What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-10-29 compared with 2024-07-30 · 139 added, 122 removed, 233 unchanged (53% of the section changed)

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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.

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

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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, 2024 and 2023:

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, 2024 and 2023:

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

2024 2023 2024 2023

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** Not meaningful.

THREE MONTHS ENDED JUNE 30, 2024 AND 2023

Net revenues increased $598 million, or 8%, in the three months ended June 30, 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 11%.

Total operating expenses increased $406 million, or 7%, in the three months ended June 30, 2024 compared to the same period of the prior year due primarily to higher transaction expense.

Operating income increased $192 million, or 17%, in the three months ended June 30, 2024 compared to the same period of the prior year due to net revenues growing more than operating expenses.

Our operating margin was 17% and 16% in the three months ended June 30, 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 $99 million, or 10%, in the three months ended June 30, 2024 compared to the same period of the prior year due to the previously discussed increase in operating income of $192 million, partially offset by a decrease in other income (expense), net of $96 million driven by net losses on strategic investments in the current period compared to net gains in the prior period.

SIX MONTHS ENDED JUNE 30, 2024 AND 2023

Net revenues increased $1.3 billion, or 9%, in the six months ended June 30, 2024 compared to the same period of the prior year driven primarily by growth in TPV of 12%.

Total operating expenses increased $896 million, or 7%, in the six months ended June 30, 2024 compared to the same period of the prior year due primarily to an increase in transaction expense and, to a lesser extent, restructuring and other, partially offset by a reduction in transaction and credit losses.

Operating income increased $361 million, or 17%, in the six months ended June 30, 2024 compared to the same period of the prior year due to net revenues growing more than operating expenses.

Our operating margin was 16% and 15% in the six months ended June 30, 2024 and 2023, 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 $192 million, or 11%, in the six months ended June 30, 2024 compared to the same period of the prior year due to the previously discussed increase in operating income of $361 million partially offset by a decrease of $130 million in other income (expense), net driven primarily by net losses on strategic investments in the current period compared to net gains in the prior period.

THREE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023

Net revenues increased $429 million, or 6%, in the three months ended September 30, 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 9%.

Total operating expenses increased $206 million, or 3%, in the three months ended September 30, 2024 compared to the same period of the prior year due primarily to higher transaction expense partially offset by a reduction in transaction and credit losses.

Operating income increased $223 million, or 19%, in the three months ended September 30, 2024 compared to the same period of the prior year due to net revenues growing more than operating expenses.

Our operating margin was 18% and 16% in the three months ended September 30, 2024 and 2023, respectively, reflecting the positive impact of lower transaction and credit losses.

Net income decreased $10 million, or 1%, in the three months ended September 30, 2024 compared to the same period of the prior year due to the previously discussed increase in operating income of $223 million, partially offset by a decrease in other income (expense), net of $153 million driven primarily by net losses on strategic investments in the current period compared to net gains in the prior period and an increase in income tax expense of $80 million due primarily to higher income before taxes, changes in jurisdictional mix of income, and U.S.

income taxed at different rates.

NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023

Net revenues increased $1.7 billion, or 8%, in the nine months ended September 30, 2024 compared to the same period of the prior year driven primarily by growth in TPV of 11%.

Total operating expenses increased $1.1 billion, or 6%, in the nine months ended September 30, 2024 compared to the same period of the prior year due primarily to an increase in transaction expense and, to a lesser extent, restructuring and other partially offset by a reduction in transaction and credit losses and customer support and operations expenses.

Operating income increased $584 million, or 18%, in the nine months ended September 30, 2024 compared to the same period of the prior year due to net revenues growing more than operating expenses.

Our operating margin was 17% and 15% in the nine months ended September 30, 2024 and 2023, respectively, reflecting the positive impact of operating efficiencies in our business and lower transaction and credit losses, partially offset by the negative impact of an increase in transaction expense.

Net income increased $182 million, or 6%, in the nine months ended September 30, 2024 compared to the same period of the prior year due to the previously discussed increase in operating income of $584 million partially offset by a decrease of $283 million in other income (expense), net driven primarily by net losses on strategic investments in the current period compared to net gains in the prior period and an increase in income tax expense of $119 million due primarily to higher income before taxes, changes in jurisdictional mix of income, and U.S.

income taxed at different rates.

IMPACT OF FOREIGN CURRENCY EXCHANGE RATES

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

in each of the periods presented.

in both the three and nine months ended September 30, 2024 compared to 43% and 42% in the three and nine months ended September 30, 2023, 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, 2024, year-over-year foreign currency exchange rate movements relative to the U.S.

In the three and nine months ended September 30, 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 June 30, 2024 Six Months Ended June 30, 2024

Three Months Ended September 30, 2024 Nine Months Ended September 30, 2024

(In millions)

Unfavorable impact to net revenues (exclusive of hedging impact)

Favorable impact to net revenues (exclusive of hedging impact)

Hedging impact (12) 10

(Unfavorable) favorable impact to net revenues

Favorable impact to operating expense

Net favorable impact to operating income $ 14 $ 33

Favorable impact to net revenues

(Unfavorable) favorable impact to operating expense

Net (unfavorable) favorable impact to operating income

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.

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Additionally, in connection with transactions occurring in multiple currencies on our payments platform, we generally set our foreign currency exchange rates daily and may face financial exposure if we incorrectly set our foreign currency exchange rates or as a result of fluctuations in foreign currency exchange rates between the times that we set our foreign currency exchange rates and when transactions occur.

While we have processes in place to mitigate these risks, it is impossible to eliminate the total effects of any possible exposure associated with setting rates on our platform.

KEY METRICS AND FINANCIAL RESULTS

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Net revenue analysis

The components of our net revenues for the three and six months ended June 30, 2024 and 2023 were as follows (in millions):

The components of our net revenues for the three and nine months ended September 30, 2024 and 2023 were as follows (in millions):

Transaction revenues

Transaction revenues grew by $597 million, or 9%, and $1.3 billion, or 10%, in the three and six months ended June 30, 2024 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 and, to a lesser extent, growth in our core PayPal and Venmo products and services.

Transaction revenues for the six months ended June 30, 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 and six months ended June 30, 2024 and 2023:

Transaction revenues grew by $413 million, or 6%, and $1.7 billion, or 9%, in the three and nine months ended September 30, 2024 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 and, to a lesser extent, from our core PayPal and Venmo products and services.

Transaction revenues for the nine months ended September 30, 2024 were also impacted unfavorably by lower net gains from hedging activities as compared to the same period of the prior year.

As a result of ongoing negotiations with merchants, we expect lower volume and transaction revenue growth in the fourth quarter of 2024 and into 2025 from our Braintree products and services.

The graphs below present the respective key metrics (in millions) for the three and nine months ended September 30, 2024 and 2023:

*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)

2024 2023 2024 2023

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Percent of cross-border TPV (1)

12 % 12 % ** 12 % 12 % **

(1) Cross-border TPV occurs primarily between two PayPal accounts in different countries and includes transactions initiated through our Xoom product.

** Not meaningful

We had active accounts of 429 million and 431 million as of June 30, 2024 and 2023, respectively.

Our total number of payment transactions was 6.6 billion and 6.1 billion for the three months ended June 30, 2024 and 2023, respectively, an increase of 8%.

Our total number of payment transactions was 13.1 billion for the six months ended June 30, 2024, compared to 11.9 billion in the six months ended June 30, 2023, an increase of 10%.

TPV was $417 billion and $377 billion for the three months ended June 30, 2024 and 2023, respectively, an increase of 11%.

TPV was $821 billion for the six months ended June 30, 2024 compared to $731 billion in the six months ended June 30, 2023, an increase of 12%.

Transaction revenues growth was lower than the growth in TPV in the three and six months ended June 30, 2024 compared to the same periods in the prior year due primarily to unfavorable changes in mix from core PayPal products and services and unfavorable impact from foreign exchange fees, partially offset by favorable impact from Braintree products and services.

We had active accounts of 432 million and 428 million as of September 30, 2024 and 2023, respectively.

Our total number of payment transactions was 6.6 billion and 6.3 billion for the three months ended September 30, 2024 and 2023, respectively, an increase of 6%.

Our total number of payment transactions was 19.7 billion for the nine months ended September 30, 2024, compared to 18.2 billion in the nine months ended September 30, 2023, an increase of 8%.

TPV was $423 billion and $388 billion for the three months ended September 30, 2024 and 2023, respectively, an increase of 9%.

TPV was $1.2 trillion for the nine months ended September 30, 2024 compared to $1.1 trillion in the nine months ended September 30, 2023, an increase of 11%.

Transaction revenues growth was lower than the growth in TPV in the three and nine months ended September 30, 2024 compared to the same periods in the prior year due primarily to unfavorable changes in mix from core PayPal products and services and unfavorable impact from foreign exchange fees.

For the nine months ended September 30, 2024, these unfavorable impacts to transaction revenues growth were partially offset by favorable impact from Braintree products and services.

Revenues from other value added services

Revenues from other value added services remained consistent in the three and six months ended June 30, 2024, compared to the same periods 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 receivables related to PayPal Business Loan (“PPBL”) products and consumer long-term interest-bearing installment products, offset by an increase in interest earned on certain assets underlying customer account balances resulting primarily from higher interest rates.

Revenues from other value added services increased $16 million and $6 million in the three and nine months ended September 30, 2024, respectively, compared to the same periods in the prior year due primarily to an increase in interest earned on certain assets underlying customer account balances resulting primarily from higher interest rates and higher customer balances, partially offset by a decline in the revenue share earned from an independent chartered financial institution.

Revenues from other value added services for the nine months ended September 30, 2024 were also impacted by lower interest and fee revenue on our loans receivable portfolio driven by a decrease in receivables related to PayPal Business Loan (“PPBL”) products.

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)

2024 2023 2024 2023

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Transaction expense

Transaction expense for the three and six months ended June 30, 2024 and 2023 was as follows (in millions):

Transaction expense increased by $401 million, or 11%, and $1.0 billion, or 15%, in the three and six months ended June 30, 2024, respectively, compared to the same periods of the prior year due primarily to the increase in TPV of 11% and 12% for the three and six months ended June 30, 2024, 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, 2024 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 our other products and services, partially offset by favorable changes in regional mix, product mix, and certain third-party pricing incentives within our core PayPal products and services.

For both the three and six months ended June 30, 2024, approximately 36% of TPV was generated outside of the U.S.

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

Transaction expense for the three and nine months ended September 30, 2024 and 2023 was as follows (in millions):

Transaction expense increased by $238 million, or 7%, and $1.3 billion, or 12%, in the three and nine months ended September 30, 2024, respectively, compared to the same periods of the prior year due primarily to the increase in TPV of 9% and 11% for the three and nine months ended September 30, 2024, respectively, as well as unfavorable changes in product mix.

The decrease in the transaction expense rate for the three months ended September 30, 2024 compared to the same period of the prior year was primarily attributable to favorable changes in regional mix, product mix, and certain third-party pricing incentives within our core PayPal products and services as well as favorable changes in merchant mix associated with our unbranded card processing volume.

The slight increase in the transaction expense rate for the nine months ended September 30, 2024 compared to the same period of the prior year was 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 our other products and services, largely offset by favorable changes in regional mix, product mix, and certain third-party pricing incentives within our core PayPal products and services.

For both the three months ended September 30, 2024 and 2023, approximately 37% of TPV was generated outside of the U.S.

For both the nine months ended September 30, 2024 and 2023, approximately 36% of TPV 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, 2024 and 2023 were as follows (in millions):

Transaction and credit losses decreased by $63 million, or 16%, and $184 million, or 22%, in the three and six months ended June 30, 2024, respectively, compared to the same periods of the prior year.

Transaction losses were $259 million in the three months ended June 30, 2024 compared to $286 million in the three months ended June 30, 2023, a decrease of $27 million, or 9%.

Transaction losses were $519 million in the six months ended June 30, 2024 compared to $586 million in the six months ended June 30, 2023, a decrease of $67 million, or 11%.

Transaction loss rate (transaction losses divided by TPV) was 0.06% for the three and six months ended June 30, 2024, compared to 0.08% for the three and six months ended June 30, 2023.

The decrease in transaction losses and the associated transaction loss rate in the three and six months ended June 30, 2024 compared to the same periods of the prior year was primarily due to recoveries and lower losses from our Venmo products and services resulting from fewer fraud events in the current period.

Credit losses decreased by $36 million and $117 million in the three and six months ended June 30, 2024 compared to the same periods of the prior year.

The components of credit losses for the three and six months ended June 30, 2024 and 2023 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, 2024 and 2023 were as follows (in millions):

Transaction and credit losses decreased by $94 million, or 21%, and $278 million, or 22%, in the three and nine months ended September 30, 2024, respectively, compared to the same periods of the prior year.

Transaction losses were $264 million in the three months ended September 30, 2024 compared to $329 million in the three months ended September 30, 2023, a decrease of $65 million, or 20%.

Transaction losses were $783 million in the nine months ended September 30, 2024 compared to $915 million in the nine months ended September 30, 2023, a decrease of $132 million, or 14%.

Transaction loss rate (transaction losses divided by TPV) was 0.06% for the three and nine months ended September 30, 2024, compared to 0.08% for the three and nine months ended September 30, 2023.

The decrease in transaction losses and the associated transaction loss rate in the three and nine months ended September 30, 2024 compared to the same periods of the prior year was primarily due to higher recoveries and lower losses resulting from fewer fraud events in the current period.

Credit losses decreased by $29 million and $146 million in the three and nine months ended September 30, 2024 compared to the same periods of the prior year.

The components of credit losses for the three and nine months ended September 30, 2024 and 2023 were as follows (in millions):

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

2024 2023 2024 2023 (3)

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

The provision in the three and six months ended June 30, 2024 was attributable to loan originations partially offset by improvement in credit quality of loans outstanding.

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 the reversal of reserve associated with the reclassification of certain receivables to held for sale at that point in time.

During the periods presented, allowances for our merchant and consumer portfolios included qualitative adjustments due to uncertain macroeconomic conditions, financial health of our borrowers, and effectiveness of loan modification programs made available to merchants.

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

The provision in the three and nine months ended September 30, 2024 was attributable to loan originations during the period partially offset by improvement in 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.

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 United Kingdom (“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 June 30, 2024 and 2023, loans and interest receivable, held for sale was $369 million and $1.9 billion, respectively, representing the portion of our installment consumer receivables that we intend to sell.

The consumer loans and interest receivable balance as of June 30, 2024 and 2023 was $4.6 billion and $4.5 billion, respectively, net of participation interest sold, representing an increase of 2%.

As of September 30, 2024 and 2023, loans and interest receivable, held for sale was $471 million and $2.2 billion, respectively, representing the portion of our installment consumer receivables that we intend to sell.

The consumer loans and interest receivable balance as of September 30, 2024 and 2023 was $5.1 billion and $4.2 billion, respectively, net of participation interest sold, representing an increase of 21%.

The increase was driven primarily by growth in our installment credit products in Japan and our revolving credit product in the U.K., partially offset by a decline in our installment credit products in Germany due to the forward flow arrangement with the global investment firm as well as a decrease in our interest-bearing installment credit product in the U.S.

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

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

(2) Net charge-off rate is the annualized ratio of net credit losses during the three months ended June 30, 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.

(2) Net charge-off rate is the annualized ratio of net credit losses during the three months ended September 30, 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 decline in net charge-off rate for consumer receivables at September 30, 2024 as compared to September 30, 2023 was due primarily to the improvement in credit quality of the U.S.

interest-bearing installment products.

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

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In response to changing portfolio performance, we continue to evaluate and modify our acceptable risk parameters.

Such changes in the second quarter of 2024, combined with enhanced risk monitoring, have resulted in increased U.S.

interest-bearing installment loan originations over the three months ended June 30, 2024.

Changes to such parameters in the second quarter of 2024, combined with enhanced risk monitoring, have resulted in an increase of U.S.

interest-bearing installment loan originations back to historical levels.

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 June 30, 2024 and 2023 was $1.2 billion and $1.7 billion, respectively, reflecting a decline of 29% attributable to a decrease in originations related to our PPBL product in the U.S.

Total merchant loans, advances, interest, and fees receivable outstanding, net of participation interest sold, as of September 30, 2024 and 2023 was $1.4 billion, reflecting a slight decline of 4% attributable to slowed originations related to our PPBL product in the U.S.

mostly offset by an increase in our PayPal Working Capital product portfolio across countries.

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 91.3 % 86.7 %

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Net charge-off rate (2)

10.7 % 13.3 %

(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 June 30, 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 percent of current merchant receivables and decrease in percent of merchant receivables greater than 90 days outstanding and the net charge-off rate for merchant receivables at June 30, 2024 as compared to June 30, 2023 was due primarily to the improvement in the credit quality of the PPBL portfolio.

(2) Net charge-off rate is the annualized ratio of net credit losses during the three months ended September 30, 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 percent of current merchant receivables and decrease in percent of merchant receivables greater than 90 days outstanding and the net charge-off rate for merchant receivables at September 30, 2024 as compared to September 30, 2023 was due primarily to the improvement in the credit quality of the PPBL portfolio.

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

In response to changing portfolio performance, we continue to evaluate and modify our acceptable risk parameters.

Such changes in 2024, combined with enhanced risk monitoring, have resulted in an increase in PPBL originations over the six months ended June 30, 2024.

Changes to such parameters, combined with enhanced risk monitoring, have resulted in an increase in PPBL originations in 2024.

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, 2024 and 2023 were as follows (in millions):

Customer support and operations expenses decreased by $56 million, or 11%, and $90 million, or 9%, in the three and six months ended June 30, 2024, respectively, compared to the same periods of the prior year due primarily to a decline in employee-related costs associated with headcount reduction.

The decline in customer support and operations expenses in the six months ended June 30, 2024 was also impacted by a decline in other costs incurred related to delivery of our products, including payment devices, warehouses, and shipping, and a decline in contractors and consulting costs, partially offset by an increase in customer onboarding and compliance costs.

Customer support and operations expenses for the three and nine months ended September 30, 2024 and 2023 were as follows (in millions):

Customer support and operations expenses decreased by $47 million, or 10%, and $137 million, or 9%, in the three and nine months ended September 30, 2024, respectively, compared to the same periods of the prior year due primarily to a decline in employee-related costs associated with headcount reduction.

The decline in customer support and operations expenses in the nine months ended September 30, 2024 was also impacted by a reduction in other costs incurred related to delivery of our products, including warehouses, shipping, and payment devices and a decrease in contractors and consulting costs, partially offset by an increase in card issuance costs and customer onboarding and compliance costs.

Sales and marketing

Sales and marketing expenses for the three and six months ended June 30, 2024 and 2023 were as follows (in millions):

Sales and marketing expenses decreased by $19 million, or 4%, and $34 million, or 4%, in the three and six months ended June 30, 2024, respectively, compared to the same periods of the prior year.

The decline in the three months ended June 30, 2024 was due primarily to lower employee-related costs associated with lower commissions.

The decline in sales and marketing expenses in the six months ended June 30, 2024 was primarily attributable to lower spending on marketing campaigns and user incentives, partially offset by higher revenue share to our partners.

We expect sales and marketing expenses to increase in the second half of 2024 as we invest in brand advertising and marketing campaigns.

Sales and marketing expenses for the three and nine months ended September 30, 2024 and 2023 were as follows (in millions):

Sales and marketing expenses increased by $66 million, or 15%, and $32 million, or 2%, in the three and nine months ended September 30, 2024, respectively, compared to the same periods of the prior year primarily attributable to higher spend on marketing and brand advertising, including the launch of our PayPal Everywhere advertising campaign, partially offset by a decline in employee-related costs.

The increase in the nine months ended September 30, 2024 was also attributable to higher revenue share to our partners.

We expect sales and marketing expenses to increase in the fourth quarter of 2024 as we continue to invest in brand advertising and marketing campaigns.

Technology and development

Technology and development expenses for the three and six months ended June 30, 2024 and 2023 were as follows (in millions):

Technology and development expenses decreased by $25 million, or 3%, and $4 million, or relatively flat, in the three and six months ended June 30, 2024, respectively, compared to the same periods of the prior year due primarily to a decline in employee-related costs associated with headcount reduction.

The decline in technology and development expenses in the six months ended June 30, 2024 was offset by increases in cloud computing services utilized in delivering our products and services, amortization expense associated with internally developed software, and software maintenance costs.

Technology and development expenses for the three and nine months ended September 30, 2024 and 2023 were as follows (in millions):

Technology and development expenses remained consistent in the three and nine months ended September 30, 2024, respectively, compared to the same periods of the prior year.

The slight increase in technology and development expenses in the three months ended September 30, 2024 was primarily due to an increase in contractor and consultant costs offset by a decline in employee-related costs associated with headcount reduction.

The slight increase in technology and development expenses in the nine months ended September 30, 2024 was driven by increases in cloud computing services utilized in delivering our products and services, amortization expense associated with internally developed software, and software maintenance costs offset by a decline in employee-related costs associated with headcount reduction.

General and administrative

General and administrative expenses for the three and six months ended June 30, 2024 and 2023 were as follows (in millions):

General and administrative expenses increased by $79 million, or 16%, and $36 million, or 4%, in the three and six months ended June 30, 2024, respectively, compared to the same periods of the prior year due primarily to an increase in indirect tax expense, a contingency reserve, and professional services expense.

The increase in general and administrative expenses in the six months ended June 30, 2024 was partially offset by declines in facilities expense and depreciation expense.

General and administrative expenses for the three and nine months ended September 30, 2024 and 2023 were as follows (in millions):

General and administrative expenses increased by $12 million, or 2%, and $48 million, or 3%, in the three and nine months ended September 30, 2024, respectively, compared to the same periods of the prior year due primarily to an increase in indirect tax expense and professional services expense.

The increase in general and administrative expenses in the nine months ended September 30, 2024 was also attributable to a contingency reserve, partially offset by declines in facilities expense and depreciation expense.

Restructuring and other

Restructuring and other for the three and six months ended June 30, 2024 and 2023 were as follows (in millions):

Restructuring and other increased by $89 million and $137 million in the three and six months ended June 30, 2024, respectively, compared to the same periods of the prior year.

Restructuring and other for the three and nine months ended September 30, 2024 and 2023 were as follows (in millions):

Restructuring and other increased by $24 million and $161 million in the three and nine months ended September 30, 2024, respectively, compared to the same periods of the prior year.

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 and six months ended June 30, 2024 were $83 million and $258 million, respectively, and included employee severance and benefits costs and stock-based compensation expense, substantially all of which were accrued for as of June 30, 2024.

The associated restructuring charges during the three and nine months ended September 30, 2024 were $36 million and $294 million, respectively, and included employee severance and benefits costs and stock-based compensation expense, substantially all of which were accrued for as of September 30, 2024.

The estimated reduction in annualized employee-related costs associated with the impacted workforce is approximately $575 million, including approximately $155 million in stock-based compensation.

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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 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, which were substantially completed by the fourth quarter of 2023.

We continue to review our real estate and facility capacity requirements due to our new and evolving work models.

We incurred asset impairment charges of nil in the three and six months ended June 30, 2024 and $4 million and $43 million in the three and six months ended June 30, 2023, 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.

In the six months ended June 30, 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 and six months ended June 30, 2024, approximately $27 million and $64 million, respectively, 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.

During the three and six months ended June 30, 2023, approximately $34 million of losses were recorded in restructuring and other, which included fair value adjustments 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 nil in the three and nine months ended September 30, 2024 and $18 million and $61 million in the three and nine months ended September 30, 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 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 upon designation of an owned property as held for sale in the nine months ended September 30, 2023.

During the three and nine months ended September 30, 2024, approximately $28 million and $92 million, respectively, 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 to measure loans and interest receivable, held for sale, at the lower of cost or fair value.

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, which included fair value adjustments 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 $96 million and $130 million in the three and six months ended June 30, 2024, respectively, compared to the same periods 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 cash balances year over year.

Other income (expense), net decreased $153 million and $283 million in the three and nine months ended September 30, 2024, respectively, compared to the same periods 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 cash balances and interest rates year-over-year.

Income tax expense

Our effective income tax rate was 19% and 21% for the three months ended June 30, 2024 and 2023, respectively, and 23% for both the six months ended June 30, 2024 and 2023.

The decrease in our effective income tax rate for the three months ended June 30, 2024 compared to the same period of the prior year was due primarily to discrete tax adjustments.

Our effective income tax rate was 23% and 18% for the three months ended September 30, 2024 and 2023, respectively, and 23% and 21% for the nine months ended September 30, 2024 and 2023, respectively.

The increases in our effective income tax rate for the three and nine months ended September 30, 2024 compared to the same periods of the prior year were due primarily to changes in jurisdictional mix of income and U.S.

income taxed at different rates.

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, 2024 and December 31, 2023:

June 30, 2024 December 31, 2023

The following table summarizes our cash, cash equivalents, and investments as of September 30, 2024 and December 31, 2023:

September 30, 2024 December 31, 2023

(In millions)

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$ 14,493 $ 15,493

(1) Excludes assets related to funds receivable and customer accounts of $38.7 billion and $38.9 billion at June 30, 2024 and December 31, 2023, respectively.

(2) Excludes total restricted cash of $3 million at June 30, 2024 and December 31, 2023 and strategic investments of $1.9 billion and $1.8 billion at June 30, 2024 and December 31, 2023, respectively.

Cash, cash equivalents, and investments held by our foreign subsidiaries were $8.9 billion and $10.0 billion at June 30, 2024 and December 31, 2023, or 54% and 64% of our total cash, cash equivalents, and investments as of those respective dates.

(1) Excludes assets related to funds receivable and customer accounts of $39.2 billion and $38.9 billion at September 30, 2024 and December 31, 2023, respectively.

(2) Excludes total restricted cash of $1 million and $3 million at September 30, 2024 and December 31, 2023, respectively, and strategic investments of $1.7 billion and $1.8 billion at September 30, 2024 and December 31, 2023, respectively.

Cash, cash equivalents, and investments held by our foreign subsidiaries were $6.9 billion and $10.0 billion at September 30, 2024 and December 31, 2023, or 48% 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.

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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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Operating activities

The net cash provided by operating activities of $3.4 billion in the six months ended June 30, 2024 was due primarily to operating income of $2.5 billion, as well as adjustments for non-cash expenses including stock-based compensation of $663 million, provision for transaction and credit losses of $656 million, and depreciation and amortization of $528 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 $11.2 billion.

These cash inflows from operating activities were partially offset by originations of loans receivable, held for sale of $11.1 billion and changes in other assets and liabilities of $511 million, primarily related to actual cash transaction losses incurred during the period.

The net cash provided by 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 and changes in other assets and liabilities of $1.2 billion primarily related to actual cash transaction losses incurred during the period, a decline in other liabilities, and changes in income taxes payable, partially offset by proceeds from repayments of loans receivable, originally classified as held for sale, of $302 million.

In the six months ended June 30, 2024 and 2023, cash paid for income taxes, net was $822 million and $906 million, respectively.

The net cash provided by operating activities of $5.1 billion in the nine months ended September 30, 2024 was due primarily to operating income of $3.9 billion, as well as adjustments for non-cash expenses, including provision for transaction and credit losses of $1.0 billion, stock-based compensation of $947 million, and depreciation and amortization of $783 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 $17.2 billion and net losses from our strategic investments of $226 million.

These inflows from operating activities were partially offset by originations of loans receivable, held for sale of $17.2 billion, changes in other assets and liabilities of $647 million, primarily related to actual cash transaction losses incurred during the period, and accretion of discounts on investments, net of amortization of premiums, of $290 million.

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 $865 million, primarily related to actual cash transaction losses incurred during the period, changes in deferred income taxes of $439 million, accretion of discounts on investments, net of amortization of premiums, of $265 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.

In the nine months ended September 30, 2024 and 2023, cash paid for income taxes, net was $975 million and $1.1 billion, respectively.

Investing activities

The net cash used in investing activities of $3.7 billion in the six months ended June 30, 2024 was due primarily to purchases of investments of $16.0 billion, purchases and originations of loans receivable of $10.0 billion, changes in funds receivable from customers of $1.4 billion, and purchases of property and equipment of $311 million, partially offset by maturities and sales of investments of $14.2 billion and proceeds from repayments and sales of loans receivable, originally classified as held for investment, of $9.8 billion.

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 and sales 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 $868 million in the nine months ended September 30, 2024 was due primarily to purchases of investments of $20.8 billion, purchases and originations of loans receivable of $15.4 billion, purchases of property and equipment of $480 million, and purchases of reverse repurchase agreements of $299 million, partially offset by maturities and sales of investments of $21.2 billion, proceeds from repayments and sales of loans receivable, originally classified as held for investment, of $14.7 billion, and maturities of reverse repurchase agreements of $226 million.

From time to time, we enter into reverse repurchase agreements as a form of secured lending primarily to deploy excess cash.

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 and sales 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.

Financing activities

The net cash used in financing activities of $2.2 billion in the six months ended June 30, 2024 was due primarily to the repurchase of $3.0 billion of our common stock under our stock repurchase program, repayments of borrowings under financing arrangements of $411 million, and tax withholdings related to net share settlement of equity awards of $230 million.

These cash outflows were partially offset by borrowings under financing arrangements of $1.4 billion (including proceeds from the issuance of fixed rate debt in May 2024).

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 program, 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 $4.7 billion in the nine months ended September 30, 2024 was due primarily to the repurchase of $4.8 billion of our common stock under our stock repurchase program, changes in funds payable and amounts due to customers of $771 million, repayments of borrowings from repurchase agreements of $656 million, repayments of borrowings under financing arrangements of $411 million, and tax withholdings related to net share settlement of equity awards of $271 million.

These cash outflows were partially offset by borrowings under financing arrangements of $1.5 billion (including proceeds from the issuance of fixed rate debt in May 2024) and borrowings from repurchase agreements of $656 million.

From time to time, we enter into repurchase agreements as a form of secured borrowing primarily to address temporary liquidity needs.

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 program, 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.

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

Foreign currency exchange rates for the six months ended June 30, 2024 and 2023 had a negative impact of $89 million and $50 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, 2024 was due primarily to the unfavorable impact of fluctuations in the exchange rate of the U.S.

dollar to the Australian dollar and the British pound, and to a lesser extent, the Euro and Japanese yen.

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.

Foreign currency exchange rates for the nine months ended September 30, 2024 and 2023 had a positive impact of $103 million and a negative impact of $95 million, respectively, on cash, cash equivalents, and restricted cash.

The positive impact on cash, cash equivalents, and restricted cash in the nine months ended September 30, 2024 was due primarily to the favorable impact of fluctuations in the exchange rate of the U.S.

dollar to the British pound.

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.

Available credit and debt

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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 acquisitions of businesses, assets, or strategic investments.

As of June 30, 2024, we had $11.8 billion in fixed rate debt outstanding with varying maturity dates.

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 $559 million as of June 30, 2024.) As of June 30, 2024 and December 31, 2023, ¥70.0 billion (approximately $435 million) and ¥50.0 billion (approximately $355 million), respectively, was outstanding under the Paidy Credit Agreement.

At June 30, 2024, ¥20.0 billion (approximately $124 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, 2024, we had an aggregate principal amount of $11.9 billion in fixed rate debt outstanding with varying maturity dates.

As of September 30, 2024 and December 31, 2023, ¥90.0 billion (approximately $633 million) and ¥50.0 billion (approximately $355 million), respectively, was outstanding under the Paidy Credit Agreement.

At September 30, 2024, no borrowing capacity was available for the purposes permitted by the Paidy Credit Agreement.

Other than as described above, there were no significant changes to the available credit and debt disclosed in our 2023 Form 10‑K.

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The net balance of the withdrawals and the Aggregate Cash Deposits are used by the financial institution as a basis for calculating our net interest expense or income under the arrangement.

As of June 30, 2024, we had a total of $2.8 billion in cash withdrawals offsetting our $2.8 billion in Aggregate Cash Deposits held within the financial institution under the cash pooling arrangement.

As of September 30, 2024, we had a total of $2.2 billion in cash withdrawals offsetting our $2.2 billion in Aggregate Cash Deposits held within the financial institution under the cash pooling arrangement.

Credit ratings

As of June 30, 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.

As of September 30, 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.

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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.

operating activities, credit products, customer protection programs, stock repurchases, strategic investments, acquisitions, other commitments, capital expenditures, and other future obligations.

Credit products

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credit activities.

As of June 30, 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.

As of September 30, 2024, the cumulative amount approved by PayPal to be designated to fund credit activities aggregated to $2.0 billion and represented approximately 27% 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 change the designation of 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 six months ended June 30, 2024, we sold $9.6 billion of loans and interest receivable in connection with this agreement.

During the nine months ended September 30, 2024, we sold $14.7 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.

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Stock repurchases

During the six months ended June 30, 2024, we repurchased approximately $3.0 billion of our common stock in the open market under our stock repurchase program authorized in June 2022.

As of June 30, 2024, a total of approximately $7.9 billion remained available for future repurchases of our common stock under our June 2022 stock repurchase program.

During the nine months ended September 30, 2024, we repurchased approximately $4.8 billion of our common stock in the open market under our stock repurchase program authorized in June 2022.

As of September 30, 2024, a total of approximately $6.1 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