PAYPAL HOLDINGS, INC. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that involve expectations, plans, or intentions (such as those relating to future business, future results of operations or financial condition, new or planned features or services, mergers or acquisitions, or management strategies). Additionally, our forward looking statements include expectations related to anticipated impacts of the coronavirus pandemic. These forward-looking statements can be identified by words such as "may," "will," "would," "should," "could," "expect," "anticipate," "believe," "estimate," "intend," "strategy," "future," "opportunity," "plan," "project," "forecast," and other similar expressions. These forward-looking statements involve risks and uncertainties that could cause our actual results and financial condition to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those discussed in Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the year endedDecember 31, 2020 (the "2020 Form 10-K"), as supplemented in the risk factors set forth below in Part II, Item 1A, Risk Factors, of this Form 10-Q, as well as in our unaudited condensed consolidated financial statements, related notes, and the other information appearing in this report and our other filings with theSecurities and Exchange Commission ("SEC"). We do not intend, and undertake no obligation except as required by law, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. You should read the following "Management's Discussion and Analysis of Financial Condition and Results of Operations" in conjunction with the unaudited condensed consolidated financial statements and the related notes that appear in this report. Unless otherwise expressly stated or the context otherwise requires, references to "we," "our," "us," "the Company," and "PayPal" refer toPayPal Holdings, Inc. and its consolidated subsidiaries. BUSINESS ENVIRONMENT THE COMPANY We are a leading technology platform and digital payments company that enables digital and mobile payments on behalf of merchants and consumers worldwide.PayPal is committed to democratizing financial services to improve the financial health of individuals and to increase economic opportunity for entrepreneurs and businesses of all sizes around the world. Our goal is to enable our merchants and consumers to manage and move their money anywhere in the world, anytime, on any platform, and using any device when sending payments or getting paid. We also facilitate person-to-person payments through ourPayPal , Venmo, and Xoom products and services and simplify and personalize shopping experiences for our consumers through our Honey Platform. Our combined payment solutions, including our corePayPal ,PayPal Credit,Braintree , Venmo, Xoom, Zettle, andHyperwallet products and services, comprise our proprietary Payments Platform.
Regulatory environment
We operate globally and in a rapidly evolving regulatory environment characterized by a heightened focus by regulators globally on all aspects of the payments industry, including countering terrorist financing, anti-money laundering, privacy, cybersecurity, and consumer protection. The laws and regulations applicable to us, including those enacted prior to the advent of digital and mobile payments, are continuing to evolve through legislative and regulatory action and judicial interpretation. New or changing laws and regulations, including the changes to their interpretation and implementation, as well as increased penalties and enforcement actions related to non-compliance, could have a material adverse impact on our business, results of operations, and financial condition. We monitor these areas closely and are focused on designing compliant solutions for our customers.
Information security
Information security risks for global payments and technology companies like us have increased significantly in recent years. Although we have developed systems and processes designed to protect the data we manage, prevent data loss and other security incidents and effectively respond to known and potential risks, and expect to continue to expend significant resources to bolster these protections, we remain subject to these risks and there can be no assurance that our security measures will provide sufficient security or prevent breaches or attacks. For additional information regarding our information security risks, see Part I, Item 1A, Risk Factors in our 2020 Form 10-K, as supplemented and, to the extent inconsistent, superseded below (if applicable) in Part II, Item 1A, Risk Factors of this Form 10-Q. [[Image Removed: pypl-20210630_g2.jpg]] 40
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COVID-19
The coronavirus ("COVID-19") pandemic resulted in government authorities and
businesses throughout the world implementing numerous measures intended to
contain and limit the spread of COVID-19, including travel restrictions, border
closures, quarantines, shelter-in-place and lock-down orders, mask and social
distancing requirements, and business limitations and shutdowns. The spread of
COVID-19 has caused us to make significant modifications to our business
practices, including enabling most of our workforce to work from home,
establishing strict health and safety protocols for our offices, restricting
physical participation in meetings, events, and conferences and imposing
restrictions on employee travel. We will continue to actively monitor the
situation and may take further actions that may alter our business practices as
may be required by federal, state, or local authorities or that we determine are
in the best interests of our employees, customers, or business partners.
The spread of COVID-19 has also accelerated the shift from in-store shopping and
traditional in-store payment methods (e.g., cash) towards e-commerce and digital
payments and resulted in increased customer demand for safer payment and
delivery solutions (e.g. contactless payment methods, buy online and pick up in
store) and a significant increase in online spending in certain verticals that
have historically had a strong in-store presence. On balance, our business has
benefited from these behavioral shifts, including a significant increase in net
new active accounts and payments volume. To the extent that consumers revert to
pre-COVID-19 behaviors as mitigation measures to limit the spread of COVID-19
are lifted or relaxed and effective vaccines for COVID-19 are available and
widely distributed, our business, financial condition, and results of operations
could be adversely impacted.
The rapidly changing global market and economic conditions as a result of the
COVID-19 pandemic have impacted, and are expected to continue to impact, our
operations and business. The broader implications of the COVID-19 pandemic and
related global economic unpredictability on our business, financial condition,
and results of operations remain uncertain. For additional information on how
the COVID-19 pandemic has impacted and could continue to negatively impact our
business, see below for specific discussion in the respective areas, and also
refer to Part I, Item 1A, Risk Factors in our 2020 Form 10-K.
BREXIT
TheUnited Kingdom ("U.K.") formally exited theEuropean Union ("EU") and the European Economic Area ("EEA") onJanuary 31, 2020 (commonly referred to as "Brexit") with the expiration of a transition period onDecember 31, 2020 .PayPal (Europe ) S.à.r.l. et Cie, SCA ("PayPal (Europe )") operates in theU.K. within the scope of its passport permissions (as they stood at the end of the transition period) under the Temporary Permissions Regime pending the grant of newU.K. authorizations by theU.K financial regulators. We are currently unable to determine the longer-term impact that Brexit will have on our business, which will depend, in part, on the implications of new tariff, trade, and regulatory frameworks that now govern the provision of cross-border goods and services between theU.K. and the EEA, as well as the financial and operational consequences of the requirement forPayPal (Europe ) to obtain newU.K. authorizations to operate its business longer-term within theU.K. market. For additional information on how Brexit could affect our business, see Part I, Item 1A, Risk Factors in our 2020 Form 10-K, as supplemented and, to the extent inconsistent, superseded below (if applicable) in Part II, Item 1A, Risk Factors of this Form 10-Q. Brexit may contribute to instability in financial, stock, and foreign currency exchange markets, including volatility in the value of the British Pound and Euro. We have foreign currency exchange exposure management programs designed to help reduce the impact from foreign currency exchange rate movements. The below tables provide the percentage of our total net revenues and gross loans and interest receivable from theU.K. and EU (excluding theU.K. ) for the periods presented: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Net revenues generated from the U.K. 9 % 11 % 10 % 11 % Net revenues generated from the EU (excluding the U.K.) 20 % 18 % 20 % 18 % June 30, 2021
48 % 50 %
Gross loans and interest receivable due from customers in
the EU (excluding the U.K.) 18 % 14 %
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OVERVIEW OF RESULTS OF OPERATIONS
The following table provides a summary of our condensed consolidated financial
results for the three and six months ended
Three Months Ended June 30, Percent Six Months Ended June 30, Percent
2021 2020 Increase/(Decrease) 2021 2020 Increase/(Decrease)
(In millions, except percentages and per share data)
Net revenues $ 6,238 $ 5,261 19 % $ 12,271 $ 9,879 24 %
Operating expenses 5,111 4,310 19 % 10,102 8,530 18 %
Operating income $ 1,127 $ 951 19 % $ 2,169 $ 1,349 61 %
Operating margin 18 % 18 % ** 18 % 14 % **
Other income (expense), net $ 229 $ 848 (73) % $ 59 $ 713 (92) %
Income tax expense (benefit) $ 172 $ 269 (36) % $ (53) $ 448 (112) %
Effective tax rate 13 % 15 % ** (2) % 22 % **
Net income $ 1,184 $ 1,530 (23) % $ 2,281 $ 1,614 41 %
Net income per diluted share $ 1.00 $ 1.29 (23) % $ 1.92 $ 1.36 41 %
Net cash provided by operating
activities(1) $ 1,306 $ 1,772 (26) % $ 3,064 $ 3,193 (4) %
All amounts in tables are rounded to the nearest million, except as otherwise
noted. As a result, certain amounts may not recalculate using the rounded
amounts provided.
(1) Prior period amounts have been revised to conform to the current
presentation. For additional information, see "Note 1-Overview and Summary of
Significant Accounting Policies" in the notes to the condensed consolidated
financial statements in Part I, Item 1 of this Form 10-Q.
** Not meaningful
THREE MONTHS ENDED
Net revenues increased$977 million , or 19%, in the three months endedJune 30, 2021 compared to the same period of the prior year driven primarily by growth in total payment volume ("TPV", as defined below under "Net Revenues") of 40%. Total operating expenses increased$801 million , or 19%, in the three months endedJune 30, 2021 compared to the same period of the prior year due primarily to an increase in transaction expense, and to a lesser extent, increases in sales and marketing expenses, technology and development expenses, and customer support and operations expenses. These increases were partially offset by a decline in transaction and credit losses and restructuring and other charges. Operating income increased by$176 million , or 19%, in the three months endedJune 30, 2021 compared to the same period of the prior year due to growth in net revenues, partially offset by an increase in operating expenses. Our operating margin was 18% in both the three months endedJune 30, 2021 and 2020. Operating margin for the three months endedJune 30, 2021 was positively impacted by the decrease in transaction and credit losses. Net income decreased by$346 million , or 23%, in the three months endedJune 30, 2021 compared to the same period of the prior year due to a decrease of$619 million in other income (expense), net, driven primarily by lower net gains on strategic investments than in the prior period, partially offset by the previously discussed increase in operating income of$176 million and a decrease in income tax expense of$97 million driven primarily by a decrease in tax expense associated with the lower net gains on strategic investments.
SIX MONTHS ENDED
Net revenues increased$2.4 billion , or 24%, in the six months endedJune 30, 2021 , compared to the same period of the prior year driven primarily by growth in TPV of 45%. Total operating expenses increased$1.6 billion , or 18%, in the six months endedJune 30, 2021 , compared to the same period of the prior year due primarily to an increase in transaction expense, and to a lesser extent, increases in sales and marketing expenses, technology and development expenses, and customer support and operations expense, partially offset by a decrease in transaction and credit losses. [[Image Removed: pypl-20210630_g2.jpg]] 42
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Operating income increased by$820 million , or 61%, in the six months endedJune 30, 2021 , compared to the same period of the prior year due to growth in net revenues, partially offset by an increase in operating expenses. Our operating margin was 18% and 14% in the six months endedJune 30, 2021 and 2020, respectively. Operating margin for the six months endedJune 30, 2021 was positively impacted by revenue growth outpacing growth in operating expenses, which benefited from a decrease in transaction and credit losses. Net income increased by$667 million , or 41%, in the six months endedJune 30, 2021 , compared to the same period of the prior year due to the previously discussed increase in operating income of$820 million and a decrease in income tax expense of$501 million , driven primarily by tax expense related to the intra-group transfer of intellectual property in the six months endedJune 30, 2020 with no comparable activity in the current period and an increase in tax benefits associated with discrete tax adjustments. This was partially offset by a decrease of$654 million in other income (expense), net driven primarily by lower net gains on strategic investments compared to the prior period. IMPACT OF FOREIGN CURRENCY EXCHANGE RATES We have significant international operations that are denominated in foreign currencies, primarily the British Pound, Euro, Australian dollar, and Canadian dollar, subjecting us to foreign currency exchange risk which may adversely impact our financial results. The strengthening or weakening of theU.S. dollar versus the British Pound, Euro, Australian dollar, and Canadian dollar, as well as other currencies in which we conduct our international operations, impacts the translation of our net revenues and expenses generated in these foreign currencies into theU.S. dollar. We generated approximately 48% of our net revenues from customers domiciled outside of theU.S. in both the three and six months endedJune 30, 2021 . We generated approximately 50% and 48% of our net revenues from customers domiciled outside of theU.S. in the three and six months endedJune 30, 2020 , respectively. Because we generate substantial net revenues internationally, we are subject to the risks of doing business outside of theU.S. See Part I, Item 1A, Risk Factors in our 2020 Form 10-K, as supplemented and, to the extent inconsistent, superseded (if applicable) below in Part II, Item 1A, Risk Factors of this Form 10-Q. We calculate the year-over-year impact of foreign currency exchange movements on our business using prior period foreign currency exchange rates applied to current period transactional currency amounts. While changes in foreign currency exchange rates affect our reported results, we have a foreign currency exchange exposure management program in which we designate certain foreign currency exchange contracts as cash flow hedges intended to reduce the impact on earnings from foreign currency exchange rate movements. Gains and losses from these foreign currency exchange contracts are recognized as a component of transaction revenues in the same period the forecasted transactions impact earnings. In the three and six months endedJune 30, 2021 , year-over-year foreign currency movements relative to theU.S. dollar had the following impact on our reported results: Three Months Ended Six Months EndedJune 30, 2021 June 30, 2021
(In millions) Favorable impact to net revenues (exclusive of hedging impact)
$ 237 $ 427
Hedging impact (89) (148)
Favorable impact to net revenues 148 279
Unfavorable impact to operating expense (101) (174)
Net favorable impact to operating income $ 47 $ 105
While we enter into foreign currency exchange contracts to help reduce the
impact on earnings from foreign currency exchange rate movements, it is
impossible to predict or eliminate the total effects of this exposure.
Additionally, in connection with transactions occurring in multiple currencies
on our Payments Platform, we generally set our foreign currency exchange rates
daily, and may face financial exposure if we incorrectly set our foreign
currency exchange rates or as a result of fluctuations in foreign currency
exchange rates between the times that we set our foreign currency exchange rates
and when transactions occur. Given that we also have foreign currency exchange
risk on our assets and liabilities denominated in currencies other than the
functional currency of our subsidiaries, we have an additional foreign currency
exchange exposure management program in which we use foreign currency exchange
contracts to offset the impact of foreign currency exchange rate movements on
our assets and liabilities. The foreign currency exchange gains and losses on
our assets and liabilities are recorded in other income (expense), net, and are
offset by the gains and losses on the foreign currency exchange contracts. These
foreign currency exchange contracts reduce, but do not entirely eliminate, the
impact of foreign currency exchange rate movements on our assets and
liabilities.
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Table of Contents FINANCIAL RESULTS NET REVENUES Our revenues are classified into the following two categories: •Transaction revenues: Net transaction fees charged to merchants and consumers on a transaction basis primarily based on the TPV completed on our Payments Platform. Growth in TPV is directly impacted by the number of payment transactions that we enable on our Payments Platform. We earn additional fees on transactions where we perform currency conversion, when we enable cross-border transactions (i.e., transactions where the merchant and consumer are in different countries), to facilitate the instant transfer of funds for our customers from theirPayPal or Venmo account to their debit card or bank account, to facilitate the purchase and sale of cryptocurrencies, and other miscellaneous fees. •Revenues from other value added services: Net revenues derived primarily from revenue earned through partnerships, referral fees, subscription fees, gateway fees, and other services we provide to our merchants and consumers. We also earn revenues from interest and fees earned primarily on our portfolio of loans receivable, and interest earned on certain assets underlying customer balances. Active accounts, number of payment transactions, number of payment transactions per active account, and TPV are key non-financial performance metrics ("key metrics") that management uses to measure the performance of our business, and are defined as follows: •An active account is an account registered directly withPayPal or a platform access partner that has completed a transaction on our Payments Platform or through our Honey Platform, not including gateway-exclusive transactions, within the past 12 months. A platform access partner is a third party whose customers are provided access toPayPal 's Payments Platform through such third party's login credentials. The number of active accounts provides management with additional perspective on the growth of accounts across our Payments and Honey Platforms as well as the overall scale of our platforms. •Number of payment transactions are the total number of payments, net of payment reversals, successfully completed on our Payments Platform or enabled byPayPal via a partner payment solution, not including gateway-exclusive transactions. •Number of payment transactions per active account reflects the total number of payment transactions within the previous 12-month period, divided by active accounts at the end of the period. The number of payment transactions per active account provides management with insight into the number of times a customer is engaged in payments activity on our Payments Platform in a given period. •TPV is the value of payments, net of payment reversals, successfully completed on our Payments Platform, or enabled byPayPal via a partner payment solution, not including gateway-exclusive transactions. As our transaction revenue is typically correlated with TPV growth and the number of payment transactions completed on our Payments Platform, management uses these metrics to gain insights into the scale and strength of our Payments Platform, the engagement level of our customers, and underlying activity and trends which are indicators of current and future performance. We present these key metrics to enhance investors' evaluation of the performance of our business and operating results. [[Image Removed: pypl-20210630_g2.jpg]] 44
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Net revenue analysis
The components of our net revenues for the three and six months ended
[[Image Removed: pypl-20210630_g3.jpg]][[Image Removed: pypl-20210630_g4.jpg]]
Transaction revenues
Transaction revenues grew by$852 million , or 17%, and$2.3 billion , or 25%, for the three and six months endedJune 30, 2021 , respectively, compared to the same periods of the prior year. The growth in transaction revenues was mainly attributable to our corePayPal andBraintree products and services driven by strong growth in TPV and the number of payment transactions, both of which resulted primarily from an increase in our active accounts. In the current period, we benefited from the recovery of travel and events verticals, which were adversely impacted in the prior year as a result of the COVID-19 pandemic. These factors favorably impacting growth in transaction revenues in the current period were offset by a decline in TPV and revenue we generate from merchants on eBay's marketplace platform, which we expect to continue to decline for the remainder of the year. In the first quarter of 2020, we experienced an adverse impact on our TPV and transaction revenues due to the initial impact of the COVID-19 pandemic. The shift beginning in the second quarter of 2020 from in-store payment methods to digital payments (as described above) has continued to benefit our business.
The graphs below present the respective key metrics (in millions) for the three
and six months ended
[[Image Removed: pypl-20210630_g5.jpg]]*Reflects active accounts at the end of the applicable period.
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Number of payment transactions[[Image Removed: pypl-20210630_g6.jpg]][[Image Removed: pypl-20210630_g7.jpg]]
TPV[[Image Removed: pypl-20210630_g8.jpg]][[Image Removed: pypl-20210630_g9.jpg]]
The following table provides a summary of related metrics:
Three Months Ended June 30, Percent Six Months Ended June 30, Percent
2021 2020 Increase/(Decrease) 2021 2020 Increase/(Decrease)
Number of payment transactions
per active account 43.5 39.2 11 % 43.5 39.2 11 %
Percent of cross-border TPV 16 % 17 % ** 17 % 17 % **
** Not meaningful
We had 403 million active accounts as of June 30, 2021 compared to 346 million
as of June 30, 2020 , an increase of 16%. Number of payment transactions were 4.7
billion for the three months ended June 30, 2021 compared to 3.7 billion in the
three months ended June 30, 2020 , an increase of 27%. Number of payment
transactions were 9.1 billion for the six months ended June 30, 2021 compared to
7.0 billion in the six months ended June 30, 2020 , an increase of 30%. TPV was
$311 billion for the three months ended June 30, 2021 compared to $222 billion
in the three months ended June 30, 2020 , an increase of 40%. TPV was $596
billion for the six months ended June 30, 2021 compared to $412 billion in the
six months ended June 30, 2020 , an increase of 45%.
Transaction revenues grew more slowly than TPV and number of payment
transactions for the three and six months ended June 30, 2021 compared to the
same periods in the prior year due primarily to a decline in eBay's marketplace
platform TPV with higher rates, a higher portion of TPV generated by platform
partners, large merchants, and other marketplaces who generally pay lower rates
with higher transaction volumes, and an unfavorable impact from hedging. Changes
in prices charged to our customers did not significantly impact transaction
revenue growth for the three and six months ended June 30, 2021 .
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Revenues from other value added services
Revenues from other value added services increased$125 million , or 40%, and$134 million , or 19%, in the three and six months endedJune 30, 2021 , respectively, compared to the same periods in the prior year primarily attributable to increases in our revenue share withSynchrony Bank ("Synchrony"), interest and fee revenue on our consumer loans receivable portfolio driven primarily by growth in international markets, and fee revenue from the servicing of loans under theU.S. Government's Paycheck Protection Program ("PPP") administered by theU.S. Small Business Administration ("SBA") and enacted inMarch 2020 under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") in response to the COVID-19 pandemic. We receive a fee for providing origination services and loan servicing for the loans and retain operational risk related to those activities. Revenues from other value added services for the three and six months endedJune 30, 2021 were negatively impacted by a decline in interest and fee revenue on our merchant loans receivable portfolio due to a decrease in outstanding loans and in interest earned on certain assets underlying customer account balances resulting from lower interest rates. The total gross consumer and merchant loans receivable balance was$3.9 billion as ofJune 30, 2021 and$4.0 billion as ofJune 30, 2020 , reflecting a year-over-year decrease of 4% driven by a decline in our merchant receivable portfolio due to reduced originations as a result of modifications to our acceptable risk parameters in 2020, partially offset by growth in our consumer receivable portfolio due to increased originations including from the expansion of our installment credit products. In response to the COVID-19 pandemic, we took both proactive and reactive measures during 2020 to support our merchants and consumers that had loans and interest receivables due to us under our credit product offerings. These measures were intended to help reduce financial difficulties experienced by our customers and included providing payment holidays to grant payment deferrals to certain borrowers for varying periods of time, and amended payment terms through loan modifications in certain cases. These measures have adversely impacted and may continue to adversely impact the recognition of interest and fee income in future periods. Given the uncertainty surrounding the COVID-19 pandemic, including its duration and severity, related global economic conditions and the ultimate impact it may have on the financial condition of our merchants and consumers, the extent of these types of actions and their prospective impact on our interest and fee income is not determinable. In addition, consumers that have outstanding loans and interest receivable due to Synchrony may experience similar hardships that result in increased losses recognized by Synchrony, which may result in a decrease in our revenue share earned from Synchrony in future periods. In the event the overall return on thePayPal branded credit programs funded by Synchrony does not meet a minimum rate of return ("minimum return threshold") in a particular quarter, our revenue share for that period would be zero. Further, in the event the overall return on thePayPal branded credit programs managed by Synchrony does not meet the minimum return threshold as measured over four consecutive quarters and in the following quarter, we would be required to make a payment to Synchrony, subject to certain limitations. ThroughJune 30, 2021 , the overall return on thePayPal branded credit programs funded by Synchrony exceeded the minimum return threshold.
OPERATING EXPENSES
The following table summarizes our operating expenses and related metrics we use to assess the trends in each:
Three Months Ended June 30, Percent Six Months Ended June 30, Percent
2021 2020 Increase/(Decrease) 2021 2020 Increase/(Decrease)
(In millions, except percentages)Transaction expense$ 2,524 $ 1,843 37 %$ 4,799 $ 3,582 34 % Transaction and credit losses 169 440 (62) % 442 1,031 (57) % Customer support and operations 521 423 23 % 1,039 822 26 % Sales and marketing 628 414 52 % 1,230 785 57 % Technology and development 746 631 18 % 1,487 1,236 20 % General and administrative 522 512 2 % 1,046 998 5 % Restructuring and other charges 1 47 (98) % 59 76 (22) % Total operating expenses$ 5,111 $ 4,310 19 %$ 10,102 $ 8,530 18 % Transaction expense rate(1) 0.81 % 0.83 % ** 0.80 % 0.87 % ** Transaction and credit loss rate(2) 0.05 % 0.20 % ** 0.07 % 0.25 % ** (1) Transaction expense rate is calculated by dividing transaction expense by TPV. (2) Transaction and credit loss rate is calculated by dividing transaction and credit losses by TPV. ** Not meaningful. [[Image Removed: pypl-20210630_g2.jpg]] 47
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Transaction expense Transaction expense for the three and six months endedJune 30, 2021 and 2020 was as follows (in millions): [[Image Removed: pypl-20210630_g10.jpg]][[Image Removed: pypl-20210630_g11.jpg]] Transaction expense increased by$681 million , or 37%, and$1.2 billion , or 34%, in the three and six months endedJune 30, 2021 , respectively, compared to the same periods of the prior year due primarily to the increase in TPV of 40% and 45% for the three and six months endedJune 30, 2021 , respectively. The decrease in transaction expense rate for the three and six months endedJune 30, 2021 compared to the same periods of the prior year was due primarily to favorable changes in product mix. The decrease in transaction expense rate for the six months endedJune 30, 2021 was also attributable to favorable changes in merchant mix and funding mix. Our transaction expense rate is impacted by changes in product mix, merchant mix, regional mix, funding mix, and assessments charged by payment processors and other financial institutions when we draw funds from a customer's credit or debit card, bank account, or other funding sources. The cost of funding a transaction with a credit or debit card is generally higher than the cost of funding a transaction from a bank or through internal sources such as aPayPal or Venmo account balance, orPayPal Credit. For each of the three and six months endedJune 30, 2021 , approximately 1% of TPV was funded withPayPal Credit, compared to approximately 2% of TPV for the same periods of 2020. For the three and six months endedJune 30, 2021 , approximately 39% and 40% of TPV, respectively, was generated outside of theU.S. For the three and six months endedJune 30, 2020 , approximately 40% and 39% of TPV, respectively, was generated outside of theU.S. As we expand the availability and presentation of alternative funding sources to our customers, our funding mix may change, which could increase or decrease our transaction expense rate. Transaction and credit losses The components of our transaction and credit losses for the three and six months endedJune 30, 2021 and 2020 were as follows (in millions): [[Image Removed: pypl-20210630_g12.jpg]][[Image Removed: pypl-20210630_g13.jpg]] Transaction and credit losses decreased by$271 million , or 62%, and$589 million , or 57%, in the three and six months endedJune 30, 2021 , respectively, compared to the same periods of the prior year. [[Image Removed: pypl-20210630_g2.jpg]] 48
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Transaction losses were$273 million in the three months endedJune 30, 2021 compared to$271 million in the three months endedJune 30, 2020 , an increase of$2 million , or 1%. Transaction losses were$554 million in the six months endedJune 30, 2021 compared to$518 million in the six months endedJune 30, 2020 , an increase of$36 million , or 7%. Transaction loss rate (transaction losses divided by TPV) was 0.09% and 0.12% for the three months endedJune 30, 2021 and 2020, respectively, and 0.09% and 0.13% for the six months endedJune 30, 2021 and 2020, respectively. The increase in transaction losses in the three and six months endedJune 30, 2021 was primarily due to growth in TPV, which was substantially offset by benefits realized from continued risk mitigation strategies, which contributed to a decrease in our transaction loss rate in the three and six months endedJune 30, 2021 compared to the same periods of the prior year. The duration and severity of the impacts of the COVID-19 pandemic and related global economic conditions remain unknown. The negative impacts on macroeconomic conditions could increase the risk of merchant bankruptcy, insolvency, business failure, or other business interruption, which may adversely impact our transaction losses, particularly for merchants that sell goods or services in advance of the date of their delivery or use. Credit losses declined by$273 million , or 162%, and$625 million , or 122% in the three and six months endedJune 30, 2021 , respectively, compared to the same periods of the prior year. The components of credit losses for the three and six months endedJune 30, 2021 and 2020 were as follows (in millions): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Net charge-offs(1) $ 52$ 68 $ 128$ 153 Reserve build (release)(2) (156) 101 (240) 360 Credit losses $ (104)$ 169 $ (112)$ 513 (1) Net charge offs includes the principal charge offs partially offset by recoveries for consumer and merchant receivables. (2) Reserve build (release) represents change in allowance for principal receivables excluding foreign currency remeasurement and, for the prior periods, impact of adoption of credit losses accounting standard. The benefit in the three and six months endedJune 30, 2021 was attributable to the net release of reserves for loans and interest receivable due to improvements in both current and projected macroeconomic conditions, including lower projected unemployment, lower projected consumer credit card charge off rates, and improving growth in projected household income, as well as the credit quality of loans outstanding, partially offset by provisions for originations during the period. The net release of reserves also reflects the impact of qualitative adjustments to allowances for our merchant and consumer portfolios. These qualitative adjustments resulted in increases in reserves to account for a high degree of uncertainty around the financial health of our consumer and merchant borrowers, including uncertainty around the effectiveness of loan modification programs made available to merchants, as well as continued volatility with respect to both projected and actual macroeconomic conditions. The credit losses in the three and six months endedJune 30, 2020 were associated with an increase in provisions for our loans and interest receivable portfolio resulting from a reserve build driven by a deterioration in macroeconomic projections reflecting the anticipated impact of the COVID-19 pandemic and factored into the determination of our current expected credit losses. The consumer loans and interest receivable balance as ofJune 30, 2021 and 2020 was$2.5 billion and$1.5 billion , respectively, representing a year-over-year increase of 70% driven by growth of our installment credit products in international markets and theU.S. as well as growth ofPayPal Credit in international markets. Approximately 68% and 89% of our consumer loans receivable outstanding as ofJune 30, 2021 and 2020, respectively, were due from consumers in theU.K. The decline in the percentage of consumer loans receivable outstanding in theU.K. atJune 30, 2021 compared toJune 30, 2020 was due to overall growth in the consumer loan portfolio, particularly from installment credit products in other markets.
The following table provides information regarding the credit quality of our consumer loans and interest receivable balance:
2021 2020
Percent of consumer loans and interest receivable current 97.1 % 97.7 %
Percent of consumer loans and interest receivable > 90 days
outstanding(1) 1.4 % 1.4 %
Net charge off rate(2) 3.8 % 4.9 %
(1) Represents percentage of balances which are 90 days past the billing date to
the consumer or contractual repayment date on installment credit products.
(2) Net charge off rate is the annual ratio of net credit losses, excluding
fraud losses, on consumer loans receivables as a percentage of the average daily
amount of consumer loans and interest receivables balance during the period.
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We offer access to credit products for certain small and medium-sized merchants, which we refer to as our merchant lending offerings. Total merchant loans, advances, and interest and fees receivable outstanding, net of participation interest sold, as ofJune 30, 2021 were$1.3 billion , compared to$2.5 billion as ofJune 30, 2020 , representing a year-over-year decrease of 48%. The decrease in merchant loans, advances, and interest and fees receivable outstanding was due primarily to a reduction in originations due to modifications in our acceptable risk parameters as well as a shift towards merchants borrowing through the PPP. We do not own the receivables associated with loans originated through the PPP. Approximately 80% and 10% of our merchant receivables outstanding as ofJune 30, 2021 were due from merchants in theU.S. andU.K. , respectively, as compared to 86% and 8%, respectively, as ofJune 30, 2020 .
The following table provides information regarding the credit quality of our merchant loans, advances, and interest and fees receivable balance:
2021(1) 2020
Percent of merchant receivables within original expected or contractual repayment period
87.7 % 85.6 %
Percent of merchant receivables > 90 days outstanding after the end of original expected or contractual repayment period
5.3 % 5.2 %
Net charge off rate(2) 8.7 % 7.0 %
(1) Includes the impact of merchants participating in the troubled debt
restructuring programs as described in "Note 11-Loans and Interest Receivable"
in the notes to the condensed consolidated financial statements in Part I, Item
1 of this Form 10-Q.
(2) Net charge off rate is the annual ratio of net credit losses, excluding
fraud losses, on merchant loans and advances as a percentage of the average
daily amount of merchant loans, advances, and interest and fees balance during
the period.
Beginning in the third quarter of 2020, we have granted certain merchants loan
modifications intended to provide them with financial relief and help enable us
to mitigate losses. The associated loans and interest receivables have been
treated as troubled debt restructurings due to significant changes in their
structure, including repayment terms and fee and rate structure.
Modifications to the acceptable risk parameters of our credit products in 2020
in response to the impacts of the COVID-19 pandemic resulted in the
implementation of a number of risk mitigation strategies, including reduction of
maximum loan size, tightening eligibility terms, and a shift from automated to
manual underwriting of loans and advances. These changes in acceptable risk
parameters have resulted in a decrease in merchant receivables as of June 30,
2021 . While the impact of the COVID-19 pandemic on the economic environment
remains uncertain, the longer and more severe the pandemic, the more likely it
is to have a material adverse impact on our borrowing base, which is primarily
comprised of small and medium-sized merchants.
For additional information, see "Note 11-Loans and Interest Receivable" in the
notes to the condensed consolidated financial statements in Part I, Item 1 of
this Form 10-Q.
Customer support and operations
Customer support and operations expenses for the three and six months endedJune 30, 2021 and 2020 were as follows (in millions): [[Image Removed: pypl-20210630_g14.jpg]][[Image Removed: pypl-20210630_g15.jpg]] Customer support and operations expenses increased by$98 million , or 23%, and$217 million , or 26%, in the three and six months endedJune 30, 2021 , respectively, compared to the same periods of the prior year due primarily to increases in employee-related expenses, customer onboarding and compliance costs, and contractors and consulting costs that support the growth of our active accounts and payment transactions. [[Image Removed: pypl-20210630_g2.jpg]] 50
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Sales and marketing
Sales and marketing expenses for the three and six months endedJune 30, 2021 and 2020 were as follows (in millions): [[Image Removed: pypl-20210630_g16.jpg]][[Image Removed: pypl-20210630_g17.jpg]] Sales and marketing expenses increased by$214 million , or 52%, and$445 million , or 57%, in the three and six months endedJune 30, 2021 , respectively, compared to the same periods of the prior year due primarily to higher spending on marketing programs, including the acquisition of new customer accounts and the promotion of new product experiences, and to a lesser extent, employee-related expenses.
Technology and development
Technology and development expenses for the three and six months endedJune 30, 2021 and 2020 were as follows (in millions): [[Image Removed: pypl-20210630_g18.jpg]][[Image Removed: pypl-20210630_g19.jpg]] Technology and development expenses increased by$115 million , or 18%, and$251 million , or 20%, in the three and six months endedJune 30, 2021 , respectively, compared to the same periods of the prior year due primarily to increases in costs related to contractors and consultants, employee-related expenses, cloud computing services utilized in delivering our products, and depreciation expense. [[Image Removed: pypl-20210630_g2.jpg]] 51
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General and administrative
General and administrative expenses for the three and six months endedJune 30, 2021 and 2020 were as follows (in millions): [[Image Removed: pypl-20210630_g20.jpg]][[Image Removed: pypl-20210630_g21.jpg]] General and administrative expenses increased by$10 million , or 2%, and$48 million , or 5%, in the three and six months endedJune 30, 2021 , respectively, compared to the same periods of the prior year due primarily to an increase in employee-related expenses partially offset by a decrease in professional services expenses. The increase in the six months endedJune 30, 2021 was also attributable to expenses associated with software services.
Restructuring and other charges
Restructuring and other charges for the three and six months endedJune 30, 2021 and 2020 were as follows (in millions): [[Image Removed: pypl-20210630_g22.jpg]][[Image Removed: pypl-20210630_g23.jpg]] Restructuring and other charges decreased by$46 million and$17 million in the three and six months endedJune 30, 2021 , respectively, compared to the same periods of the prior year. During the first quarter of 2020, management approved a strategic reduction of the existing global workforce as part of a multiphase process to reorganize our workforce concurrently with the redesign of our operating structure, which spanned multiple quarters. The associated restructuring charges for the three months endedJune 30, 2021 were de minimis and for the six months endedJune 30, 2021 were$27 million . During the three and six months endedJune 30, 2020 , the associated restructuring charges were$26 million and$55 million , respectively. We primarily incurred employee severance and benefits costs, as well as other associated consulting costs under the 2020 strategic reduction, substantially all of which have been accrued as ofJune 30, 2021 . For information on the associated restructuring liability, see "Note 17-Restructuring and Other Charges" in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q. Additionally, in the six months endedJune 30, 2021 and 2020 we incurred asset impairment charges of$26 million and$21 million , respectively, due to the exiting of certain leased properties which resulted in a reduction of certain right of use lease assets and related leasehold improvements.
Other income (expense), net
Other income (expense), net decreased$619 million , or 73%, and$654 million , or 92%, in the three and six months endedJune 30, 2021 , respectively, compared to the same periods of the prior year due primarily to lower net gains on strategic investments as compared to the prior periods. [[Image Removed: pypl-20210630_g2.jpg]] 52
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Income tax expense (benefit)
Our effective income tax rate was 13% and 15% for the three months endedJune 30, 2021 and 2020, respectively. The decrease in our effective income tax rate for the three months endedJune 30, 2021 compared to the same period of the prior year was due primarily to a decrease in tax expense associated with lower net gains on strategic investments. Our effective income tax rate was (2)% and 22% for the six months endedJune 30, 2021 and 2020, respectively. The decrease in our effective income tax rate for the six months endedJune 30, 2021 compared to the same period of the prior year was primarily attributable to tax expense related to an intra-group transfer of intellectual property in the six months endedJune 30, 2020 with no comparable activity in the current period, and an increase in tax benefits associated with discrete tax adjustments including stock-based compensation deductions.
LIQUIDITY AND CAPITAL RESOURCES
We require liquidity and access to capital to fund our global operations, including customer protection programs, our credit products, capital expenditures, investments in our business, potential acquisitions and strategic investments, working capital, and other cash needs. The following table summarizes our cash, cash equivalents, and investments as ofJune 30, 2021 andDecember 31, 2020 :June 30, 2021 December 31, 2020 (In millions)
Cash, cash equivalents, and investments(1)(2)
15,852
(1) Excludes assets related to funds receivable and customer accounts of$35.7 billion and$33.4 billion atJune 30, 2021 andDecember 31, 2020 , respectively. (2) Excludes total restricted cash of$18 million and$88 million atJune 30, 2021 andDecember 31, 2020 , respectively, and strategic investments of$3.2 billion as of bothJune 30, 2021 andDecember 31, 2020 .
Foreign cash, cash equivalents, and investments
Cash, cash equivalents, and investments held by our foreign subsidiaries were$7.7 billion as ofJune 30, 2021 and$7.0 billion atDecember 31, 2020 , or 48% and 44% of our total cash, cash equivalents, and investments as of those respective dates. AtDecember 31, 2020 , all of our cash, cash equivalents, and investments held by foreign subsidiaries were subject toU.S. taxation under Subpart F, Global Intangible Low Taxed Income ("GILTI"), or the one-time transition tax under the Tax Cuts and Jobs Act of 2017. Subsequent repatriations to theU.S. will not be taxable from aU.S. federal tax perspective, but may be subject to state or foreign withholding tax. A significant aspect of our global cash management activities involves meeting our customers' requirements to access their cash while simultaneously meeting our regulatory financial ratio commitments in various jurisdictions. Our global cash balances are required not only to provide operational liquidity to our businesses, but also to support our global regulatory requirements across our regulated subsidiaries. As such, not all of our cash is available for general corporate purposes.
Available credit and debt
We maintain uncommitted credit facilities in various regions throughout the world with a borrowing capacity of approximately$80 million in the aggregate, where we can withdraw and utilize the funds at our discretion for general corporate purposes. As ofJune 30, 2021 , the majority of the borrowing capacity under these credit facilities was available, subject to customary conditions to borrowing. Other than as described above, there are no significant changes to the available credit and debt disclosed in our 2020 Form 10K. For additional information, see "Note 12-Debt" in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q. We have a cash pooling arrangement with a financial institution for cash management purposes. The arrangement allows for cash withdrawals from the financial institution based upon our aggregate operating cash balances held within the financial institution ("Aggregate Cash Deposits"). The arrangement also allows us to withdraw amounts exceeding the Aggregate Cash Deposits up to an agreed-upon limit. The net balance of the withdrawals and the Aggregate Cash Deposits are used by the financial institution as a basis for calculating our net interest expense or income under the arrangement. As ofJune 30, 2021 , we had a total of$3.4 billion in cash withdrawals offsetting our$3.4 billion in Aggregate Cash Deposits held within the financial institution under the cash pooling arrangement. [[Image Removed: pypl-20210630_g2.jpg]] 53
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Liquidity for loans receivable Growth in our portfolio of loan receivables increases our liquidity needs and any inability to meet those liquidity needs could adversely affect our business. We continue to evaluate partnerships and third party sources of funding for our loans receivable portfolio. InJune 2018 , theLuxembourg Commission de Surveillance du Secteur Financier (the "CSSF") agreed thatPayPal 's management may designate up to 35% of European customer balances held in our Luxembourg banking subsidiary to be used for European andU.S. credit activities. During the first quarter of 2021, an additional$700 million was approved to fund such credit activities. As ofJune 30, 2021 , the cumulative amount approved by management to be designated for credit activities aggregated to$2.7 billion and represented approximately 27% of European customer balances that have been made available for our corporate use at that date as determined by applying financial regulations maintained by the CSSF. We may periodically seek to designate additional amounts of customer balances, if necessary, based on utilization of the approved funds and anticipated credit funding requirements. While our objective is to expand the availability of our credit products with capital from external sources, there can be no assurance that we will be successful in achieving that goal. Under certain exceptional circumstances, corporate liquidity could be called upon to meet our obligations related to our European customer balances. Credit ratings As ofJune 30, 2021 , we continue to be rated investment grade byStandard and Poor's Financial Services, LLC ,Fitch Ratings, Inc. , andMoody's Investors Services, Inc. We expect that these credit rating agencies will continue to monitor our performance, including our capital structure and results of operations. Our goal is to be rated investment grade, but as circumstances change, there are factors that could result in our credit ratings being downgraded or put on a watch list for possible downgrading. If that were to occur, it could increase our borrowing rates, including the interest rate on borrowings under our credit agreement. Risk of loss The risk of losses from our buyer and seller protection programs are specific to individual customers, merchants, and transactions, and may also be impacted by regional variations in, and changes or modifications to, the programs, including as a result of changes in regulatory requirements. For the periods presented in these condensed consolidated financial statements included in this report, our transaction loss rates ranged between 0.09% and 0.13% of TPV. Historical loss rates may not be indicative of future results. The duration and severity of the impacts of the COVID-19 pandemic and related global economic conditions remain unknown. The negative impacts on macroeconomic conditions could increase the risk of merchant bankruptcy, insolvency, business failure, or other business interruption, which may result in an adverse impact on our transaction losses, particularly for merchants that sell goods or services in advance of the date of their delivery or use. Stock repurchases and acquisitions During the six months endedJune 30, 2021 , we repurchased approximately$1.5 billion of our common stock in the open market under our stock repurchase program authorized inJuly 2018 . As ofJune 30, 2021 , a total of approximately$6.9 billion remained available for future repurchases of our common stock under ourJuly 2018 stock repurchase program.
In the second quarter of 2021, we completed three acquisitions for
Other considerations In 2020, we announced our commitment to invest$535 million to support racial equality. As ofJune 30, 2021 , we have deployed substantially all of the commitment through charitable contributions, grants to small businesses, internal investments to support and strengthen diversity and inclusion initiatives, and an economic opportunity fund focused on bolstering our relationships with community banks and credit unions serving underrepresented minority communities, as well as investing directly into black- and minority-led startups and minority-focused investment funds, among other initiatives. Our liquidity, access to capital, and borrowing costs could be adversely impacted by declines in our credit rating, our financial performance, and global credit market conditions, as well as a broad range of other factors including those related to the COVID-19 pandemic discussed in this Form 10-Q. In addition, our liquidity, access to capital, and borrowing costs could also be negatively impacted by the outcome of any of the legal or regulatory proceedings to which we are a party. See Part I, Item 1A, Risk Factors of our 2020 Form 10-K, as supplemented and, to the extent inconsistent, superseded below in Part II, Item 1A, Risk Factors of this Form 10-Q, as well as "Note 13-Commitments and Contingencies" in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q for additional discussion of these and other risks that our business faces. [[Image Removed: pypl-20210630_g2.jpg]] 54
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We believe that our existing cash, cash equivalents, and investments, cash
expected to be generated from operations, and our expected access to capital
markets, together with potential external funding through third party sources,
will be sufficient to fund our operating activities, anticipated capital
expenditures, and our credit products for the foreseeable future. Depending on
market conditions, we may from time to time issue debt, including in private or
public offerings, to fund our operating activities, finance acquisitions, make
strategic investments, repurchase shares under our stock repurchase program, or
reduce our cost of capital.
CASH FLOWS
The following table summarizes our condensed consolidated statements of cash
flows:
Six Months Ended June 30,
2021 2020
(In millions)
Net cash provided by (used in):
Operating activities(1) $ 3,064 $ 3,193
Investing activities(1) (2,682) (10,084)
Financing activities(1) 630 9,224Effect of exchange rates on cash, cash equivalents, and restricted cash
(34) (72)
Net increase in cash, cash equivalents, and restricted cash $ 978
(1) Prior period amounts have been revised to conform to the current period presentation. For additional information, see "Note 1-Overview and Summary of Significant Accounting Policies" in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.
Operating activities
We generated cash from operating activities of$3.1 billion in the six months endedJune 30, 2021 due primarily to operating income of$2.2 billion , as well as adjustments for non-cash expenses including stock-based compensation of$758 million , depreciation and amortization of$616 million , and provision for transaction and credit losses of$442 million . Net income was also adjusted for net gains on our strategic investments of$163 million , changes in accounts receivable of$112 million , changes in deferred income taxes of$103 million , and changes in other assets and liabilities of$793 million , primarily related to actual cash transaction losses incurred during the period. We generated cash from operating activities of$3.2 billion in the six months endedJune 30, 2020 due primarily to operating income of$1.3 billion , as well as adjustments for non-cash expenses including provision for transaction and credit losses of$1.0 billion , stock-based compensation of$635 million , and depreciation and amortization of$590 million . Net income was also adjusted for net gains on our strategic investments of$764 million and changes in income taxes payable of$114 million .
In the six months ended
Investing activities
The net cash used in investing activities of
The net cash used in investing activities of$10.1 billion in the six months endedJune 30, 2020 was due primarily to purchases of investments of$14.8 billion , acquisitions (net of cash acquired) of$3.6 billion , changes in funds receivable from customers of$1.1 billion , and purchases of property and equipment of$399 million . These cash outflows were partially offset by maturities and sales of investments of$9.8 billion and proceeds from the sale of property and equipment of$120 million .
Financing activities
We generated cash from financing activities of$630 million in the six months endedJune 30, 2021 due primarily to changes in funds payable and amounts due to customers of$3.0 billion , partially offset by the repurchase of$1.5 billion of our common stock under our stock repurchase program, and tax withholdings related to net share settlement of equity awards of$940 million . [[Image Removed: pypl-20210630_g2.jpg]] 55
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We generated cash from financing activities of$9.2 billion in the six months endedJune 30, 2020 due primarily to cash proceeds from the issuance of long-term debt in the form of fixed rate notes as well as proceeds from borrowings under our credit agreement of$7.0 billion and changes in funds payable and amounts due to customers of$6.6 billion . These cash inflows were partially offset by the repayment of outstanding borrowings under our credit agreement of$3.0 billion , the repurchase of$1.0 billion of our common stock under our stock repurchase programs, and tax withholdings related to net share settlement of equity awards of$421 million .
Effect of exchange rates on cash, cash equivalents, and restricted cash
Foreign currency exchange rates had a negative impact of$34 million on cash, cash equivalents, and restricted cash for the six months endedJune 30, 2021 due primarily to fluctuations in the exchange rate of theU.S. dollar to the Australian dollar, and to a lesser extent, the Euro and Swedish krona. Foreign currency exchange rates had a negative impact of$72 million on cash, cash equivalents, and restricted cash for the six months endedJune 30, 2020 , due to the strengthening of theU.S. dollar against certain foreign currencies, primarily the Brazilian real.
OFF-BALANCE SHEET ARRANGEMENTS
As of
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