PayPal Holdings Inc (PYPL) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to PayPal's Second Quarter 2017 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, Head of Investor Relations.

Please go ahead.

Thank you, Sherry.

Good afternoon, and thank you for joining us.

Welcome to PayPal Holdings' Earnings Conference Call for the Second Quarter of 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 broadcast on the Internet, 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.

In discussing certain historical year-over-year comparisons, we have chosen to present non-GAAP pro forma measures because we believe that these measures provide investors a consistent basis for reviewing the company's performance across different periods.

You can find the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in the presentation accompanying this conference call.

Please note that as reflected in the reconciliation of GAAP net income to non-GAAP net income in the press release included in our 8-K filed earlier this afternoon, GAAP diluted net income per share for the 6 months ended June 30, 2016, was $0.56.

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 third quarter and full year 2017.

Our actual results may differ materially from those discussed on this call.

You can find more information about risks, uncertainties and other factors that could affect our operating 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, July 26, 2017.

We 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 today.

I'm pleased to say that PayPal delivered another strong quarter of financial results, achieving new milestones for the company on multiple fronts.

PayPal generated $3.136 billion in revenue, the first time we've exceeded $3 billion in a single quarter, and representing 20% FX-neutral growth, nearly a 110 basis point acceleration from the first quarter and 70 basis points from a year ago.

We exceeded our guidance and delivered $0.46 of non-GAAP earnings per diluted share, up 27% year-over-year.

Our non-GAAP operating margin grew by 110 basis points year-over-year to 21%.

We generated $747 million in free cash flow, up 51% from a year ago.

Perhaps more importantly, we had strong performance across our customer metrics.

We gained 6.5 million net new active accounts, the largest organic quarterly gain in the past 3 years and up over 80% from a year ago.

We ended the quarter with 210 million active accounts, including 17 million merchant accounts, growing our base by 12% year-over-year.

Given our first half results, we now anticipate our net new active additions will exceed 25 million for 2017.

Engagement once again increased, growing 10% year-over-year.

Our customers now transact 32.3 times per year, up from 29.4 times a year ago and 31.7 last quarter.

Our growing base and increasing customer engagement enabled us to pass another milestone as we processed $106 billion in payment volume, exceeding $100 billion in quarterly TPV for the first time.

TPV grew at a currency-neutral rate of 26% year-over-year, accelerating 75 basis points from last quarter.

Our volume growth was driven by our leadership in mobile.

In the quarter, 34% of the payments on our platform were made on a mobile device.

PayPal processed approximately $36 billion in mobile payment volume in Q2, up 50% year-over-year.

This growth is largely driven by the exceptional and differentiated consumer experiences we enabled on mobile devices.

One Touch adoption continued to expand in the quarter, with over 60 million consumer accounts opted in.

Merchant accounts accepting One Touch now number just over 5.5 million, growing by 500,000 in the quarter.

Venmo users sent and received $8 billion in the second quarter, representing a 103% increase from this time last year as we continue to achieve increasing network effects in the millennial market.

Based on the strong trends we are seeing across the business, we are once again raising guidance for revenue and EPS for the full year.

John will share more details about our results and guidance during his remarks.

Our performance is driven by the cumulative effect of multiple initiatives.

We have fundamentally retooled our technology and infrastructure, leading to significant improvements in availability and developer productivity.

We have meaningfully improved our core experiences and expanded our suite of products.

Our overall scale is accelerating due to the network effects of our 2-sided platform.

There is clearly a macro secular shift towards digital payments, and our customer choice results continue to exceed our expectations.

We have completed the rollout of choice across our onboarding, servicing and checkout experiences in the United States, and over 13 million customers have opted into choice.

With the data from millions of customers over multiple quarters, we are beginning to see clear trends resulting from our choice initiative.

Choice has both simplified and clarified our customer experiences, which has meaningfully reduced the volume of calls into our customer service centers.

Despite our transaction volume increasing by more than 20%, our net call volumes into our global operations are down year-over-year.

The results of choice, along with numerous other product improvements, will deliver significant OpEx savings over the course of our 3-year planning horizon.

More importantly, customers who have opted into choice had meaningful increases in overall satisfaction.

As a result, choice is driving a significant reduction in churn and a meaningful lift in overall engagement and, consistent with last quarter, the impact on our funding cost continues to remain well within our expectations.

Based on the success of choice in the U.S., we are pleased to be expanding its rollout into Australia, Canada, the U.K. and Japan later this year.

Choice will also help to expand PayPal's presence in our customers' lives.

These opportunities are driven by the landmark partnership agreements we have announced with technology companies, financial networks, wireless carriers and financial institutions around the world.

In the second quarter, we continued to make excellent progress with our partnerships.

We continue to expand our relationship with Visa, extending our partnership into Europe.

As most of you will recall, last quarter, we announced an agreement with Visa that covered the Asia Pacific region.

Consequently, we now work around the globe with Visa.

And as part of our network agreements announced last year with Visa and MasterCard, we recently announced a new service that is designed to allow PayPal and Venmo users in the U.S. to instantly transfer money to their bank accounts via eligible debit cards linked to their PayPal account.

Finding faster and more convenient ways for our customers to get funds into and out of their PayPal accounts is a key part of our overall value proposition.

Throughout the quarter, we saw our relationships with issuers grow increasingly collaborative and productive.

For example, we are pleased to see leading issuers, including Wells Fargo and HSBC, actively marketing PayPal to their customer base, encouraging their clients to link their cards into PayPal accounts.

We also announced new strategic relationships with JPMorgan Chase and, as of today, Bank of America to utilize their token services and enable their customers to easily integrate their cards into PayPal and seamlessly create a new PayPal account from their properties.

Furthermore, as part of our expanded relationship with Citi and Chase, we will make Citi ThankYou Reward Points and Chase Ultimate Reward Points available in our PayPal Wallet to be used as a funding source for consumers shopping at our 17 million merchants.

As I said on last quarter's call, it's hard to overstate the difference in the relationships we now have with companies across multiple sectors who many once viewed as potential competitors.

We are confident these partnerships will drive enhanced value to our mutual customers.

The accelerating and extensive scale of our 2-sided global platform, which allows consumers and merchants to transact instantly in new contexts across operating systems, technologies and platforms, creates a strong foundation and is very attractive to multiple partners.

Our open-technology platform has enabled expanded partnerships with Google, Apple, Facebook and Samsung over the past few months.

These agreements benefit both PayPal and our partners by creating innovative consumer-focused experiences that connect their combined billions of consumers to new buying experiences enabled by PayPal's powerful platform.

In April, Google announced an extension of our partnership to make it easy for consumers to use PayPal as a payment method in Android Pay wherever it is accepted, in-store, in-app and online.

In addition, Android Pay users on Google's Chrome mobile web will be able to seamlessly pay at the millions of online merchants that accept PayPal simply by using their PayPal account and fingerprint authentication.

Just like the deployment of One Touch, this great new checkout experience will be available to millions of PayPal merchants without requiring any integration work from the merchant, further extending the value we bring to our merchant customers.

Also in the quarter, Facebook announced additional commerce experiences with PayPal that will be available within its Messenger platform.

At F8, Facebook shared that over 1 million joint PayPal and Facebook customers have already enabled our payments experience within Facebook Messenger.

Earlier this month, PayPal and Apple announced an extension of our iTunes integration, which means customers can now buy games, music, movies and in-app purchases with PayPal on their iPhones and iPads, in the Apple App Store, iBooks, Apple Music and iTunes stores in 12 countries, including the U.S., Australia and parts of Europe.

We anticipate that this integration will expand to more countries around the world in the coming months.

This complements our existing integration into Siri and Apple iMessage and marks a growing relationship with Apple.

Finally, we announced a strategic partnership with Samsung.

Users of Samsung Pay in the U.S. will be able to use PayPal to pay for purchases in stores using Samsung Pay mag stripe emulation technology, which is used at the vast majority of merchants that accept cards.

The totality of these partnerships reinforces the fact that we are becoming an underlying open payments platform and wallet for many of the leading technology platforms, OEMs and wireless carriers around the world.

We continue to make good progress in rolling out Venmo as a payment option for PayPal merchants.

As we shared last quarter, we are now introducing the ability for U.S. PayPal merchants to accept Venmo as a mobile payment option.

Venmo users are now able to use Venmo at an expanded number of PayPal merchants such as lululemon and Forever 21, and I'm quite encouraged by the early results.

We expect that the ability to pay with Venmo will be widely deployed across millions of our PayPal merchants by the end of this year, and I look forward to sharing more details in the coming quarters.

The ability to deliver new consumers and enhanced sales growth to merchants of all sizes is a key benefit of PayPal, especially as the world becomes more global and increasingly digital.

As of today, this includes bringing the power and reach of the PayPal platform to the expensive and rapidly growing Chinese consumer market.

We are very pleased to announce that PayPal has signed a strategic partnership agreement with Baidu, the leading Chinese-language Internet search provider with approximately 700 million users.

This partnership allows Chinese consumers to pay with their Baidu Wallet and PayPal at our merchants outside of China.

Beginning later this year, this partnership will provide Chinese consumers more ways to discover and buy from PayPal merchants in the U.S. and will eventually expand PayPal's entire global merchant base outside of China.

We expect this partnership to drive significant demand and additional cross-border trade over the PayPal platform.

In addition to helping our merchant customers maximize their opportunities in the age of digital commerce, another key part of our strategy is helping underserved consumers join and thrive in the digital economy.

This vision drove our recent acquisition of TIO Networks, which adds bill-pay functionality to our 2-sided platform, offering consumers the ability to access a digital network and benefit from the convenience and speed of digital bill payments.

Last week, we announced that we have closed our acquisition of TIO Networks, and I'd like to take this opportunity to welcome Hamed and the TIO team to the PayPal family.

3 years ago, we set off to transform PayPal.

Our goal was to create an open platform for digital commerce that delivers innovative mobile checkout experiences that blurred the lines between physical, online and mobile shopping.

We set off to create an integrated suite of services, experiences and APIs that could extend the power of our 2-sided ecosystem to our merchants with little and often no integration work required.

That vision has grown increasingly important to our merchants in today's rapidly evolving retail landscape.

Our execution and support of that vision is yielding strong results and extending our leadership position.

Our efforts to place our customers front and center in everything we do is driving both scale and engagement on our platform.

It has opened the door to strategic and productive partnerships that have extended the PayPal experience across multiple contexts in existing and new geographies.

But we know we are still in the early stages of our transformation, and we are just scratching the surface of the opportunities in front of us.

We are fully committed to delivering improved core experiences and additional innovative and comprehensive solutions for our customers, helping our consumers and merchants navigate the rapidly evolving and expanding digital payments landscape.

And with that, I'd like to now turn the call over to John.

Thanks, Dan.

I also want to thank all of PayPal's customers and our employees worldwide for making this another great quarter.

As Dan discussed, we achieved several notable milestones in the second quarter, including for the first time, processing more than $100 billion of TPV and generating more than $3 billion of revenue in a quarter.

In addition, we saw accelerating growth in customer accounts, revenue, operating income, earnings per share and free cash flow.

Our second quarter financial and operating results demonstrate the momentum in our business and build on the strength of our recent performance.

Relative to our expectations going into the quarter, our revenue and operating income outperformed.

On the top line, we attribute acceleration in our core to strong account and engagement growth, enhanced user experiences that make setting preferences and choosing funding instruments intuitive, cross-border initiatives as well as increased functionality that allows our customers to use our products in additional contexts.

In addition, though foreign exchange rates continue to be a headwind in comparison to last year, they provided a benefit relative to our plans going into the quarter.

On the expense side, nonvolume-related expenses grew only 4.5%, approximately 25% of the rate of revenue growth.

Our team did an outstanding job managing costs, resulting in cost performance slightly better than our expectations.

At the same time, we continued to fully fund our key growth initiatives.

This level of expense growth demonstrates our ability to scale with minimal incremental costs.

Before I discuss the financial results in detail, here are a few highlights for the quarter.

Revenue was $3.14 billion, growing 18% on a spot basis and 20% on a currency-neutral basis.

Non-GAAP operating income grew 25% to $659 million and non-GAAP EPS grew 27% to $0.46.

We generated $921 million of operating cash flow, and free cash flow grew 51% to $747 million.

For the second quarter, our total payment volume was $106 billion, up 26% on a currency-neutral basis, consisting of U.S. payment volume growth of 27% and international volume growth of 25%.

Our merchant services volume grew 30% on a currency-neutral basis to $91 billion.

Merchant services represented approximately 86% of our total volume in the quarter.

Volume associated with eBay represented approximately 14% of the total compared to 15% in the first quarter 2017 and 17% in the second quarter of 2016.

P2P continues to be a meaningful contributor to TPV, representing approximately 21% of total payment volume.

In the quarter, active accounts grew 12% and we ended the second quarter with 210 million active accounts.

Active account growth was driven by strength in our core PayPal business as well as growth in Venmo.

The number of payment transactions per active account on a trailing 12-month basis reached 32.3, with 6.8 billion transactions occurring on our payment platform over that period.

In the second quarter, transactions grew 23% to 1.8 billion.

Revenue grew 18% on a spot basis in Q2 and was the result of an 18% increase in both transaction revenue and revenue from other value-added services.

The revenue growth in the second quarter represents an acceleration of more than 100 basis points versus the first quarter.

Transaction revenue growth was primarily driven by our core PayPal and Braintree businesses, and revenue from other value-added services was predominantly driven by credit.

For Q2, our transaction take rate was 2.58%, a decline of 11 basis points from the second quarter of 2016, and our total take rate was 2.95%, down 13 basis points year-over-year.

(inaudible) 75% of the decrease in both transaction and total take rate was related to the increase in our P2P volume.

Increased stability in our transaction take rate in the second quarter is indicative of the balanced growth and the strength we are seeing across our platform as well as our ability to monetize experiences where we demonstrate a compelling value proposition for our customers.

Volume-based expenses were up 29% year-over-year.

Transaction expense was $1.06 billion, up 31% year-over-year, driven primarily by increased funding costs across our core PayPal platform.

As Dan mentioned in his remarks, the increased transaction expenses we have seen from choice have been well within our expectations.

Further, we continue to see benefits on both the top line as well as cost improvements from lower customer call volumes and servicing costs, validating our initial expectations.

We are pleased to roll out these experiences to additional geographies in Europe and Asia.

Transaction loss in the quarter was $185 million or 17 basis points of TPV compared to 18 basis points of TPV in Q2 '16.

Loan losses across our consumer and merchant credit products were $123 million, representing 26% growth, in line with the growth of our receivables portfolio.

Our consumer credit portfolio continues to perform in line with our expectations.

The net charge-off rate was 6.9% in the second quarter.

We ended the quarter with an aggregate gross receivables balance, including both principal and interest, of $6.1 billion in our consumer and merchant loan portfolios and a total reserve of $380 million.

Other operating expenses increased 4.5% to $1.1 billion, representing 35% of total revenue, an improvement of 465 basis points of operating leverage versus the same quarter last year.

Both general and administrative and product development costs were flat year-over-year and experienced the lowest rates of growth since separation.

Sales and marketing expenses grew 10% as we invested to support our brand strategies and choice experiences.

For the second quarter in a row, other operating expenses increased only $0.10 for every incremental dollar of revenue, demonstrating the scalability of our platform.

Strong revenue and cost performance resulted in 25% growth in non-GAAP operating income to $659 million.

Non-GAAP operating margin expanded 110 basis points to 21% compared to Q2 '16.

GAAP operating income grew 16% in the second quarter to $430 million and resulted in a GAAP operating margin of 13.7%.

Both GAAP and non-GAAP EPS grew 27% in the second quarter to $0.34 and $0.46, respectively.

We ended Q2 with cash, cash equivalents and short-term investments of $6.4 billion.

We generated $921 million of operating cash flow in the quarter, and capital expenditures were $174 million or 6% of revenue.

This resulted in $747 million of free cash flow in the quarter as we generated $0.24 of free cash flow for every dollar of revenue.

Capital return is a fundamental component of our overall capital allocation strategy.

Year-to-date, we have returned more than $600 million to shareholders in the form of stock repurchases.

We now have approximately $400 million remaining on our original $2 billion authorization.

As announced on our last earnings call, our board has also approved an additional $5 billion buyback authorization.

In addition to focusing on enhanced capital allocation strategies, we are also committed to optimizing our capital structure.

As we've shared over the past few quarters, we are forming alternatives to run our consumer credit business in a less capital-intensive manner.

We're encouraged by the discussions with potential partners, and based on the progress we are making, the timing and structure of these alternatives are in line with our expectations.

While we continue to assess more efficient ways to manage balance sheet exposure to consumer credit, we're also assessing strategies that will support the growth of merchant credit products.

We continue to introduce and expand financial services and tools to help small and mid-size business customers start and grow their businesses.

Since 2013, PayPal Working Capital has provided in excess of $3 billion in funding to more than 115,000 merchants.

PayPal Working Capital is a strategic offering for PayPal, which drives merchant sales growth, increases processing volume and reduces merchant churn rate.

We will continue to invest in our working capital business to provide innovative financial products to small and medium-sized businesses.

I would now like to discuss our updated guidance for the full year 2017 as well as the guidance for the third quarter.

For the full year, we are raising our revenue guidance and now expect revenue between $12.775 billion and $12.875 billion, representing currency-neutral growth of 19% to 20%.

At current exchange rates for the full year, we expect currency translation to impact revenue by approximately 100 basis points, resulting in spot growth of 18% to 19%.

For the first half of 2017, nonvolume-related expenses have grown only 4.5%.

We are pleased with this performance, and it's indicative of the type of cost discipline with which we can operate going forward.

This level of growth for our nonvolume-related expenses is sustainable given the manner in which we are scaling our business and the changes we have made to our organizational structure.

At the same time, this very measured approach to expense growth gives us the flexibility to be opportunistic and make investments to drive our business going forward.

Given our year-to-date performance and our operating plans for the remainder of the year, we expect that our full year non-GAAP operating margins will expand relative to 2016.

We are also raising our full year EPS outlook by $0.05 at the high end and now expect non-GAAP EPS to be in the range of $1.80 to $1.84.

Further, we are increasing our free cash flow outlook and now expect to generate in excess of $2.9 billion in 2017.

As Dan mentioned, we recently closed our acquisition of TIO Networks and have included an expected impact of $25 million in revenue for the remainder of the year in our full year outlook with a negligible impact to our earnings.

At the high end of the ranges we're providing today, our current full year guidance represents an increase of $225 million in revenue and a $0.10 increase in non-GAAP EPS relative to the initial full year 2017 guidance that we provided in January.

For the third quarter, we expect revenue to be between $3.14 billion and $3.19 billion, and we expect non-GAAP EPS to be between $0.42 and $0.44.

I want to close with a few observations on the quarter and our full year outlook.

We saw accelerating growth across net new actives, TPV and revenue in the quarter.

Net new active accounts grew by 80%, and on a currency-neutral basis, TPV grew 26% and revenue increased 20%.

Our merchant services growth has been consistently in the 30% range and demonstrates we are continuing to grow our market share.

And while growing our top line, we expect to maintain disciplined expense growth, which allowed us to deliver more than 100 basis points of non-GAAP operating margin expansion in the quarter.

This performance gives us great conviction in our ability to deliver on our commitments for the year.

With that, let me turn it back over to the operator for questions.

Thank you.

(Operator Instructions) Our first question comes from Dan Perlin with RBC Capital Markets.

I had a question around the payment transactions per active account.

I know they were up 10%, and that's still a very strong number.

It was down a little bit relative to the last quarter.

I think it was up 12%.

And over the last 6 quarters prior to that, it was up, on average, 13%.

So I would have thought, given choice and all of the kind of reduced friction that you guys have had, that you might actually see that number accelerating as opposed to decelerating in its growth.

Is there any callouts in the quarter we should know about?

Dan, it's Dan.

Nice to hear you, and thanks for the question.

So I'm quite pleased with our progress on engagement.

It is up 10% despite, really, what is an accelerating pace right now, which is kind of a high-class problem to have.

We are seeing tremendous adoption across merchants and consumers into the PayPal franchise.

And as I mentioned, we think we'll exceed 25 million in new actives for the year.

In the past couple of years, we've taken our active user engagement up almost 7 transactions per user across the whole base.

And if you look under the covers, which we've done here quite a bit, the news is even better because the majority of our user engagement right now is coming from the core PayPal Wallet.

And in many places -- before, it was coming from the growth of Braintree and core PayPal.

But now it is being driven, the majority, from our PayPal core wallet, and that is a great new story for us.

And if you look at our product growth and our core PayPal franchise, over the last several quarters, we've taken multiyear trends that have been drifting slightly down in terms of their growth rate year-over-year, and we have bent those curves across pretty much every single one of our core products, and they are now up and accelerating.

So that is a piece of really good news that you probably wouldn't see from the number in and of itself.

And I kind of feel like we're just at the beginning of this.

We've got One Touch that is driving engagement -- that's driving increased engagement, and it's accelerating across the base.

Choice is still new, but choice engagement, when somebody opts in to choice, that engagement is up quite substantially.

And I am really pleased with what we are seeing from choice.

As I mentioned, we have about 13 million-plus customers that are in choice now.

That will grow and that will impact engagement.

We're obviously just beginning at the journey, the movement to new content.

Now we now have basically major agreements for pretty much every major issuer.

We've got agreements from the financial networks to utilize their tokens, and it will start to move us, move more into an in-store environment as we go into next year.

That will also drive engagement.

You've got Pay with Venmo.

Right now, there are no engagements with Venmo.

There's P2P, but we don't count that in our engagement total, so you'll see that drive up.

TIO just came on.

Our new partnerships with Facebook and Google are going to start to kick in.

That's really not in our guidance right now.

That's a -- those things are going to start to accelerate and drive our future growth as we look into '18, '19, '20.

So we still have a goal to have a consumer use PayPal 2 times a week.

That is our goal, not to drive to once a week but to drive to 2 times a week.

And I feel like with all the initiatives we have right now and the trending that we're seeing, that over our medium to long term, that's within our reach.

So feeling pretty good about where we are in the engagement side.

Yes.

That's fantastic.

I'm going to just ask one other quick one is you mentioned those strategic partnerships, and they are plentiful.

I'm wondering how you're viewing that, from a trend perspective, to bring down your customer acquisition cost as we think about the future.

You violated first cardinal rule of one question per, but okay, you got away with it, and I admire that.

I'm increasing my engagement.

So -- yes, exactly.

I can see that.

So listen, one of the things that I mentioned in my opening remarks is we're beginning to see a tremendously collaborative relationship with issuers right now.

We're seeing, I mentioned 2 that are marketing to their base to actively encourage them to link their cards into our PayPal account.

And that happened because we're helping drive growth for them.

As John mentioned in his remarks, our MS TPV, our TPV growth outside of eBay is growing at 30%.

And we are the perfect digital distribution channel for financial institutions, especially now that we've implemented choice and a consumer will [opt] on how they want to pay, where they want to pay on that.

And so I think this acceleration of our net new actives is coming at a lower cost to us, so it's really kind of sort of a 1-2 punch that's positive for us now, but especially as we look forward.

Okay.

No more questions.

You're not allowed any more questions, Dan.

Our next question comes from Lisa Ellis with Bernstein.

I had a question about in-store and your in-store strategy in light of the partnerships that you've signed.

Can you kind of give an overall view of in which of these instances, like in Android Pay versus Samsung Pay versus using the network tokens in your own wallet, you are able to generate revenues for PayPal or envision that over time versus where it's just a strategy of driving more user engagement at the POS even though it's not revenue-generating?

This is Bill.

So great question.

And you're exactly right that as you parse out the parts or places where we earn revenue, there are places where you think about it as engagement opportunity.

And so the places where somebody's paying in-store and they're using their PayPal balance, those are places where we would make revenue on those transactions.

In places where we are enabling the use of an issuer's card directly and we're providing a pass or token, we wouldn't earn revenue on those, but we also don't have cost on those.

And So we get great consumer engagement but without cost on those transactions per se.

Also, importantly, in addition to what we're doing with partners like Samsung Pay and Android Pay to drive into the store, we're working with those same partners, particularly like Android Pay, for example, where it's not as in-store, but that blends into in-app purchasing and online purchasing.

And there's a lot of blurring of the lines of online and in-store with things like buy online, pick up in store where these cross-channel experiences are really getting to consumers using a mobile device, but really engaging with the retailer and the store.

You see us really, really delivering on those types of experiences as well.

So we have a broad strategy that can both help the retailer engage across multiple fronts, drive engagement with the consumer.

And we have several of those that we monetize directly and some of those that are going to be a pass-through, which would be -- would not generate revenue for us, but would also not generate cost for us.

And we have many of those like buy online, pick up in store, paying with your balance where we do generate revenue on those things.

And by the way, this is consistent with PayPal's history where we have historically had products such as P2P that were free that we then monetize in other forms.

And so this is a strategy that we have employed previously, and we feel really good about where we are on that.

And just to add to that.

Lisa, first of all, nice to hear your voice.

Hope you're doing well.

And we spent a lot of time as we've started to transition the company from being, really, single-product type of company to being a platform company that offers a suite of services to both merchants and to consumers.

And what we've found, and we've done a ton of detailed research and analytics on this, is when we add an incremental service to a consumer or even to a merchant, we see their lifetime value basically double.

And so if a consumer adds P2P, we see they engage more, their use of PayPal goes up, their churn goes way down, and it is a gigantic benefit for our flywheel and for our economics.

And so the more products and services and experiences and the more engagement we can have with a consumer and a merchant, the better the LTV is for us.

And that comes to, as Bill has said, historically, as we've seen that with P2P and others, we also have started in-store with trials with Vodafone as we've rolled out, we've seen, as people have used Vodafone and PayPal in-store, they use PayPal more in-app and online because the distinctions between those things are blurring, especially with mobile.

And so our ability to engage with consumers and drive that engagement is a good thing both for consumers, for merchants and for the economics of PayPal.

Our next question comes from Ashwin Shirvaikar with Citi.

My question is with regards to the rise in active accounts and the reacceleration of that as that has gone from 10% to 11% to 12%.

Is that a stage for relationship with consumer choice?

Is it possible to potentially estimate -- is there sort of an untapped number of inactive accounts, people who downloaded PayPal but didn't use it, that can give us some idea of potential to continue increasing your accounts?

I'll start, then maybe Bill can supplement.

So I would say, kind of as I mentioned in my remarks, there's no one single thing driving the growth of those net new actives.

And as I've mentioned, I said I think we'll do in excess of 25 million net new actives.

That would imply, Ashwin, that we're going to do another, on average, 6 million or so in the third and fourth quarter.

So we see a continued strength in net new actives.

That's coming as a result, and Bill won't say this but I will, from the great work that Bill and his product and engineering teams have done, the great work that Tomer Barel and the risk teams have done around improving our core experiences.

And as I mentioned, we are bending multiyear curves now, and we are seeing now really nice year-over-year growth in our core experiences.

Availability, just things like availability is up.

That matters a lot.

Latency is down.

That matters a lot.

We've got a new mobile app there.

We've got One Touch.

We have choice coming in.

Choice is driving both a reduction in churn, which helps net new actives, obviously, but it's also driving additional new adds because the onboarding process is so much more streamlined.

And then you also have partners that are now actively marketing PayPal because, together, we're sort of allies in advancing digital payments and tapping into that growth.

And so I think there is a number of things, and we also -- obviously with 210 million people now in the platform.

We've got -- maybe at a tipping point of these network effects right now where there are so many merchants on the platform, so many consumers on the platform that it's a must-have for people, especially as they move into mobile checkout experiences.

I think what Bill and the risk teams have done in things like One Touch that's really been unparalleled, kind of a mobile checkout experience, almost 2x the conversion of the industry average.

And so I look at a number of things that we've done over the course of the last several years, and they're beginning to take hold in the market and are really driving our results.

I don't know, Bill, would you add to that?

I think you captured it really well, just think the points there.

We have multiple new places that customers are coming in.

But as Dan described, we have, across nearly every major product area, revamped those products over the last few years.

And so we're seeing that not only do each of those products tend to get more net new actives for us coming in, we're driving increased engagement across each of those.

As people come in through those, they become more engaged on those products, and there's additional product that they can engage with that also deepens our relationship with those customers, really leading us to more of their daily lives.

So just as Dan said, it is across multiple fronts, and quite noteworthy that it's across our core experiences as well, we're deepening that engagement.

If just -- could just add one last thing, and then we'll be done with your question, Ashwin.

I wouldn't underestimate what could happen with Baidu.

I mean, we are now tapping in to the Chinese consumer marketplace, and that is going to open up a whole new market for consumers to come on to the PayPal platform, interact with our PayPal merchants outside of China and drive what we think could be substantial customer traffic.

And I talked about this, it's not just Baidu, it's Baidu and PayPal, almost a little like we've done with Android Pay.

It's a co-branded experience.

They sign up to be on a PayPal account from there.

So there are a lot of things that we're working on, a lot of things we still want to implement, but feel good about the current trend right now.

Our next question comes from Tien-tsin Huang from JPMorgan.

Good results and momentum.

I want to ask about the -- maybe the partner pipeline.

Just any big partnerships out there still to sign in 2017?

And maybe I'll ask about the acquisition pipeline as well and your appetite to do deals.

Yes.

So we've done, I think, 24 major partnerships in the last 18 months, and you've seen this last quarter it starting to accelerate, actually.

And it's accelerating because I think people are beginning to understand the assets that we bring to our partners.

We obviously bring a lot of scale to partners.

And when you talk to different platforms, whether it be Baidu or Google or Samsung, the ability to tap into the 17 million merchants we have, that long tail of merchants, that's a very difficult asset for others to replicate, and it's accelerating in its growth.

If you look at other partnerships, you can add potential for pretty significant additional growth for them, whether that's driven by mobile, and mobile you can do on One Touch or a PPV.

That's accelerating.

And as you know, we also control the value prop end to end.

There are very few players who do that.

There are some players that control a piece of it, but very few players own it including risk, customer service, brand reputation.

And we own all of that parts of the value proposition.

And we've also changed our model quite a bit.

We are an open platform and a suite of services, both branded and unbranded, that's operating system- and device- and technology-agnostic.

And so -- and we're -- and very importantly, we're a neutral third-party platform.

So we don't compete with any of our merchants or partners.

We are allies in advancing digital payments.

So I think our positioning is really good within the entire ecosystem to continue to partner.

There are a number of other partnerships that are on the horizon, and I think the more we partner, the more people see that the benefit of doing that can be quite substantial.

So I think we announced enough partnerships for right now, so we'll save some for the next announcement, but I think we're really well positioned on that front.

On the M&A front -- because you got your 2 questions in there in a very subtle way.

But on the M&A front, look, we have a very strong balance sheet.

John mentioned we have $6.4 billion of cash equivalents on our balance sheet.

We're generating -- now our guidance is over $2.9 billion of free cash flow for the year.

So that's a competitive advantage for us.

There's no question about it.

And we're very active at looking at a range of opportunities around the world, both big and small.

But look, those opportunities need to tie in to our vision and our mission.

They've got to accelerate our progress, either against a key vertical or a geographic expansion.

We'll do tuck-in acquisitions from a tech or a functional capability like a TIO type of thing, but we look at this in the -- through the lens of do we build, do we partner or do we buy?

And the amount of work that Tomer and Bill have done on their respective platforms with risk capabilities on our full infrastructure, I mentioned the increased developer productivity, we can put out a ton of releases, now we've got something like 30,000 releases in a quarter.

I mean, it's amazing the velocity of new functionality and innovation that Bill and his team are putting out into the marketplace.

And so what we used to have to buy at one time, because it used to take us months to make a change on our website, usually it's such a monolithic infrastructure, now there's a rapid velocity of very innovative services coming in.

Second thing is we can partner now in ways that we never could partner before.

Choice has enabled that.

We have a new philosophy about cooperating with people that created an environment that's gone from a very competitive one to one that's much more cooperative.

We have a ton of complementary resources that we can use with partners.

And now, many times where we used to think we'd have to buy something, we can now partner on a commercial relationship to go and do that.

And then, obviously, if we can't do any of that, we look at buy, and we do that in a very disciplined manner.

We've got a certain amount of scale and capabilities.

And so you can expect us to continue to be acquisitive but in a disciplined fashion and within the context of what I just mentioned.

Our next question comes from Paul Condra with Crédit Suisse.

Great.

Yes, I guess, Bill, I just wondered if you could give a little more detail on Venmo, kind of what you're seeing as you roll that out in terms the way consumers are using it.

Are they potentially using their credit card?

And then any merchant feedback?

And just anything -- any surprises or anything unexpected, just to kind of help us understand where your focus is as you're scaling that product out?

Sure.

We -- as we talked about in prior calls, we spent quite a long time really making sure that we had dialed in the customer experience so that Venmo would not just be another pay button but that the uniqueness of Venmo is -- really gets to great mobile payments as well as the social engagement.

Then we'd have that dialed in.

We took that from person-to-person payment and to merchant payments.

We've been working through that for a year plus.

And so we're really now in the place of taking those prior learnings, which we got to a place of feeling really great about, and we're opening that up to the PayPal merchant base.

And so the really interesting thing that's happening right now is that we're saying, for Venmo users, we're lighting up PayPal merchants, allowing Venmo users to pay a PayPal merchant, notably without PayPal merchants having to do any work, just like we rolled out PayPal One Touch, just like we rolled out Android Pay.

And so you're seeing us leverage that very unique distribution capability to PayPal merchants, again, to go deliver Venmo consumers to those PayPal merchants.

And so we're in the midst of a ramp with that, but we're feeling really good about that.

We not only had previously proven out that consumers on Venmo really wanted to use Venmo for more things beyond P2P, and we have a number of merchants where we see really, really positive results in terms of how Venmo stacks up next to other payment alternatives and those merchants feel great about those things.

We're now really focused on how we take that from where we are now with a handful of merchants to go take that to millions of PayPal merchants.

And we started that journey already, as Dan mentioned previously, we've started to introduce that.

We have merchants like lululemon and Forever 21 that are now there.

We have thousands of PayPal merchants now where you can use Venmo to pay, and we expect we'll progress that towards the millions of PayPal merchants over the coming quarters.

So we're feeling really good about those things with the-- what consumers want to do this?

What was the interaction model?

Would they like it?

Those are things that we really spent that prior year testing out, so now we're in the mode of just thoughtfully scaling that, and we're feeling really good about how that's going so far.

Our next question comes from Darrin Peller with Barclays.

Just following up on this acceleration in partnerships, Dan, especially around the mega tech companies, which is Apple and Google this past quarter.

Can you touch on these partnerships in a little more detail?

But more, just -- does this underscore any type of deeper meaning around the positioning in the payments ecosystem by any of these companies?

Just given -- there's always been a lot of questions over the competitive threats from some of these names versus PayPal.

Are they now more partnerships?

And then, John, just to sneak one financial one in.

Pricing opportunities, I know that was a key driver potentially in the quarter.

Is it still a driver -- or it's supposed to be or it could be driver in the year.

How much more of that to go is there?

Or how much of an impact in the quarter?

And just maybe comment on that a little further.

Sure, Darrin.

I'll start and then kick it over to Dan.

As we've talked a little bit about this year, pricing is an opportunity for us.

We did announce a couple of corridors where we made price increases.

And part of that is reflected both in our financial results for the quarter as well as our improved guidance for the year.

I will say that we're very focused on really identifying where customers derive value enhancement as part of their experience and in pricing to that versus just arbitrarily going out and raising prices for something where there's no incremental value that's perceived by the customer.

And so we've had some targeted initiatives that we've done, and that's reflected in our results as well as our guidance for the year.

Yes, and Darrin.

So I'll start off, and then I'll turn it over to Bill.

But I think there's a real difference now with the partnerships that you've mentioned, major tech platform companies.

I think none of them really wanted to go into payment as an end to itself.

It was a means to an end that they had.

And so it might be more engagement on their platform, and that engagement could lead to key metrics that they want us to try to keep the advertising, it could be other things.

And when we made the shift to being a open payments platform as opposed to just being a button as a checkout experience and really opened our platform up through pretty sophisticated technological upgrades, through open APIs with the partnerships we had, with tokenization and that kind of thing, we were then able to become really, in many ways, an underlying payment OS for those tech platforms that enabled them to create the experiences that they wanted to drive for their end user.

And so that partnership is fundamentally different right now.

It has evolved greatly over the last several years.

I'll ask Bill to add color to that, but it's a very different conversation that we have now than we used to have.

Yes.

I would just add to that, that absolutely, payments was a means to an end, as Dan described.

And what we have demonstrated is that through the unique 2-sided platform that we have and our ability to go connect consumers and merchants around the world, do so in a single touch, makes us very unique in being able to light up those experiences for those partners.

And so not only did we make the strategic shift to say we want to be more open platform to enable those things and improve our experiences so that we could do things like One Touch to drive industry-leading conversion levels to connect to those experiences, I think as mobile has matured and players have been able to see different alternatives in the ecosystem and see what consumers have affinity to, what drives better conversion rates, I think we are demonstrating consistently that the uniqueness of our 2-sided platform, our ability to connect consumers and merchants lets us drive connection between consumers and merchants of all types or consumers and tech ecosystems in ways that others can't.

Or whatever their aspirations are, whether that's selling more ads or selling more devices or driving engagement with their experiences, we're generally able to connect their -- connect users to them and those experiences in a lower-friction way than anybody else out there.

And that's why you've seen us really start to play a central role there.

And I think as more and more of these interesting new experiences proliferate, every time that happens, I think PayPal is now positioned as a place where, of course, people would want to look given what we've demonstrated we can do on those things.

Our last question comes from Bryan Keane with Deutsche Bank.

I just wanted to ask, lots of new partnerships.

The Chase deal in particular caught my eye, thinking about the ability for PayPal to process through ChaseNet.

Doesn't that materially lower your funding costs with Chase cards going forward?

And then just as a bigger strategic picture, maybe Dan, with all these partnerships, are we about to launch a big in-store campaign or opportunity?

Or is it going to be a -- more of a trial-and-error process?

Yes, so I'll start off with that.

Obviously, we've worked closely with JPMorgan Chase over the last couple of years, actually, as we've talked about the potential for how we might work together, and I'm really pleased with where we came out in this partnership.

We both see a lot of value in it.

You have 2 very strong companies blending what are really impressive assets to create great consumer experiences, including, as you mentioned, processing through ChaseNet, which, obviously, does give the potential.

We're not talking about any deal terms one way or another but there's potential for lower costs on that.

So I'm really pleased with the comprehensive nature of the partnership that we have with Chase.

It took us time to work through all the details of it, but I think both of us feel really good about and really good about what we can drive coming out of that.

And I would just add to that, again, without calling out the deal terms in any one specific deal.

The closer working relationship that we now have with the broader financial ecosystem, as you look through a broad lens of how you think about costs, whether that's customer acquisition costs or risk and fraud losses or all of these kinds of things, we, as one of the largest drivers of digital transactions for banks and issuers and having a place that is one of the largest [reps] growth for banks and issuers, the opportunity for us to collaborate across a number of fronts across the ecosystem is quite meaningful, we believe.

And we see that across these partnerships it's not just about what's the cost of processing a transaction, but how can we think about delivering better digital experiences to customers that has impact -- positive impact on customer engagement, on customer acquisition costs and how you think about the lifetime value of a customer, risk, all these things.

The opportunity to collaborate with the ecosystem has many, many potential positives across a number of those things, and that's something we feel really encouraged by in the conversations that we have and the relationships we're building.

I think you just think about things like reward points.

Discover, Chase, Citi have all decided that utilizing rewards points within the PayPal platform to utilize those for purchases at our 17 million merchants.

That's a real significant differentiation for those particular financial institutions and their customers who are using their instruments, but also for PayPal because you now can utilize those reward points in a split transaction.

You have X number of reward points but maybe couldn't do that full transaction, you can now split that.

You can use those reward points to purchase 40%, of which we're going to do, and then the other 60% can be done through whatever funding instrument you select as a consumer.

That's a lower-cost funding mechanism as well for us.

So there are all sorts of things within these relationships that we have that drive enhanced value for our mutual customers that, if you parse through them, it's really quite significant and differentiated from where we were certainly a year or so ago.

On the in-store stuff, we obviously now have the ability to use industry tokens from Visa, MasterCard and others.

And now we're working with each of the FIs to use their tokens for their particular instruments.

And so you'll start to see that just naturally begin to roll out.

There really isn't much of a trial and error per se on this.

We will have the ability for a PayPal customer, or if they're opted into one of the bank services that's providing tokens, we'll use the network tokens with that.

And you'll simply be able to use that instrument seamlessly across where, obviously, it's accepted, Android phones, for instance, across a in-app experience, online experience or an in-store experience without us having to do this full build customization of software at the point-of-sale terminal.

And so that would just be a natural rollout utilizing existing POS technology.

Okay.

So thank you for that last question, Bryan, and thanks, everybody, for joining us.

We really appreciate your time, and we look forward to speaking with all of you soon.

Thanks a lot, everybody, and 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.

This concludes the program.

You may all disconnect.

Everyone, have a great afternoon.