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, 2021 (the "2021 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 . 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 that enables digital payments and simplifies commerce experiences on behalf of merchants and consumers worldwide.PayPal is committed to democratizing financial services to help 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 in the markets we serve, anytime, on any platform, and using any device when sending payments or getting paid, including person-to-person payments.
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 payments, are continuing to evolve through legislative and regulatory action and judicial interpretation. New or changing laws and regulations, including 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 2021 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-20220331_g2.jpg]] 40
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Table of ContentsRUSSIA ANDUKRAINE CONFLICT With respect to the military hostilities commenced byRussia inUkraine inFebruary 2022 , our priority is the safety and well-being of ourPayPal employee community impacted by these events. We continue to take actions to comply with all applicable restrictions and sanctions that may impact our operations. InMarch 2022 , we suspended our transactional services inRussia . We are unable to reasonably estimate the total potential financial impact that may ultimately result from this situation. In the three months endedMarch 31, 2022 and the year endedDecember 31, 2021 , our total net revenues related toRussia andUkraine were not material. For additional information regarding the risks related to theRussia andUkraine conflict and its potential negative impacts on our business, see Part II, Item 1A, Risk Factors of this Form 10-Q.
COVID-19
The coronavirus ("COVID-19") pandemic has 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 and increased variants has caused, and may continue to cause 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. During the first
quarter of 2022, we reopened many of our physical offices in locations where
permitted by the government authorities. Employees in these locations have been
allowed to return to the office on a voluntary basis. We will continue to
actively monitor the situation and may take further actions that 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 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. While our business has
experienced some benefits from these behavioral shifts, as pandemic-related
restrictions have decreased and consumers have begun reverting to pre-COVID-19
behaviors, the growth in our results of operations has been, and may continue to
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 2021 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 the 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 2021 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-20220331_g2.jpg]] 41
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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 tables below 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 March 31, 2022 2021 Net revenues generated from the U.K. 8 % 10 % Net revenues generated from the EU (excluding the U.K.) 18 % 21 % March 31, December 31, 2022 2021
Gross loans and interest receivable due from customers in the
36 % 40 %
Gross loans and interest receivable due from customers in the EU
(excluding the U.K.) 26 % 21 %
The change in the percentage of gross loans and interest receivable due from
customers in the U.K. and EU as of March 31, 2022 compared to December 31, 2021
was primarily attributable to expansion of our installment credit products in
the EU , particularly in Germany where we have increased our product offerings.
MACROECONOMIC ENVIRONMENT
The impacts of the macroeconomic environment, including uncertainty around the duration and severity of the COVID-19 pandemic, theRussia andUkraine conflict, supply chain shortages, higher inflation rates, and other related global economic conditions, remain unknown. A deterioration in macroeconomic conditions could increase the risk of lower consumer spending, merchant bankruptcy, insolvency, business failure, higher credit losses, foreign currency fluctuations, or other business interruption, which may adversely impact our business. If these conditions continue or worsen, they could adversely impact our future operating results.
OVERVIEW OF RESULTS OF OPERATIONS
The following table provides a summary of our condensed consolidated financial
results for the three months ended
Three Months Ended March 31, Percent
2022 2021 Increase/(Decrease)
(In millions, except percentages and per share data)
Net revenues $ 6,483 $ 6,033 7 %
Operating expenses 5,772 4,991 16 %
Operating income $ 711 $ 1,042 (32) %
Operating margin 11 % 17 % **
Other income (expense), net $ (82) $ (170) (52) %
Income tax expense (benefit) 120 (225) 153 %
Effective tax rate 19 % (26) % **
Net income $ 509 $ 1,097 (54) %
Net income per diluted share $ 0.43 $ 0.92 (53) %
Net cash provided by operating activities $ 1,242 $ 1,758 (29) %
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.
** Not Meaningful
THREE MONTHS ENDED
Net revenues increased$450 million , or 7%, in the three months endedMarch 31, 2022 compared to the same period of the prior year driven primarily by growth in total payment volume ("TPV", as defined below under "Key Metrics") of 13%. [[Image Removed: pypl-20220331_g2.jpg]] 42
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Total operating expenses increased$781 million , or 16%, in the three months endedMarch 31, 2022 compared to the same period of the prior year due primarily to an increase in transaction expense, and to a lesser extent, increases in transaction and credit losses, general and administrative expenses, and technology and development expenses, partially offset by a decline in restructuring and other charges. Operating income decreased by$331 million , or 32%, in the three months endedMarch 31, 2022 compared to the same period of the prior year due to growth of operating expenses outpacing growth in net revenues. Our operating margin was 11% and 17% in the three months endedMarch 31, 2022 and 2021, respectively. Operating margin for the three months endedMarch 31, 2022 was negatively impacted primarily by an increase in transaction expense due to unfavorable changes in product, funding, and merchant mix, as described below under "Operating Expenses". Net income decreased by$588 million , or 54%, in the three months endedMarch 31, 2022 compared to the same period of the prior year due primarily to the decrease in operating income of$331 million as discussed above, and an increase in income tax expense of$345 million driven primarily by a decrease in discrete tax benefits associated with stock-based compensation deductions. These factors contributing to the decline in net income were partially offset by improvement year-over-year in other income (expense), net of$88 million driven primarily by net gains on strategic investments in the current 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 ofthe United States ("U.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 43% and 49% of our net revenues from customers domiciled outside of theU.S. in the three months endedMarch 31, 2022 and 2021, 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 2021 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 months endedMarch 31, 2022 , year-over-year foreign currency movements relative to theU.S. dollar had the following impact on our reported results: Three Months Ended March 31, 2022 (In millions) Unfavorable impact to net revenues (exclusive of hedging impact) $ (123) Hedging impact 47 Unfavorable impact to net revenues (76) Favorable impact to operating expense 57 Net unfavorable impact to operating income $ (19)
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.
We also use foreign currency exchange contracts designated as net investment hedges to reduce the foreign currency exchange risk related to our investment in certain foreign subsidiaries. Gains and losses associated with these instruments will remain in accumulated other comprehensive income until the underlying foreign subsidiaries are sold or substantially liquidated. [[Image Removed: pypl-20220331_g2.jpg]] 43
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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.
KEY METRICS AND FINANCIAL RESULTS
KEY METRICS
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 with PayPal or a platform
access partner that has completed a transaction on our platform, not including
gateway-exclusive transactions, within the past 12 months. A platform access
partner is a third party whose customers are provided access to PayPal 's
platform or services through such third party's login credentials, including
entities that utilize Hyperwallet's payout capabilities. A user may register on
our platform to access different products and may register more than one account
to access a product. Accordingly, a user may have more than one active account.
The number of active accounts provides management with additional perspective on
the growth and overall scale of our platform.
•Number of payment transactions are the total number of payments, net of payment
reversals, successfully completed on our payments platform or enabled by PayPal
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 average number of times a
customer account engages 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 by PayPal 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.
Our key metrics are calculated using internal company data based on the activity
we measure on our platform and may be compiled from multiple systems, including
systems that are organically developed or acquired through business
combinations. While the measurement of our key metrics is based on what we
believe to be reasonable methodologies and estimates, there are inherent
challenges and limitations in measuring our key metrics globally at our scale.
The methodologies used to calculate our key metrics require judgment.
We regularly review our processes for calculating these key metrics, and from
time to time we may make adjustments to improve their accuracy or relevance. For
example, we continuously apply models, processes, and practices designed to
detect and prevent fraudulent account creation on our platforms, and work to
improve and enhance those capabilities. When we detect a significant volume of
illegitimate activity, we generally remove the activity identified from our key
metrics. Although such adjustments may impact key metrics reported in prior
periods, we generally do not update previously reported key metrics to reflect
these subsequent adjustments unless the retrospective impact of process
improvements or enhancements is determined by management to be material.
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Table of Contents 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 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 from merchants and consumers 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, as contractual compensation from accounts that violate our user agreement, 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 on our portfolio of loans receivable, and interest earned on certain assets underlying customer balances.
Net revenue analysis
The components of our net revenues for the three months ended
[[Image Removed: pypl-20220331_g3.jpg]]Transaction revenues
Transaction revenues grew by$377 million , or 7%, in the three months endedMarch 31, 2022 compared to the same period of the prior year driven primarily by growth inBraintree products and services and, to a lesser extent, Venmo products and services in each case driven by strong growth in TPV and the number of payment transactions on our payments platform. Additionally, during the three months endedMarch 31, 2022 transaction revenues benefited from net gains from our foreign currency exchange contracts as compared to net losses in the prior period. These factors, which favorably impacted growth in transaction revenues in the current period, were partially offset by a decline in TPV and revenue generated from our corePayPal products and services, due primarily to a decrease in revenue earned on eBay's marketplace platform. We expect the decline in revenue earned on eBay's marketplace platform to continue to negatively impact revenue growth trends, most significantly in the first half of 2022. [[Image Removed: pypl-20220331_g2.jpg]] 45
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The graphs below present the respective key metrics (in millions) for the three months endedMarch 31, 2022 and 2021: [[Image Removed: pypl-20220331_g4.jpg]][[Image Removed: pypl-20220331_g5.jpg]][[Image Removed: pypl-20220331_g6.jpg]] *Reflects active accounts at the end of the applicable period. Active accounts as ofMarch 31, 2022 include 3.2 million active accounts contributed byPaidy, Inc. ("Paidy") on the date of acquisition inOctober 2021 .
The following table provides a summary of related metrics:
Three Months Ended March 31, Percent
2022 2021 Increase/(Decrease)
Number of payment transactions per active account 47.0 42.2 11 %
Percent of cross-border TPV 14 % 17 % **
** Not meaningful
We had active accounts of 429 million and 392 million as of March 31, 2022 and
2021, respectively, an increase of 9%. Our number of payment transactions was
5.2 billion and 4.4 billion for the three months ended March 31, 2022 and 2021,
respectively, an increase of 18%. TPV was $323 billion and $285 billion for the
three months ended March 31, 2022 and 2021, respectively, an increase of 13%.
Transaction revenues grew more slowly than TPV and the number of payment
transactions in the three months ended March 31, 2022 compared to the same
period in the prior year due primarily to a decline in TPV attributable to
eBay's marketplace platform, where we had historically earned higher rates, a
decline in foreign exchange fees, and a higher portion of TPV generated through
Braintree by bill pay partners, large merchants, and other marketplaces, which
generally pay lower rates with higher transaction volumes, partially offset by a
favorable impact from hedging. Changes in prices charged to our customers did
not significantly impact transaction revenue growth for the three months ended
March 31, 2022 .
Revenues from other value added services
Revenues from other value added services increased$73 million , or 18%, in the three months endedMarch 31, 2022 compared to the same period in the prior year primarily attributable to increases in our revenue share withSynchrony Bank and, to a lesser extent, an increase in interest and fee revenue on our merchant loans receivable portfolio. [[Image Removed: pypl-20220331_g2.jpg]] 46
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Table of Contents OPERATING EXPENSES
The following table summarizes our operating expenses and related metrics we use to assess the trends in each:
Three Months Ended March 31, Percent Increase/(Decrease)
2022 2021
(In millions, except percentages)
Transaction expense $ 2,817 $ 2,275 24 %
Transaction and credit losses 369 273 35 %
Customer support and operations 534 518 3 %
Sales and marketing 594 602 (1) %
Technology and development 815 741 10 %
General and administrative 607 524 16 %
Restructuring and other charges 36 58 (38) %
Total operating expenses $ 5,772 $ 4,991 16 %
Transaction expense rate(1) 0.87 % 0.80 % **
Transaction and credit loss rate(2) 0.11 % 0.10 % **
(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.
Transaction expense
Transaction expense for the three months ended
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Transaction expense increased by $542 million , or 24%, in the three months ended
March 31, 2022 compared to the same period of the prior year due primarily to
the increase in TPV of 13% and a higher proportion of TPV from Braintree
products, which generally have higher expense rates than other products and
services. The increase in transaction expense rate for the three months ended
March 31, 2022 compared to the same period of the prior year was also impacted
by an increase in transaction expense rates associated with both our Braintree
and core PayPal products driven by unfavorable changes in funding and merchant
mix. For the three months ended March 31, 2022 and 2021, approximately 36% and
40% of TPV, respectively, was generated outside of the U.S.
Our transaction expense rate is impacted by changes in product mix, merchant
mix, regional mix, funding mix, and fees paid to payment processors and other
financial institutions. 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 a PayPal or Venmo account balance or our
consumer credit products. 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. Macroeconomic
environment changes may also result in behavioral shifts in consumer spending
patterns affecting the type of funding source they use, which would also impact
the funding mix.
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Table of Contents Transaction and credit losses
The components of our transaction and credit losses for the three months ended
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Transaction and credit losses increased by
Transaction losses were$322 million in the three months endedMarch 31, 2022 compared to$281 million in the three months endedMarch 31, 2021 , an increase of$41 million , or 15%. Transaction loss rate (transaction losses divided by TPV) was 0.10% for both the three months endedMarch 31, 2022 and 2021. The increase in transaction losses in the three months endedMarch 31, 2022 was primarily due to an increase in losses related to our Venmo product as compared to the prior year resulting from a higher volume of losses from fraud schemes and an increase in goods and services transactions, which are now eligible for coverage by our protection programs. Credit losses increased by$55 million in the three months endedMarch 31, 2022 compared to the same period of the prior year. The components of credit losses for the three months endedMarch 31, 2022 and 2021 were as follows (in millions): Three Months Ended March 31, 2022 2021 Net charge-offs(1) $ 52$ 76 Reserve build (release)(2) (5) (84) Credit losses $ 47$ (8)
(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.
The provision in the three months endedMarch 31, 2022 was attributable to originations during the period, partially offset by improvements in the credit quality of loans outstanding, and a reduction in the volatility of model inputs representing current and projected macroeconomic conditions, including unemployment rates, relative to the same period in the prior year. The benefit in the three months endedMarch 31, 2021 was attributable to the reduction of our allowance for loans and interest receivable due to improvements in both current and projected macroeconomic conditions at that point in time and the credit quality of loans outstanding, partially offset by an increase in the provision due to new originations. During both of these periods, allowances for our merchant and consumer portfolios included qualitative adjustments which took into account uncertainty with respect to macroeconomic conditions, historical loss rates when applicable, and uncertainty around the financial health of our borrowers and effectiveness of loan modification programs made available to merchants. The consumer loans and interest receivable balance as ofMarch 31, 2022 and 2021 was$4.1 billion and$2.2 billion , respectively, representing a year-over-year increase of 83% driven by the expansion of our installment credit products, including the entry into new international markets in the fourth quarter of 2021. Approximately 48% and 75% of our consumer loans receivable outstanding as ofMarch 31, 2022 and 2021, respectively, were due from consumers in theU.K. The decline in the percentage of consumer loans receivable outstanding in theU.K. atMarch 31, 2022 compared toMarch 31, 2021 was due to overall growth in the consumer loan receivables portfolio, particularly from installment credit products in other markets includingGermany ,Japan , and theU.S. [[Image Removed: pypl-20220331_g2.jpg]] 48
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The following table provides information regarding the credit quality of our consumer loans and interest receivable balance:
2022 2021
Percent of consumer loans and interest receivable current 96.9 % 97.2 %
Percent of consumer loans and interest receivable > 90 days
outstanding(1) 1.4 % 1.2 %
Net charge-off rate(2) 3.9 % 3.0 %
(1) Represents percentage of balances which are 90 days past the billing date or
contractual repayment date, as applicable.
(2) Net charge-off rate is the annual ratio of net credit losses, excluding
fraud losses, on consumer loans as a percentage of the average daily amount of
consumer loans and interest receivable balance during the period.
We offer access to merchant finance products for certain small and medium-sized
businesses, which we refer to as our merchant finance offerings. Total merchant
loans, advances, and interest and fees receivable outstanding, net of
participation interest sold, as of March 31, 2022 were $1.5 billion , compared to
$1.2 billion as of March 31, 2021 , representing a year-over-year increase of
31%. The increase in merchant loans, advances, and interest and fees receivable
outstanding was due primarily to growth in our PPBL product in the U.S.
Approximately 83% and 7% of our merchant receivables outstanding as of March 31,
2022 were due from merchants in the U.S. and U.K. , respectively, as compared to
79% and 11%, respectively, as of March 31, 2021 .
The following table provides information regarding the credit quality of our merchant loans, advances, and interest and fees receivable balance:
2022 2021
Percent of merchant loans and interest receivable current 92.6 % 82.1 %
Percent of merchant loans and interest receivable > 90 days
outstanding(1) 2.9 % 8.8 %
Net charge-off rate(2) 3.2 % 19.4 %
(1) Represents percentage of balances which are 90 days past the original expected or contractual repayment period, as applicable.
(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 receivable balance during the period.
The increase in the percent of current merchant receivables, decrease in percent of merchant receivables greater than 90 days outstanding, and decrease in the net charge-off rate for merchant receivables atMarch 31, 2022 as compared toMarch 31, 2021 were primarily due to the charge-off of accounts that experienced financial difficulties as a result of the COVID-19 pandemic in the prior year as well as improved credit quality of our merchant loan portfolio due to modifications to the acceptable risk parameters, including stricter eligibility requirements, as discussed below. 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 a reduction in maximum loan size, stricter eligibility terms, and a shift from automated to manual underwriting of loans and advances, all of which resulted in a decrease in originations as compared to pre-pandemic levels. We continue to evaluate and modify our acceptable risk parameters in response to the changing macroeconomic environment, and changes to our acceptable risk parameters in 2021 resulted in a gradual increase in originations, and thus a higher merchant receivable balance as ofMarch 31, 2022 as compared toMarch 31, 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 may 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. [[Image Removed: pypl-20220331_g2.jpg]] 49
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Customer support and operations
Customer support and operations expenses for the three months ended
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Customer support and operations expenses increased by $16 million , or 3%, in the
three months ended March 31, 2022 compared to the same period of the prior year
due primarily to increases in third-party credit processing fees and customer
onboarding and compliance costs, partially offset by a decline in contractors
and consulting costs.
Sales and marketing
Sales and marketing expenses for the three months ended
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Sales and marketing expenses decreased by $8 million , or 1%, in the three months
ended March 31, 2022 compared to the same period of the prior year due primarily
to lower spending on marketing campaigns and contractor and consulting costs,
partially offset by an increase in expense related to targeted user incentives
and an increase in amortization of acquired intangible assets.
Technology and development
Technology and development expenses for the three months ended
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Technology and development expenses increased by$74 million , or 10%, in the three months endedMarch 31, 2022 compared to the same period of the prior year due primarily to increases in cloud computing services utilized in delivering our products and services, costs related to contractors and consultants, and, to a lesser extent, amortization expense associated with internally developed software.
General and administrative
General and administrative expenses for the three months ended
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General and administrative expenses increased by $83 million , or 16%, in the
three months ended March 31, 2022 compared to the same period of the prior year
which was primarily attributable to increases in employee-related expenses
driven mainly by growth in stock-based compensation.
Restructuring and other charges
Restructuring and other charges for the three months ended
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Restructuring and other charges decreased by
During the first quarter of 2022, management initiated a strategic reduction of the existing global workforce intended to streamline and optimize our global operations to enhance operating efficiency. As part of this effort, we are focusing on the reduction of redundant operations and simplifying our organizational structure. The associated restructuring charges during the three months endedMarch 31, 2022 were$20 million . We primarily incurred employee severance and benefits costs, as well as other associated consulting costs. Additionally, we are continuing to review our facility needs due to our new work models. This strategic action and cash payments associated with this plan are expected to be substantially completed by the fourth quarter of 2022. Management estimates that an additional$100 million in restructuring charges will be incurred over the remainder of 2022. The estimated reduction in annualized employee-related costs associated with the impacted workforce is approximately$260 million , including approximately$90 million in stock-based compensation. A portion of the reduction in annual costs associated with the impacted workforce is expected to be reinvested in the business to drive additional growth. 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. It resulted in restructuring charges of$32 million during the three months endedMarch 31, 2021 . We primarily incurred employee severance and benefits costs, as well as other associated consulting costs under the 2020 strategic reduction, which was substantially completed in 2021. [[Image Removed: pypl-20220331_g2.jpg]] 51
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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 three months endedMarch 31, 2022 and 2021, we incurred asset impairment charges of$16 million and$26 million , respectively, due to exiting 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 of($82) million during the three months endedMarch 31, 2022 decreased$88 million , or 52%, as compared to($170) million in the same period of the prior year due primarily to net gains on strategic investments in the current period compared to net losses in the prior period partially offset by an increase in foreign currency exchange losses, resulting primarily from actions taken in connection with our decision to suspend transactional services inRussia .
Income tax expense (benefit)
Our effective income tax rate was 19% and (26)% for the three months endedMarch 31, 2022 and 2021, respectively. The increase in our effective income tax rate for the three months endedMarch 31, 2022 compared to the same period of the prior year was primarily due to a decrease in discrete tax benefits associated with stock-based compensation deductions and, to a lesser extent, a new requirement to capitalize and amortize previously deductible research and experimental expenses.
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. 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 meet our cash requirements within the next twelve months and beyond.
SOURCES OF LIQUIDITY
Cash, cash equivalents, investments, and restricted cash
The following table summarizes our cash, cash equivalents, and investments as of
March 31, 2022 December 31, 2021
(In millions)
Cash, cash equivalents, and investments(1),(2) $ 11,894 $ 12,981
(1) Excludes assets related to funds receivable and customer accounts of $37.0
billion and $36.1 billion at March 31, 2022 and December 31, 2021 , respectively.
(2) Excludes total restricted cash of $27 million and $109 million at March 31,
2022 and December 31, 2021 , respectively, and strategic investments of
$3.2 billion as of both March 31, 2022 and December 31, 2021 , respectively.
Cash, cash equivalents, and investments held by our foreign subsidiaries were
$8.1 billion at March 31, 2022 and $7.4 billion at December 31, 2021 , or 68% and
57% of our total cash, cash equivalents, and investments as of those respective
dates. At December 31, 2021 , all of our cash, cash equivalents, and investments
held by foreign subsidiaries were subject to U.S. taxation under Subpart F,
Global Intangible Low Taxed Income or the one-time transition tax under the Tax
Cuts and Jobs Act of 2017. Subsequent repatriations to the U.S. will not be
taxable from a U.S. federal tax perspective, but may be subject to state income
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. Accordingly, not all of our cash is available for
general corporate purposes.
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Cash flows
The following table summarizes our condensed consolidated statements of cash
flows:
Three Months Ended March 31,
2022 2021
(In millions)
Net cash provided by (used in):
Operating activities $ 1,242 $ 1,758
Investing activities (751) (1,583)
Financing activities (695) 827Effect of exchange rates on cash, cash equivalents, and restricted cash
18 (42)
Net (decrease) increase in cash, cash equivalents, and restricted
cash $ (186) $ 960
Operating activities
We generated cash from operating activities of $1.2 billion in the three months
ended March 31, 2022 due primarily to operating income of $711 million , as well
as adjustments for non-cash expenses including stock-based compensation of
$429 million , provision for transaction and credit losses of $369 million , and
depreciation and amortization of $328 million . Net income was also adjusted for
changes in other assets and liabilities of $375 million , primarily related to
actual cash transaction losses incurred during the period.
We generated cash from operating activities of $1.8 billion in the three months
ended March 31, 2021 due primarily to operating income of $1.0 billion , as well
as adjustments for non-cash expenses including stock-based compensation of
$368 million , depreciation and amortization of $300 million , and provision for
transaction and credit losses of $273 million . Net income was also adjusted for
net losses on our strategic investments of $120 million , changes in accounts
receivable of $97 million , and changes in other assets and liabilities of $287
million , primarily related to actual cash transaction losses during the period.
In the three months ended
Investing activities
The net cash used in investing activities of$751 million in the three months endedMarch 31, 2022 was due primarily to purchases of investments of$8.6 billion , purchases and originations of loans receivable of$5.5 billion , changes in funds receivable from customers of$239 million , and purchases of property and equipment of$191 million . These cash outflows were partially offset by maturities and sales of investments of$8.8 billion and principal repayment of loans receivable of$5.1 billion . The net cash used in investing activities of$1.6 billion in the three months endedMarch 31, 2021 was due primarily to purchases of investments of$11.0 billion , purchases and originations of loans receivable of$2.1 billion , purchases of property and equipment of$221 million , and changes in funds receivable from customers of$180 million . These cash outflows were partially offset by maturities and sales of investments of$9.7 billion , and principal repayment of loans receivable of$2.2 billion .
Financing activities
The net cash used in financing activities of$695 million in the three months endedMarch 31, 2022 was due primarily to the repurchase of$1.5 billion of our common stock under our stock repurchase program, tax withholdings related to net share settlement of equity awards of$244 million , and repayment of borrowings under the Prior Credit Agreement (as defined below under "Available credit and debt") of$104 million , partially offset by changes in funds payable and amounts due to customers of$863 million and borrowings under our Paidy credit agreements of$286 million . [[Image Removed: pypl-20220331_g2.jpg]] 53
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We generated cash from financing activities of$827 million in the three months endedMarch 31, 2021 due primarily to changes in funds payable and amounts due to customers of$3.0 billion , partially offset by the repurchase of$1.3 billion of our common stock under our stock repurchase program, and tax withholdings related to net share settlement of equity awards of$863 million .
Effect of exchange rates on cash, cash equivalents, and restricted cash
Foreign currency exchange rates for the three months endedMarch 31, 2022 and 2021 had a positive impact of$18 million and a negative impact of$42 million , respectively, on cash, cash equivalents, and restricted cash. The positive impact on cash, cash equivalents, and restricted cash in the three months endedMarch 31, 2022 was due primarily to the favorable impact of fluctuations in the exchange rate of theU.S. dollar to the Australian dollar, partially offset by the unfavorable impact of fluctuations in the exchange rate of theU.S. dollar to the Russian ruble and Japanese yen. The negative impact on cash, cash equivalents, and restricted cash in the three months endedMarch 31, 2021 was due primarily to fluctuations in the exchange rate of theU.S. dollar to the Euro, Australian dollar, and Swedish krona.
Available credit and debt
InFebruary 2022 , we entered into a credit agreement (the "Paidy Credit Agreement") with Paidy as co-borrower, which provides for an unsecured revolving credit facility of ¥60.0 billion (approximately$493 million as ofMarch 31, 2022 ). InMarch 2022 , ¥32.8 billion (approximately$269 million ) was drawn down under the Paidy Credit Agreement. Accordingly, atMarch 31, 2022 , ¥27.2 billion (approximately$224 million ) of borrowing capacity was available for the purposes permitted by the Paidy Credit Agreement, subject to customary conditions to borrowing. InOctober 2021 , we assumed a credit agreement through our acquisition of Paidy (the "Prior Credit Agreement"). The Prior Credit Agreement provided for a secured revolving credit facility of approximately ¥22.8 billion (approximately$198 million at acquisition). In the first quarter of 2022, we terminated the Prior Credit Agreement and repaid outstanding borrowings. Other than as described above, there are no significant changes to the available credit and debt disclosed in our 2021 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.
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.
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 of March 31, 2022 , we
had a total of $4.5 billion in cash withdrawals offsetting our $4.5 billion in
Aggregate Cash Deposits held within the financial institution under the cash
pooling arrangement.
Credit ratings
As of March 31, 2022 , we continue to be rated investment grade by Standard and
Poor's Financial Services, LLC , Fitch Ratings, Inc. , and Moody'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 agreements.
CURRENT AND FUTURE CASH REQUIREMENTS
Our material cash requirements include funds to support current and potential: operating activities, credit products, customer protection programs, stock repurchases, strategic investments, acquisitions, other commitments, and capital expenditures and other future obligations. [[Image Removed: pypl-20220331_g2.jpg]] 54
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Table of Contents Credit products 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. As ofMarch 31, 2022 , 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 for our credit activities, as we deem 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. Customer protection programs 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 rate was 0.10% of TPV. Historical loss rates may not be indicative of future results.
Stock repurchases
During the three months endedMarch 31, 2022 , we repurchased approximately$1.5 billion of our common stock in the open market under our stock repurchase program authorized inJuly 2018 . As ofMarch 31, 2022 , a total of approximately$3.6 billion remained available for future repurchases of our common stock under ourJuly 2018 stock repurchase program.
Other considerations
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 2021 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.
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