What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-02 compared with 2023-08-03 · 160 added, 142 removed, 256 unchanged (54% 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 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.

PayPal has operated in the U.K.

within the scope of its passport permissions pursuant to the Temporary Permissions Regime pending the grant of new authorizations by the U.K.

Financial Conduct Authority (“FCA”).

On October 31, 2023, PayPal’s U.K.

subsidiary received authorizations from the FCA as an electronic money institution and consumer credit firm, and registration as a cryptoasset business, subject to certain conditions that will require further implementation action by us.

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 the U.K.

and the EEA, as well as the financial and operational consequences of the requirement for PayPal to obtain new U.K.

authorizations to operate its business longer-term within the U.K.

For additional information on how Brexit could affect our business, see Part I, Item 1A, Risk Factors in our 2022 Form 10-K, as supplemented and, to the extent inconsistent, superseded below (if applicable) in Part II, Item 1A, Risk Factors of this Form 10 ‑ Q.

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and EU for the periods presented:

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

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

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

September 30,

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

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MACROECONOMIC ENVIRONMENT

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.

The broader implications of the macroeconomic environment, including uncertainty around conflicts (including 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.

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OVERVIEW OF RESULTS OF OPERATIONS

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

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

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

Three Months Ended September 30, Percent Increase/(Decrease) Nine Months Ended September 30, Percent Increase/(Decrease)

2023 2022 2023 2022

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** Not meaningful.

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.

THREE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

Net revenues increased $572 million, or 8%, in the three months ended September 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 15%.

Total operating expenses increased $522 million, or 9%, in the three months ended September 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.

Operating income increased by $50 million, or 4%, in the three months ended September 30, 2023 compared to the same period of the prior year.

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

Net income decreased $310 million, or 23% in the three months ended September 30, 2023 compared to the same period of the prior year due primarily to a decrease in other income (expense), net of $387 million driven primarily by lower net gains on strategic investments in the current period.

NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

Net revenues increased $1.6 billion, or 8%, in the nine months ended September 30, 2023 compared to the same period of the prior year driven primarily by growth in TPV of 12%.

Total operating expenses increased $903 million, or 5%, in the nine months ended September 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, and technology and development expense.

Operating income increased $707 million, or 27%, in the nine months ended September 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 13% in the nine months ended September 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 $1.3 billion, or 90%, in the nine months ended September 30, 2023 compared to the same period of the prior year due to the previously discussed increase in operating income of $707 million and an increase of $655 million 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 as well as higher interest income from an increase in interest rates.

IMPACT OF FOREIGN CURRENCY EXCHANGE RATES

We have significant international operations that are denominated in foreign currencies, primarily the British pound, Euro, Australian dollar, and Canadian dollar, subjecting us to foreign currency exchange risk which may adversely impact our financial results.

The strengthening or weakening of 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 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.

The strengthening or weakening of the United States (“U.S.”) dollar versus foreign 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 43% and 42% of our net revenues from customers domiciled outside of the U.S.

in the three and nine months ended September 30, 2023, respectively, as compared to 42% and 43% in the three and nine months ended September 30, 2022, respectively.

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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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.

In the three and nine months ended September 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 June 30, 2023 Six Months Ended June 30, 2023

Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023

(In millions)

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

Favorable impact to net revenues (exclusive of hedging impact)

Hedging impact 7 117

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

Favorable impact to operating expense 7 85

Favorable impact to net revenues

(Unfavorable) favorable impact to operating expense

Net favorable impact to operating income $ 91 $ 153

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Net revenue analysis

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

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

Transaction revenues

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:

Transaction revenues grew by $420 million, or 7%, and $1.1 billion, or 6%, in the three and nine months ended September 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 nine months ended September 30, 2023, of $76 million and $181 million, respectively, from sellers that violated our contractual terms predominantly in international markets.

Transaction revenues for the three and nine months ended September 30, 2023 were also impacted unfavorably by lower net gains due to hedging activities as compared to the same periods of the prior year.

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

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

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The following table provides a summary of related metrics:

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

June 30, Percent Increase/(Decrease)

Three Months Ended September 30, Percent Increase/(Decrease) Nine Months Ended

September 30, Percent Increase/(Decrease)

2023 2022 2023 2022

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** Not meaningful

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.

We had active accounts of 428 million and 432 million as of September 30, 2023 and 2022, respectively, a decline of 1%.

Our total number of payment transactions was 6.3 billion and 5.6 billion for the three months ended September 30, 2023 and 2022, respectively, an increase of 11%.

Our total number of payment transactions was 18.2 billion for the nine months ended September 30, 2023, compared to 16.3 billion in the nine months ended September 30, 2022, an increase of 11%.

TPV was $388 billion and $337 billion for the three months ended September 30, 2023 and 2022, respectively, an increase of 15%.

TPV was $1.1 trillion for the nine months ended September 30, 2023 compared to $1.0 trillion in the nine months ended September 30, 2022, an increase of 12%.

Transaction revenues grew more slowly than growth in TPV and the number of payment transactions in the three and nine months ended September 30, 2023 compared to the same periods in the prior year due primarily to an unfavorable impact from hedging and a decline in revenues from core PayPal products.

Revenues from other value added services

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.

Revenues from other value added services increased $152 million, or 25%, and $540 million, or 33%, in the three and nine months ended September 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 June 30, Percent Increase/(Decrease) Six Months Ended June 30, Percent Increase/(Decrease)

Three Months Ended September 30, Percent Increase/(Decrease) Nine Months Ended September 30, Percent Increase/(Decrease)

2023 2022 2023 2022

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Transaction expense

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.

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

Transaction expense increased by $615 million, or 21%, and $1.6 billion, or 18%, in the three and nine months ended September 30, 2023, respectively, due primarily to the increase in TPV of 15% and 12% for the three and nine months ended September 30, 2023, respectively, as well as unfavorable changes in product mix.

The increase in the transaction expense rate for the three and nine months ended September 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.

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

For the three and nine months ended September 30, 2022, approximately 34% and 35% 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 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,

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

Transaction and credit losses increased by $79 million, or 22%, and $102 million, or 9%, in the three and nine months ended September 30, 2023, respectively, compared to the same periods of the prior year.

Transaction losses were $329 million in the three months ended September 30, 2023 compared to $254 million in the three months ended September 30, 2022, an increase of $75 million, or 30%.

Transaction losses were $915 million in the nine months ended September 30, 2023 compared to $956 million in the nine months ended September 30, 2022, a decrease of $41 million, or 4%.

Transaction loss rate (transaction losses divided by TPV) was 0.08% for both the three and nine months ended September 30, 2023, compared to 0.08% and 0.10% for the three and nine months ended September 30, 2022, respectively.

The increase in transaction losses in the three months ended September 30, 2023 compared to the same period of the prior year was due to an increase in losses related to our core PayPal products and services driven by fraud schemes.

The decrease in transaction losses in the nine months ended September 30, 2023 compared to the same period of the prior year was primarily due to a $114 million loss related to an ongoing merchant insolvency proceeding in the nine months ended September 30, 2022 with no activity of comparable individual magnitude in the current period and benefits from continued risk mitigation strategies in the current period, partially offset by lower recoveries compared to the same period of the prior year.

Credit losses increased by $4 million and $143 million in the three and nine months ended September 30, 2023, respectively, compared to the same periods of the prior year.

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

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 (3)

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Reserve build (release) (2)

(46) 44 (36) 47

Credit losses $ 117 $ 113 $ 371 $ 228

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(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.

The provision in the three and nine months ended September 30, 2023 was attributable to loan originations during the period and a deterioration in the credit quality of loans outstanding.

The provision in the nine months ended September 30, 2023 was partially offset by reversal of reserves associated with the reclassification of certain receivables to held for sale.

The provision in the three and nine months ended September 30, 2022 was attributable to loan originations in that period.

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.

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

Consumer loan portfolio

As of September 30, 2023, loans and interest receivable, held for sale was $2.2 billion.

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

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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”).

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 (collectively, “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.

See “Note 1—Overview and Summary of Significant Accounting Policies” and “Note 18—Subsequent Events” 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, as of September 30, 2023 and 2022 was $4.2 billion and $4.4 billion, respectively, representing a decrease of 5%.

The decrease was driven by the reclassification of eligible consumer installment receivables as held for sale in the U.K and other European countries, as discussed above, partially offset by the expansion of our revolving credit product in the U.K.

and our installment credit products in Japan and the U.S.

Approximately 36% and 41% of our consumer loans receivable outstanding (including loans held for sale and loans held for investment) as of September 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.

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

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

September 30,

Percent of consumer loans and interest receivable current (1)

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

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

(1) Amounts as of September 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.

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

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

In response to declining performance, a number of risk mitigation strategies were implemented in the third quarter of 2023, which resulted in reduced originations for our U.S.

interest-bearing installment product.

We expect to maintain reduced originations through the remainder of 2023.

Merchant loan portfolio

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, 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.

Total merchant loans, advances, interest, and fees receivable outstanding, net of participation interest sold, as of September 30, 2023 and 2022 was $1.4 billion and $2.0 billion, respectively, a decrease of 30%, due to a decline in receivables outstanding related to our PayPal Business Loan (“PPBL”) product in the U.S.

Approximately 74% and 8% of our merchant receivables outstanding as of September 30, 2023 were due from merchants in the U.S.

and U.K., respectively, as compared to 86% and 5%, respectively, as of September 30, 2022.

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

September 30,

Percent of merchant loans, advances, and interest and fees receivable current 86.7 % 93.4 %

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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 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 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.

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 September 30, 2023 as compared to September 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.

The significant decline in the merchant receivable portfolio year over year due to repayments and reduced originations also resulted in higher delinquency and charge-off rates as a percentage of outstanding loan balance as of September 30, 2023.

The net charge-off rate is expected to remain elevated in the fourth quarter of 2023 due to reduced new originations of merchant loans and advances.

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

In response to declining performance, a number of risk mitigation strategies were implemented throughout 2023, which resulted in reduced originations for our PPBL product.

We expect to maintain reduced originations through the remainder of 2023.

For additional information, see “Note 11—Loans and Interest Receivable” in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.

Customer support and operations

Customer support and operations expenses for the three and six months 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.

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

Customer support and operations expenses decreased by $35 million, or 7%, and $125 million, or 8%, in the three and nine months ended September 30, 2023, respectively, compared to the same periods of the prior year due primarily to a decline in employee-related costs, contractors and consulting costs, and customer onboarding and compliance costs.

Sales and marketing

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.

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

Sales and marketing expenses decreased by $102 million, or 19%, and $390 million, or 23%, in the three and nine months ended September 30, 2023, respectively, compared to the same periods of the prior year due primarily to lower spending on targeted user incentives and marketing campaigns and, to a lesser extent, a decline in amortization of acquired intangibles.

The decline in sales and marketing expenses in the three months ended September 30, 2023 was partially offset by an increase employee-related costs.

Technology and development

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.

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

Technology and development expenses decreased by $62 million, or 8%, and $228 million, or 9%, in the three and nine months ended September 30, 2023, respectively, compared to the same periods of the prior year due primarily to lower intangible amortization and a decline in costs related to contractors and consultants.

General and administrative

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.

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

General and administrative expenses increased by $44 million, or 10%, and decreased by $79 million, or 5%, in the three and nine months ended September 30, 2023, respectively, compared to the same periods of the prior year.

The increase in general and administrative expenses in the three months ended September 30, 2023 was due primarily to an increase in employee-related expenses driven by higher stock-based compensation expense, partially offset by a decline in depreciation expense.

The decline in general and administrative expenses in the nine months ended September 30, 2023 was primarily attributable to a decline in employee-related expenses driven by lower headcount, depreciation expense, and a decrease in professional services expenses.

Restructuring and other charges

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.

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

Restructuring and other charges decreased by $17 million and increased by $45 million, in the three and nine months ended September 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 and six months ended June 30, 2023 were nil and $117 million, respectively.

The associated restructuring charges during the three and nine months ended September 30, 2023 were $3 million and $120 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 and six months ended June 30, 2022 was $71 million and $91 million, respectively.

The associated restructuring charges during the three and nine months ended September 30, 2022 was $23 million and $114 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 $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.

We incurred asset impairment charges of $15 million and $58 million in the three and nine months ended September 30, 2023, respectively, and $29 million and $64 million in the three and nine months ended September 30, 2022, respectively, due to exiting certain leased properties, which resulted in a reduction of right-of-use lease assets and related leasehold improvements.

In the nine months ended September 30, 2023, we recognized a gain of $17 million due to the sale of an owned property.

We also incurred a loss of $12 million related to another owned property held for sale in the nine months ended September 30, 2023.

During the three and nine months ended September 30, 2023, approximately $15 million and $49 million, respectively, 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 $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.

Other income (expense), net decreased $387 million and increased $655 million in the three and nine months ended September 30, 2023, respectively, compared to the same periods of the prior year.

The decrease in the three months ended September 30, 2023 was due primarily to lower net gains on strategic investments in the current period compared to the prior period, partially offset by higher interest income resulting from an increase in interest rates.

The increase in the nine months ended September 30, 2023 was driven primarily by net gains on strategic investments in the current period as compared to net losses in the prior period, higher interest income from an increase in interest rates, and foreign exchange gains in the current period compared to losses in the prior period due in part to actions taken in connection with our decision to suspend transactional services in Russia.

These factors favorably impacting the nine months ended September 30, 2023 were partially offset by an increase in interest expense due to incremental expense from our May 2022 fixed rate debt.

Income tax expense

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.

Our effective income tax rate was 18% and 16% for the three months ended September 30, 2023 and 2022, respectively, and 21% and 34% for the nine months ended September 30, 2023 and 2022, respectively.

The increase in our effective income tax rate for the three months ended September 30, 2023 compared to the same period of the prior year was due primarily to a decrease in tax benefits associated with discrete tax adjustments.

The decrease in our effective income tax rate for the nine months ended September 30, 2023 compared to the same period 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 June 30, 2023 and December 31, 2022:

June 30, 2023 December 31, 2022

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

September 30, 2023 December 31, 2022

(In millions)

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$ 13,007 $ 13,723

(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.

(1) Excludes assets related to funds receivable and customer accounts of $34.6 billion and $36.3 billion at September 30, 2023 and December 31, 2022, respectively.

(2) Excludes total restricted cash of $6 million and $17 million at September 30, 2023 and December 31, 2022, respectively, and strategic investments of $2.4 billion and $2.1 billion as of September 30, 2023 and December 31, 2022, respectively.

Cash, cash equivalents, and investments held by our foreign subsidiaries were $7.7 billion at September 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:

Six Months Ended June 30,

Nine Months Ended September 30,

(In millions)

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Financing activities (1)

(5,993) (1,985)

Effect of exchange rates on cash, cash equivalents, and restricted cash (95) (253)

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Operating activities

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.

The net cash provided by operating activities of $2.2 billion in the nine months ended September 30, 2023 was due primarily to operating income of $3.3 billion, as well as adjustments for non-cash expenses including provision for transaction and credit losses of $1.3 billion, stock-based compensation of $1.1 billion, and depreciation and amortization of $809 million.

Cash flows from operating activities was also impacted by originations of loans receivable, held for sale of $5.7 billion, changes in other assets and liabilities of $834 million, primarily related to actual cash transaction losses incurred during the period, changes in deferred income taxes of $439 million, and net gains from our strategic investments of $205 million, partially offset by proceeds from repayments of loans receivable, originally classified as held for sale, of $3.7 billion.

The net cash provided by operating activities of $4.2 billion in the nine months ended September 30, 2022 was due primarily to operating income of $2.6 billion, as well as adjustments for non-cash expenses including provision for transaction and credit losses of $1.2 billion, depreciation and amortization of $991 million, and stock-based compensation of $967 million.

Cash flows from operating activities was also impacted by net losses incurred on our strategic investments of $163 million, partially offset by changes in deferred income taxes of $538 million, and changes in other assets and liabilities of $522 million, primarily related to actual cash transaction losses during the period and an increase in other liabilities.

In the nine months ended September 30, 2023 and 2022, cash paid for income taxes, net was $1.1 billion and $666 million, respectively.

The Internal Revenue Service disaster-area tax relief allows us to defer quarterly payments of 2023 federal estimated taxes to the fourth quarter of 2023.

We expect to pay approximately $725 million related to this deferral in the fourth quarter of 2023.

Investing activities

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.

The net cash provided by investing activities of $1.3 billion in the nine months ended September 30, 2023 was due primarily to proceeds from repayments of loans receivable, originally classified as held for investment, of $21.3 billion and maturities and sales of investments of $16.1 billion, partially offset by purchases and originations of loans receivable of $19.8 billion, purchases of investments of $15.0 billion, changes in funds receivable from customers of $1.0 billion, and purchases of property and equipment of $478 million.

The net cash used in investing activities of $3.3 billion in the nine months ended September 30, 2022 was due primarily to purchases and originations of loans receivable of $19.2 billion, purchases of investments of $16.5 billion, changes in funds receivable from customers of $1.1 billion, and purchases of property and equipment of $548 million.

These cash outflows were partially offset by principal repayment of loans receivable of $17.2 billion and maturities and sales of investments of $16.8 billion.

Financing activities

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.

The net cash used in financing activities of $6.0 billion in the nine months ended September 30, 2023 was due primarily to the repurchase of $4.4 billion of our common stock under our stock repurchase programs, changes in funds payable and amounts due to customers of $1.3 billion, repayments of borrowings under financing arrangements of $942 million (including principal repayment of fixed rate debt that matured in June 2023 and repayment of borrowings under our Paidy credit agreement), and tax withholdings related to net share settlement of equity awards of $225 million.

These cash outflows were partially offset by borrowings under financing arrangements of $829 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 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.

The net cash used in financing activities of $2.0 billion in the nine months ended September 30, 2022 was due primarily to the repurchase of $3.2 billion of our common stock under our 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), changes in funds payable and amounts due to customers of $659 million, and tax withholdings related to net share settlement of equity awards of $321 million.

These cash outflows were partially offset by 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), and changes in collateral received related to derivative instruments, net of $437 million.

Effect of exchange rate changes on cash, cash equivalents, and restricted cash

Foreign currency exchange rates for the nine months ended September 30, 2023 and 2022 had a negative impact of $95 million and $253 million, respectively, on cash, cash equivalents, and restricted cash.

The negative impact on cash, cash equivalents, and restricted cash in the nine months ended September 30, 2023 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 Chinese yuan and Japanese yen.

The negative impact on cash, cash equivalents and restricted cash in the nine months ended September 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, Swedish krona, and Japanese yen.

Available credit and debt

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).

In June 2023, we issued fixed rate notes with varying maturity dates for an aggregate principal amount of ¥90 billion (approximately $603 million as of September 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.

As of September 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.

As of September 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 $603 million as of September 30, 2023.) In June 2023, we repaid borrowings on the Paidy Credit Agreement using proceeds from the June 2023 debt issuance.

As of September 30, 2023 and December 31, 2022, ¥16.0 billion (approximately $108 million) and ¥64.3 billion (approximately $491 million), respectively, was outstanding under the Paidy Credit Agreement.

At September 30, 2023, ¥74.0 billion (approximately $495 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.

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 programs, or reduce our cost of capital.

We have a cash pooling arrangement with a financial institution for cash management purposes.

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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 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.

As of September 30, 2023, we had a total of $2.6 billion in cash withdrawals offsetting our $2.6 billion in Aggregate Cash Deposits held within the financial institution under the cash pooling arrangement.

Credit ratings

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.

As of September 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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credit activities.

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.

As of December 31, 2022, the cumulative amount approved by management to be designated to fund credit activities aggregated to $3.8 billion.

In the third quarter of 2023, an additional $250 million was approved to fund our credit activities.

As of September 30, 2023, the cumulative amount approved by management to be designated to fund credit activities aggregated to $4.0 billion and represented approximately 43% of European customer balances made available for our corporate use at that date, as determined by applying financial regulations maintained by the CSSF.

In October 2023, management approved a $1.0 billion reduction to the amount approved to fund credit activities, lowering the aggregate cumulative amount approved by management for this purpose to $3.0 billion.

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.

Under certain exceptional circumstances, corporate liquidity could be called upon to meet our obligations related to our European customer balances.

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 receivables 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 fourth quarter 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.

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 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.

During the nine months ended September 30, 2023, we repurchased approximately $4.4 billion of our common stock in the open market under our stock repurchase programs authorized in July 2018 and June 2022.

As of September 30, 2023, a total of approximately $11.5 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