What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-03 compared with 2023-05-09 · 158 added, 108 removed, 240 unchanged (53% of the section changed)

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The United Kingdom (“U.K.”) formally exited the European Union (“EU”) and the European Economic Area (“EEA”) on January 31, 2020 (commonly referred to as “Brexit”) with the expiration of the transition period on December 31, 2020.

PayPal (Europe) S.à.r.l.

et Cie, SCA operates in the U.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 new U.K.

authorizations by the U.K.

PayPal operates in the U.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 new authorizations by the U.K.

financial regulators.

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and EU for the periods presented:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Net revenues generated from the U.K.

7 % 8 % 7 % 8 %

Net revenues generated from the EU 20 % 17 % 19 % 18 %

2023 December 31,

Gross loans and interest receivable due from customers in the U.K.

Gross loans and interest receivable due from customers in the EU 30 % 28 %

(1) Includes loans and interest receivable, held for sale.

MACROECONOMIC ENVIRONMENT

The broader implications of the macroeconomic environment, including uncertainty around the duration and severity of the coronavirus pandemic, the Russia and Ukraine conflict, supply chain shortages, a recession globally or in markets in which we operate, higher inflation rates, higher interest rates, and other related global economic conditions, remain unknown.

A deterioration in macroeconomic conditions could increase the risk of lower consumer spending, merchant and consumer bankruptcy, insolvency, business failure, higher credit losses, foreign currency exchange fluctuations, or other business interruption, which may adversely impact our business.

The broader implications of the macroeconomic environment, including uncertainty around the Russia and Ukraine conflict, supply chain shortages, a recession globally or in markets in which we operate, higher inflation rates, higher interest rates, and other related global economic conditions, remain unknown.

A deterioration in macroeconomic conditions could continue to increase the risk of lower consumer spending, merchant and consumer bankruptcy, insolvency, business failure, higher credit losses, foreign currency exchange fluctuations, or other business interruption, which may adversely impact our business.

If these conditions continue or worsen, they could adversely impact our future financial and operating results.

OVERVIEW OF RESULTS OF OPERATIONS

The following table provides a summary of our condensed consolidated financial results for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31, Percent Increase/(Decrease)

The following table provides a summary of our condensed consolidated financial results for the three and six months ended June 30, 2023 and 2022:

Three Months Ended June 30, Percent Increase/(Decrease) Six Months Ended June 30, Percent Increase/(Decrease)

2023 2022 2023 2022

(In millions, except percentages and per share data)

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** Not meaningful.

THREE MONTHS ENDED MARCH 31, 2023 AND 2022

Net revenues increased $557 million, or 9%, in the three months ended March 31, 2023 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 10%.

Total operating expenses increased $269 million, or 5%, in the three months ended March 31, 2023 compared to the same period of the prior year due primarily to an increase in transaction expense, and to a lesser extent, an increase in restructuring and other charges, partially offset by reductions in sales and marketing expense, general and administrative expense, and technology and development expense.

Operating income increased by $288 million, or 41%, in the three months ended March 31, 2023 compared to the same period of the prior year due to net revenues growing faster than operating expenses.

Our operating margin was 14% and 11% in the three months ended March 31, 2023 and 2022, respectively, reflecting the positive impact of operating efficiencies in our business, partially offset by the negative impact of an increase in transaction expense.

Net income increased $286 million, or 56%, in the three months ended March 31, 2023 as compared to the same period of the prior year due to the previously discussed increase in operating income of $288 million and an increase in other income (expense), net of $157 million driven primarily by higher interest income due to an increase in interest rates, partially offset by an increase in income tax expense of $159 million driven primarily by higher tax expense on higher income before taxes and discrete tax adjustments.

THREE MONTHS ENDED JUNE 30, 2023 AND 2022

Net revenues increased $481 million, or 7%, in the three months ended June 30, 2023 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 11%.

Total operating expenses increased $112 million, or 2%, in the three months ended June 30, 2023 compared to the same period of the prior year due primarily to an increase in transaction expense, partially offset by reductions in sales and marketing expense, technology and development expense, and restructuring and other charges.

Operating income increased by $369 million, or 48%, in the three months ended June 30, 2023 compared to the same period of the prior year due to net revenues growing faster than operating expenses.

Our operating margin was 16% and 11% in the three months ended June 30, 2023 and 2022, respectively, reflecting the positive impact of operating efficiencies in our business, partially offset by the negative impact of an increase in transaction expense.

Net income increased $1.4 billion in the three months ended June 30, 2023 compared to the same period of the prior year due to the previously discussed increase in operating income of $369 million, an increase in other income (expense), net of $885 million driven primarily by net gains on strategic investments in the current period as compared to net losses in the prior period, and a decrease in income tax expense of $116 million driven primarily by higher tax expense in the prior period related to the intra-group transfer of intellectual property, partially offset by higher tax expense in the current period on higher operating income and net gains on strategic investments.

SIX MONTHS ENDED JUNE 30, 2023 AND 2022

Net revenues increased $1.0 billion, or 8%, in the six months ended June 30, 2023 compared to the same period of the prior year driven primarily by growth in TPV of 10%.

Total operating expenses increased $381 million, or 3%, in the six months ended June 30, 2023 compared to the same period of the prior year due primarily to an increase in transaction expense, partially offset by reductions in sales and marketing expense, technology and development expense, general and administrative expense, and customer support and operations expense.

Operating income increased $657 million, or 45%, in the six months ended June 30, 2023 compared to the same period of the prior year due to net revenues growing faster than operating expenses.

Our operating margin was 15% and 11% in the six months ended June 30, 2023 and 2022, respectively, reflecting the positive impact of operating efficiencies in our business, partially offset by the negative impact of an increase in transaction expense.

Net income increased $1.7 billion in the six months ended June 30, 2023 compared to the same period of the prior year due to the previously discussed increase in operating income of $657 million and an increase of $1.0 billion in other income (expense), net driven primarily by net gains on strategic investments in the current period as compared to net losses in the prior period.

IMPACT OF FOREIGN CURRENCY EXCHANGE RATES

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The strengthening or weakening of the 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 the U.S.

We generated approximately 41% and 43% of our net revenues from customers domiciled outside of the U.S.

in the three months ended March 31, 2023 and 2022, respectively.

We generated approximately 42% of our net revenues from customers domiciled outside of the U.S.

in the three and six months ended June 30, 2023 as compared to 43% in both the three and six months ended June 30, 2022.

Because we generate substantial net revenues internationally, we are subject to the risks of doing business outside of the U.S.

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While changes in foreign currency exchange rates affect our reported results, we have a foreign currency exchange exposure management program in which we use foreign currency exchange contracts, designated 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 ended March 31, 2023, year-over-year foreign currency exchange rate movements relative to the U.S.

Gains and losses from these foreign currency exchange contracts are recognized as a component of transaction revenues or operating expenses (as applicable) in the same period the forecasted transactions impact earnings.

In the three and six months ended June 30, 2023, year-over-year foreign currency exchange rate movements relative to the U.S.

dollar had the following impact on our reported results:

Three Months Ended March 31, 2023

Three Months Ended June 30, 2023 Six Months Ended June 30, 2023

(In millions)

Unfavorable impact to net revenues (exclusive of hedging impact) $ (139)

Favorable (unfavorable) impact to net revenues (exclusive of hedging impact) $ 6 $ (133)

Hedging impact 34 110

Unfavorable impact to net revenues (63)

Favorable (unfavorable) impact to net revenues 40 (23)

Favorable impact to operating expense 7 85

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Net revenue analysis

The components of our net revenues for the three months ended March 31, 2023 and 2022 were as follows (in millions):

The components of our net revenues for the three and six months ended June 30, 2023 and 2022 were as follows (in millions):

Transaction revenues

Transaction revenues grew by $366 million, or 6%, in the three months ended March 31, 2023 compared to the same period of the prior year driven primarily by growth in TPV (in particular growth in our unbranded card processing volume, which consists primarily of our Braintree products and services) and the number of payment transactions on our payments platform.

The growth in transaction revenues in the three months ended March 31, 2023 was partially offset by a decline in revenues from our core PayPal products and services, including fee revenue from foreign exchange.

The graphs below present the respective key metrics (in millions) for the three months ended March 31, 2023 and 2022:

Transaction revenues grew by $284 million, or 5%, and $650 million, or 5%, in the three and six months ended June 30, 2023, respectively, compared to the same periods of the prior year driven primarily by growth in TPV and the number of payment transactions from our Braintree products and services partially offset by a decline in revenues from our core PayPal products and services, including declines in contractual compensation for the three and six months ended June 30, 2023, of $75 million and $105 million, respectively, from sellers that violated our contractual terms predominantly in international markets.

The graphs below present the respective key metrics (in millions) for the three and six months ended June 30, 2023 and 2022:

*Reflects active accounts at the end of the applicable period.

Number of payment transactions

The following table provides a summary of related metrics:

Three Months Ended March 31, Percent Increase/(Decrease)

Three Months Ended June 30, Percent Increase/(Decrease) Six Months Ended

June 30, Percent Increase/(Decrease)

2023 2022 2023 2022

Number of payment transactions per active account 54.7 48.7 12 % 54.7 48.7 12 %

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** Not meaningful

We had active accounts of 433 million and 429 million as of March 31, 2023 and 2022, respectively, an increase of 1%.

Our total number of payment transactions was 5.8 billion and 5.2 billion for the three months ended March 31, 2023 and 2022, respectively, an increase of 13%.

TPV was $355 billion and $323 billion for the three months ended March 31, 2023 and 2022, respectively, an increase of 10%.

Transaction revenues grew more slowly than growth in TPV and the number of payment transactions in the three months ended March 31, 2023 compared to the same period in the prior year due primarily to a decline in revenues from core PayPal products and services and foreign currency exchange fees.

We had active accounts of 431 million and 429 million as of June 30, 2023 and 2022, respectively.

Our total number of payment transactions was 6.1 billion and 5.5 billion for the three months ended June 30, 2023 and 2022, respectively, an increase of 10%.

Our total number of payment transactions was 11.9 billion for the six months ended June 30, 2023, compared to 10.7 billion in the six months ended June 30, 2022, an increase of 12%.

TPV was $377 billion and $340 billion for the three months ended June 30, 2023 and 2022, respectively, an increase of 11%.

TPV was $731 billion for the six months ended June 30, 2023 compared to $663 billion in the six months ended June 30, 2022, an increase of 10%.

Transaction revenues grew more slowly than growth in TPV and the number of payment transactions in the three and six months ended June 30, 2023 compared to the same periods in the prior year due primarily to a decline in revenues from core PayPal products and services and foreign currency exchange fees.

Additionally, for the three months ended June 30, 2023, the slower growth of transaction revenues compared to TPV and the number of payment transactions was due to an unfavorable impact from hedging.

Revenues from other value added services

Revenues from other value added services increased $191 million, or 39%, in the three months ended March 31, 2023 compared to the same period in the prior year primarily attributable to increases in interest earned on certain assets underlying customer account balances resulting from higher interest rates and interest and fee revenue on our loans receivable portfolio driven by consumer interest-bearing installment loans and our PayPal Business Loan (“PPBL”) products.

Revenues from other value added services increased $197 million, or 37%, and $388 million, or 38%, in the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily attributable to increases in interest earned on certain assets underlying customer account balances resulting from higher interest rates, and to a lesser extent, interest and fee revenue on our loans receivable portfolio driven by consumer interest-bearing installment loans and consumer revolving loans.

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)

Three Months Ended June 30, Percent Increase/(Decrease) Six Months Ended June 30, Percent Increase/(Decrease)

2023 2022 2023 2022

(In millions, except percentages)

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Transaction expense

Transaction expense for the three months ended March 31, 2023 and 2022 was as follows (in millions):

Transaction expense increased by $466 million, or 17%, in the three months ended March 31, 2023 compared to the same period of the prior year due primarily to the 10% increase in TPV for the three months ended March 31, 2023 and unfavorable changes in product mix.

The increase in the transaction expense rate for the three months ended March 31, 2023 compared to the same period of the prior year was also attributable to unfavorable changes in product mix with a higher proportion of TPV from unbranded card processing volume, which generally has higher expense rates than other products and services, partially offset by favorable impacts resulting from certain third-party pricing reductions and favorable changes in regional mix with respect to our core PayPal products.

For the three months ended March 31, 2023 and 2022, approximately 35% and 36% of TPV, respectively, was generated outside of the U.S.

Transaction expense for the three and six months ended June 30, 2023 and 2022 was as follows (in millions):

Transaction expense increased by $497 million, or 16%, and $963 million, or 16%, in the three and six months ended June 30, 2023, respectively, due primarily to the increase in TPV of 11% and 10% for the three and six months ended June 30, 2023, respectively, as well as unfavorable changes in product mix.

The increase in the transaction expense rate for the three and six months ended June 30, 2023 compared to the same periods of the prior year was also attributable to unfavorable changes in product mix with a higher proportion of TPV from unbranded card processing volume, which generally has higher expense rates than other products and services, partially offset by favorable changes in regional mix with respect to our core PayPal products and certain third-party pricing reductions with respect to our Venmo products.

For the three and six months ended June 30, 2023, approximately 37% and 36% of TPV, respectively, was generated outside of the U.S.

For the three and six months ended June 30, 2022, approximately 35% and 36% 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.

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Transaction and credit losses

The components of our transaction and credit losses for the three months ended March 31, 2023 and 2022 were as follows (in millions):

Transaction and credit losses increased by $73 million, or 20%, in the three months ended March 31, 2023 compared to the same period of the prior year.

Transaction losses were $300 million in the three months ended March 31, 2023 compared to $322 million in the three months ended March 31, 2022, a decrease of $22 million, or 7%.

Transaction loss rate (transaction losses divided by TPV) was 0.08% for the three months ended March 31, 2023, compared to 0.10% for the three months ended March 31, 2022.

The decrease in transaction losses in the three months ended March 31, 2023 was primarily due to benefits from risk mitigation strategies particularly with our Venmo products.

Credit losses increased by $95 million in the three months ended March 31, 2023 compared to the same period of the prior year.

The components of credit losses for the three months ended March 31, 2023 and 2022 were as follows (in millions):

Three Months Ended March 31,

The components of our transaction and credit losses for the three and six months ended June 30, 2023 and 2022 were as follows (in millions):

Transaction and credit losses decreased by $50 million, or 11%, and increased by $23 million, or 3%, in the three and six months ended June 30, 2023, respectively, compared to the same periods of the prior year.

Transaction losses were $286 million in the three months ended June 30, 2023 compared to $380 million in the three months ended June 30, 2022, a decrease of $94 million, or 25%.

Transaction losses were $586 million in the six months ended June 30, 2023 compared to $702 million in the six months ended June 30, 2022, a decrease of $116 million, or 17%.

Transaction loss rate (transaction losses divided by TPV) was 0.08% for the three and six months ended June 30, 2023, compared to 0.11% for the three and six months ended June 30, 2022.

The decrease in transaction losses in the three and six months ended June 30, 2023 was primarily due to a $114 million loss related to an ongoing merchant insolvency proceeding in the three and six months ended June 30, 2022 with no activity of comparable individual magnitude in the current period.

Credit losses increased by $44 million and $139 million in the three and six months ended June 30, 2023, respectively, compared to the same periods of the prior year.

The components of credit losses for the three and six months ended June 30, 2023 and 2022 were as follows (in millions):

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Net charge-offs (1)

$ 134 $ 60 $ 244 $ 112

Reserve build (release) (2),(3)

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(2) Reserve build (release) represents change in allowance for principal receivables excluding foreign currency remeasurement.

The provision in the three months ended March 31, 2023 was attributable to loan originations during the period and a deterioration in the credit quality of loans outstanding.

The provision in the three months ended March 31, 2022 was attributable to loan originations in that 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 at that time.

During the periods presented, allowances for our merchant and consumer portfolios included qualitative adjustments that took into account uncertainty with respect to macroeconomic conditions and around the financial health of our borrowers, including the effectiveness of loan modification programs made available to merchants in previous years.

The consumer loans and interest receivable balance as of March 31, 2023 and 2022 was $6.1 billion and $4.1 billion, respectively, net of participation interest sold, representing a year-over-year increase of 47% driven by the expansion of our installment credit products.

Approximately 36% and 48% of our consumer loans receivable outstanding as of March 31, 2023 and 2022, respectively, were due from consumers in the U.K.

The decline in the percentage of consumer loans receivable outstanding in the U.K.

at March 31, 2023 compared to March 31, 2022 was due to overall growth in the consumer loan receivables portfolio, particularly from installment credit products in other markets including Germany, the U.S., and Japan.

(3) Includes the reversal of allowance associated with the reclassification of certain loans to held for sale.

The provision in the three and six months ended June 30, 2023 was attributable to loan originations during the period and a deterioration in the credit quality of loans outstanding, partially offset by reversal of reserve associated with the reclassification of certain receivables to held for sale.

The provision in the three and six months ended June 30, 2022 was attributable to loan originations in that period, partially offset by improvements in the credit quality of loans outstanding.

As of June 30, 2023, loans and interest receivable, held for sale was $1.9 billion.

Loans and interest receivable, held for sale, represents the portion of our installment consumer receivables that we intend to sell.

This portfolio includes the substantial majority of the U.K.

and other European buy now, pay later loan receivables.

In June 2023, we entered into a multi-year agreement with a global investment firm to sell up to €40 billion of U.K.

and other European buy now, pay later loan receivables, consisting of eligible loans and interest receivable, held for sale at the closing of the transaction and a forward-flow arrangement for the sale of future originations of eligible loans over a 24-month commitment period (together, “eligible consumer installment receivables”).

At the time of reclassification, previously recorded allowance for credit losses for loans and interest receivable outstanding was reversed, resulting in a decrease of approximately $33 million in transaction and credit losses in our condensed consolidated statement of income (loss).

See “Note 1—Overview and Summary of Significant Accounting Policies” in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for additional information.

The consumer loans and interest receivable balance, net of participation interest sold, remained consistent as of June 30, 2023 and 2022 at $4.5 billion.

The increases driven by the expansion of our installment credit products in the U.S.

and Japan and our revolving credit product in the U.K.

were offset by the reclassification of eligible consumer installment receivables as held for sale in the U.K and other European countries, as discussed above.

Approximately 36% and 43% of our consumer loans receivable outstanding (including loans held for sale and loans held for investments) as of June 30, 2023 and 2022, respectively, were due from consumers in the U.K.

The decrease in the percentage of consumer loans receivable outstanding in the U.K.

at June 30, 2023 compared to June 30, 2022 was primarily due to overall growth in other markets related to installment credit products.

The following table provides information regarding the credit quality of our consumer loans and interest receivable balance:

Percent of consumer loans and interest receivable current (1)

95.5 % 96.5 %

Percent of consumer loans and interest receivable > 90 days outstanding (1), (2)

Net charge-off rate (1), (3)

(1) Amounts as of June 30, 2023 exclude loans and interest receivable, held for sale.

(2) Represents percentage of balances which are 90 days past the billing date or contractual repayment date, as applicable.

(3) 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.

The increase in net charge-off rate for consumer loans and interest receivable at June 30, 2023 as compared to June 30, 2022 was primarily due to the reclassification of certain receivables to held for sale.

The net charge-off rate is expected to increase in the second half of 2023 due to a slowing of new originations of consumer loans held for investment because all eligible new U.K.

and other European installment loans will be classified as held for sale and consequently excluded from net charge-offs.

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, 2023 were $2.1 billion, compared to $1.5 billion as of March 31, 2022, representing a year-over-year increase of 33%.

The increase in merchant loans, advances, and interest and fees receivable outstanding was due primarily to growth in our PayPal Business Loan products in the U.S.

Approximately 84% and 5% of our merchant receivables outstanding as of March 31, 2023 were due from merchants in the U.S.

and U.K., respectively, as compared to 83% and 7%, respectively, as of March 31, 2022.

Total merchant loans, advances, and interest and fees receivable outstanding, net of participation interest sold, remained consistent as of June 30, 2023 and 2022 at $1.7 billion.

The increase in merchant loans, advances, and interest and fees receivable outstanding related to our PayPal Working Capital (“PPWC”) product in Europe was offset by a decrease in receivable outstanding related to our PayPal Business Loan (“PPBL”) product in the U.S.

Approximately 79% and 7% of our merchant receivables outstanding as of June 30, 2023 were due from merchants in the U.S.

and U.K., respectively, as compared to 84% and 6%, respectively, as of June 30, 2022.

The following table provides information regarding the credit quality of our merchant loans, advances, and interest and fees receivable balance:

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(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 decrease in the percent of current merchant receivables, increase in percent of merchant receivables greater than 90 days outstanding, and increase in the net charge-off rate for merchant receivables at March 31, 2023 as compared to March 31, 2022 were primarily due to the expansion of acceptable risk parameters in 2022, which resulted in a decline in the overall credit quality of loans outstanding.

The decrease in the percent of current merchant receivables, increase in percent of merchant receivables greater than 90 days outstanding, and increase in the net charge-off rate for merchant receivables at June 30, 2023 as compared to June 30, 2022 were primarily due to the expansion of acceptable risk parameters in 2022, which resulted in a decline in the overall credit quality of loans outstanding related to our PPBL product.

We continue to evaluate and modify our acceptable risk parameters in response to the changing macroeconomic environment.

During the first quarter of 2023, in response to declining performance, a number of risk mitigation strategies were implemented which resulted in reduced PPBL originations in the quarter.

During the first quarter of 2023, in response to declining performance, a number of risk mitigation strategies were implemented which resulted in reduced PPBL originations in the first half of 2023.

Modifications to the acceptable risk parameters for our consumer credit products did not have a material impact on our consumer loans in the periods presented.

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Customer support and operations

Customer support and operations expenses for the three months ended March 31, 2023 and 2022 were as follows (in millions):

Customer support and operations expenses decreased by $46 million, or 9%, in the three months ended March 31, 2023, compared to the same period of the prior year due primarily to a decline in employee-related costs, customer onboarding and compliance costs, and contractors and consulting costs.

Customer support and operations expenses for the three and six months ended June 30, 2023 and 2022 were as follows (in millions):

Customer support and operations expenses decreased by $44 million, or 8%, and $90 million, or 8%, in the three and six months ended June 30, 2023, respectively, compared to the same periods of the prior year due primarily to a decline in employee-related costs, and contractors and consulting costs.

The decline in customer support and operations expense for the six months ended June 30, 2023 was also driven by a decline in customer onboarding and compliance costs.

Sales and marketing

Sales and marketing expenses for the three months ended March 31, 2023 and 2022 were as follows (in millions):

Sales and marketing expenses decreased by $158 million, or 27%, in the three months ended March 31, 2023 compared to the same period of the prior year due primarily to lower spending on marketing campaigns and targeted user incentives and decline in employee-related costs.

Sales and marketing expenses for the three and six months ended June 30, 2023 and 2022 were as follows (in millions):

Sales and marketing expenses decreased by $130 million, or 22%, and $288 million, or 24%, in the three and six months ended June 30, 2023, respectively, compared to the same periods of the prior year due primarily to lower spending on marketing campaigns and targeted user incentives and, to a lesser extent, declines in employee-related costs, amortization of acquired intangibles, and consulting services.

Technology and development

Technology and development expenses for the three months ended March 31, 2023 and 2022 were as follows (in millions):

Technology and development expenses decreased by $94 million, or 12%, in the three months ended March 31, 2023 compared to the same period of the prior year due primarily to a decline in costs related to contractors, consultants, and cloud computing services utilized in delivering our products and services along with lower intangible amortization in the current period.

Technology and development expenses for the three and six months ended June 30, 2023 and 2022 were as follows (in millions):

Technology and development expenses decreased by $72 million, or 9%, and $166 million, or 10%, in the three and six months ended June 30, 2023, respectively, compared to the same periods of the prior year due primarily to lower intangible amortization in the current period and a decline in costs related to contractors and consultants.

The decline in technology and development expenses for the six months ended June 30, 2023 was also attributable to a decline in cloud computing services utilized in delivering our products and services.

General and administrative

General and administrative expenses for the three months ended March 31, 2023 and 2022 were as follows (in millions):

General and administrative expenses decreased by $100 million, or 16%, in the three months ended March 31, 2023 compared to the same period of the prior year due primarily to a decrease in employee-related expenses driven by a decline in stock-based compensation expense.

General and administrative expenses for the three and six months ended June 30, 2023 and 2022 were as follows (in millions):

General and administrative expenses decreased by $23 million, or 4%, and $123 million, or 11%, in the three and six months ended June 30, 2023, respectively, compared to the same periods of the prior year.

The decline in general and administrative expenses in the three months ended June 30, 2023 was due primarily to a decrease in professional services expenses.

The decline in general and administrative expenses in the six months ended June 30, 2023 was primarily attributable to a decline in employee-related expenses driven by lower stock-based compensation expense, and to a lesser extent, a decrease in professional services expenses.

Restructuring and other charges

Restructuring and other charges for the three months ended March 31, 2023 and 2022 were as follows (in millions):

Restructuring and other charges increased by $128 million in the three months ended March 31, 2023 compared to the same period of the prior year.

Restructuring and other charges for the three and six months ended June 30, 2023 and 2022 were as follows (in millions):

Restructuring and other charges decreased by $66 million and increased by $62 million, in the three and six months ended June 30, 2023, respectively, compared to the same periods of the prior year.

During the first quarter of 2023, management initiated a global workforce reduction intended to focus resources on core strategic priorities, and improve our cost structure and operating efficiency.

The associated restructuring charges during the three months ended March 31, 2023 were $117 million.

The associated restructuring charges during the three and six months ended June 30, 2023 were nil and $117 million, respectively.

We primarily incurred employee severance and benefits costs, substantially all of which have been accrued for as of March 31, 2023.

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This effort focused on reducing redundant operations and simplifying our organizational structure.

The associated restructuring charges during the three months ended March 31, 2022 was $20 million.

The associated restructuring charges during the three and six months ended June 30, 2022 was $71 million and $91 million, respectively.

We primarily incurred employee severance and benefits costs, as well as associated consulting costs.

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Additionally, we are continuing to review our real estate and facility capacity requirements due to our new and evolving work models.

We incurred asset impairment charges of $39 million and $16 million in the three months ended March 31, 2023 and 2022, respectively, due to exiting certain leased properties, which resulted in a reduction of right-of-use lease assets and related leasehold improvements.

We also incurred a loss of $8 million upon designation of an owned property as held for sale in the three months ended March 31, 2023.

We incurred asset impairment charges of $4 million and $43 million in the three and six months ended June 30, 2023, respectively, and $19 million and $35 million in the three and six months ended June 30, 2022, respectively, due to exiting certain leased properties, which resulted in a reduction of right-of-use lease assets and related leasehold improvements.

We recognized a gain of $14 million due to the sale of an owned property in the three and six months ended June 30, 2023.

We also incurred a loss of $8 million upon designation of another owned property as held for sale in the six months ended June 30, 2023.

During the three and six months ended June 30, 2023, approximately $34 million of losses were recorded in restructuring and other charges in order to measure loans and interest receivable, held for sale, at the lower of cost or fair value.

Other income (expense), net

Other income (expense), net increased $157 million in the three months ended March 31, 2023 compared to the same period of the prior year due primarily to higher interest income resulting from an increase in interest rates.

Other income (expense), net in the three months ended March 31, 2023 was also positively impacted by foreign exchange gains in the current period compared to losses in the prior period primarily from actions taken in connection with our decision to suspend transactional services in Russia, and higher net gains on strategic investments.

These factors favorably impacting other income (expense), net were partially offset by an increase in interest expense due in part to incremental expense from our May 2022 fixed rate debt.

Other income (expense), net increased $885 million and $1.0 billion in the three and six months ended June 30, 2023, respectively, compared to the same periods of the prior year due primarily to net gains on strategic investments in the current periods as compared to net losses in the prior periods, and to a lesser extent, higher interest income resulting from an increase in interest rates, partially offset by an increase in interest expense due to incremental expense from our May 2022 fixed rate debt.

Other income (expense), net in the six months ended June 30, 2023 was also positively impacted by foreign exchange gains in the current period compared to losses in the prior period primarily from actions taken in connection with our decision to suspend transactional services in Russia.

Income tax expense

Our effective income tax rate was 26% and 19% for the three months ended March 31, 2023 and 2022, respectively.

The increase in the effective income tax rate for the three months ended March 31, 2023 compared to the same period of the prior year was due primarily to a decrease in tax benefits associated with discrete tax adjustments and an increase in tax expense associated with higher net gains on strategic investments.

Our effective income tax rate was 21% and 796% for the three months ended June 30, 2023 and 2022, respectively, and 23% and 75% for the six months ended June 30, 2023 and 2022, respectively.

The decrease in our effective income tax rate for the three and six months ended June 30, 2023 compared to the same periods of the prior year was due primarily to higher tax expense in the prior year related to the intra-group transfer of intellectual property.

LIQUIDITY AND CAPITAL RESOURCES

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Cash, cash equivalents, and investments

The following table summarizes our cash, cash equivalents, and investments as of March 31, 2023 and December 31, 2022:

March 31, 2023 December 31, 2022

The following table summarizes our cash, cash equivalents, and investments as of June 30, 2023 and December 31, 2022:

June 30, 2023 December 31, 2022

(In millions)

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$ 12,076 $ 13,723

(1) Excludes assets related to funds receivable and customer accounts of $35.3 billion and $36.4 billion at March 31, 2023 and December 31, 2022, respectively.

(2) Excludes total restricted cash of $13 million and $17 million at March 31, 2023 and December 31, 2022, respectively, and strategic investments of $2.2 billion and $2.1 billion as of March 31, 2023 and December 31, 2022, respectively.

Cash, cash equivalents, and investments held by our foreign subsidiaries were $8.9 billion at March 31, 2023 and $8.6 billion at December 31, 2022, or 68% and 62% of our total cash, cash equivalents, and investments as of those respective dates.

(1) Excludes assets related to funds receivable and customer accounts of $33.6 billion and $36.3 billion at June 30, 2023 and December 31, 2022, respectively.

(2) Excludes total restricted cash of $11 million and $17 million at June 30, 2023 and December 31, 2022, respectively, and strategic investments of $2.4 billion and $2.1 billion as of June 30, 2023 and December 31, 2022, respectively.

Cash, cash equivalents, and investments held by our foreign subsidiaries were $7.1 billion at June 30, 2023 and $8.6 billion at December 31, 2022, or 59% and 62% of our total cash, cash equivalents, and investments as of those respective dates.

At December 31, 2022, all of our cash, cash equivalents, and investments held by foreign subsidiaries were subject to U.S.

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The following table summarizes our condensed consolidated statements of cash flows:

Three Months Ended March 31,

Six Months Ended June 30,

(In millions)

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Investing activities (1)

Financing activities (1)

1,593 (4,662)

Financing activities (1)

Effect of exchange rates on cash, cash equivalents, and restricted cash (50) (136)

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Operating activities

The net cash generated from operating activities of $1.2 billion in the three months ended March 31, 2023 was due primarily to operating income of $1.0 billion, as well as adjustments for non-cash expenses including provision for transaction and credit losses of $442 million, stock-based compensation of $345 million, and depreciation and amortization of $270 million.

Cash flows from operating activities was also impacted by changes in other assets and liabilities of $240 million, primarily related to actual cash transaction losses incurred during the period, and changes in income taxes payable of $235 million.

The net cash generated from operating activities of $1.2 billion in the three months ended March 31, 2022 was 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.

Cash flows from operating activities was also impacted by changes in other assets and liabilities of $391 million, primarily related to actual cash transaction losses during the period.

In the three months ended March 31, 2023 and 2022, cash paid for income taxes, net was $495 million and $47 million, respectively.

The net cash generated from operating activities of $1.0 billion in the six months ended June 30, 2023 was due primarily to operating income of $2.1 billion, as well as adjustments for non-cash expenses including provision for transaction and credit losses of $840 million, stock-based compensation of $708 million, and depreciation and amortization of $539 million.

Cash flows from operating activities was also impacted by originations of loans receivable, held for sale of $1.5 billion, changes in other assets and liabilities of $851 million, primarily related to actual cash transaction losses incurred during the period and a decline in other liabilities, changes in income taxes payable of $326 million, and net gains from our strategic investments of $181 million, partially offset by proceeds from repayments of loans receivable, originally classified as held for sale of $302 million.

The net cash generated from operating activities of $2.5 billion in the six months ended June 30, 2022 was due primarily to operating income of $1.5 billion, as well as adjustments for non-cash expenses including provision for transaction and credit losses of $817 million, stock-based compensation of $741 million, and depreciation and amortization of $661 million.

Cash flows from operating activities was also impacted by net losses incurred on our strategic investments of $658 million, changes in deferred income taxes of $457 million, and changes in other assets and liabilities of $408 million, primarily related to actual cash transaction losses during the period partially offset by an increase in other liabilities.

In the six months ended June 30, 2023 and 2022, cash paid for income taxes, net was $906 million and $444 million, respectively.

Investing activities

The net cash provided by investing activities of $34 million in the three months ended March 31, 2023 was due primarily to principal repayment of loans receivable of $8.1 billion, maturities and sales of investments of $5.4 billion, and changes in funds receivable from customers of $1.1 billion, offset by purchases and originations of loans receivable of $8.3 billion, purchases of investments of $6.1 billion, and purchases of property and equipment of $170 million.

The net cash used in investing activities of $752 million in the three months ended March 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.

The net cash provided by investing activities of $1.6 billion in the six months ended June 30, 2023 was due primarily to proceeds from repayments of loans receivable, originally classified as held for investment, of $16.0 billion, maturities and sales of investments of $10.7 billion, and changes in funds receivable from customers of $759 million, partially offset by purchases and originations of loans receivable of $15.2 billion, purchases of investments of $10.5 billion, and purchases of property and equipment of $320 million.

The net cash used in investing activities of $4.7 billion in the six months ended June 30, 2022 was due primarily to purchases of investments of $13.2 billion, purchases and originations of loans receivable of $12.3 billion, changes in funds receivable from customers of $882 million, and purchases of property and equipment of $366 million.

These cash outflows were partially offset by maturities and sales of investments of $11.1 billion and principal repayment of loans receivable of $10.9 billion.

Financing activities

The net cash used in financing activities of $2.7 billion in the three months ended March 31, 2023 was due primarily to the repurchase of $1.4 billion of our common stock under our stock repurchase programs, changes in funds payable and amounts due to customers of $1.0 billion, tax withholdings related to net share settlement of equity awards of $149 million, and changes in collateral received related to derivative instruments, net of $129 million.

The net cash used in financing activities of $669 million in the three months ended March 31, 2022 was due primarily to the repurchase of $1.5 billion of our common stock under our July 2018 stock repurchase program, tax withholdings related to net share settlement of equity awards of $244 million, and repayment of borrowings under a prior credit agreement 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.

The net cash used in financing activities of $6.1 billion in the six months ended June 30, 2023 was due primarily to the repurchase of $3.0 billion of our common stock under our stock repurchase programs, changes in funds payable and amounts due to customers of $2.6 billion, repayments of borrowings under financing arrangements of $942 million (including principal repayment of fixed rate debt under our May 2020 debt issuance and repayment of borrowings under our Paidy credit agreement), tax withholdings related to net share settlement of equity awards of $200 million, and changes in collateral received related to derivative instruments, net of $175 million.

These cash outflows were partially offset by borrowings under financing arrangements of $720 million (including proceeds from the issuance of fixed rate debt in June 2023 and borrowings under our Paidy credit agreement).

The net cash provided by financing activities of $986 million in the six months ended June 30, 2022 was due primarily to borrowings under financing arrangements of $3.3 billion (including proceeds from the issuance of fixed rate debt in May 2022 and borrowing under our Paidy credit agreements), changes in funds payable and amounts due to customers of $1.6 billion, and changes in collateral received related to derivative instruments, net of $236 million.

These cash inflows were partially offset by the repurchase of $2.3 billion of our common stock under our July 2018 stock repurchase program, repayment of borrowings under financing arrangements of $1.7 billion (including the repurchase and redemption of certain fixed rate notes and repayment of borrowings under a prior credit agreement), and tax withholdings related to net share settlement of equity awards of $275 million.

Effect of exchange rates on cash, cash equivalents, and restricted cash

Foreign currency exchange rates for the three months ended March 31, 2023 had a negative impact of $4 million on cash, cash equivalents, and restricted cash due primarily to the unfavorable impact of fluctuations in the exchange rate of the U.S.

dollar to the Australian dollar partially offset by the impact of favorable fluctuations in the exchange rate of the U.S.

dollar to the Euro.

Foreign currency exchange rates for the three months ended March 31, 2022 had a positive impact of $18 million on cash, cash equivalents, and restricted cash due primarily to the favorable impact of fluctuations in the exchange rate of the U.S.

dollar to the Australian dollar partially offset by the impact of unfavorable fluctuations in the exchange rate of the U.S.

dollar to the Russian ruble and Japanese yen.

Foreign currency exchange rates for the six months ended June 30, 2023 and 2022 had a negative impact of $50 million and $136 million, respectively, on cash, cash equivalents, and restricted cash.

The negative impact on cash, cash equivalents and restricted cash in the six months ended June 30, 2023 was due primarily to the unfavorable impact of fluctuations in the exchange rate of the U.S.

dollar to the Australian dollar.

The negative impact on cash, cash equivalents and restricted cash in the six months ended June 30, 2022 was due primarily to the unfavorable impact of fluctuations in the exchange rate of the U.S.

dollar to the Australian dollar, and to a lesser extent, the Euro, Japanese yen, and Swedish krona.

Available credit and debt

In February 2022, we entered into a credit agreement (the “Paidy Credit Agreement”) with Paidy as co-borrower, which provided for an unsecured revolving credit facility of ¥60.0 billion, which was modified in September 2022 to increase the borrowing capacity by ¥30.0 billion for a total borrowing capacity of ¥90.0 billion (approximately $678 million as of March 31, 2023.) As of March 31, 2023 and December 31, 2022, ¥73.3 billion (approximately $553 million) and ¥64.3 billion (approximately $491 million), respectively, were outstanding under the Paidy Credit Agreement.

At March 31, 2023, ¥16.7 billion (approximately $125 million) of borrowing capacity was available for the purposes permitted by the Paidy Credit Agreement, subject to customary conditions to borrowing.

In June 2023, we issued fixed rate notes with varying maturity dates for an aggregate principal amount of ¥90 billion (approximately $622 million as of June 30, 2023).

Proceeds from the issuance of these notes may be used for general corporate purposes, which may include funding the repayment or redemption of outstanding debt, share repurchases, ongoing operations, capital expenditures, and possible acquisitions of businesses, assets, or strategic investments.

As of June 30, 2023, we had $10.6 billion in fixed rate debt outstanding with varying maturity dates.

In June 2023, we entered into a credit agreement (the “Credit Agreement”) that provides for an unsecured $5.0 billion, five-year revolving credit facility and terminated the facility entered into in September 2019.

The Credit Agreement includes a $150 million letter of credit sub-facility and a $600 million swingline sub-facility, with available borrowings under the revolving credit facility reduced by the amount of any letters of credit and swingline borrowings outstanding from time to time.

As of June 30, 2023, no borrowings were outstanding under the Credit Agreement and as such, $5.0 billion of borrowing capacity was available for the purposes permitted by the Credit Agreement, subject to customary conditions to borrowing.

In February 2022, we entered into a credit agreement (the “Paidy Credit Agreement”) with Paidy as co-borrower, which provided for an unsecured revolving credit facility of ¥60.0 billion, which was modified in September 2022 to increase the borrowing capacity by ¥30.0 billion for a total borrowing capacity of ¥90.0 billion (approximately $622 million as of June 30, 2023.) In June 2023, we repaid borrowings on the Paidy Credit Agreement using proceeds from the June 2023 debt issuance.

As of June 30, 2023, no borrowings were outstanding, and as of December 31, 2022, ¥64.3 billion (approximately $491 million) was outstanding under the Paidy Credit Agreement.

At June 30, 2023, ¥90.0 billion (approximately $622 million) of borrowing capacity was available for the purposes permitted by the Paidy Credit Agreement, subject to customary conditions to borrowing.

Other than as described above, there were no significant changes to the available credit and debt disclosed in our 2022 Form 10‑K.

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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, 2023, we had a total of $3.8 billion in cash withdrawals offsetting our $3.8 billion in Aggregate Cash Deposits held within the financial institution under the cash pooling arrangement.

As of June 30, 2023, we had a total of $3.0 billion in cash withdrawals offsetting our $3.0 billion in Aggregate Cash Deposits held within the financial institution under the cash pooling arrangement.

Credit ratings

As of March 31, 2023, we continue to be rated investment grade by Standard and Poor’s Financial Services, LLC, Fitch Ratings, Inc., and Moody’s Investors Services, Inc.

As of June 30, 2023, 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.

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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 are currently evaluating partnerships and third-party sources of funding for our credit products.

We continue to evaluate partnerships and third-party sources of funding for our credit products.

In June 2018, the Luxembourg Commission de Surveillance du Secteur Financier (the “CSSF”) agreed that PayPal’s management may designate up to 35% of European customer balances held in our Luxembourg banking subsidiary to fund European and U.S.

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credit activities.

As of March 31, 2023, the cumulative amount approved by management to be designated to fund credit activities aggregated to $3.8 billion and represented approximately 39% of European customer balances made available for our corporate use at that date, as determined by applying financial regulations maintained by the CSSF.

As of June 30, 2023, the cumulative amount approved by management to be designated to fund credit activities aggregated to $3.8 billion and represented approximately 40% of European customer balances 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 European customer balances for our credit activities, as we deem necessary, based on utilization of the approved funds and anticipated credit funding requirements.

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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.

In June 2023, we entered into a multi-year agreement with a global investment firm to sell up to €40 billion of our eligible consumer installment receivables portfolio including those held on our balance sheet at closing of the transaction and a forward-flow arrangement for the sale of future originations.

Following the closing of this transaction, which is expected to occur in the second half of 2023, the global investment firm will become the owner of the eligible consumer installment receivables and future eligible installment receivables originated over a 24-month commitment period, and we will no longer hold an ownership interest in these receivables.

Customer protection programs

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Stock repurchases

During the three months ended March 31, 2023, we repurchased approximately $1.4 billion of our common stock in the open market under our stock repurchase programs authorized in July 2018 and June 2022.

As of March 31, 2023, a total of approximately $14.4 billion remained available for future repurchases of our common stock under our June 2022 stock repurchase program.

During the six months ended June 30, 2023, we repurchased approximately $3.0 billion of our common stock in the open market under our stock repurchase programs authorized in July 2018 and June 2022.

As of June 30, 2023, a total of approximately $12.9 billion remained available for future repurchases of our common stock under our June 2022 stock repurchase program.

Other considerations

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis