics we delivered this quarter. We grew revenue at 19.5%, delivering $2.65…

I also want to thank all of PayPal's customers and our employees worldwide for making this another great quarter. Q2 marks another quarter where we advanced our goals of becoming a central part of our customers' daily financial lives, strengthened our position in the ecosystem, enhanced our value proposition as a customer champion company. First I will walk you through the highlights of our second quarter results. On a currency-neutral basis, total payment volume was $86.2 billion, an increase of 29%. U.S. payment volume grew 27% and international volume grew 21%. Our merchant services business grew 36%, demonstrating that our strategy of being a customer champion and moving from being a payment button to an end-to-end payment solution for merchants of all sizes continues to gain transaction. We ended the quarter with 188 million active accounts, an 11% increase from a year ago. Account growth was predominantly driven by our PayPal Afford [ph] offering, followed by Venmo. The number of payment transactions per account increased to 29, up 13% year over year, and an acceleration from the first quarter. This, when combined with the increase in active accounts, contributed to payment transaction growth of 25% year over year. In the second quarter we generated revenue of $2.65 billion, up 19.5% on a currency-neutral basis and 15.6% on a spot basis. Q2 revenue exceeded our expectations as a result of strong performance in our core business and Braintree. In the second quarter we faced difficult year-over-year comparisons from the amendment of our Synchrony co-branded credit card agreement and the sale of a portion of our credit receivables portfolio last year, as well as the larger currency hedging gains in Q2 '15. We are pleased with our very strong top-line performance and our ability to offset these year-over-year pressures. Transaction revenue increased…

[Operator Instructions] Our first question comes from the line of Tien-tsin Huang of JPMorgan. Your question please.

Thanks. Good afternoon. Congrats on the Visa deal. I was curious, can we still rely upon your midterm guidance after considering the Visa partnership? I know there's a lot of moving pieces obviously, but curious if the midterm guidance still applies.

Thanks, Tien-tsin, appreciate it. This is John. We'll update that, if it's appropriate, as we get closer to the yearend. Like I suggested in my prepared remarks, we're very early on into this. We're very encouraged by the agreement. We think it's a fantastic opportunity for PayPal. And it's likely to positively affect the way our financial outlook and for the future. But we're not prepared to update that at this time.

Thank you. Our next question comes from the line of Heath Terry of Goldman Sachs. Your question please.

Great. Thanks. On the part of the Visa agreement around contactless payments and the enablement of offline acceptance, can you give us a sense of what the process is going to look like for that? Visa mentioned on their call that you still have to get sort of approval from the financial institutions, from the merchants. How do you intend to kind of get more out of this enablement than we saw out of the Discover deal and what's the roadmap look like to get there, you know, particularly from a timing perspective?

Hey, Heath, it's Dan. Thanks for your question. So we're very excited about the partnership with Visa. I think it's very important to understand that, I think as Charlie said on the Visa call, partnerships like the one we announced today work best when there's alignment for everyone. And we believe that we've designed an agreement that works for PayPal, Visa and the issuers. We've been in discussions with issuers, Visa has been in discussion with its issuers, and they're excited about the benefit from the volumes that we can bring to them and that we can bring to point of sale. And as Charlie pointed out, this agreement removes many of the concerns, if not all of the concerns, that issuers and others in the ecosystem have about working with PayPal. You know, choice is something that everybody has been talking about. What issuers want, what we want, is the ability for a consumer to make a choice, to have options as to what payment tender type they want to pay with. What that basically means is that, you know, a consumer could pay with their credit, with ACAs, with debit, with cash, with P2P, with PayPal credit, any of those, but it's the option of the consumer to make that choice. And then when you add on top of that optionality, the fact that we are very willing and happy to share the same sorts of data that somebody would get with a typical credit card swipe back to the network, back to the issuers and to customers, that's exactly what issuers have been asking for. We actually think that this deal that we have with Visa offers a couple of benefits. Obviously it offers access to tokens at rates that are comparable to other contactless methods out…

Great. Thanks, Dan.

You bet.

Thank you. Our next question comes from the line of Lisa Ellis of Bernstein. Your line is open.

Hi guys. Good afternoon. So, one just follow-up question then on the Visa arrangements around activating at the point of sale, how -- in that scenario, do you guys remain the merchant of record? And does it flow over your acquiring platform? Or is the construct more of a pass-through wallet, as that's envisioned?

For the point of sale, we would do kind of pass-through on the token level, so that there'd be transparency on that. We've always said that we are perfectly willing to use the industry tokens and do that on a pass-through basis. And this agreement allows us to do that. It allows us, one, to approach merchants with rates that are comparable to any digital wallets that are out there, so this whole card not present/card present rate structure that people have talked about, this takes away that concern as well. So it's an agreement that our two teams spent a lot of time working with, a lot of time making sure that the issuer population was also comfortable with it. And we think it is a, really, a tremendous win for all the parties on that.

Got it. And on those transactions, sorry, just to clarify though, it's still processing over your acquiring platform?

It is, yes.

Right? Meaning like the merchant will be paying you directly their typical take rate.

That's correct.

Okay. Okay. Terrific. Thanks guys.

Yes.

Thank you. Our next question comes from James Friedman of Susquehanna. Your question please.

Hi. I was going to pivot out of the Visa conversation and ask you about Braintree. I think in the past, Dan, you've disclosed, or discussed at least, some of the backlog in Braintree. I was wondering if you could update us in fact quantitatively, what does it take to actually active the merchant from the backlog from a Braintree perspective? Thank you.

Yeah. So we're making very good progress in terms of our ability to work through the large demand that we have for Braintree. In effect, we try to make it as easy as possible on a merchant. We have ADI sets [ph] that makes it easy to integrate. It really depends on the extent of the integration that we're doing in any of the customization [ph] that we have to do. But I'd say we're making really good progress on keeping up with the demand. Right now the demand is strong, as John mentioned. That's why we're -- part of the reason why we're taking up our revenue forecast. But I'm really pleased with our ability now to onboard these customers and bring them live, to say [ph].

Thank you.

Yup.

Thank you. Our next question comes from George Mihalos of Cowen. Your line is open. George Mihalos - Cowen & Co.: Great. Thanks for taking the question guys. I was wondering if you can give us a rough sense how much of TPV now goes through the Visa network both on a credit and debit perspective? And I just want to be clear, there is no initial incentive that is going to be provided to that volume starting day one, right? You'll have to go negotiate that with the issuers.

We have volume-based incentives from Visa themselves. There are also other potential terms that we could do with issuers specifically. Your first question was?

How much volume is on Visa.

Yeah.

And that's not something we'll disclose, but maybe, George, a construct or a framework to kind of think about this, because I understand why you're asking the question. If you consider we have just rough order of magnitude $300 billion of TPV today, and if you were to look at funding shift on that, that would overstate the effect of funding shift, because this agreement for now is U.S.-only, and as we've disclosed in the past, that's roughly half of our TPV. We also see differences in funding mix between P2P versus goods and services, so you've got to strip that out or at least treat that differently. And we disclosed earlier this year that P2P is roughly $40 billion of our annual TPV. And then lastly, you need to also consider that there's a large percentage of our customers today that only have a card in the wallet. So, choice for them, there'd be no other increase in cost by moving -- by adding additional card or doing a different card. So from the cost side, that's the right framework to think about this. George Mihalos - Cowen & Co.: Okay. That's very helpful.

I'd also add to it, George, that, remember, this is about optionality. So, all tender types will be presented to the customer, present to choose the tender type that makes the most sense for them for that particular purchase. And we've seen that that is a beneficial thing when we offer customers that ability.

Yeah. Even the early stages of testing some of these experiences with customers, we see really encouraging signs just in things like customer activation where you remove some of the friction from that process. And as Dan alluded to earlier, One Touch has been a great testbed for us as we've seen pretty dramatic increases in engagement after someone activates there. George Mihalos - Cowen & Co.: Okay, great. Just a quick follow-up. John, I think you talked about taking some steps on the PayPal credit side to maybe mitigate some of the increases that you've seen in charge-offs. Can you elaborate on that, what that might mean for the back half of the year?

Sure. So as Dan talked about on the call last quarter, since we've become an independent company, we've really tried to establish ourselves as at least aspiring to be best in class when it comes to compliance. We think that that's really important for us. That's part of being a customer champion. And so we've taken steps across every aspect of our business to improve our compliance. And so, specifically, we changed some of the ways that both we contacted customers as well as the repayment options for credit. That had some effect that on the late-stage delinquencies. There are other methods that we can do to mitigate that impact and we're going ourselves with those options for the back half of the year.

And I'd also just say, John mentioned, we're seeing some improvements in the underlying credit quality of our base, delinquency write-offs on that. So it's just that one particular bucket that we saw an increase, and so we're taking actions to address that. But in terms of the overall portfolio, we're very comfortable with what we're seeing on that.

Yeah. If I can just add maybe a little bit more color to that, our total delinquencies were actually down year over year. When we look at the percentage of our portfolio that's rated prime or above, that grew by a point, a better credit quality year over year. The 90-day delinquency is down year over year. And our portfolio of FICO store is relatively flat with where it's been. So it's -- look, we're very keen on all the concern around this, with other players in the ecosystem, and we're aware of that. So it's something that we're hyper-focused on. George Mihalos - Cowen & Co.: Okay, great. Really appreciate the color.

Yeah. You bet.

Thank you. Our next question comes from Ashwin Shirvaikar of Citi. Your line is open.

Thank you. Good afternoon, Dan and John. Congratulations on getting the deal. Two separate questions. On the Visa-related customer choice, when you say no impact in 2016, is that indicative of your view as to how long it might take to implement specific deals with issuers? I guess that's the first question. And the second is with regards to, how does the agreement affect your relationship with merchants, and I guess your weighted average funding cost is an important part of the discussion but not the only factor. If you could comment on those.

So in terms of our guidance for 2016, incorporates any impact that there might be from customer choice. But you're right that this takes some time for this to be implemented and to move forward. So our guidance incorporates any impact that there might be from customer choice. And as John mentioned, we will wait until we get closer to 2017 to give 2017 guidance. First of all, obviously we'll take a look at consumer behavior as a result of this. There are a number of discussions going on in the ecosystem and we want to look at the totality of the landscape before we really talk about what 2017 could look like. And finally, we're halfway through the year, we got a full another six months to execute against and let's see how our momentum takes us before we provide 2017 guidance. And on the merchant side, merchants have been working with us quite closely as we're creating a platform for them to take advantage of digital commerce. And that basically means letting a merchant write their own application. And we power that application through a platform that enables them to extend our value proposition to their customers online, on the mobile, and instore. And part of that instore environment, when it comes to the takeout wallet, we did not have tokenization schema, we've used different swarms of that. And so from a merchant perspective, the rates now that we can offer on an instore point of sale transaction are significantly more competitive for them. So it just strengthens our position in terms of working with merchants. No change in our strategy, but certainly strengthens it and opens up a wide opportunity for us. As we talk about the blurring of online and offline coming together, this really opens up our ability to move into any context, whether it be online, in app or instore with our digital wallet.

Okay. I guess a quick follow-up if I may. In terms of the online choice, how is Paydiant affected by this, if it is?

Yeah, great question. Paydiant impact. Paydiant is part of our fundamental underlying platform. So when you think about the piece parts that we've started to put together, we had PayPal that was obviously very strong and online market. Braintree extremely strong in the mobile and in app marketplace. And Paydiant, very strong in the instore environment. And so all of those are now coming together and being integrated, so that we can offer merchants the ability to look across any of those contexts and use our platform to power and enable their move to digital commerce. Then what we've done obviously is, because our base is so large, we take our branded PayPal wallet, which now available to go into more context, as I've just mentioned, and write up those applications, because we have so many subscribers that we can bring to those merchants. And so you've got a platform play that's really unbranded, that supports a merchant's move into digital commerce, and then a branded wallet. And this helps us with our branded wallet to move into that offline space.

That's great. Thank you for that explanation.

Yeah. You're welcome. Operator, I think we have time for one more question.

Yes, we do, sir. That question comes from the line of Bill Carcache of Nomura. Your line is open, sir.

Thank you. Dan, there are some skepticism regarding the willingness of issuers to promote PayPal. Could you speak to what you think will lead issuers to want to promote their brands on PayPal during the exclusivity period? And maybe give a little more color on what the receptivity has been in your discussions with the large issuers. And finally, what your confidence level is that you'll be able to get some of them onboard.

Yup. So we have a high degree of confidence in that we haven't worked this agreement in a vacuum, nor has Visa worked it in a vacuum. We've obviously been working with the issuer community. We've obviously been very close communications with them. We've been in close communications actually throughout the whole payment ecosystem with quite a number of players. And this move towards choice, our ability to open up our data, is something that issuers have been asking us for for quite some time. I think they are, based on our conversations, conversations that Visa has had with its own issuers, and we've been a part of some of those, there's a lot of excitement about the ability to partner and work together. We think we could be a very strong distribution channel for them. You've talked about that in some of your write-ups, and that's exactly the vision that we are moving towards, and we have a good degree of confidence around that.

Thank you. If I may, a follow-up for John. John, I believe that you made the point at Investor Day that the increase in your transaction expense rate from the shift to consumer choice would be something that you could offset with the operating leverage inherent in the business. Given the partnership announcement and all of the different aspects to it, I guess you guys are saying tonight that that doesn't necessarily still hold, you'll reevaluate over the next couple of quarters when you give 2017 guidance, say whether that's still the case. Or just trying to get a sense of I guess applicability of that statement still.

Yeah. So, yeah, that's not entirely correct, but just talking directionally, we have -- I would describe this as very analogous still to like an investment that one would make, an acquisition for example, where there's perhaps an upfront cost but there's a revenue stream that more than offsets that to where it's very accretive to the business. With respect to the increase in transaction expense, we'll give more specific guidance as we get towards the end of the year about 2017. But when you look at both the revenue benefit as well as the good demonstrated cost control that you've seen for several quarters now, just look at the over 180 basis points of leverage this quarter, the fact that our operating expenses, if you normalize for the Xoom acquisition, only went up 7% in the quarter, we continue to demonstrate that we have a laser focused on discipline here, while still not starving the business for investment as well. We're making sure that we're continuing to invest organically. So all that in combination gives us a level of comfort with this, that it's absolutely the right thing to do for the business. But specific to 2017, we'll give you a heads-up on that towards yearend.

Great. Thank you for taking my questions.

You bet.

Thank you.

Okay. Thank you everybody for joining us today. We really appreciate your time, and, operator, that will conclude our Q&A session. Thank you.

And this concludes today's Q&A session. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may now disconnect. Everyone have a great evening.