Good day, ladies and gentlemen, and welcome to PayPal’s Fourth Quarter and Full Year 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Ms. Gabrielle Rabinovitch, Head of Investor Relations. Please go ahead.

Thank you, Sherrie. Good afternoon and thank you for joining us. Welcome to PayPal Holdings’ earnings conference call for the fourth quarter and full year 2017. Joining me today on the call are Dan Schulman, our President and CEO; John Rainey, our Chief Financial Officer; and Bill Ready, our Chief Operating Officer. We’re providing a slide presentation to accompany our commentary. This conference call is also being webcast and both the presentation and call are available through the Investor Relations section of our website. We will discuss some non-GAAP measures in talking about our company’s performance. You can find a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in the presentation accompanying this conference call. In addition, management will make forward-looking statements that are based on our current expectations, forecasts and assumptions, and involve risks and uncertainties. These statements include our guidance for the first quarter and full year 2018 and the expected impact of tax reform. Our actual results may differ materially from these statements. You can find more information about risks, uncertainties and other factors that could affect our results in our most recent annual report on Form 10-K, and quarterly reports on Form 10-Q filed with the SEC and available on the Investor Relations section of our website. You should not rely on any forward-looking statements. All information in this presentation is as of today’s date, January 31, 2018. We expressly disclaim any obligation to update the information. With that, let me turn the call over to Dan.

Thank you, Gabrielle, and thanks everyone for joining us on today’s call. 2017 was a transformative year for PayPal with consistently strong and in many cases record breaking results. I'd like to highlight couple of areas in particular. First, we achieved record net new actives and engagement on our core platform, by increasing our reach and relevant with both consumers and merchants. Importantly, we anticipate this elevated level of net new actives to continue in 2018. As we experience increasing network effects from our scale. Second, we continue to grow our market share through our increasing leadership in mobile and by introducing a suite of new and innovative services and project experiences for our customers. Third, we meaningfully strengthen our competitive positioning due to rollout customer choice. The combination of customer choice and our move towards an open platform architecture enabled strategic partnership with many of the world leading companies. Several of these companies had previously been perceived as potential adversaries. The partnerships have opened new avenues of growth from geographic expansion to in-store payments. Fourth, we announce a new long-term strategic partnership with Synchrony Financial, which will result in PayPal receiving more than $6 billion in cash proceeds at closing. The deal also freeze up more than $1 billion in free cash flow each year, which we will allocate the higher yielding organic and inorganic growth opportunities. Finally, we did all this while delivering consistently strong financial results. I'll discuss the first four areas in more detail in a moment, but I want to start with our financial results for Q4. I am pleased to say that Q4 was our strongest quarter of the year, capping off landmarks 2017. Payment volume grew 29% on a currency neutral basis to a $131.4 billion, generating revenue of 3.71 billion. Revenue grew by 24% and this is our third consecutive quarter of accelerating revenue growth. The strong revenue performance combined with disciplined OpEx management drove non-GAAP EPS of $0.55, which was up 30% year-over-year. Our customer metrics were particularly strong. We drove a record 8.7 of new active account [Technical Difficulty]

Ladies and gentlemen, please stand by your conference will begin momentarily. Thank you. Speakers your line is now open.

Okay, I’m back. I was in the middle of these exciting results and shocked even our speaker. So, okay, so let me start off just recapping our fourth quarter. As I mentioned, our payment volume was up 29% on a currency neutral basis to $131.4 billion, generating revenue of $3.71 billion. Revenue grew by 24% and this is our third consecutive quarter of accelerating revenue growth. This strong revenue performance combined with disciplined OpEx management drove our non-GAAP EPS to $0.55 up 30% year-over-year. Our customer metrics were particular strong. We drove a record 8.7 million net new active accounts and that was up 61% over Q4 of 2016. And we ended the year with 227 million active accounts, adding more than 29 million net new actives for the year. And it’s worth noting that we now serve 18 million merchants on our platform. Importantly, engagement was once again higher at 33.6 transactions for active account. I think it's started to note that our accelerating net new active growth hides the true underlying growth of engagement. If our total net new ads have grown at the same rate last year, our growth in engagement would have increased a 11% to approximately 34.5%. It’s particularly encouraging that our net new active cohorts acquired in 2017 are showing an acceleration and engagement versus similar cohorts from 2016. The net take away as we are bringing on record, net new actives with higher engagement than ever before and that obviously bodes well as we look ahead. Our partnership with Synchrony Financial accomplishes every goal we set out for our asset life strategy. The transaction substantially reduces our overall risk profile. It provides us the opportunity to double down on our innovative credit experiences for our merchants and our consumers, while sharing in the…

Thanks, Dan. I also want to thank our PayPal customers, partners and employees for making 2017 a great year. We achieved many significant milestones in 2017 and are well-positioned to continue delivering on our commitments and executing against our strategic plans. Before I go into details of the fourth quarter, I would like to provide a few highlights for the full-year. For 2017, active accounts grew 15% to $227 million and acceleration of 500 basis points over the 2016 growth rate. Payment volume grew 27% on a currency neutral basis to $451 billion. Approximately 34% of this volume was mobile where we saw 52% volume growth for the year. Revenue for 2017 exceeded $13 billion growing 21% on currency neutral basis. For the full year, revenue related to eBay market places grew 7%, while our merchants' service revenue grew 24% more than three times the rate with our legacy eBay market places business. For the year, non-GAAP earnings per share grew 27% to $1.90 and we return more than $1 billion to shareholders. I'd first like to discuss the impact of tax reform. We believe the modernization of U.S. tax code is a significant step forward in a clear path of PayPal and its shareholders. The ability to work efficiently and strategically allocate capital is an unmitigated benefit. The full value of which we expect to utilize over the medium and long term, I would note if we’re still the number of open items that require clarification and we may define our estimated impact in future quarters, its further information and interpretation become available. Our fourth quarter GAAP results include a one-time charge for the 180 million related to the deemed repatriation of unrelated earnings on foreign subsidiaries and the revaluation of deferred tax assets and liabilities. We expect our…

Thank you. [Operator Instructions] Our first question comes from Heath Terry with Goldman Sachs.

Dan and John, there seems to be a bit of a disconnect between the way that eBay is presenting the new partnership or expansion versus the way that that it's coming across on this call in the press release, primarily that the difference being the Adyen partnership that their Adyen partnership that the eBay is talking about is being their primary partner now and that they intend to transition the majority of their marketplace customers to this new payment experience that Adyen's powering. Can you help clarify for us a little bit for how -- basically try and connect the dots between those two? And I know you've talked about they're not being any sort of meaningful financial impact here as we get to the end of the original 2020 date, how does that change?

So I start off with just saying that eBay and PayPal have had a close relationship and a long history together. And I’m really pleased that we're expanding that partnership on the branded through July 2023. As I think most people on the call know, there is a five-year operating agreement that governs our separation, and we're halfway through that, we’ve got another 2.5 years left till the end of July 2020. And with this announcement, here there are no changes to any of the terms. And the operating agreement was meant to assure both the thoughtful and a smooth transition for both companies post-separation. And it assumed in the operating agreement that as have we, that eBay will gradually transition to become an MOR. And consequently all of our numbers, all of our plans have always included that assumption. So as we've given our medium-term guidance, that’s a part of our assumption. And as a result, this announcement does not change our medium-term guidance or the way that we think about our long-term outlook. And let me give you some facts around that because we strongly believe that the eBay transition to MOR is quite manageable for us. So why do we think that? So today, eBay as John mentioned is about 13% of our TPV, our total process volume, transaction process volume and that down about 900 basis points in the last 2.5 years. So let's just assume that exactly the same thing happens over the next 2.5 years. And that we have no acquisitions of ourselves which finds way as you know we are acquisitive, we are aggressive on that. We had a large cash balances coming to us. So we can talk about acquisitions that will be a part of our strategy going forward. But assuming…

Thank you. Our next question comes from Bryan Keane with Deutsche Bank.

I just want a follow-up on that. Just trying to understand -- my understanding is in 2020 that's when you guys will no longer be the MOR. And then just thinking about going forward then, my understanding is PayPal will still be a button of choice, but it just won't process some of the card payments. And just trying to figure out the economics, what that exactly means when you don't become the MOR? And how that impacts the P&L?

It's a great question. One of the things to understand that is, as we work with many other retailers out there, they are merchant of record as we work with them and as we are able to go command, even a premium relative to card processing because we deliver greater customer acquisition, higher conversion rates, all those things, we're doing that across much of our business with the merchants or marketplace and it's now functioning as a merchant for the record. So as Dan was commenting on earlier quite, a lot of insight into exactly how this plays out, and that led to us being able to fully contemplate that as we've laid our future plans and have been doing separation because we know how that works in other marketplaces and other small business forums and have either moved the merchant record or started the merchant record with PayPal still as a predominant way of paying inside of those marketplaces or small business forums.

Bryan, this is John. I would add to that maybe that I think what you're getting to is sort of the economic impact overall and there's a couple of things that point you to. First is, as Dan has suggested in his prepared remarks that our -- in terms of their percentage of our business, it's declined 900 basis points, over the last couple of years. And during that period, we've actually been able to keep margins flat to growing, all right. And if you look at the 10 quarters that we've had, since separation, the average revenue growth of those quarters for our eBay part of our business has been 4%. If you look at the other 87% of our business that has grown 23%, so if you -- history is not necessarily -- you can't project that forward, but if you were just to take those numbers and project them through to mid 2020 at the end of the operating agreement, that would suggest that in 2021 our revenue growth each year is roughly 50% larger than the entire of the eBay business at that point in time. So, the other thing I'd point to is that we actually incur quite a cost to support eBay today. So, when we look at things like our losses or our call volumes into op center, those disproportionately skewed towards eBay relatively to their percentage of the TPV. So, we feel very confident that we can continue this trajectory going forward and there's nothing about what's been announced today that changes our thoughts and our ability to continue to grow our top line and bottom line after we operate it here.

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

A couple of follow-up questions to that, I am not sure if you could share, how much of your profits come from eBay today? But is your ability and your confidence to maintain your midterm guidance, does it require any sort of unusual mediation efforts like cost cutting or share repurchase like get the organic cost cutting or savings from the change? But just curious, if it requires any extra remediation efforts or even the assumption of new marketplace whence? And if I could just hack on one more, is it fair to think that your checkout share, the 50% numbers helpful. But it is fair to think that your checkout share would be higher longer term here just because of how integrated you’ve been with eBay after all this year? Sorry for all the questions.

So Tien-tsin, I’ll start. The assumption that we have going forward is that, we will continue to realize the benefits from our scale and our leverage going forward. And so this is not required massive restructuring or layoffs to continue kind of performance that we seen; as I suggested, we’ve been doing this for two years. And we would expect this. We continue to grow other parts of our business that we can continue to generate this kind of leverage. I’ll point you back to the fact that half of our cost based this year and we’re growing $0.10 for every incremental dollar. Now for other part of your question, does that assume like anything in terms of acquisitions anything like that? It does not and so we think about the -- and if you go back to my answer to Brian’s question, and you think about losing some share of that business going forward. We’re talking about a few points of impact to revenue growth of profitability and that can easily be backfill going out and looking at inorganic opportunities, and this doesn’t also address the fact that with the operating agreement in the mid-2020. We now have the ability to go out and partner with the largest marketplaces in the world, largest and fastest growing market places in the world. All of these give us an opportunity to backfill, we kind of gap that we might have as we transition to this next chapter with eBay.

Yes. And I think also say that our guidance assumed this. So what that means is that we knew this is going to happen and that guidance that we’ve been giving in the medium-term guidance that we put out there has assumed this happening. So, that means that we've built into our models, costs and things that we know, we can target and take out revenues that we can target. So, this is not anything that we haven’t covered in all of our modeling and all of our plans. Otherwise, we wouldn’t have been giving that medium term guidance. This isn't a surprise this is exactly what we assume, it was contemplated in the operating agreement and constantly, when I think about kind of the experiences we have, where eBay will be at the end of the operating agreement is multi-year transition and our place as they branded check-out solution. I feel like, this would be one of the events that will, that obviously will have to move, but it will be one of the quite manageable for us going forward.

And one of the Tien-tsin, you talk about, one of the market places things like that. As Dan alluded to earlier and as you know, we’re hiring payment platform for many of the best next gen marketplaces in the world already Uber, Airbnb and many others. But as Dan alluded to, not only that many tens of billions of dollars of volume for us and growing 50% plus already, that growths in that business as we think in our other large marketplaces. As growth we seen on an absolute basis is already outpacing the growth we see from eBay. So just the way, we’re already engaging our marketplaces outpace of the growth that we see from eBay and as we are able to contemplate are engaging there and at an un-federal way we think there is a lot more opportunity ahead for us there. You touched one other points around share of checkout about being over penetrate to given our launch is for the relationship and we don’t disclose specifics about the share of checkout that was certainly it's reasonable to expect as we see 50% approximately with other small business forum when we've been made and embedded overtime what would be a place where we yes or strongly preferred and if you've seen in our consumer base our engagement is going up consistently across our consumer base. So your point there about our share of checking all we tend to see that our consumers are using PayPal and becoming more engagement with us overtime now left and so their preference for PayPal is increasing and so we think that is goes well for us across any marketplace we work with and certainly as a big part of the branded deals we've done with eBay why that's important to both us and eBay is a continuity of how a significant portions the buyers have been choosing to personally on eBay for a very long time and like we will continue to into the future.

Our next question comes from Sanjay Sakhrani with KBW.

Just on that point on these other partnerships that you can have with marketplaces. How many discussions that you had with some of the larger ones, that are opportunities? And how significant economically could those be road into sort of what you have with eBay? And then maybe just thinking about the transaction cost element of being a lesser merchant for the networks, does that have any impact to your interchange expenses?

We've just had conversations with other marketplaces, as part of the operating agreement, we're prohibited from offerings MOR services to I don't name it -- to the largest consensus for our marketplaces that are out there that are really direct to competitors with these that was part of the operating agreement. Obviously, each of them have spoken with us, you've spoken to them, but they all know that we are respecting the terms of the operating agreement just as eBay does this well. And so, I do believe that those conversations are quite sincere, and they all do want to think about how they can work with us. But until we get closer to the end of DRA that's what we will be able to give you more about today's information everything out to this point is confidential.

Our next question comes from James Fawcett with Morgan Stanley.

I wanted to ask always the qualitative, an additional qualitative follow-up question on eBay. And I'm just wondering how we should think about then what maybe you had to agree to give or give up in terms of being able to secure the extra years of presence of as checkout on eBay and next so that you would have a presence there through 2023? And I guess as part of that, I'm curious like why agree to whatever now instead of waiting to see there were some additional services that PayPal can deliver to eBay that to improve your positioning in long-term relationship there?

Yes. James, when we thought that within the OA, this year coming up versus first year that permitted eBay to experiment with MOR capabilities. It’s laid out in the operating agreement as they can choose two countries and do up to 5% of the volume on an MOR solution. So it was the right time and we’ve always thought that we’d never do all these negotiations at the very end. We both feel like we’re going to be partners for a long time and we looked carefully at all parts of this deal, both the unbranded and the branded. And we felt that the unbranded piece of this was not something that made sense for us. One because we felt the most profitable part of the business was on the branded side and it’s the largest part of the business today. And number two, we in no way wanted to be restricted post the OA in terms of our ability to work with the largest marketplaces around the globe. So for us to be really -- we thought like we didn't give everything up, it’s going to do this now. It was a natural extension. This is important to eBay, it’s important to us that we both signal that we're going to be very close partners going forward.

Yes. I’d just say on this point whatever given these things, it is as Dan was alluded to very much slightly with firm another large retailer. So when we serve large retailers, we certainly give them rates that are commensurate with their volumes. But we’re not restricted in ways of how we would do that as of others or things like that. So it’s very along the line of a standard commercial relationship that we would have regular retailer.

I’ll just add too one other thing, James. As it relates to the unbranded part of the business, volume is obviously important to us but so is profitability. And where this was ending up is something that we weren’t interested in from a profitability perspective. We can certainly go acquire volume as we’ve demonstrated each quarter since separation from many other places. And we have a lot of confidence and conviction in our ability to do that going forward and do it at more profitable rates than what this unbranded agreement would have been.

Thank you. Our next question comes from Paul Condra with Credit Suisse.

I just wanted to -- can you just clarify a bit, I know that eBay, it sounds like they’re starting this process now with Adyen. So I’m wondering when are you actually no longer restricted to start looking partnerships of other marketplaces, and then my follow-up is just on a different topic. You did mention something about industry standard tokens in the point of sale setting, I wonder if you could just give a little bit more detail about that?

Yes. I’ll take the first part of that and then Bill can take the second part. So, we have the ability to partner with many of marketplaces as you probably know, here the underlying payment platform for Airbnb, for Uber and for others. But there was a set of eBay competitors that were carved out within the operating agreement, in which we could not serve them as an MOR. And that goes away at the end of the operating agreement. So at the end of July 2020 that restriction is lifted. So, and eBay has the ability to start to experiment with alternative PSPs beginning this year, so they can do up to 5% of volume in two countries they select and then that can go up to 10% within a volume within those two countries of the last year of the operating agreement. So they have a change to experiment. Just as we have chance to work with leading market places out there, it's just slow that we might think of this being competitive with eBay we then presented from working with them as part of their operating agreement and that makes sense for both of us as we separated from eBay.

So for in-store, what we were really like about there just is the continuation of our implementation of Visa and MasterCard took it and network standard tokens around our in-store offering. So, as we discussed previously, we work with GooglePay and with other around in-store efforts, and we’re continuing to rollout our deployment of standard network tokens around those things consistent with RBs and MasterCard relationship that we previously announced.

Thank you. Our next question comes from Ashwin Shirvaikar with Citi

CAN you comment on both the merchant and consumer engagement trends separately? And I think one related question is, it seems payment transactions and revenue per active are countered I mean higher, but the payment transaction per active account decelerated as well? And then would your answer change, if you separated out eBay or non eBay merchant engagement? Sorry for the multipart but just kind want to get there and get an idea of that.

So in terms of the overall engagement, which grew by 8%, in my opening remarks I said if you normalize that anything that change to be decelerating is because we're bringing on so many net new actives in comparisons to the year before. And so when a new customer comes on we would bring them on throughout this year they obviously had it ramped up to the engagement levels that somebody is been here for a year or two have been. So when we take a look at it, we look at every one of those cohorts that came on and we look at their patient levels to 2017 works versus the 2016 co work that we brought on. And what we see is that our 2017 co work which was 20 over 29 million net new actives have more engagement than the cohort that we brought in 2016. So what that does, that bodes very well for the future of it as those large cohorts of net new actives that are more engaged there before start engaging with the platform overtime, that takes our engagement levels help. And so you would actually see from a double-digit increase and engagement if you normalize with the increase in net new actives. I think and on the other things we don't break those out, and so we just do a one number although I will say one thing we could also see that we're having acceleration in the number of merchants that are coming out of the PayPal platform as well. So, we now have 18 million merchants on the platform, that's also experienced the same type of growth as we've seen, with our merchant -- our consumer growth as well.

Thank you. We've time for one last question from Darrin Peller with Barclays.

Look I mean I know you're describing the eBay contribution to be relatively minor, but this rolls off obviously, give you a lot of opportunities. One, other things you mentioned was deploying capital to help diversify further. I guess I just wanted to hear more given you now post Synchrony deal tax reform, there should be a ton of cash available for you guys like a considerable some unlevered cash. So can you give us more color on potential thoughts around incremental buybacks they way you've done before? And then what kind of M&A, how fast, it's been a while since we've seen the material size M&A?

It's John. So, in terms of our priorities for capital allocation, those haven't changed. Our top priority is always to invest for profitable growth and that can be both organic opportunities, and also be looking at the M&A landscape and we certainly do allude to given cash balance and the ability to move that across borders, that we can be much more aggressive there perhaps then we have in the past, we are pretty rigorous in looking at all of the different opportunities out there, but we're also pretty disciplined in making sure that there is the right return that creates shareholder value. So, you can expect us to be active there. At the same point in time, we fundamentally believe that returning cash to shareholders is absolutely a good thing. The thing that I would want to press upon you know is that, we don't feel pressured to go loud and do that immediately to try to show additional accretion or anything like that. Being measured and thoughtful in this area creates opportunities and it creates opportunities that over the long term could pay -- payback much more going out and for example taking a large chunk of our international cash and doing a stock buyback. So we believe there's a fine balance there and we'll do that and we'll acquire companies and return cash to shareholders as we -- when the time is right for all of those but you could expect us to be active on all of those fronts.

And I'd just say that to add to John's point that, we are happy with the set of assets and capabilities we have today. We've got a very robust product pipeline, and we're ready to compete as the leader of the market and I think we're planning from the position strength. I have to agree with John. I think that our balance sheet is a strong weapon for us, 7 billion of cash, bringing in another 6 billion that strong free cash flow, each year, and we intend to stay resilient and be a consolidator in the industry. We do look at 100s of opportunities every quarter from small investments to larger ones, and as a set of criteria that we look at, we are very disciplined, needs to fit into our vision and mission and need to accelerate our progress across either key vertical and geography or some piece of technology that we don’t have. But bottom-line expect this to be acquisitive, but as John said and both discipline and the thoughtful matter. Okay. Well, I want to thank everybody for your time to joining us today. We really appreciate it and we look forward to speaking with you soon. Thank you. Thank you, operator.

Thank you. This concludes today’s question-and-answer session. Ladies and gentlemen, thank you for your participation in today’s conference call. This concludes the program and you may disconnect now. Everyone have a great afternoon.