PayPal Holdings, Inc. 10-Q

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that involve expectations, plans, or intentions (such as those relating to future business, future results of operations or financial condition, new or planned features or services, mergers or acquisitions, or management strategies). These forward-looking statements can be identified by words such as “may,” “will,” “would,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “continue,” “strategy,” “future,” “opportunity,” “plan,” “project,” “forecast,” and other similar expressions. These forward-looking statements involve risks and uncertainties that could cause our actual results and financial condition to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those discussed in Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”), as supplemented in the risk factors set forth below in Part II, Item 1A, Risk Factors, of this Form 10-Q, as well as in our unaudited condensed consolidated financial statements, related notes, and the other information appearing in this report and our other filings with the Securities and Exchange Commission. We do not intend, and undertake no obligation except as required by law, to update any of our forward-looking statements after the date of this report to reflect actual results, new information, or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. You should read the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in conjunction with the unaudited condensed consolidated financial statements and the related notes that appear in this report. Unless otherwise expressly stated or the context otherwise requires, references to “we,” “our,” “us,” “the Company,” and “PayPal” refer to PayPal Holdings, Inc. and its consolidated subsidiaries. BUSINESS ENVIRONMENT THE COMPANY We are a leading technology platform that enables digital payments and personalizes commerce experiences on behalf of merchants and consumers worldwide. PayPal’s mission is to revolutionize commerce globally by creating innovative experiences that are designed to make moving money, selling, and shopping simple, personalized, and secure. Regulatory environment We operate globally and in a rapidly evolving regulatory environment characterized by a heightened focus by regulators globally on all aspects of the payments industry, including countering terrorist financing, anti-money laundering, privacy, cybersecurity, and consumer protection. The laws and regulations applicable to us, including those enacted prior to the advent of digital payments, continue to evolve through legislative and regulatory action and judicial interpretation. New or changing laws and regulations, including changes to their interpretation and implementation, as well as increased penalties and enforcement actions related to non-compliance, could have a material adverse impact on our business, results of operations, and financial condition. We monitor these areas closely and are focused on designing compliant solutions for our customers. Cybersecurity and information security Cybersecurity and information security risks for global payments and technology companies like us have increased significantly in recent years. Although we have developed systems and processes designed to protect the data we manage, prevent data loss and other security incidents, and enable us to effectively respond to known and potential risks, and expect to continue to expend significant resources to bolster these protections, we have experienced and expect to continue to experience cybersecurity incidents and remain subject to these risks. There can be no assurance that our security measures will provide sufficient protection or security to prevent breaches or attacks. For additional information regarding our cybersecurity and information security risks, see Part I, Item 1A, Risk Factors in our 2023 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. MACROECONOMIC ENVIRONMENT The broader implications of the macroeconomic environment, including uncertainty around recent international conflicts such as 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. 46 Table of Contents OVERVIEW OF RESULTS OF OPERATIONS The following table provides a summary of our condensed consolidated financial results for the three months ended March 31, 2024 and 2023: Three Months Ended March 31, Percent Increase/(Decrease) 2024 2023 (In millions, except percentages and per share data) Net revenues $ 7,699 $ 7,040 9 % Operating expenses 6,531 6,041 8 % Operating income $ 1,168 $ 999 17 % Operating margin 15 % 14 % ** Other income (expense), net $ 41 $ 75 (45) % Income tax expense 321 279 15 % Effective tax rate 27 % 26 % ** Net income (loss) $ 888 $ 795 12 % Net income (loss) per diluted share $ 0.83 $ 0.70 18 % Net cash provided by operating activities $ 1,917 $ 1,170 64 % All amounts in tables are rounded to the nearest million, except as otherwise noted. As a result, certain amounts may not recalculate using the rounded amounts provided. ** Not meaningful. THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Net revenues increased $659 million, or 9%, in the three months ended March 31, 2024 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 14%. Total operating expenses increased $490 million, or 8%, in the three months ended March 31, 2024 compared to the same period of the prior year due primarily to higher transaction expense, partially offset by a decline in transaction and credit losses. Operating income increased by $169 million, or 17%, in the three months ended March 31, 2024 compared to the same period of the prior year due to revenue growing by more than operating expenses. Our operating margin was 15% and 14% in the three months ended March 31, 2024 and 2023, respectively, reflecting the positive impact of operating efficiencies in our business, partially offset by the negative impact of higher transaction expense. Net income increased $93 million, or 12%, in the three months ended March 31, 2024 compared to the same period of the prior year due to the previously discussed increase in operating income of $169 million, partially offset by an increase in income tax expense of $42 million and a decrease in other income (expense), net of $34 million. 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 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. dollar. We generated approximately 42% and 41% of our net revenues from customers domiciled outside of the U.S. in the three months ended March 31, 2024 and 2023, respectively. Because we generate substantial net revenues internationally, we are subject to the risks of doing business outside of the U.S. See Part I, Item 1A, Risk Factors in our 2023 Form 10-K, as supplemented and, to the extent inconsistent, superseded (if applicable) below in Part II, Item 1A, Risk Factors of this Form 10-Q. 47 Table of Contents We calculate the year-over-year impact of foreign currency exchange movements on our business using prior period foreign currency exchange rates applied to current period transactional currency amounts. While changes in foreign currency exchange rates affect our reported results, we have a foreign currency exchange exposure management program in which we 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 or operating expenses (as applicable) in the same period the forecasted transactions impact earnings. In the three months ended March 31, 2024, 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, 2024 (In millions) Favorable impact to net revenues (exclusive of hedging impact) $ 32 Hedging impact — Favorable impact to net revenues 32 Unfavorable impact to operating expense (13) Net favorable impact to operating income $ 19 While we enter into foreign currency exchange contracts to help reduce the impact on earnings from foreign currency exchange rate movements, it is impossible to predict or eliminate the total effects of this exposure. We also use foreign currency exchange contracts, designated as net investment hedges, to reduce the foreign currency exchange risk related to our investment in certain foreign subsidiaries. Gains and losses associated with these instruments will remain in accumulated other comprehensive income (loss) until the underlying foreign subsidiaries are sold or substantially liquidated. Given that we also have foreign currency exchange risk on our assets and liabilities denominated in currencies other than the functional currency of our subsidiaries, we have an additional foreign currency exchange exposure management program in which we use foreign currency exchange contracts to help offset the impact of foreign currency exchange rate movements on our assets and liabilities. The foreign currency exchange gains and losses on our assets and liabilities are recorded in other income (expense), net, and are offset by the gains and losses on the foreign currency exchange contracts. These foreign currency exchange contracts reduce, but do not entirely eliminate, the impact of foreign currency exchange rate movements on our assets and liabilities. Additionally, in connection with transactions occurring in multiple currencies on our payments platform, we generally set our foreign currency exchange rates daily and may face financial exposure if we incorrectly set our foreign currency exchange rates or as a result of fluctuations in foreign currency exchange rates between the times that we set our foreign currency exchange rates and when transactions occur. KEY METRICS AND FINANCIAL RESULTS KEY METRICS TPV, number of payment transactions, active accounts, and number of payment transactions per active account are key non-financial performance metrics (“key metrics”) that management uses to measure the scale of our platform and the relevance of our products and services to our customers, and are defined as follows: • TPV is the value of payments, net of payment reversals, successfully completed on our payments platform or enabled by PayPal via a partner payment solution, not including gateway-exclusive transactions. • Number of payment transactions is the total number of payments, net of payment reversals, successfully completed on our payments platform or enabled by PayPal via a partner payment solution, not including gateway-exclusive transactions. 48 Table of Contents • An active account is an account registered directly with PayPal or a platform access partner that has completed a transaction on our platform, not including gateway-exclusive transactions, within the past 12 months. A platform access partner is a third party whose customers are provided access to PayPal’s platform or services through such third party’s login credentials, including individuals and entities that utilize Hyperwallet’s payout capabilities. A user may register on our platform to access different products and may register more than one account to access a product. Accordingly, a user may have more than one active account. The number of active accounts provides management with additional perspective on the overall scale of our platform, but may not have a direct relationship to our operating results. • Number of payment transactions per active account reflects the total number of payment transactions within the previous 12-month period, divided by active accounts at the end of the period. The number of payment transactions per active account provides management with insight into the average number of times an account engages in payments activity on our payments platform in a given period. The number of times a consumer account or a merchant account transacts on our platform may vary significantly from the average number of payment transactions per active account. As our transaction revenue is typically correlated with TPV growth and the number of payment transactions completed on our payments platform, management uses these metrics to gain insights into the scale and strength of our payments platform, the engagement level of our customers, and underlying activity and trends which may be indicators of current and future performance. We present these key metrics to enhance investors’ evaluation of the performance of our business and operating results. Our key metrics are calculated using internal company data based on the activity we measure on our payments platform and compiled from multiple systems, including systems that are internally developed or acquired through business combinations. While the measurement of our key metrics is based on what we believe to be reasonable methodologies and estimates, there are inherent challenges and limitations in measuring our key metrics globally at our scale. The methodologies used to calculate our key metrics require significant judgment. We regularly review our processes for calculating these key metrics, and from time to time we may make adjustments to improve the accuracy or relevance of our metrics. For example, we continuously apply models, processes, and practices designed to detect and prevent fraudulent account creation on our platforms, and work to improve and enhance those capabilities. When we detect a significant volume of illegitimate activity, we generally remove the activity identified from our key metrics. Although such adjustments may impact key metrics reported in prior periods, we generally do not update previously reported key metrics to reflect these subsequent adjustments unless the retrospective impact of process improvements or enhancements is determined by management to be material. NET REVENUES Our revenues are classified into the following two categories: • Transaction revenues : Net transaction fees charged to merchants and consumers on a transaction basis based on the TPV completed on our payments platform. Growth in TPV is directly impacted by the number of payment transactions that we enable on our payments platform. We generate additional revenue from merchants and consumers: on transactions where we perform currency conversion, when we enable cross-border transactions (i.e., transactions where the merchant and consumer are in different countries), to facilitate the instant transfer of funds for our customers from their PayPal or Venmo account to their bank account or debit card, to facilitate the purchase and sale of cryptocurrencies, as contractual compensation from sellers that violate our contractual terms (for example, through fraud or counterfeiting), and other miscellaneous fees. • Revenues from other value added services : Net revenues derived primarily from revenue earned through partnerships, referral fees, subscription fees, gateway fees, and other services we provide to our merchants and consumers. We also earn revenues from interest and fees earned on our portfolio of loans receivable and interest earned on certain assets underlying customer balances. 49 Table of Contents Net revenue analysis The components of our net revenues for the three months ended March 31, 2024 and 2023 were as follows (in millions): Transaction revenues Transaction revenues grew by $670 million, or 11%, in the three months ended March 31, 2024 compared to the same period of the prior year driven primarily by growth in TPV and the number of payment transactions from our Braintree products and services and, to a lesser extent, growth in our core PayPal products and services. Transaction revenues for the three months ended March 31, 2024 were also impacted unfavorably by lower net gains due to hedging activities as compared to the same period of the prior year. The graphs below present the respective key metrics (in millions) for the three months ended March 31, 2024 and 2023: *Reflects active accounts at the end of the applicable period. The following table provides a summary of related metrics: Three Months Ended March 31, Percent Increase/(Decrease) 2024 2023 Number of payment transactions per active account 60.0 53.1 13 % Percent of cross-border TPV 12 % 13 % ** ** Not meaningful We had active accounts of 427 million and 433 million as of March 31, 2024 and 2023, respectively, a decline of 1%. Our total number of payment transactions was 6.5 billion and 5.8 billion for the three months ended March 31, 2024 and 2023, respectively, an increase of 11%. TPV was $404 billion and $355 billion for the three months ended March 31, 2024 and 2023, respectively, an increase of 14%. 50 Table of Contents Transaction revenues growth was lower than the growth in TPV and the number of payment transactions in the three months ended March 31, 2024 compared to the same period in the prior year due primarily to an unfavorable impact from foreign exchange fees and hedging and unfavorable changes in mix from core PayPal products. Revenues from other value added services Revenues from other value added services decreased $11 million, or 2%, in the three months ended March 31, 2024 compared to the same period in the prior year due primarily to a decline in the revenue share earned from an independent chartered financial institution and interest and fee revenue on our loans receivable portfolio driven by a decrease in merchant loan originations, mostly offset by an increase in interest earned on certain assets underlying customer account balances. The increase in interest earned on certain assets underlying customer accounts resulted primarily from higher interest rates, partially offset by a decline in the balances earning interest year-over-year. 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) 2024 2023 (In millions, except percentages) Transaction expense $ 3,917 $ 3,283 19 % Transaction and credit losses 321 442 (27) % Customer support and operations 454 488 (7) % Sales and marketing 421 436 (3) % Technology and development 742 721 3 % General and administrative 464 507 (8) % Restructuring and other 212 164 29 % Total operating expenses $ 6,531 $ 6,041 8 % Transaction expense rate (1) 0.97 % 0.93 % ** Transaction and credit loss rate (2) 0.08 % 0.12 % ** (1) Transaction expense rate is calculated by dividing transaction expense by TPV. (2) Transaction and credit loss rate is calculated by dividing transaction and credit losses by TPV. ** Not meaningful. Transaction expense Transaction expense for the three months ended March 31, 2024 and 2023 was as follows (in millions): 51 Table of Contents Transaction expense increased by $634 million, or 19%, in the three months ended March 31, 2024 due primarily to the increase in TPV of 14% as well as unfavorable changes in product mix. The increase in the transaction expense rate for the three months ended March 31, 2024 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 changes in regional mix and product mix within our core PayPal products and services. For the three months ended March 31, 2024 and 2023, approximately 36% 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. The cost of funding a transaction with a credit or debit card is generally higher than the cost of funding a transaction from a bank or through internal sources such as a PayPal or Venmo account balance or our consumer credit products. Transaction and credit losses The components of our transaction and credit losses for the three months ended March 31, 2024 and 2023 were as follows (in millions): Transaction and credit losses decreased by $121 million, or 27%, in the three months ended March 31, 2024 compared to the same period of the prior year. Transaction losses were $260 million in the three months ended March 31, 2024 compared to $300 million in the three months ended March 31, 2023, a decrease of $40 million, or 13%. Transaction loss rate (transaction losses divided by TPV) was 0.06% and 0.08% for the three months ended March 31, 2024 and 2023, respectively. The decrease in transaction losses and the associated transaction loss rate in the three months ended March 31, 2024 compared to the same period of the prior year was primarily due to lower losses from our core PayPal and Venmo products and services. These lower losses were the result of higher fraud recoveries and fewer fraud events in the current period for core PayPal and Venmo, respectively. Credit losses decreased by $81 million in the three months ended March 31, 2024 compared to the same period of the prior year. The components of credit losses for the three months ended March 31, 2024 and 2023 were as follows (in millions): Three Months Ended March 31, 2024 2023 Net charge-offs (1) $ 123 $ 110 Reserve build (release) (2) (62) 32 Credit losses $ 61 $ 142 (1) Net charge-offs includes principal charge-offs partially offset by recoveries for consumer and merchant receivables. (2) Reserve build (release) represents change in allowance for principal receivables excluding foreign currency remeasurement. The provision in the three months ended March 31, 2024 was attributable to loan originations partially offset by improvement in credit quality of loans outstanding. 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. 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. 52 Table of Contents Consumer loan portfolio 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 receivables, including a forward-flow arrangement for the sale of future originations of eligible loans over a 24-month commitment period (collectively, “eligible consumer installment receivables”). As of March 31, 2024, loans and interest receivable, held for sale was $307 million. Loans and interest receivable, held for sale, represents the portion of our installment consumer receivables that we intend to sell and includes certain United Kingdom (“U.K.”) and other European buy now, pay later loan receivables. The consumer loans and interest receivable balance as of March 31, 2024 and 2023 was $4.5 billion and $6.1 billion, respectively, net of participation interest sold, representing a decrease of 26%. The decrease was driven by the classification of eligible consumer installment receivables in the U.K. and other European countries as held for sale during the second quarter of 2023, partially offset by the expansion of our installment credit products in Japan and our revolving credit product in the U.K. The following table provides information regarding the credit quality of our consumer loans and interest receivable balance: March 31, 2024 2023 Percent of consumer loans and interest receivable current (1) 95.9 % 96.7 % Percent of consumer loans and interest receivable > 90 days outstanding (1), (2) 1.9 % 1.4 % Net charge-off rate (1), (3) 7.2 % 4.4 % (1) Amounts as of March 31, 2024 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 annualized ratio of net credit losses during the three months ended March 31, 2024 and 2023, excluding fraud losses, on consumer loans as a percentage of the average daily amount of consumer loans and interest receivable balance during the same period. The increase in net charge-off rate for consumer loans and interest receivable at March 31, 2024 as compared to March 31, 2023 was primarily due to the classification of eligible consumer installment receivables as held for sale during the second quarter of 2023, and deterioration in the credit quality of the U.S. interest-bearing installment product. 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 have reduced originations for our U.S. interest-bearing installment product. 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, interest, and fees receivable outstanding, net of participation interest sold, as of March 31, 2024 and 2023 was $1.2 billion and $2.1 billion, respectively, reflecting a decline of 42% attributable to a decrease in originations related to our PayPal Business Loan (“PPBL”) product in the U.S. The following table provides information regarding the credit quality of our merchant loans, advances, and interest and fees receivable balance: March 31, 2024 2023 Percent of merchant loans, advances, and interest and fees receivable current 88.7 % 89.8 % Percent of merchant loans, advances, and interest and fees receivable > 90 days outstanding (1) 4.4 % 4.5 % Net charge-off rate (2) 14.0 % 8.2 % (1) Represents percentage of balances which are 90 days past the original expected or contractual repayment period, as applicable. (2) Net charge-off rate is the annualized ratio of net credit losses during the three months ended March 31, 2024 and 2023, 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 same period. The increase in the net charge-off rate for merchant receivables at March 31, 2024 as compared to March 31, 2023 was primarily due to the significant year-over-year reduction of the PPBL portfolio balance as a result of reduced originations. 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 have reduced originations for our PPBL product. 53 Table of Contents 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 months ended March 31, 2024 and 2023 were as follows (in millions): Customer support and operations expenses decreased by $34 million, or 7%, in the three months ended March 31, 2024 compared to the same period of the prior year due primarily to a decline in employee-related costs and other operating costs, partially offset by an increase in customer onboarding and compliance costs. Sales and marketing Sales and marketing expenses for the three months ended March 31, 2024 and 2023 were as follows (in millions): Sales and marketing expenses decreased by $15 million, or 3%, in the three months ended March 31, 2024 compared to the same period of the prior year due primarily to lower spending on marketing campaigns and advertising. 54 Table of Contents Technology and development Technology and development expenses for the three months ended March 31, 2024 and 2023 were as follows (in millions): Technology and development expenses increased by $21 million, or 3%, in the three months ended March 31, 2024 compared to the same period of the prior year due primarily to an increase in cloud computing services utilized in delivering our products and services and higher depreciation expense in the current period, partially offset by a decline in costs related to contractors and consultants. General and administrative General and administrative expenses for the three months ended March 31, 2024 and 2023 were as follows (in millions): General and administrative expenses decreased by $43 million, or 8%, in the three months ended March 31, 2024 compared to the same period of the prior year due primarily to declines in indirect tax expense, facilities expense, and depreciation expense. Restructuring and other Restructuring and other for the three months ended March 31, 2024 and 2023 were as follows (in millions): Restructuring and other increased by $48 million in the three months ended March 31, 2024 compared to the same period of the prior year. 55 Table of Contents During the first quarter of 2024, management initiated a global workforce reduction intended to streamline operations, focus resources on core strategic priorities, and improve our cost structure. The associated restructuring charges during the three months ended March 31, 2024 were $175 million and included employee severance and benefits costs and stock-based compensation expense. In connection with this restructuring, we expect to incur additional charges related to employee severance and benefits costs of approximately $70 million to $90 million, which includes stock-based compensation expense. We expect the remaining charges to be substantially recognized by the second quarter of 2024. The estimated reduction in annualized employee-related costs associated with the impacted workforce is approximately $560 million, including approximately $135 million in stock-based compensation. We expect to reinvest a portion of the reduction in annual costs associated with the impacted workforce to drive business priorities. For information on the associated restructuring liability, see “Note 17—Restructuring and Other” in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q. During the first quarter of 2023, management initiated a global workforce reduction intended to focus resources on core strategic priorities, and improve cost structure and operating efficiency. The associated restructuring charges during the three months ended March 31, 2023 were $117 million. We primarily incurred employee severance and benefits costs, which were substantially completed by the fourth quarter of 2023. 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 nil and $39 million in the three months ended March 31, 2024 and 2023, respectively, due to exiting certain leased properties, which resulted in a reduction of right-of-use lease assets and related leasehold improvements. In the three months ended March 31, 2023, we also incurred a loss of $8 million upon designation of an owned property as held for sale in that period. During the three months ended March 31, 2024, approximately $37 million of losses were recorded in restructuring and other, which included net loss on sale of loans and interest receivable previously held for sale and fair value adjustments 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 decreased $34 million in the three months ended March 31, 2024 compared to the same period of the prior year due primarily to net losses on strategic investments in the current period compared to net gains in the prior period, partially offset by higher interest income resulting from an increase in interest rates and cash balances year-over-year. Income tax expense Our effective income tax rate was 27% and 26% for the three months ended March 31, 2024 and 2023, respectively. The increase in our effective income tax rate for the three months ended March 31, 2024 compared to the same period of the prior year was due primarily to changes in foreign income taxed at different rates and discrete tax adjustments. LIQUIDITY AND CAPITAL RESOURCES We require liquidity and access to capital to fund our global operations, including our customer protection programs, credit products, capital expenditures, investments in our business, potential acquisitions and strategic investments, working capital, and other cash needs. We believe that our existing cash, cash equivalents, and investments, cash expected to be generated from operations, and our expected access to capital markets, together with potential external funding through third-party sources, will be sufficient to meet our cash requirements within the next 12 months and beyond. 56 Table of Contents SOURCES OF LIQUIDITY Cash, cash equivalents, and investments The following table summarizes our cash, cash equivalents, and investments as of March 31, 2024 and December 31, 2023: March 31, 2024 December 31, 2023 (In millions) Cash, cash equivalents, and investments (1),(2) $ 15,894 $ 15,493 (1) Excludes assets related to funds receivable and customer accounts of $38.4 billion and $38.9 billion at March 31, 2024 and December 31, 2023, respectively. (2) Excludes total restricted cash of $3 million at March 31, 2024 and December 31, 2023 and strategic investments of $1.8 billion at March 31, 2024 and December 31, 2023. Cash, cash equivalents, and investments held by our foreign subsidiaries were $9.8 billion and $10.0 billion at March 31, 2024 and December 31, 2023, or 62% and 64% of our total cash, cash equivalents, and investments as of those respective dates. At December 31, 2023, all of our cash, cash equivalents, and investments held by foreign subsidiaries were subject to U.S. taxation under Subpart F, Global Intangible Low Taxed Income or the one-time transition tax under the Tax Cuts and Jobs Act of 2017. Subsequent repatriations to the U.S. will not be taxable from a U.S. federal tax perspective, but may be subject to state income or foreign withholding tax. A significant aspect of our global cash management activities involves meeting our customers’ requirements to access their cash while simultaneously meeting our regulatory financial ratio commitments in various jurisdictions. Our global cash balances are required not only to provide operational liquidity to our businesses, but also to support our global regulatory requirements across our regulated subsidiaries. Accordingly, not all of our cash is available for general corporate purposes. Cash flows The following table summarizes our condensed consolidated statements of cash flows: Three Months Ended March 31, 2024 2023 (In millions) Net cash provided by (used in): Operating activities $ 1,917 $ 1,170 Investing activities 980 153 Financing activities (2,362) (2,781) Effect of exchange rates on cash, cash equivalents, and restricted cash (94) (4) Net increase (decrease) in cash, cash equivalents, and restricted cash $ 441 $ (1,462) Operating activities The net cash provided by operating activities of $1.9 billion in the three months ended March 31, 2024 was due primarily to operating income of $1.2 billion, as well as adjustments for non-cash expenses including stock-based compensation of $365 million, provision for transaction and credit losses of $321 million, and depreciation and amortization of $265 million. Cash flows from operating activities was also impacted by proceeds from repayments and sales of loans receivable, originally classified as held for sale of $5.2 billion, and changes in other assets and liabilities of $176 million, primarily related to an increase in other liabilities partially offset by actual cash transaction losses incurred during the period. These cash inflows from operating activities were partially offset by originations of loans receivable, held for sale of $5.3 billion. The net cash provided by 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 $475 million, primarily related to actual cash transaction losses during the period and changes in income taxes payable. 57 Table of Contents In the three months ended March 31, 2024 and 2023, cash paid for income taxes, net was $83 million and $495 million, respectively. The decline in cash paid for income taxes, net in the current period was due primarily to cash paid in the three months ended March 31, 2023 related to the intra-group transfer of intellectual property, for which there was no similar activity in three months ended March 31, 2024. Investing activities The net cash provided by investing activities of $980 million in the three months ended March 31, 2024 was due primarily to maturities and sales of investments of $9.2 billion and proceeds from repayments and sales of loans receivable, originally classified as held for investment, of $4.8 billion, partially offset by purchases of investments of $7.1 billion, purchases and originations of loans receivable of $4.8 billion, changes in funds receivable from customers of $1.2 billion, and purchases of property and equipment of $154 million. The net cash provided by investing activities of $153 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 $1.2 billion, partially 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. Financing activities The net cash used in financing activities of $2.4 billion in the three months ended March 31, 2024 was due primarily to the repurchase of $1.5 billion of our common stock under our stock repurchase program, changes in funds payable and amounts due to customers of $483 million, repayments of borrowings under financing arrangements of $359 million, and tax withholdings related to net share settlement of equity awards of $167 million. These cash outflows were partially offset by borrowings under financing arrangements of $115 million. The net cash used in financing activities of $2.8 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 program, changes in funds payable and amounts due to customers of $1.1 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. Effect of exchange rate changes on cash, cash equivalents, and restricted cash Foreign currency exchange rates for the three months ended March 31, 2024 and 2023 had a negative impact of $94 million and $4 million, respectively, on cash, cash equivalents, and restricted cash. The negative impact on cash, cash equivalents, and restricted cash in the three months ended March 31, 2024 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 British pound and Euro. The negative impact on cash, cash equivalents and restricted cash in the three months ended March 31, 2023 was 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. 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 $595 million as of March 31, 2024.) As of March 31, 2024 and December 31, 2023, ¥61.0 billion (approximately $403 million) and ¥50.0 billion (approximately $355 million), respectively, was outstanding under the Paidy Credit Agreement. At March 31, 2024, ¥29.0 billion (approximately $192 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 2023 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 program, or reduce our cost of capital. 58 Table of Contents We have a cash pooling arrangement with a financial institution for cash management purposes. The arrangement allows for cash withdrawals from the financial institution based upon our aggregate operating cash balances held within the financial institution (“Aggregate Cash Deposits”). The arrangement also allows us to withdraw amounts exceeding the Aggregate Cash Deposits up to an agreed-upon limit. The net balance of the withdrawals and the Aggregate Cash Deposits are used by the financial institution as a basis for calculating our net interest expense or income under the arrangement. As of March 31, 2024, 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. Credit ratings As of March 31, 2024, we continue to be rated investment grade by Standard and Poor’s Financial Services, LLC, Fitch Ratings, Inc., and Moody’s Investors Services, Inc. We expect that these credit rating agencies will continue to monitor our performance, including our capital structure and results of operations. Our goal is to be rated investment grade, but as circumstances change, there are factors that could result in our credit ratings being downgraded or put on a watch list for possible downgrading. If that were to occur, it could increase our borrowing rates, including the interest rate on borrowings under our credit agreements. CURRENT AND FUTURE CASH REQUIREMENTS Our material cash requirements include funds to support current and potential: operating activities, credit products, customer protection programs, stock repurchases, strategic investments, acquisitions, other commitments, and capital expenditures and other future obligations. Credit products Growth in our portfolio of loan receivables increases our liquidity needs and any inability to meet those liquidity needs could adversely affect our business. We continue to evaluate partnerships and third-party sources of funding for our credit products. The Luxembourg Commission de Surveillance du Secteur Financier (the “CSSF”) agreed that PayPal’s management may designate up to 50% of European customer balances held in our Luxembourg banking subsidiary to fund European, U.K., and U.S. credit activities. As of March 31, 2024, the cumulative amount approved by management to be designated to fund credit activities aggregated to $3.0 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. 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. During the three months ended March 31, 2024, we sold $4.8 billion of loans and interest receivable in connection with this agreement. See “Note 11—Loans and Interest Receivable” in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for additional information. 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. Customer protection programs The risk of losses from our customer protection programs are specific to individual consumers, merchants, and transactions, and may also be impacted by regional variations in, and changes or modifications to, the programs, including as a result of changes in regulatory requirements. For the periods presented in these condensed consolidated financial statements included in this report, our transaction loss rate ranged between 0.06% and 0.08% of TPV. Historical loss rates may not be indicative of future results. Stock repurchases During the three months ended March 31, 2024, we repurchased approximately $1.5 billion of our common stock in the open market under our stock repurchase program authorized in June 2022. As of March 31, 2024, a total of approximately $9.4 billion remained available for future repurchases of our common stock under our June 2022 stock repurchase program. 59 Table of Contents Other considerations Our liquidity, access to capital, and borrowing costs could be adversely impacted by declines in our credit rating, our financial performance, and global credit market conditions, as well as a broad range of other factors. In addition, our liquidity, access to capital, and borrowing costs could also be negatively impacted by the outcome of any of the legal or regulatory proceedings to which we are a party. See Part I, Item 1A, Risk Factors of our 2023 Form 10-K, as supplemented and, to the extent inconsistent, superseded below in Part II, Item 1A, Risk Factors of this Form 10-Q, as well as “Note 13—Commitments and Contingencies” in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for additional discussion of these and other risks that our business faces. 60 Table of Contents