Edgar Filing: PayPal Holdings, Inc.

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016.



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to .

Commission file number 001-36859

PayPal Holdings, Inc.

(Exact Name of Registrant as Specified in Its Charter)



Delaware	47-2989869
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

2211 North First Street San Jose, California	95131
(Address of Principal Executive Offices)	(Zip Code)

(408) 967-1000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [x] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	ý	Accelerated filer	o

Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]

As of April 22, 2016, there were 1,212,026,663 shares of the registrant's common stock, $0.0001 par value, outstanding, which is the only class of common or voting stock of the registrant issued.

PART I: FINANCIAL INFORMATION


Item 1:	Financial Statements

PayPal Holdings, Inc.

CONDENSED COMBINED AND CONSOLIDATED BALANCE SHEET



	March 31, 2016			December 31, 2015
	(In millions, except par value)
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	2,583		$	1,393
Short-term investments	2,184			2,018
Accounts receivable, net	159			137
Loans and interest receivable, net of allowances of $257 in 2016 and $233 in 2015	4,224			4,184
Funds receivable and customer accounts	12,232			12,261
Prepaid expenses and other current assets	586			655
Total current assets	21,968			20,648
Long-term investments	1,661			2,348
Property and equipment, net	1,345			1,344
Goodwill	4,071			4,069
Intangible assets, net	320			358
Other assets	105			114
Total assets	$	29,470		$	28,881
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	158		$	145
Funds payable and amounts due to customers	13,032			12,261
Accrued expenses and other current liabilities	1,145			1,179
Income taxes payable	27			32
Total current liabilities	14,362			13,617
Deferred tax liability and other long-term liabilities	1,510			1,505
Total liabilities	15,872			15,122
Commitments and contingencies (Note 11)
Equity:
Common stock, $0.0001 par value; 4,000 shares authorized; 1,208 and 1,224 outstanding	—			—
Treasury stock at cost, 17 shares as of March 31, 2016	(596		)	—
Additional paid-in-capital	13,188			13,100
Retained earnings	1,033			668
Accumulated other comprehensive loss	(27		)	(9		)
Total equity	13,598			13,759
Total liabilities and equity	$	29,470		$	28,881

The accompanying notes are an integral part of these condensed combined and consolidated financial statements.

PayPal Holdings, Inc.

CONDENSED COMBINED AND CONSOLIDATED STATEMENT OF INCOME



	Three Months Ended March 31,
	2016		2015
	(In millions, except per share data)
	(Unaudited)
Net revenues	$	2,544	$	2,137
Operating expenses:
Transaction expense	752		575
Transaction and loan losses	255		178
Customer support and operations	296		249
Sales and marketing	233		222
Product development	195		185
General and administrative	231		217
Depreciation and amortization	175		141
Restructuring	—		48
Total operating expenses	2,137		1,815
Operating income	407		322
Other income (expense), net	15		(1		)
Income before income taxes	422		321
Income tax expense	57		66
Net income	$	365	$	255

Net income per share:
Basic	$	0.30	$	0.21
Diluted	$	0.30	$	0.21

Weighted average shares:
Basic	1,216		1,218
Diluted	1,225		1,224

The accompanying notes are an integral part of these condensed combined and consolidated financial statements.

PayPal Holdings, Inc.

CONDENSED COMBINED AND CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME



	Three Months Ended March 31,
	2016			2015
	(In millions)
	(Unaudited)
Net income	$	365		$	255
Other comprehensive income (loss), net of reclassification adjustments:
Foreign currency translation	8			(33		)
Unrealized gains on investments, net	12			—
Tax expense on unrealized gains on investments, net	(2		)	—
Unrealized gains (losses) on hedging activities, net	(36		)	64
Tax expense on unrealized gains (losses) on hedging activities, net	—			1
Other comprehensive income (loss), net of tax	(18		)	32
Comprehensive income	$	347		$	287

The accompanying notes are an integral part of these condensed combined and consolidated financial statements.

PayPal Holdings, Inc.

CONDENSED COMBINED AND CONSOLIDATED STATEMENT OF CASH FLOWS



	Three Months Ended March 31,
	2016			2015
	(In millions)
	(Unaudited)
Cash flows from operating activities:
Net income	$	365		$	255
Adjustments:
Transaction and loan losses	255			178
Depreciation and amortization	174			141
Stock-based compensation	95			79
Deferred income taxes	22			49
Excess tax benefits from stock-based compensation	(1		)	(8		)
Premium received on sale of principal loans receivable held for sale	(6		)	—
Changes in assets and liabilities:
Accounts receivable	(22		)	12
Receivable from eBay	—			(38		)
Changes in principal loans receivable held for sale, net	6			—
Accounts payable	13			13
Payable to eBay	—			(113		)
Income taxes payable	(5		)	42
Other assets and liabilities	(158		)	(66		)
Net cash provided by operating activities	738			544
Cash flows from investing activities:
Purchases of property and equipment	(133		)	(194		)
Changes in principal loans receivable, net	(120		)	(19		)
Purchases of investments	(4,091		)	(2,361		)
Maturities and sales of investments	4,196			2,570
Acquisitions, net of cash acquired	(19		)	—
Funds receivable and customer accounts	492			(527		)
Notes and receivables from eBay	—			(56		)
Net cash provided by (used in) investing activities	325			(587		)
Cash flows from financing activities:
Proceeds from issuance of common stock	6			—
Purchases of treasury stock	(596		)	—
Excess tax benefits from stock-based compensation	1			8
Contribution from eBay	—			17
Tax withholdings related to net share settlements of restricted stock units and restricted stock awards	(15		)	—
Repayments under financing arrangements, net	(21		)	(119		)
Funds payable and amounts due to customers	738			333
Net cash provided by financing activities	113			239
Effect of exchange rate changes on cash and cash equivalents	14			(32		)
Net increase in cash and cash equivalents	1,190			164
Cash and cash equivalents at beginning of period	1,393			2,201
Cash and cash equivalents at end of period	$	2,583		$	2,365
Supplemental cash flow disclosures:
Cash paid for interest	$	1		$	7
Cash paid for income taxes	$	24		$	5

The accompanying notes are an integral part of these condensed combined and consolidated financial statements.

PayPal Holdings, Inc.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Overview and Summary of Significant Accounting Policies

Overview and Organization

PayPal Holdings, Inc. ("PayPal", the "Company", "we", "us", or "our") was incorporated in Delaware in January 2015 and is a leading technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. We put our customers at the center of everything we do. We strive to increase our relevance for consumers, merchants, friends and family to access and move their money anywhere in the world, anytime, on any platform and through any device (e.g., mobile, tablets, personal computers or wearables). We provide safer and simpler ways for businesses of all sizes to accept payments from merchant websites, mobile devices and applications, and at offline retail locations through a wide range of payment solutions. We also facilitate person to person payments through PayPal, Venmo and Xoom (acquired in November 2015). Our combined payment solution capabilities, including our PayPal, PayPal Credit, Braintree, Venmo, and Xoom products, comprise our proprietary Payments Platform.

We operate globally in a rapidly evolving regulatory environment characterized by a heightened regulatory focus on all aspects of the payments industry. Government regulation impacts key aspects of our business, and we are subject to regulations that affect the payments industry in the many countries in which we operate. Changes in or non-compliance with laws and regulations, changes in the interpretation of laws and regulations, and the enactment of new laws and regulations applicable to us could have a material adverse impact on our business, results of operations and financial condition.

Significant Accounting Policies

Basis of Presentation and Principles of Combination and Consolidation

On July 17, 2015 (the "distribution date"), PayPal became an independent publicly-traded company through the pro rata distribution by eBay Inc. ("eBay") of 100% of the outstanding common stock of PayPal to eBay stockholders (which we refer to as the "separation" or the "distribution"). Each eBay stockholder of record as of the close of business on July 8, 2015 received one share of PayPal common stock for every share of eBay common stock held on the record date. Approximately 1.2 billion shares of PayPal common stock were distributed on July 17, 2015 to eBay stockholders. PayPal's common stock began "regular way" trading under the ticker symbol "PYPL" on The NASDAQ Stock Market on July 20, 2015.

For periods prior to the capitalization, the condensed combined financial statements include expenses associated with real estate and information technology that were previously allocated to the payments business of eBay, and additional expenses related to certain corporate functions, including senior management, legal, human resources and finance. These expenses also include allocations related to stock-based compensation. The expenses that were incurred by eBay were allocated to us based on direct usage or benefit where identifiable, with the remainder allocated on a pro rata basis of revenue, headcount, or other systematic measure. We consider the expense allocation methodology and results to be reasonable for all periods presented. The condensed combined financial statements also include certain assets and liabilities that were historically held at the eBay corporate level, but which are specifically identifiable and attributable to us. The condensed combined and consolidated financial position, results of operations and cash flows of PayPal may not be indicative of our results had we been a separate stand-alone entity throughout the periods presented, nor are the results stated herein indicative of what the Company’s financial position, results of operations and cash flows may be in the future. All intercompany transactions and accounts have been eliminated. Transactions between the Company and eBay are included in these condensed combined and consolidated financial statements for all periods presented.

PayPal Holdings, Inc.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

not allocate these operating expenses for internal financial reporting and general management of the business and has therefore discontinued this allocation for external financial reporting purposes. As a result, starting with the first quarter of 2016, these operating expenses are reported as part of general and administrative expenses. These changes have no impact on the previously reported condensed combined and consolidated net income for prior periods, including total operating expenses, financial position or cash flows for any periods presented, and do not eliminate any of the costs allocated to us by eBay for any periods prior to the separation. Prior period amounts have been reclassified to conform to the current period presentation.

The following table presents the effects of the changes on the presentation of operating expenses to the previously reported condensed combined and consolidated statement of income:



	Three Months Ended March 31, 2015
In millions	As Reported		Adjustments		Revised
Transaction expense	$	575	—		$	575
Transaction and loan losses	178		—		178
Customer support and operations	275		(26	)	249
Sales and marketing	236		(14	)	222
Product development	224		(39	)	185
General and administrative	138		79		217
Depreciation and amortization	141		—		141
Restructuring	48		—		48
Total operating expenses	$	1,815	—		$	1,815

The accompanying condensed combined and consolidated financial statements include the financial statements of PayPal and our wholly and majority-owned subsidiaries. Investments in entities where we hold less than a 20% ownership interest are generally accounted for using the cost method of accounting, and our share of the investees’ results of operations is included in other income (expense), net in our condensed combined and consolidated statement of income to the extent dividends are received and our investment balance is included in long-term investments on our condensed combined and consolidated balance sheet.

These condensed combined and consolidated financial statements and accompanying notes should be read in conjunction with the audited combined and consolidated financial statements and accompanying notes for the year ended December 31, 2015 included in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission.

In the opinion of management, these condensed combined and consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for fair presentation of the condensed combined and consolidated financial statements for interim periods. We have evaluated all subsequent events through the date the financial statements were issued.

Use of Estimates

The preparation of condensed combined and consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed combined and consolidated financial statements and the reported amounts of revenues and expenses, including allocations from eBay for periods presented prior to the separation, during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to provisions for transaction and loan losses, loss contingencies, income taxes, revenue recognition and the valuation of goodwill and intangible assets. We base our estimates on historical experience and on various other assumptions which we believe to be reasonable under the circumstances. Actual results could differ from those estimates.

Cash and cash equivalents

Cash and cash equivalents are short-term, highly liquid investments with original maturities of three months or less when purchased and are comprised primarily of bank deposits, government and agency securities and commercial paper. As of March 31, 2016,

PayPal Holdings, Inc.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

cash and cash equivalents also includes a portion of cash underlying customer balances held in our Luxembourg banking subsidiary which we have designated for use as corporate funds, as discussed further below.

Customer accounts

We hold all customer balances (both in the U.S. and internationally) as direct claims against us which are reflected on our consolidated balance sheet as a liability classified as amounts due to customers. Various jurisdictions where PayPal operates require us to hold eligible liquid assets, as defined by the regulators in these jurisdictions, equal to at least 100% of the aggregate amount of all customer balances. Therefore, we use the assets underlying the customer balances to meet these regulatory requirements and separately classify the assets as customer accounts in our condensed combined and consolidated balance sheet. We classify the assets underlying the customer balances as current based on their purpose and availability to fulfill our direct obligation under amounts due to customers.

In March 2016, as approved by management and our Luxembourg banking subsidiary Supervisory Board and as permitted within regulations set forth by the Luxembourg Commission de Surveillance du Secteur Financier (the “CSSF”), we designated $800 million of European customer balances held in our Luxembourg banking subsidiary to be used to extend credit to our European customers. This is consistent with our strategy of diversifying funding sources for our credit business and neither represents a change in our credit business development strategy nor risk appetite. These funds have been classified as cash and cash equivalents in our condensed consolidated balance sheet as of March 31, 2016 and represented 27% of European customer balances potentially available for corporate use by the Company as determined by applying financial regulations maintained by the CSSF. As of March 31, 2016, none of these funds had been utilized to extend credit. The remaining assets underlying the customer balances that we do not presently intend to use to extend credit will remain separately classified as customer accounts in our consolidated balance sheet. We do not commingle these customer accounts with corporate funds and maintain these assets separately in interest and non-interest bearing bank deposits, time deposits, corporate debt securities and U.S. and foreign government and agency securities. See “Note 6—Funds Receivable and Customer Accounts” for additional information related to customer accounts. Due to the above approved plan, we have presented changes in funds receivable and customer accounts as cash flows from investing activities in our condensed combined and consolidated statements of cash flows based on the nature of the activity underlying our customer accounts. We have elected to conform the prior year statement of cash flows to the current period presentation to provide comparability.

The following table presents the effects of the changes on the presentation of the statement of cash flows to the previously reported cash flows from investing activities and cash flows from financing activities in the condensed combined statement of cash flows for the three months ended March 31, 2015. These changes have no impact on the previously reported total net cash flows:



	Three Months Ended March 31, 2015
In millions	As Reported			Adjustments		Revised
Cash flows from investing activities:
Purchases of investments	—			(2,361	)	(2,361		)
Maturities and sales of investments	15			2,555		2,570
Funds receivable and customer accounts	—			(527	)	(527		)

Cash flows from financing activities:
Funds receivable and customer accounts	(333		)	333		—

Net change	$	(318	)	—		$	(318	)

Recent Accounting Pronouncements

In 2014, the Financial Accounting Standards Board (FASB) issued new accounting guidance related to revenue recognition. This new standard will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition guidance provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. In 2016, the FASB updated the guidance for reporting revenue gross versus net to improve the implementation guidance on principal versus agent considerations. This guidance can be applied either retrospectively to each period presented or as a cumulative-effect adjustment

PayPal Holdings, Inc.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

as of the date of adoption. In 2015, the FASB deferred the effective date to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We are evaluating our approach to adopting this new accounting guidance, as well as its impact on our financial statements.

In 2016, the FASB issued new accounting guidance related to the classification and measurement of financial instruments. This new standard makes limited amendments to the guidance in U.S. GAAP by requiring equity investments to be measured at fair value with changes in fair value recognized in net income. This new standard also amends the presentation of certain fair value changes for financial liabilities measured at fair value and it also amends certain disclosure requirements associated with the fair value of financial instruments. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted in limited situations. We are required to apply the new guidance on a modified retrospective basis to all outstanding instruments, with a cumulative effect adjustment as of the date of adoption. We are evaluating the impact and approach to adopting this new accounting guidance on our financial statements.

In 2016, the FASB issued new accounting guidance related to accounting for leases, which will require lessees to recognize lease assets and lease liabilities on the balance sheet for the rights and obligations created by all leases with terms greater than twelve months. As we are not a lessor, other changes in the standard applicable to lessors do not apply. The standard is effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted. We are required to adopt the guidance using a modified retrospective basis and can elect to apply optional practical expedients. We are evaluating the impact and approach to adopting this new accounting guidance on our financial statements.

In 2016, the FASB issued new accounting guidance to simplify the analysis for embedded derivatives. The new guidance clarifies that when assessing whether a contingent call or put option qualifies as a separate derivative from the host contract (e.g., the debt instrument), the nature of the exercise contingency would be excluded from the assessment. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 with early adoption permitted. We are required to apply the new guidance on a modified retrospective basis to all existing debt instruments as of the beginning of the fiscal year for which the amendments are effective. The adoption of this standard is not expected to have a material impact on our financial statements.

In 2016, the FASB issued new accounting guidance on investments that qualify for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The new guidance eliminates the requirement for retrospective adjustment of the investment, results of operations and retained earnings as if the equity method had been in effect during all the previous periods that the investment had been held. Instead, under the new guidance, the cost of acquiring the additional interest in the investee would be added to the current basis of the previously held interest and equity method of accounting would be adopted as of the date the investment becomes qualified for equity method accounting. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 with early adoption permitted. The guidance should be applied prospectively after adoption. The adoption of this standard is not expected to have a material impact on our financial statements.

In 2016, the FASB issued new guidance on the accounting for share-based payment compensation. The new guidance makes amendments to the following areas: accounting for income taxes upon vesting or settlement of awards, presentation of excess tax benefits on the statement of cash flows, accounting for forfeitures, minimum statutory withholding requirements and presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet minimum statutory withholding requirements. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 with early adoption permitted. We are required to apply different transition methods depending on the amendments, including a modified retrospective transition method, a retrospective transition method and a prospective transition method. We are evaluating the impact and approach to adopting this new accounting guidance on our financial statements.

Note 2 - Net Income Per Share

Basic net income per share is computed by dividing net income for the period by the weighted average number of common shares outstanding during the period. The weighted average number of common shares outstanding for basic and diluted earnings per share for the three months ended March 31, 2016 was based on the weighted average number of common shares outstanding for the period. The weighted average number of common shares outstanding for basic and diluted earnings per share for the three months ended March 31, 2015 was based on the number of shares of PayPal common stock outstanding on July 17, 2015, the distribution date. On the distribution date, eBay stockholders of record as of the close of business on July 8, 2015 received one share of PayPal common stock for every share of eBay common stock held as of the record date. Approximately 1.2 billion shares of PayPal common stock were distributed on July 17, 2015 to eBay stockholders. Diluted net income per share is computed by

PayPal Holdings, Inc.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

dividing net income for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding for the period. The dilutive effect of outstanding options and equity incentive awards is reflected in diluted net income per share by application of the treasury stock method. The calculation of diluted net income per share excludes all anti-dilutive common shares.

The following table sets forth the computation of basic and diluted net income per share for the periods indicated:



	Three Months Ended March 31,
	2016		2015⁽¹⁾
(In millions, except per share amounts)
Numerator:
Net income	$	365	$	255
Denominator:
Weighted average shares of common stock - basic	1,216		1,218
Dilutive effect of equity incentive awards	9		6
Weighted average shares of common stock - diluted	1,225		1,224
Net income per share:
Basic	$	0.30	$	0.21
Diluted	$	0.30	$	0.21
Common stock equivalents excluded from income per diluted share because their effect would have been anti-dilutive	5		2

¹ On July 17, 2015, the distribution date, eBay stockholders of record as of the close of business on July 8, 2015 received one share of PayPal common stock for every share of eBay common stock held as of the record date. Basic and diluted net income per share for the three months ended March 31, 2015 is calculated using the number of shares of common stock distributed on July 17, 2015.

Note 3 - Business Combinations

There were no acquisitions or divestitures completed in the three months ended March 31, 2016. During 2015, we completed four acquisitions, reflecting 100% of the equity interests of the acquired companies, for an aggregate amount of $1.4 billion as described in Part IV, Item 15, "Note 3—Business Combinations" in our Annual Report on Form 10-K for the year ended December 31, 2015. In the three months ended March 31, 2016 we finalized the allocation of the purchase consideration for Paydiant and Cyactive which did not result in any material changes to the allocation.

Note 4 - Goodwill and Intangible Assets

Goodwill

The following table presents goodwill balances and adjustments to those balances during the three months ended March 31, 2016 (in millions):



	December 31, 2015		Goodwill Acquired		Adjustments		March 31, 2016
Total Goodwill	$	4,069	$	—	$	2	$	4,071

The adjustments to goodwill during the three months ended March 31, 2016 were related to foreign exchange rate translation.

PayPal Holdings, Inc.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Intangible Assets

The components of identifiable intangible assets are as follows:



	March 31, 2016								December 31, 2015
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Useful Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Useful Life (Years)
	(In millions, except years)
Intangible assets:
Customer lists and user base	$	605	$	(512	)	$	93	4	$	605	$	(501	)	$	104	4
Marketing related	197		(161		)	36		3	197		(150		)	47		3
Developed technologies	245		(182		)	63		3	245		(176		)	69		3
All other	243		(115		)	128		5	243		(105		)	138		5
Intangible assets, net	$	1,290	$	(970	)	$	320		$	1,290	$	(932	)	$	358

Amortization expense for intangible assets was $38 million and $19 million for the three months ended March 31, 2016 and 2015, respectively.

Expected future intangible asset amortization as of March 31, 2016 is as follows (in millions):



Fiscal years:
Remaining 2016	$	112
2017	100
2018	68
2019	23
2020	17
Thereafter:	—
	$	320

Note 5 - Geographical Information

The following tables summarize the allocation of net revenues and long-lived assets based on geography:



	Three Months Ended March 31,
	2016		2015
	(In millions)
Net revenues:
U.S.	$	1,343	$	1,030
United Kingdom	307		277
Other Countries	894		830
Total net revenues	$	2,544	$	2,137

PayPal Holdings, Inc.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	March 31, 2016		December 31, 2015
	(In millions)
Long-lived assets:
U.S.	$	1,260	$	1,256
Other Countries	85		88
Total long-lived assets	$	1,345	$	1,344

Net revenues are attributed to U.S., UK and other countries primarily based upon the country in which the merchant is located, or in the case of a cross border transaction, may be earned from the countries in which the consumer and the merchant respectively reside. Net revenues earned from value added services are typically attributed to the country in which either the consumer or the merchant reside. Tangible long-lived assets for the three months ended March 31, 2016 and 2015 consisted of property and equipment. Long-lived assets attributed to the U.S. and other countries are based upon the country in which the asset is located or owned.

Note 6 - Funds Receivable and Customer Accounts

The following table summarizes the assets underlying our funds receivable and customer accounts as of March 31, 2016 and December 31, 2015.



	March 31, 2016		December 31, 2015
	(In millions)
Cash and cash equivalents	$	4,546	$	5,245
Government and agency securities	5,063		4,305
Time deposits	526		830
Corporate debt securities	190		180
Funds receivable	1,907		1,701
Total funds receivable and customer accounts	$	12,232	$	12,261

At March 31, 2016 and December 31, 2015, the estimated fair value of our investments classified as available for sale included within funds receivable and customer accounts was as follows:



	March 31, 2016
	Gross Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(In millions)
Government and agency securities	$	5,060	$	3	$	—	$	5,063
Time deposits	526		—		—		526
Corporate debt securities	190		—		—		190
Total	$	5,776	$	3	$	—	$	5,779



	December 31, 2015
	Gross Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In millions)
Government and agency securities	$	4,305	$	1	$	(1	)	$	4,305
Time deposits	830		—		—			830
Corporate debt securities	180		—		—			180
Total	$	5,315	$	1	$	(1	)	$	5,315

PayPal Holdings, Inc.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The aggregate fair value of investments in an unrealized loss position was $583 million as of March 31, 2016. The aggregate gross unrealized loss on our short-term and long-term investments was not material as of March 31, 2016. We believe the decline in value is due to temporary market conditions and expect to recover the entire amortized cost basis of the securities. We neither intend nor anticipate the need to sell the securities before recovery. We continue to monitor the performance of the investment portfolio and assess market and interest rate risk when evaluating whether other-than-temporary impairment exists.

As of March 31, 2016, we had no material investments that have been in a continuous unrealized loss position for greater than 12 months. Amounts reclassified to earnings from unrealized gains and losses were not material for the three months ended March 31, 2016 and 2015.

The estimated fair values of our investments classified as available for sale included within funds receivable and customer accounts by date of contractual maturity at March 31, 2016 were as follows:



	March 31, 2016
	(In millions)
One year or less	$	5,263
One year through two years	379
Two years through three years	137
Total	$	5,779

Note 7 - Investments

At March 31, 2016 and December 31, 2015, the estimated fair value of our short-term and long-term investments classified as available for sale was as follows:



	March 31, 2016
	Gross Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In millions)
Short-term investments⁽¹⁾⁽²⁾:
Corporate debt securities	2,140		1		(1		)	2,140
Government and agency securities	10		—		—			10
Time deposits	17		—		—			17
Long-term investments⁽²⁾:
Corporate debt securities	1,613		2		(7		)	1,608
Total⁽¹⁾	$	3,780	$	3	$	(8	)	$	3,775

⁽¹⁾Excludes funds receivable and customer accounts of $12.2 billion. See “Note 6—Funds Receivable and Customer Accounts” for the estimated fair value of investments classified as available for sale included within funds receivable and customer accounts.

⁽²⁾Excludes short-term restricted cash of $17 million and long-term restricted cash of $8 million.

PayPal Holdings, Inc.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	December 31, 2015
	Gross Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In millions)
Short-term investments⁽¹⁾⁽²⁾:
Corporate debt securities	2,000		—		(2		)	1,998
Time deposits	2		—		—			2
Long-term investments⁽²⁾:
Corporate debt securities	2,328		—		(14		)	2,314
Total⁽¹⁾	$	4,330	$	—	$	(16	)	$	4,314

⁽¹⁾ Excludes funds receivable and customer accounts of $12.3 billion. See “Note 6—Funds Receivable and Customer Accounts” for the estimated fair value of investments classified as available for sale included within funds receivable and customer accounts.

⁽²⁾Excludes short-term restricted cash of $18 million and long-term restricted cash of $8 million.

We have short-term restricted cash that we intend to use to support our global sabbatical program. In addition, in connection with the acquisition of Xoom, we have long-term restricted cash required as collateral by payment processors and for licensing rules in India.

As of March 31, 2016, we had no material long-term or short-term investments that have been in a continuous unrealized loss position for greater than 12 months. Amounts reclassified to earnings from unrealized gains and losses were not material for the three months ended March 31, 2016 and 2015.

The estimated fair values of our short-term and long-term investments classified as available for sale by date of contractual maturity at March 31, 2016 were as follows:



	March 31, 2016
	(In millions)
One year or less	$	2,167
One year through two years	1,071
Two years through three years	425
Three years through four years	96
Four years through five years	15
Greater than five years	1
Total⁽¹⁾	$	3,775

(1) Excludes $5.8 billion of customer account balances. See “Note 6—Funds Receivable and Customer Accounts” for the estimated fair values of our investments classified as available for sale included within funds receivable and customer accounts by date of contractual maturity at March 31, 2016.

Other Investments

We have cost method investments which are reported in long-term investments on our condensed combined and consolidated balance sheet. Our cost method investments totaled $45 million and $26 million as of March 31, 2016 and December 31, 2015, respectively. The increase in our cost method investments was due to new investments made in the three months ended March 31, 2016.

PayPal Holdings, Inc.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 8 - Fair Value Measurement of Assets and Liabilities

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2016 and December 31, 2015:



Description	Balances at March 31, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
	(In millions)
Assets:
Cash and cash equivalents	$	2,583	$	1,918	$	665
Short-term investments:
Restricted Cash	17		17		—
Corporate debt securities	2,140		—		2,140
Government and agency securities	10		—		10
Time deposits	17		—		17
Total short-term investments	$	2,184	$	17	$	2,167
Funds receivable and customer accounts	6,586		—		6,586
Derivatives	104		—		104
Long-term investments:
Restricted Cash	8		8		—
Corporate debt securities	1,608		—		1,608
Total long-term investments	1,616		8		1,608
Total financial assets	$	13,073	$	1,943	$	11,130
Liabilities:
Derivatives	$	107	$	—	$	107



Description	Balances at December 31, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
	(In millions)
Assets:
Cash and cash equivalents	$	1,393	$	987	$	406
Short-term investments:
Restricted Cash	18		18		—
Corporate debt securities	1,998		—		1,998
Time deposits	2		—		2
Total short-term investments	2,018		18		2,000
Funds receivable and customer accounts	6,978		—		6,978
Derivatives	97		—		97
Long-term investments:
Restricted Cash	8		8		—
Corporate debt securities	2,314		—		2,314
Total long-term investments	2,322		8		2,314
Total financial assets	$	12,808	$	1,013	$	11,795
Liabilities:
Derivatives	$	25	$	—	$	25

PayPal Holdings, Inc.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Our financial assets and liabilities are valued using market prices on both active markets (Level 1) and less active markets (Level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily available pricing sources for comparable instruments, identical instruments in less active markets, or models using market observable inputs.

The majority of our derivative instruments are valued using pricing models that take into account the contract terms as well as multiple inputs where applicable, such as currency rates, interest rate yield curves, option volatility and equity prices. Our derivative instruments are primarily short-term in nature, generally one month to one year in duration. Certain foreign currency contracts designated as cash flow hedges may have a duration of up to 18 months.

We did not have any transfers of financial instruments between valuation levels during the first three months of 2016 and 2015. As of March 31, 2016, we did not have any assets or liabilities requiring measurement at fair value without observable market values that would require a high level of judgment to determine fair value (Level 3).

Cash and cash equivalents are short-term, highly liquid investments with original or remaining maturities of three months or less when purchased and are comprised primarily of bank deposits and commercial paper. As of March 31, 2016, cash and cash equivalents also includes $800 million of cash underlying customer balances held in our Luxembourg banking subsidiary which we have designated for use as corporate funds, as discussed in "Note 1—Overview and Summary of Significant Accounting Policies".

We had total funds receivable and customer accounts of $12.2 billion and $12.3 billion as of March 31, 2016 and December 31, 2015, respectively, of which $5.8 billion and $5.3 billion was invested primarily in short-term investments and the remainder was held in cash and cash equivalents for the respective periods. We elect to account for certain customer accounts, including foreign-currency denominated available-for-sale investments, under the fair value option. Election of the fair value option allows us to significantly reduce the accounting asymmetry that would otherwise arise when recognizing foreign exchange gains and losses relating to available-for-sale investments and the corresponding customer liabilities.

Note 9 - Derivative Instruments

Summary of Derivative Instruments

Our primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. Our derivatives expose us to credit risk to the extent that our counterparties may be unable to meet the terms of the arrangement. We seek to mitigate such risk by limiting our counterparties to, and by spreading the risk across, major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored on an ongoing basis.

Foreign Exchange Contracts

We transact business in various foreign currencies and have significant international revenues as well as costs denominated in foreign currencies, which subjects us to foreign currency risk. We have a foreign currency exposure management program whereby we designate certain foreign currency exchange contracts, generally with maturities of 18 months or less, to reduce the volatility of cash flows primarily related to forecasted revenues and expenses denominated in foreign currencies. The objective of the foreign exchange contracts is to help mitigate the risk that the U.S. dollar-equivalent cash flows are adversely affected by changes in the applicable U.S. dollar/foreign currency exchange rate. These derivative instruments are designated as cash flow hedges and accordingly, the effective portion of the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into earnings in the same period the forecasted transaction affects earnings. The ineffective portion of the unrealized gains and losses on these contracts, if any, is recorded immediately in earnings. We evaluate the effectiveness of our foreign exchange contracts on a quarterly basis by comparing the change in the fair value of the derivative instruments with the change in the fair value of the forecasted cash flows of the hedged item. We do not use any foreign exchange contracts for trading or speculative purposes.

For our derivative instruments designated as cash flow hedges, the amounts recognized in earnings related to the ineffective portion were not material in each of the periods presented, and we did not exclude any component of the changes in fair value of the derivative instruments from the assessment of hedge effectiveness. During the three months ended March 31, 2016 and 2015, we did not discontinue any cash flow hedges because it was probable that the original forecasted transaction would not occur and as

PayPal Holdings, Inc.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

such, did not reclassify any gains or losses to earnings. As of March 31, 2016, we estimated that $21 million of net derivative gains related to our cash flow hedges included in accumulated other comprehensive income will be reclassified into earnings within the next 12 months.

We have an additional foreign exchange management program whereby we use foreign exchange contracts to offset the foreign exchange risk on our assets and liabilities denominated in currencies other than the functional currency of our subsidiaries. These contracts are not designated as hedging instruments and reduce, but do not entirely eliminate, the impact of currency exchange rate movements on our assets and liabilities. The foreign currency gains and losses on our assets and liabilities are recorded in “Other income (expense), net,” which is offset by the gains and losses on the foreign exchange contracts

Fair Value of Derivative Contracts

The fair value of our outstanding derivative instruments as of March 31, 2016 and December 31, 2015 was as follows:



	Balance Sheet Location	March 31, 2016			December 31, 2015
		(In millions)
Derivative Assets:
Foreign exchange contracts designated as cash flow hedges	Other Current Assets	$	45		$	59
Foreign exchange contracts not designated as hedging instruments	Other Current Assets	59			38
Total derivative assets		$	104		$	97

Derivative Liabilities:
Foreign exchange contracts designated as cash flow hedges	Other Current Liabilities	$	24		$	2
Foreign exchange contracts not designated as hedging instruments	Other Current Liabilities	83			23
Total derivative liabilities		$	107		$	25

Net fair value of derivative instruments		$	(3	)	$	72

Under the master netting agreements with the respective counterparties to our foreign exchange contracts, subject to applicable requirements, we are allowed to net settle transactions of the same type with a single net amount payable by one party to the other. However, we have elected to present the derivative assets and derivative liabilities on a gross basis in our balance sheet. As of March 31, 2016, the potential effect of rights of setoff associated with our foreign exchange contracts would be an offset to both assets and liabilities by $88 million, resulting in net derivative assets of $15 million and net derivative liabilities of $18 million. We are not required to pledge, nor are we entitled to receive, cash collateral related to these derivative transactions.

Effect of Derivative Contracts on Accumulated Other Comprehensive Income

The following table summarizes the activity of derivative contracts that qualify for hedge accounting as of March 31, 2016 and December 31, 2015, and the impact of designated derivative instruments on accumulated other comprehensive income for the three months ended March 31, 2016 and 2015:



	December 31, 2015		Amount of loss recognized in other comprehensive income (effective portion)		Amount of gain reclassified from accumulated other comprehensive income to net revenue (effective portion)	March 31, 2016
	(In millions)
Foreign exchange contracts designated as cash flow hedges	$	57	(4	)	32	$	21

PayPal Holdings, Inc.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	December 31, 2014		Amount of gain recognized in other comprehensive income (effective portion)	Amount of gain reclassified from accumulated other comprehensive income to net revenue (effective portion)	March 31, 2015
	(In millions)
Foreign exchange contracts designated as cash flow hedges	$	126	114	50	$	190

Effect of Derivative Contracts on Combined and Consolidated Statements of Income

The following table provides the location in the financial statements of the recognized gains or losses related to our derivative instruments:



	Three Months Ended March 31,
	2016			2015
	(In millions)
Foreign exchange contracts designated as cash flow hedges recognized in net revenues	$	32		$	50
Foreign exchange contracts not designated as cash flow hedges recognized in other income (expense), net	(9		)	11
Total gain recognized from derivative contracts in the combined statement of income	$	23		$	61

Notional Amounts of Derivative Contracts

Derivative transactions are measured in terms of the notional amount, but this amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the derivative instruments. The notional amount is generally not exchanged, but is used only as the underlying basis on which the value of foreign exchange payments under these contracts is determined. The following table provides the notional amounts of our outstanding derivatives:



	March 31, 2016		March 31, 2015
	(In millions)
Foreign exchange contracts designated as cash flow hedges	$	1,900	$	1,551
Foreign exchange contracts not designated as hedging instruments	3,833		764
Total	$	5,733	$	2,315

PayPal Holdings, Inc.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 10 - Loans and Interest Receivable, Net

We offer credit products to consumers who choose PayPal Credit as their funding source at checkout and working capital advances to certain small and medium-sized PayPal merchants through our PayPal Working Capital product. In the U.S., we work with independent chartered financial institutions that extend credit to the consumer or merchant using our credit products. For our consumer credit products outside the U.S., we extend credit through our Luxembourg banking subsidiary. For our merchant credit products outside the U.S., we extend working capital advances in the U.K. through our Luxembourg banking subsidiary, and we extend working capital advances in Australia through an Australian subsidiary. We purchase the related receivables extended by an independent chartered financial institution in the U.S. and are responsible for servicing functions related to all our credit products. During the three months ended March 31, 2016 and 2015, we purchased approximately $1.9 billion and $1.5 billion, respectively, in credit receivables. As part of the arrangement with an independent chartered financial institution in the U.S. that we work with, we sell back a participation interest in the pool of consumer receivables outstanding under PayPal Credit consumer accounts. For this arrangement, we do not recognize gains or losses on the sale of the participation interest as the carrying amount of the participation interest sold approximates the fair value at time of transfer. However, we have a separate arrangement with certain investors under which we sold to these investors a participation interest in certain consumer loans receivable that we purchased, where the consideration received exceeded the carrying amount of the participation interest sold which resulted in a gain reflected as net revenues in our condensed combined and consolidated financial statements. Loans, advances and interest and fees receivable are reported at their outstanding principal balances, net of any participation interest sold and pro-rata allowances, including unamortized deferred origination costs and estimated collectible interest and fees.

Consumer receivables

As of March 31, 2016, the total outstanding balance in our pool of consumer receivables was $4.0 billion, net of the participation interest sold to the independent chartered financial institution and other investors of $0.9 billion. As of December 31, 2015, the total outstanding balance in our pool of consumer receivables was $4.0 billion, net of the participation interest sold to the independent chartered financial institution and other investors of $1.0 billion. The independent chartered financial institution and other investors have no recourse against us related to their participation interests for failure of debtors to pay when due. The participation interests held by the chartered financial institution and other investors have the same priority to the interests held by us and are subject to the same credit, prepayment, and interest rate risk associated with this pool of consumer receivables. All risks of loss are shared equally based on participation interests held amongst all participating stakeholders.

We use a consumer's FICO score, where available, among other measures, in evaluating the credit quality of our U.S. PayPal Credit consumer receivables. A FICO score is a type of credit score that lenders use to assess an applicant's credit risk and whether to extend credit. Individual FICO scores generally are obtained each quarter in which the U.S. consumer has an outstanding consumer receivable owned by PayPal Credit. The weighted average U.S. consumer FICO scores related to our loans and interest receivable balance outstanding at March 31, 2016 and December 31, 2015 were 683 and 686, respectively.

As of March 31, 2016 and December 31, 2015, approximately 52.3% and 53.6%, respectively, of the pool of U.S. consumer receivables and interest receivable balance was due from U.S. consumers with FICO scores greater than 680, which is generally considered "prime" by the consumer credit industry. As of March 31, 2016 and December 31, 2015, approximately 10.8% and 9.4%, respectively, of the pool of U.S. consumer receivables and interest receivable balance was due from U.S. customers with FICO scores below 599. As of March 31, 2016 and December 31, 2015, approximately 91.0% and 90.1%, respectively, of the portfolio of consumer receivables and interest receivable was current.

The following table presents the principal amount of U.S. consumer loans and interest receivable segmented by a FICO score range:



	March 31, 2016		December 31, 2015
	(In millions)
> 760	$	532	$	569
680 - 759	1,509		1,529
600 - 679	1,445		1,449
< 599	420		369
Total	$	3,906	$	3,916

PayPal Holdings, Inc.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The table above excludes certain outstanding consumer loans outside of the U.S., for which no FICO scores are available, with an outstanding balance of $79 million and $70 million at March 31, 2016 and December 31, 2015, respectively.

The following tables present the delinquency status of the principal amount of consumer loans and interest receivable:



March 31, 2016
(In millions)
Current		30 - 59 Days Past Due		60 - 89 Days Past Due		90 - 180 Days Past Due		Total Past Due		Total Consumer Receivables
$	3,628	$	153	$	56	$	148	$	357	$	3,985



December 31, 2015
(In millions)
Current		30 - 59 Days Past Due		60 - 89 Days Past Due		90 - 180 Days Past Due		Total Past Due		Total Consumer Receivables
$	3,593	$	172	$	66	$	155	$	393	$	3,986

We charge off consumer loan receivable balances in the month in which a customer balance becomes 180 days past due. Bankrupt accounts are charged off 60 days after receipt of notification of bankruptcy. Past due loans receivable continue to accrue interest until such time they are charged off.

The following table summarizes the activity in the allowance for consumer loans and interest receivable, net of participation interest sold for the period indicated:



	Three Months Ended March 31,
	2016			2015
	(In millions)
Balance as of January 1	$	211		$	188
Provisions	114			86
Charge-offs	(104		)	(94		)
Recoveries	7			11
Balance as of March 31	$	228		$	191

Excludes receivables from other consumer credit products of $8 million at March 31, 2016 and December 31, 2015, respectively, net of allowances of $4 million and $1 million at March 31, 2016 and December 31, 2015, respectively.

Merchant receivables

We offer credit products to certain existing small and medium-sized merchants through our PayPal Working Capital product. We closely monitor credit quality for all working capital advances that we extend or purchase through that product to manage and evaluate our related exposure to credit risk. To assess a merchant who wishes to obtain a PayPal Working Capital advance, we use, among other indicators, a risk model that we have internally developed that we refer to as our PayPal Working Capital Risk Model (“PRM”), as a credit quality indicator to help predict the merchant's ability to repay the principal balance and fixed fee related to the working capital advance. The PRM uses multiple variables as predictors of the merchant's ability to repay a working capital advance. Primary drivers of the model include the merchant's annual payment volume and payment processing history with PayPal, prior repayment history with the PayPal Working Capital product, and other measures. Merchants are assigned a PRM credit score within the range of 350 to 750. We generally expect that merchants to which we extend a working capital advance will have PRM scores greater than 525. We generally consider scores above 610 to be very good and to pose less credit risk. For all outstanding working capital advances that we own, we assess the participating merchant’s PRM score on a recurring basis. At March 31, 2016 and December 31, 2015, the weighted average PRM score related to our PayPal Working Capital balances outstanding was 638 and 630, respectively.

PayPal Holdings, Inc.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the principal amount of PayPal Working Capital advances and fees receivable segmented by our internal PRM score range:



	March 31, 2016		December 31, 2015
	(In millions)
> 630	$	324	$	255
566-629	89		94
<565	75		72
Total	$	488	$	421

Through our PayPal Working Capital product, merchants can borrow a certain percentage of their annual payment volume processed by PayPal and are charged a fixed fee for the advance, which targets an annual percentage rate based on the overall credit assessment of the merchant. Advances are repaid through a fixed percentage of the merchant's future payment volume that PayPal processes. The fee is fixed at the time the advance is extended and we estimate the repayment period based on PayPal's payment processing history with the merchant. There is no stated interest rate and there is a general requirement that at least 10% of the original amount advanced plus the fixed fee must be repaid every 90 days. We generally calculate the repayment rate of the merchant's future payment volume so that repayment of the advance and fixed fee is expected to occur within 9 to 12 months from the date of the advance. On a monthly basis, we recalculate the repayment period based on the repayment activity on the receivable. As such, actual repayment periods are dependent on actual payment processing volumes. We monitor receivables with repayment periods greater than the original expected repayment period. We charge off the receivable when the updated repayment period is 180 days past the original expected repayment period and the merchant has not made a payment in the last 60 days. The total PayPal Working Capital advances and fees receivable outstanding as of March 31, 2016 and December 31, 2015 were approximately $488 million and $421 million, respectively.

The following tables present the current repayment periods of the principal amount of PayPal Working Capital advances and fees receivable as compared to their original expected repayment period:



March 31, 2016
(In millions)
Within Original Period		30 - 59 Days Greater		60 - 89 Days Greater		90 - 180 Days Greater		180+ Days		Total Past Original Expected Repayment		Total Merchant Receivables
$	370	$	52	$	25	$	35	$	6	$	118	$	488



December 31, 2015
(In millions)
Within Original Period		30 - 59 Days Greater		60 - 89 Days Greater		90 - 180 Days Greater		180+ Days		Total Past Original Expected Repayment		Total Merchant Receivables
$	326	$	47	$	21	$	24	$	3	$	95	$	421

The following table summarizes the activity in the allowance for PayPal Working Capital advances and fees receivable, for the period indicated:



	Three Months Ended March 31,
	2016			2015
	(In millions)
Balance as of January 1	$	22		$	7
Provisions	8			5
Charge-offs	(6		)	(3		)
Recoveries	1			—
Balance as of March 31	$	25		$	9

PayPal Holdings, Inc.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 11 - Commitments and Contingencies

Commitments

As of March 31, 2016, approximately $26.4 billion of unused credit was available to PayPal Credit account holders. While this amount represents the total unused credit available, we have not experienced, and do not anticipate, that all of our PayPal Credit account holders will access their entire available credit at any given point in time. In addition, the individual lines of credit that make up this unused credit are subject to periodic review and termination by the chartered financial institution that is the issuer of PayPal Credit products based on, among other things, account usage and customer creditworthiness. When a consumer funds a purchase in the U.S. using a PayPal Credit product issued by a chartered financial institution, the chartered financial institution extends credit to the consumer, funds the extension of credit at the point of sale and advances funds to the merchant. We subsequently purchase the receivables related to the consumer loans extended by the chartered financial institution and, as a result of such purchase, bear the risk of loss in the event of loan defaults. Although the chartered financial institution continues to own each customer account, we own the related receivable (excluding participation interests sold) and are responsible for all servicing functions related to the account.

In the third quarter of 2015, we entered into a credit agreement ("Credit Agreement") that provides for an unsecured $2.0 billion, five-year revolving credit facility that includes a $150 million letter of credit sub-facility and a $150 million swingline sub-facility, with available borrowings under the revolving credit facility reduced by the amount of any letters of credit and swingline borrowings outstanding from time to time. Borrowings and other amounts payable under the Credit Agreement are guaranteed by PayPal, Inc. (the "Guarantor"). We may also, subject to the agreement of the applicable lenders, increase the commitments under the revolving credit facility by up to $500 million. Subject to specified conditions, we may designate one or more of our subsidiaries as additional borrowers under the Credit Agreement provided that we and the Guarantor guarantee all borrowings and other obligations of any such subsidiaries under the Credit Agreement. As of March 31, 2016, no subsidiaries were designated as additional borrowers. Funds borrowed under the Credit Agreement may be used for working capital, capital expenditures, acquisitions and other general corporate purposes. As of March 31, 2016, no borrowings or letters of credit were outstanding under the Credit Agreement. Accordingly, at March 31, 2016, $2.0 billion of borrowing capacity was available for the purposes permitted by the Credit Agreement subject to customary conditions to borrowing.

Litigation and Regulatory Matters

Overview

We are involved in legal and regulatory proceedings on an ongoing basis. Many of these proceedings are in early stages, and may seek an indeterminate amount of damages. If we believe that a loss arising from such matters is probable and can be reasonably estimated, we accrue the estimated liability in our financial statements. If only a range of estimated losses can be determined, we accrue an amount within the range that, in our judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, we accrue the low end of the range. For those proceedings in which an unfavorable outcome is reasonably possible but not probable, we have disclosed an estimate of the reasonably possible loss or range of losses or we have concluded that an estimate of the reasonably possible loss or range arising directly from the proceeding (i.e., monetary damages or amounts paid in judgment or settlement) are not material. If we cannot estimate the probable or reasonably possible loss or range of losses arising from a legal proceeding, we have disclosed that fact. In assessing the materiality of a legal proceeding, we evaluate, among other factors, the amount of monetary damages claimed, as well as the potential impact of non-monetary remedies sought by plaintiffs (e.g., injunctive relief) that may require us to change our business practices in a manner that could have a material adverse impact on our business. With respect to the matters disclosed in this Note 11, we are unable to estimate the possible loss or range of losses that could potentially result from the application of such non-monetary remedies.

Amounts accrued for legal and regulatory proceedings for which we believe a loss is probable were not material for the three months ended March 31, 2016. Except as otherwise noted for the proceedings described in this Note 11, we have concluded, based on currently available information, that reasonably possible losses arising directly from the proceedings (i.e., monetary damages or amounts paid in judgment or settlement) in excess of our recorded accruals are also not material. However, legal and regulatory proceedings are inherently unpredictable and subject to significant uncertainties. If one or more matters were resolved against us in a reporting period for amounts in excess of management’s expectations, the impact on our operating results or financial condition for that reporting period could be material.

PayPal Holdings, Inc.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Regulatory Proceedings

We routinely report to the U.S. Department of the Treasury’s Office of Foreign Assets Control ("OFAC") on payments we have rejected or blocked pursuant to OFAC sanctions regulations and on any possible violations of those regulations. We have cooperated with OFAC in recent years regarding our review process over transaction monitoring and have self-reported a large number of transactions that could possibly be in violation of OFAC sanctions regulations. In March 2015, we reached a settlement with OFAC regarding possible violations arising from our practices between 2009 and 2013. In addition, we continue to cooperate with OFAC regarding other transactions that we have self-reported that could also possibly be in violation of OFAC sanctions regulations. Subsequent to our March 2015 settlement, we have received new subpoenas from OFAC seeking additional information about certain of these transactions. Such self-reported transactions could result in claims or actions against us, including litigation, injunctions, damage awards, fines or penalties, or require us to change our business practices that could result in a material loss, require significant management time, result in the diversion of significant operational resources or otherwise harm our business.

On March 28, 2016, we received a Civil Investigative Demand (“CID”) from the Federal Trade Commission (“FTC”) as part of its investigation to determine whether we, through our Venmo service, have been or are engaged in deceptive or unfair practices in violation of the Federal Trade Commission Act. The CID requests the production of documents and answers to written questions related to our Venmo service. We are cooperating with the FTC in connection with the CID. The CID could lead to an enforcement action and/or one or more consent orders, which may result in substantial costs, including legal fees, fines, penalties, and remediation expenses and actions, and could require us to change aspects of the manner in which we operate Venmo.

General Matters

Other third parties have from time to time claimed, and others may claim in the future, that we have infringed their intellectual property rights. We are subject to patent disputes, and expect that we will increasingly be subject to additional patent infringement claims involving various aspects of our business as our products and services continue to expand in scope and complexity. Such claims may be brought directly or indirectly against our companies and/or against our customers (who may be entitled to contractual indemnification under their contracts with us), and we are subject to increased exposure to such claims as a result of our acquisitions, particularly in cases where we are entering into new lines of business in connection with such acquisitions. We have in the past been forced to litigate such claims, and we believe that additional lawsuits alleging such claims will be filed against us. Intellectual property claims, whether meritorious or not, are time consuming and costly to defend and resolve, could require expensive changes in our methods of doing business or could require us to enter into costly royalty or licensing agreements on unfavorable terms or make substantial payments to settle claims or to satisfy damages awarded by courts.

From time to time, we are involved in other disputes or regulatory inquiries that arise in the ordinary course of business, including suits by our customers (individually or as class actions) alleging, among other things, improper disclosure of our prices, rules or policies, that our practices, prices, rules, policies or customer/user agreements violate applicable law or that we have acted unfairly and/or not acted in conformity with such prices, rules, policies or agreements. In addition to these types of disputes and regulatory inquiries, our operations are also subject to regulatory and/or legal review and/or challenges that tend to reflect the increasing global regulatory focus to which the payments industry is subject and, when taken as a whole with other regulatory and legislative action, such actions could result in the imposition of costly new compliance burdens on our business and customers and may lead to increased costs and decreased transaction volume and revenue. Further, the number and significance of these disputes and inquiries are increasing as our Company has grown larger, our business has expanded in scope (both in terms of the range of products and services that we offer and our geographical operations) and our products and services have increased in complexity. Any claims or regulatory actions against us, whether meritorious or not, could be time consuming, result in costly litigation, settlement payments, damage awards (including statutory damages for certain causes of action in certain jurisdictions), fines, penalties, injunctive relief or increased costs of doing business through adverse judgment or settlement, require us to change our business practices in expensive ways, require significant amounts of management time, result in the diversion of significant operational resources or otherwise harm our business.

Indemnification Provisions

We entered into a separation and distribution agreement and various other agreements with eBay to govern the separation and relationship of the two companies going forward. These agreements provide for specific indemnity and liability obligations and

PayPal Holdings, Inc.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

could lead to disputes between us and eBay, which may be significant. In addition, the indemnity rights we have against eBay under the agreements may not be sufficient to protect us and our indemnity obligations to eBay may be significant.

In the ordinary course of business, we include limited indemnification provisions in certain of our agreements with parties with whom we have commercial relationships, including our standard marketing, promotions, and application-programming-interface license (API) agreements. Under these contracts, we generally indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with claims by any third party with respect to our domain names, trademarks, logos, and other branding elements to the extent that such marks are related to the subject agreement. In a limited number of agreements, we have provided an indemnity for other types of third-party claims, which are indemnities mainly related to intellectual property rights. We have also provided an indemnity to our payments processors in the event of certain third-party claims or card association fines against the processor arising out of conduct by us or our customers. It is not possible to determine the maximum potential loss under these indemnification provisions due to our limited history of prior indemnification claims and the unique facts and circumstances involved in each particular situation. To date, no significant costs have been incurred, either individually or collectively, in connection with our indemnification provisions.

Off-Balance Sheet Arrangements

As of March 31, 2016, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our combined and consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.

Protection Programs

We provide merchants and consumers with protection programs on substantially all transactions completed through our Payments Platform, except for transactions using our gateway products and Paydiant products. These programs protect both merchants and consumers from loss primarily due to fraud and counterparty performance. Our Buyer Protection Program provides protection to consumers for qualifying purchases by reimbursing the consumer for the full amount of the purchase if a purchased item does not arrive or does not match the seller’s description. Our Seller Protection Programs provide protection to merchants against claims that a transaction was not authorized by the buyer or claims that an item was not received by covering the seller for the full amount of the payment on eligible sales.

The maximum potential exposure under our protection programs is estimated to be the portion of total eligible transaction volume (TPV) for which buyer or seller protection claims may be raised under our existing user agreements. Since eligible transactions are typically completed in a period significantly shorter than the period under which disputes may be opened, and based on our historical losses to date, we do not believe that that the maximum potential exposure is representative of our actual potential exposure. The actual amount of potential exposure cannot be quantified as we are unable to determine total eligible transactions where performance by a merchant or customer is incomplete or completed transactions that may result in a claim under our protection programs. We record a liability with respect to losses under these protection programs when they are probable and the amount can be reasonably estimated.

The following table provides management's estimate of the maximum potential exposure related to our protection programs as of March 31, 2016 and December 31, 2015:



	March 31, 2016		December 31, 2015
	(In millions)
Maximum potential exposure	$	117,431	$	109,496

The following table provides the amount of allowance for transaction losses related to our protection programs as of March 31, 2016 and December 31, 2015:



	March 31, 2016		December 31, 2015
	(In millions)
Allowance for transaction losses	$	184	$	185

Note 12 - Related Party Transactions

PayPal Holdings, Inc.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Prior to the distribution, our business comprised the Payments segment of eBay and thus our transactions with eBay were considered related party transactions. In connection with the separation, we entered into a separation and distribution agreement as well as various other agreements that govern our relationships with eBay going forward, including an operating agreement, transition services agreement, tax matters agreement, employee matters agreement, intellectual property matters agreement and colocation services agreements. Information included in this Note 12 with respect to eBay is strictly limited to our related party transactions with eBay prior to the separation (i.e., periods up to July 17, 2015).

We earned net revenues of $28 million from eBay and its subsidiaries during the three months ended March 31, 2015.

Prior to the distribution, we recovered certain amounts from eBay related to customer protection programs offered on eligible eBay purchases made with PayPal. These costs included the actual transaction losses associated with customer-filed claims as well as an allocation of salary-related expenses for our customer support teams working on customer claims and disputes related to eligible eBay purchases. Recoveries associated with transaction losses incurred on eligible eBay purchases during the three months ended March 31, 2015 were $10 million, which were recorded as a reduction to transaction and loan loss. Other costs recovered from eBay related to the customer protection programs during the three months ended March 31, 2015 was $5 million and were included as a reduction to customer support and operations and general and administrative expenses in our condensed combined statement of income. Following the distribution, eBay's customer protection programs are no longer administered by us, and therefore these costs are no longer reimbursed by eBay.

Prior to the distribution, we incurred user acquisition fees from eBay on payment volume which we processed from purchases made on eBay’s platform. User acquisition fees during the three months ended March 31, 2015 were $30 million. Following the distribution, pursuant to the operating agreement, we incur referral services fees from eBay based on a fixed rate per new user.

These condensed combined and consolidated financial statements include expenses associated with workplace resources and information technology that were previously allocated to the Payments segment of eBay, and additional expenses related to certain corporate functions, including senior management, legal, human resources and finance. These expenses also include allocations related to share based compensation. These expenses allocated to us by eBay are based on direct usage or benefit where identifiable, with the remainder allocated on a pro rata basis of revenue, headcount, or other systematic measure. We consider the expense allocation methodology and results to be reasonable for all periods presented. The corporate costs and allocation of expenses to us from eBay included within customer support and operations, sales and marketing, product development, and general and administrative expenses were $160 million for the three months ended March 31, 2015.

All other contracts with related parties are at rates and terms that we believe are comparable with those that could be entered into with independent third parties. There were no other material related party transactions in the periods presented. As of March 31, 2016, there were no other material amounts payable to or amounts receivable from related parties. Following separation, transactions with eBay represent third-party transactions on an arms-length basis.

Note 13 - Stock Repurchase Program

In January 2016, our Board of Directors authorized a stock repurchase program that provides for the repurchase of up to $2 billion of our common stock, with no expiration from the date of authorization. This stock repurchase program is intended to offset the impact of dilution from our equity compensation programs and, subject to market conditions and other factors, may also be used to make opportunistic repurchases of our common stock to reduce outstanding share count. Any share repurchases under our stock repurchase program may be made through open market transactions, block trades, privately negotiated transactions or other means at times and in such amounts as management deems appropriate and will be funded from our working capital or other financing alternatives. However, any stock repurchases are subject to market conditions and other uncertainties and we cannot predict if or when any stock repurchases will be made. Moreover, we may terminate our stock repurchase program at any time without notice.

The stock repurchase activity under our stock repurchase program during the three months ended March 31, 2016 is summarized as follows:

PayPal Holdings, Inc.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	Shares Repurchased	Average Price Paid per Share⁽¹⁾		Value of Shares Repurchased		Remaining Amount Authorized
	(In millions, except per share amounts)
Authorization of plan in January 2016						$	2,000
Repurchases of shares of common stock	17	$	35.27	596		(596		)
Balance as of March 31, 2016	17			$	596	$	1,404

⁽¹⁾ Average price paid per share includes broker commissions.

These repurchased shares of common stock were recorded as treasury stock and were accounted for under the cost method. No repurchased shares of common stock have been retired.

Note 14 - Stock-Based Plans

Stock Option Activity

The following table summarizes stock option activity of our employees under our equity incentive plans for the three months ended March 31, 2016:



	Options
	(In thousands)
Outstanding at January 1, 2016	6,008
Granted	124
Exercised	(371	)
Forfeited/expired/canceled	(34	)
Outstanding at March 31, 2016	5,727

The weighted average grant-date fair value of stock options granted during the period was $8.79 per share. The weighted average exercise price of stock options granted during the period was $36.32 per share.

Restricted Stock Unit Activity

The following table summarizes the restricted stock units granted (including performance‑based restricted stock units that have been earned) under our equity incentive plans for the three months ended March 31, 2016:



	Units
	(In thousands)
Outstanding at January 1, 2016	28,005
Awarded	414
Vested	(997	)
Forfeited	(434	)
Outstanding at March 31, 2016	26,988
Expected to vest	23,501

The weighted average grant-date fair value of restricted stock units granted during the period was $33.36 per share.

PayPal Holdings, Inc.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Performance-Based Restricted Stock Units (PBRSUs)

In the first quarter of 2016, we granted PBRSUs under PayPal's 2015 Equity Incentive Award Plan to officers and certain employees providing services to the Company. PBRSUs are equity awards that are earnable based on an initial target number with the final number of PBRSUs that may be vested and settled determined based on the product of the initial target number of PBRSUs multiplied by a performance factor based on measurements of the Company’s performance against pre-established performance metrics over a predefined performance period. Over the performance period, the number of PBRSUs that will be issued and related stock-based compensation expense that is recognized is adjusted upward or downward based upon the probability of achieving the approved performance targets against the performance metrics. As of March 31, 2016, 1.7 million PBRSUs were outstanding for the 2016-2018 performance period, which is based on the Company's best estimate of the number of PBRSUs that will vest over the performance period.

Stock-based Compensation Expense

Prior to the separation, we were charged by eBay for stock-based compensation expense related to our direct employees. eBay allocated to us costs of certain employees of eBay (including stock-based compensation) who provided general and administrative services on our behalf. Following the separation, we record stock-based compensation expense for our equity incentive plans in accordance with the provisions of the authoritative accounting guidance, which requires the measurement and recognition of compensation expense based on estimated fair values.

The impact on our results of operations of recording stock-based compensation expense under eBay's and PayPal's equity incentive plans for the three months ended March 31, 2016 and 2015 was as follows:



	Three Months Ended March 31,
	2016		2015
	(In millions)
Customer support and operations	$	18	$	13
Sales and marketing	16		13
Product development	33		29
General and administrative	27		22
Depreciation and amortization	1		2
Total stock-based compensation expense	$	95	$	79

Total stock-based compensation costs capitalized as part of internal use software and website development costs was $2 million for both the three months ended March 31, 2016 and 2015.

Note 15 - Income Taxes

For periods ended on or prior to July 17, 2015, we were a member of the eBay consolidated group and our U.S. taxable income was included in the consolidated U.S. federal income tax return of eBay as well as in returns filed by eBay with certain state and local taxing jurisdictions. Our foreign income tax returns are filed on a separate company basis. For periods ended on or prior to July 17, 2015, our income tax liability has been computed and presented herein under the “separate return method” as if it were a separate tax paying entity, as modified by the benefits-for-loss approach. Accordingly, our operating losses and other tax attributes are characterized as utilized when those attributes have been utilized by other members of the eBay consolidated group; however, the benefits-for-loss approach does not impact our tax expense. Federal and unitary state income taxes incurred for periods ended on or prior to July 17, 2015 are remitted to eBay pursuant to a tax sharing agreement between the companies.

In connection with the distribution, eBay and PayPal entered into various agreements that govern the relationship between the parties going forward, including a tax matters agreement. The tax matters agreement was entered into on the distribution date. Under the tax matters agreement, eBay generally is responsible for all additional taxes (and will be entitled to all related refunds of taxes) imposed on eBay and its subsidiaries (including subsidiaries that were transferred to PayPal pursuant to the separation) arising after the distribution date with respect to the taxable periods (or portions thereof) ended on or prior to July 17, 2015, except for those taxes for which PayPal has reflected an unrecognized tax benefit in its financial statements on the distribution date.

PayPal Holdings, Inc.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Our effective tax rate for the three months ended March 31, 2016 was 13.5%. Our effective tax rate for the three months ended March 31, 2015 was 20.6%. The difference between our effective tax rate and the U.S. federal statutory rate of 35% was primarily the result of foreign income taxed at different rates.

On July 27, 2015, the U.S.Tax Court, in Altera Corp. v. Commissioner, invalidated part of a Treasury Regulation requiring stock-based compensation to be included in a qualified intercompany cost sharing arrangement. A final decision was entered by the U.S. Tax Court on December 1, 2015. On February 19, 2016, the Internal Revenue Service filed a notice of appeal to the Ninth Circuit Court of Appeals. We have reviewed this case and its impact on PayPal and concluded that no adjustment to the consolidated financial statements is appropriate at this time. We will continue to monitor ongoing developments and potential impacts to our consolidated financial statements.

Note 16 - Accumulated Other Comprehensive (Loss) Income

The following table summarizes the changes in accumulated balances of other comprehensive loss for the three months ended March 31, 2016:



	Unrealized Gains (Losses) on Cash Flow Hedges			Unrealized Gains (Losses) on Investments			Foreign Currency Translation			Estimated tax (expense) benefit			Total
	(In millions)
Beginning balance as of December 31, 2015	$	57		$	(16	)	$	(53	)	$	3		$	(9	)
Other comprehensive income (loss) before reclassifications	(4		)	9			8			(2		)	11
Amount of gain reclassified from accumulated other comprehensive income	32			(3		)	—			—			29
Net current period other comprehensive income	(36		)	12			8			(2		)	(18		)
Ending balance as of March 31, 2016	$	21		$	(4	)	$	(45	)	$	1		$	(27	)

The following table summarizes the changes in accumulated balances of other comprehensive income for the three months ended March 31, 2015:



	Unrealized Gains (Losses) on Cash Flow Hedges		Foreign Currency Translation			Estimated tax (expense) benefit		Total
	(In millions)
Beginning balance as of December 31, 2014	$	126	$	(16	)	$	—	$	110
Other comprehensive income (loss) before reclassifications	114		(33		)	1		82
Amount of gain reclassified from accumulated other comprehensive income	50		—			—		50
Net current period other comprehensive income	64		(33		)	1		32
Ending balance as of March 31, 2015	$	190	$	(49	)	$	1	$	142

PayPal Holdings, Inc.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table provides details about reclassifications out of accumulated other comprehensive income for the three months ended March 31, 2016 and 2015:



Details about Accumulated Other Comprehensive Income Components	Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income					Affected Line Item in the Statement of Income
	Three Months Ended March 31,
	2016			2015
	(In millions)
Gains on cash flow hedges-foreign exchange contracts	$	32		$	50	Net revenues
Unrealized losses on investments	$	(3	)	$	—	Other income (expense), net
	$	29		$	50	Income before income taxes
	—			—		Income tax expense
Total reclassifications for the period	$	29		$	50	Net income

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, or management strategies). These forward-looking statements can be identified by words such as “may,” “will,” “would,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” 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 II— Item 1A: Risk Factors” of this Quarterly Report on Form 10-Q as well as in our unaudited condensed combined and consolidated financial statements, related notes, and the other information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission, or the SEC. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited condensed combined and consolidated financial statements and the related notes that appear elsewhere in this report.

The Separation from eBay

On September 30, 2014, eBay Inc. (“eBay”) announced its intent to separate its payments business into an independent, publicly-traded company. To accomplish this separation, in January 2015, eBay incorporated PayPal Holdings, Inc. (“PayPal”) which is now the parent of PayPal, Inc. and holds directly or indirectly all of the assets and liabilities associated with PayPal, Inc. In June 2015, the Board of Directors of eBay approved the separation (the "separation") of eBay's payments business through the distribution (the "distribution") of 100% of the outstanding common stock of PayPal to eBay's stockholders. PayPal's registration statement on Form 10, as amended, was declared effective by the U.S. Securities and Exchange Commission on June 29, 2015. On July 17, 2015 (the "distribution date"), PayPal became an independent publicly-traded company through the pro rata distribution by eBay of 100% of the outstanding common stock of PayPal to eBay stockholders. Each eBay stockholder of record as of the close of business on July 8, 2015 received one share of PayPal common stock for every share of eBay common stock held on the record date. Approximately 1.2 billion shares of PayPal common stock were distributed on July 17, 2015 to eBay stockholders. PayPal's common stock began "regular way" trading under the ticker symbol "PYPL" on The NASDAQ Stock Market on July 20, 2015.

Prior to the separation, eBay transferred substantially all of the assets and liabilities and operations of eBay's payments business to PayPal, which was completed in June 2015 (the "capitalization"). The combined financial statements prior to the capitalization were prepared on a stand-alone basis and were derived from eBay's consolidated financial statements and accounting records. The combined financial statements reflect our financial position, results of operations, comprehensive income and cash flows as our business was operated as part of eBay prior to the capitalization. Following the capitalization, our consolidated financial statements include the accounts of PayPal and its wholly-owned subsidiaries. The condensed combined and consolidated financial position, results of operations and cash flows as of dates and for periods prior to the separation may not be indicative of what our financial position, results of operations and cash flows would have been as a separate stand-alone entity during the periods presented, nor are they indicative of what our financial position, results of operations and cash flows may be in the future. For additional information, see Note 1 to our condensed combined and consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

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 or, in the case of information as of dates or for periods prior to the separation, the combined and consolidated entities of the payments business of eBay, including PayPal, Inc. and certain other assets and liabilities that had been historically held at the eBay corporate level but were specifically identifiable and attributable to the payments business.

Business Environment

We are a leading technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. We believe in providing simple, affordable, secure and reliable financial services and digital payments to help our

customers around the world to achieve their financial goals. We strive to increase our relevance for consumers, merchants, friends and family to access and move their money anywhere in the world, anytime, on any platform and through any device (e.g., mobile, tablets, personal computers or wearables). Our goal is to provide safer and simpler ways for businesses of all sizes to accept payments from merchant websites, mobile devices and applications, and at offline retail locations through a wide range of payment solutions. We also facilitate person to person payments through PayPal, Venmo and Xoom. Our combined payment solution capabilities, including our PayPal, PayPal Credit, Braintree, Venmo, and Xoom products, comprise our proprietary Payments Platform.

We provide merchants and consumers with protection programs on substantially all transactions completed through our Payments Platform, except for transactions using our gateway and Paydiant products. Our gateway products include our Payflow Payments and certain Braintree products. A payment gateway links a merchant's website to their processing network and merchant account. These programs protect both merchants and consumers from loss primarily due to fraud and counterparty non-performance. Our risk management capabilities allow us to provide these protections, which we believe are generally broader than those protections provided by other participants in the payments industry. Most major payments providers do not offer merchant protection in general, and those that do so generally do not provide protection of online or card not present transactions. As a result, merchants may incur losses for chargebacks and other claims on certain transactions when using other payments providers that they would not incur if they had used PayPal’s payments services. PayPal also provides consumer protection against losses on qualifying purchases and accepts claims for 180 days post transaction in the markets that PayPal serves. We believe that this protection is generally consistent with, or better than, that offered by other major payments providers. We believe that as a result of these programs, consumers can be confident that they will only be required to pay if they receive the product in the condition as described, and merchants can be confident that they will receive payment for the product that they are delivering to the customer.

Our Payments Platform and open application programming interfaces (“APIs”) are designed to allow developers to innovate with ease and to offer cutting edge applications to a large ecosystem of merchants and consumers, while at the same time maintaining the security of our customers’ financial information. We provide developers with easy to use, flexible and powerful tools that are designed to leverage our global reach and payment capabilities. Our software developer kits (“SDKs”) are specifically focused on the mobile application market and are designed to remove friction by not requiring a redirect to PayPal.com or an additional login. We are using a true “mobile first” approach to make payments simple and intuitive.

Information security risks for global payments and technology companies have significantly increased in recent years. Although we are not aware of any material impacts relating to cyber-attacks or other information security breaches on our Payments Platform, there can be no assurance that we are immune to these risks and will not suffer such losses in the future. See “Risk Factors-Risk Factors That May Affect Our Business, Results of Operations and Financial Condition-Our business is subject to online security risks, including security and privacy breaches” described in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2015.

We operate globally and in a rapidly evolving regulatory environment characterized by a heightened regulatory focus on all aspects of the payments industry. That focus continues to become even more heightened as regulators on a global basis focus on such important issues as countering terrorist financing, anti-money laundering, privacy and consumer protection. Some of the laws and regulations to which we are subject were enacted recently and the laws and regulations applicable to us, including those enacted prior to the advent of digital and mobile payments, are continuing to evolve through legislative and regulatory action and judicial interpretation. Non-compliance with laws and regulations, increased penalties and enforcement actions related to non-compliance, changes in laws and regulations or their interpretation, and the enactment of new laws and regulations applicable to us could have a material adverse impact on our business, results of operations and financial condition. Therefore, we monitor these areas closely to ensure compliant solutions for our customers who depend on us.

Overview of Results of Operations

Three months ended March 31, 2016 and 2015

Net revenues increased $407 million, or 19%, in the three months ended March 31, 2016 compared to the same period of the prior year. The increase was primarily driven by growth in TPV (as defined below) of 29% compared to the same period of the prior year. Operating expenses increased $322 million, or 18%, in the three months ended March 31, 2016 compared to the same period of the prior year. The increase was primarily due to an increase in transaction expense, transaction and loan losses, customer support and operations and depreciation and amortization.

Operating income increased $85 million, or 26%, in the three months ended March 31, 2016 compared to the same period of the prior year. Non-GAAP operating income increased $64 million, or 14%, in the three months ended March 31, 2016 compared to

the same period of the prior year. Our operating margin was 16% and 15% in the three months ended March 31, 2016 and 2015, respectively. Our non-GAAP operating margin was 21% and 22% in the three months ended March 31, 2016 and 2015, respectively. Operating income increased primarily due to the increase in net revenues, restructuring expenses of $48 million in the three months ended March 31, 2015 and other operating efficiencies. Non-GAAP operating income increased primarily due to the increase in net revenues and other operating efficiencies.

Net income increased by $110 million, or 43%, in the three months ended March 31, 2016 compared to the same period in the prior year. The increase in net income was attributable to an increase in operating income of $85 million, an increase in other income, net of $16 million and a decrease in income tax expense of $9 million. Non-GAAP net income increased by $92 million, or 26%, in the three months ended March 31, 2016 compared to the same period in the prior year. For the three months ended March 31, 2016, our diluted net income per share was $0.30, a $0.09 increase compared to the same period of the prior year. For the three months ended March 31, 2016 our non-GAAP diluted net income per share was $0.37, a $0.08 increase compared to the same period of the prior year.

We generated net cash flows from operating activities of $738 million for the three months ended March 31, 2016, compared to $544 million for the three months ended March 31, 2015. We generated free cash flow (a non-GAAP financial measure) of $605 million and $350 million in the three months ended March 31, 2016 and 2015, respectively.

The following table provides a summary of our combined and consolidated GAAP financial measures for the three months ended March 31, 2016 and 2015:



	Three Months Ended March 31,						Percent Increase/(Decrease)
	2016			2015			Percent Increase/(Decrease)
	(In millions, except percentages)
Net revenues	$	2,544		$	2,137		19	%
Operating expenses	2,137			1,815			18	%
Operating income	407			322			26	%
Income tax expense	57			66			(14	)%
Effective tax rate	13.5		%	20.6		%	**
Net income	$	365		$	255		43	%
Net income per diluted share⁽¹⁾⁽²⁾	$	0.30		$	0.21		43	%

⁽¹⁾ On July 17, 2015, the distribution date, eBay stockholders of record as of the close of business on July 8, 2015 received one share of PayPal common stock for every share of eBay common stock held as of the record date. Basic and diluted net income per share for the three months ended March 31, 2015 is calculated using the number of common shares distributed on the distribution date.

⁽²⁾ Basic and diluted net income per share for the three months ended March 31, 2016 is calculated using the weighted average number of common shares outstanding for the period.

** Not Meaningful

The following table provides a summary of our combined and consolidated non-GAAP financial measures for the three months ended March 31, 2016 and 2015:



	Three Months Ended March 31,						Percent Increase/(Decrease)
	2016			2015			Percent Increase/(Decrease)
	(In millions, except percentages)
Non-GAAP operating income	$	537		$	473		14	%
Non-GAAP operating margin	21		%	22		%	**
Non-GAAP net income	$	452		$	360		26	%
Non-GAAP net income per diluted share⁽¹⁾⁽²⁾	$	0.37		$	0.29		25	%
Free cash flow	$	605		$	350		73	%

⁽¹⁾Non-GAAP net income per diluted share for the three months ended March 31, 2015 is calculated using the number of shares of PayPal common stock distributed on the distribution date.

⁽²⁾Non-GAAP net income per diluted share for the three months ended March 31, 2016 is calculated using the weighted average number of common shares outstanding for the period.

** Not Meaningful

Non-GAAP operating income, non-GAAP operating margin, non-GAAP net income, non-GAAP net income per diluted share and free cash flow are not financial measures prepared in accordance with generally accepted accounting principles (“GAAP”). For information on how we compute these non-GAAP financial measures and a reconciliation to the most directly comparable financial measures prepared in accordance with GAAP, please refer to “Non-GAAP Financial Information” below.

Impact of Foreign Currency Exchange Rates

We have significant operations internationally that are denominated in foreign currencies, primarily the British Pound, Euro, Australian Dollar and Canadian Dollar, subjecting us to foreign currency risk which may adversely impact our financial results. The strengthening or weakening of the U.S. dollar versus the British Pound, Euro, Australian Dollar and Canadian Dollar, as well as other currencies in which we conduct our international operations, impacts the translation of our net revenues and expenses generated in these foreign currencies into the U.S. dollar. In the three months ended March 31, 2016 and 2015, we generated approximately 47% and 52% of our net revenues from customers domiciled outside of the United States, respectively. Other than the United States, the United Kingdom was the only country where we generated more than 10% of total net revenues in the three months ended March 31, 2016 and 2015. During each of these periods, we also generated more than 10% of total net revenues in the Euro zone. Because we have generated substantial net revenues internationally in recent periods, including during the periods presented, we are subject to the risks of doing business in foreign countries as discussed under “Risk Factors—Risk Factors That May Affect Our Business, Results of Operations and Financial Condition” described in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2015.

We calculate the year-over-year impact of foreign currency 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 exchange exposure management program whereby we designate certain foreign currency exchange contracts as cash flow hedges to help minimize the impact on earnings from foreign currency rate movements. Gains and losses from these foreign currency exchange contracts are recognized as a component of transaction revenues in the same period the forecasted transactions impact earnings. In the three months ended March 31, 2016, foreign currency movements relative to the U.S. dollar negatively impacted net revenues by approximately $15 million (inclusive of a $32 million favorable impact from hedging activities) and favorably impacted operating expenses by approximately $30 million. In the three months ended March 31, 2015, foreign currency movements relative to the U.S. dollar negatively impacted net revenues by approximately $80 million (inclusive of a $50 million favorable impact from hedging activities) and favorably impacted operating expenses by approximately $75 million. While we enter into foreign currency exchange contracts to minimize the impact on earnings from foreign currency rate movements, it is impossible to predict or eliminate the effects of this exposure.

Additionally, in connection with our services in multiple currencies, we set our foreign exchange rates twice per day, and may face financial exposure if we incorrectly set our foreign exchange rates or as a result of fluctuations in foreign exchange rates between the times that we set our foreign exchange rates. Given that we also have foreign exchange risk on our assets and liabilities denominated in currencies other than the functional currency of our subsidiaries, we have an additional foreign exchange exposure management program whereby we use foreign exchange contracts to offset the impact of currency exchange rate movements on our assets and liabilities. The foreign currency gains and losses on our assets and liabilities are recorded in “Other income (expense), net,” which is offset by the gains and losses on the foreign exchange contracts. These foreign exchange contracts reduce, but do not entirely eliminate, the impact of currency exchange rate movements on our assets and liabilities.

Financial Results

Net revenues

We earn revenue from the following types of transactions:


•	Transaction revenues: Net transaction fees charged to consumers and merchants based on the volume of activity processed through our Payments Platform, including our PayPal, PayPal Credit, Venmo, Braintree and Xoom products.

•

Other value added services: Net revenues derived principally from interest and fees earned on our PayPal Credit loans receivable portfolio, subscription fees, gateway fees, gain on sale of participation interests in certain consumer loans receivable, revenue share we earn through partnerships, interest earned on certain PayPal customer account balances, fees earned through our Paydiant products and other services that we provide to consumers and merchants.

Net revenue analysis

The significant components of our net revenue for the three months ended March 31, 2016 and 2015 were as follows:



	Three Months Ended March 31,				Percent Increase/(Decrease)
	2016		2015		Percent Increase/(Decrease)
	(In millions, except percentages)
Transaction revenues	$	2,238	$	1,914	17	%
Other value-added services	306		223		37	%
Net revenues	$	2,544	$	2,137	19	%

Transaction revenue grew by $324 million, or 17%, for the three months ended March 31, 2016 compared to the same period in the prior year. The increase in transaction revenues in the three months ended March 31, 2016 was due primarily to the growth in TPV and the growth in total number of payment transactions on our Payments Platform, both of which were due to increased engagement from our customers and growth from our Braintree products.

The following table provides a summary of our active customer accounts, number of payment transactions, TPV and related metrics:



	Three Months Ended March 31,						Percent Increase/(Decrease)
	2016			2015			Percent Increase/(Decrease)
	(In millions, except percentages)
Active customer accounts¹	184			165			11	%
Number of payment transactions²	1,414			1,123			26	%
Payment transactions per active account³	28.4			25.2			12	%
Total TPV⁴	$	81,056		$	63,021		29	%
Percent of cross-border TPV	23		%	23		%	—	%

All amounts in tables are rounded to the nearest millions, except as otherwise noted. As a result, certain amounts may not recalculate using the rounded amounts provided.

¹ An active customer account is a registered account that successfully sent or received at least one payment or payment reversal through our Payments Platform, excluding transactions processed through our gateway and Paydiant products, in the past 12 months.

² Payment transactions are the total number of payments, net of payment reversals, successfully completed through our Payments Platform, excluding transactions processed through our gateway and Paydiant products.

³ Number of payment transactions per active customer account reflects the total number of payment transactions within the previous 12 month period, divided by active customer accounts at the end of the period

⁴ Total Payment Volume or “TPV” is the value of payments, net of payment reversals, successfully completed through our Payments Platform, excluding transactions processed through our gateway and Paydiant products.

The growth in transaction revenues was lower than the growth in TPV and growth in payment transactions for the three months ended March 31, 2016 was due to a higher portion of person-to-person transactions, primarily from our PayPal and Venmo products, in which we earn lower rates and a higher portion of TPV generated by large merchants who generally pay lower rates on higher transaction volume. The percentage of TPV generated by large merchants increased three percentage points in the three months ended March 31, 2016 compared to the same period in the prior year. The impact of changes in prices charged to our customers did not significantly impact revenue growth in the three months ended March 31, 2016.

Net revenues from other value-added services increased by $83 million, or 37%, for the three months ended March 31, 2016 compared to the same period in the prior year. The increase in net revenues from other value-added services for the three months ended March 31, 2016 was due primarily to interest and fee income earned on loans receivable outstanding from consumers and merchants that use our PayPal Credit products and revenue share earned under our credit program agreement with Synchrony Financial (formerly GE Capital Retail Bank). In 2015, we amended the terms of our credit program agreement with Synchrony Financial. As a result of the amendment, net revenues from other value-added services increased by $29 million for the three months ended March 31, 2016 compared to the same period in the prior year.

Operating Expenses

Beginning with the first quarter of 2016, we reclassified certain operating expenses in our condensed combined and consolidated statements of income to better align our external and internal financial reporting. These classification changes relate primarily to real estate and information technology operating expenses that were previously allocated among customer support and operations expense, sales and marketing expense and product development expense. Our management does not allocate these operating expenses for internal financial reporting purposes or general management of the business and has therefore discontinued this allocation for external financial reporting purposes. As a result, starting with the first quarter of 2016 these operating expenses are reported as part of general and administrative expenses. These changes have no impact on the previously reported condensed combined and consolidated net income for prior periods, including total operating expenses, financial position or cash flows for any periods presented, and do not eliminate any of the costs allocated to us by eBay for any periods prior to the separation. Prior period amounts have been reclassified to conform to the current period presentation. See “Note 1- Overview and Summary of Significant Accounting Policies" in the notes to the combined and consolidated financial statements in Item 1 of Part I of this Form 10-Q for additional information on the effects of the changes on the presentation of operating expenses to our previously reported condensed combined and consolidated statement of income on a GAAP basis. Growth rates presented below are calculated based upon the reclassified prior period amounts.

The following table summarizes our operating expenses and related metrics we use to assess the trend in each:



	Three Months Ended March 31,						Percent Increase/(Decrease)
	2016			2015			Percent Increase/(Decrease)
	(In millions, except percentages)
Transaction expense	$	752		$	575		31	%
Transaction and loan losses	255			178			43	%
Customer support and operations	296			249			19	%
Sales and marketing	233			222			5	%
Product development	195			185			5	%
General and administrative	231			217			6	%
Depreciation and amortization	175			141			24	%
Restructuring	—			48			**
Total operating expenses	$	2,137		$	1,815		18	%
Transaction expense rate¹	0.93		%	0.91		%	**
Transaction and loan loss rate²	0.31		%	0.28		%	**

¹ Transaction expense rate is calculated by dividing transaction expense by TPV.

² Transaction and loan loss rate is calculated by dividing transaction and loan loss by TPV.

** Not Meaningful

Transaction expense

Transaction expense increased by $177 million, or 31%, in the three months ended March 31, 2016 compared to the same period of the prior year. The increase in transaction expense in the three months ended March 31, 2016 was primarily attributable to an increase in TPV, offset by favorable foreign currency fluctuations due to the strengthening of the U.S. dollar.

Our transaction expense rate in the three months ended March 31, 2016 increased compared to the same period of the prior year due primarily to growth from our Braintree products, which is predominantly credit or debit card funded, and higher assessments charged by payments processors and other financial institutions. The cost of funding a transaction with a credit or debit card is generally more costly than the cost of funding a transaction from a bank or through internal sources such as a PayPal account balance or PayPal Credit. As we expand the availability of alternative funding sources to our customers, a change in funding mix could increase or decrease our transaction expense rate. Funding mix did not have a material impact on our transaction expense rate for the three months