ASM 2018

May 23, 2018

Good morning, ladies and gentlemen, and welcome to PayPal Holdings, Inc.'s 2018 annual stockholders meeting. I would like to introduce you to Mr. John Donahoe, Chairman of the Board of PayPal Holdings, Inc.. Mr. Donahoe, you may begin. Good morning, and welcome to the 2018 Annual Shareholders Meeting of PayPal Holdings Incorporated. I'm John Donahoe, Chairman of the Board of PayPal Holdings Inc., and I'll be serving as Chair of this meeting. I'd like to start by introducing the other board members who are participating in today's meeting. Dan Schulman, who also serves as our President and Chief Executive Officer. Rod Adkins, Wences Casares, Jonathan Christodoro, David Dorman, Belinda Johnson, David Moffett, Ann Sarnoff, and Frank Yeary. In addition to Dan Schulman, other members of PayPal's senior leadership team participating in today's meeting include John Rainey, Chief Financial Officer, Bill Ready, Chief Operating Officer, Brian Yamasaki, Corporate Secretary, Gabrielle Rabinovitch, Investor Relations, and Franz Paasche, Corporate Affairs and Communications. A representative of PwC, our independent auditor, is also present today and will be available to answer appropriate questions during the question and answer session of the meeting. I would now like to call the 2018 Annual Shareholders Meeting to order. I'll be serving as Chair of this meeting, and Brian Yamasaki will serve as Secretary of the meeting. I will now turn the meeting over to Brian to begin the formal matters to be discussed this morning. Thanks, John. Before we begin, we wanted to share that we are excited that our annual stockholder meeting is being conducted virtually through a live audio webcast. By holding a virtual meeting, we're enabling stockholders from around the world to attend and participate in our annual meeting, which allows for increased access and participation. We've engaged with our investors and solicited feedback on the virtual meeting format for our annual meeting, that feedback has generally been positive. Following this meeting, we will consider any additional feedback from our stockholders on the meeting format and will continue to work to enhance the meeting experience going forward. We're conducting this meeting in accordance with our bylaws and the meeting rules of conduct and procedures. The meeting rules and agenda are available on the meeting website. As a reminder, stockholders attending the virtual meeting can vote their shares online from now through the closing of the polls by logging in to the meeting website as a stockholder and clicking the Vote Here button on their screen. If you have previously voted by proxy and do not wish to change your vote, your vote will be cast as you previously instructed, and no further action is required. We will begin by attending to the formal business of the meeting. After the formal meeting is adjourned, Dan Schulman, our President and CEO, will provide a short presentation on the business. Following that, we will hold a question and answer session. We have received several questions that were submitted by stockholders in advance of today's meeting that we will address during the Q&A session. Stockholders logged into the meeting website will be able to submit questions by typing them into the text box on the meeting website through the end of the Q&A session. If you have a specific question about a specific PayPal product or your customer account, please feel free to send those questions to the following email address, stockholdercustomerquestions@paypal.com. Finally, please note that the meeting is being recorded and will be available for replay on the meeting website for 90 days. This meeting is held pursuant to the notice of annual meeting that we began mailing on April 12th, 2018 to all stockholders of record as of the close of business on April 3rd, 2018. We have received an affidavit of mailing from Broadridge indicating that notice of the meeting has been duly given. A copy of our proxy statement is available on PayPal's Investor Relations website and the Securities and Exchange Commission's website at www.sec.gov. The Inspector of Elections has confirmed that proxies have been received from more than 88% of the nearly 1.2 billion shares of the company's outstanding common stock entitled to vote. I declare that there is a quorum present. Accordingly, the meeting is duly constituted, and we may now proceed with the business of the meeting. As John indicated in his introduction, the polls are open for voting. We will close the polls after the proposals have been presented. There are eight items of business to be voted on at this meeting. The first item of business is the election of 11 director nominees to the Board of Directors, each to hold office until the 2019 annual meeting of stockholders or until their successors are duly elected and qualified. The nominees for election to the Board of Directors are Rodney Adkins, Wences Casares, Jonathan Christodoro, John Donahoe, David Dorman, Belinda Johnson, Gail McGovern, David Moffett, Ann Sarnoff, Dan Schulman, and Frank Yeary. The second item of business is an advisory vote to approve the compensation of our named executive officers. The third item of business is the approval of our amended and restated 2015 Equity Incentive Award Plan. The fourth item of business is the approval of our amended and restated employee stock purchase plan. The fifth item of business is the ratification of the appointment of PricewaterhouseCoopers LLP as our independent auditor for 2018. The next item of business is the consideration of three stockholder proposals, if properly presented at this meeting. The three stockholder proposals and the company's opposition statements are provided in our proxy statement. A representative from each proponent will have five minutes to present their stockholder proposal. The first stockholder proposal was submitted by Mr. John Chevedden. Mr. Chevedden will be presenting the proposal. Operator, please open the line for Mr. Chevedden. Hello, this is John Chevedden. Can you hear me? Yes. Proposal six, shareholder proxy access enhancement. Stockholders request the board of directors to take the steps necessary to amend the proxy access bylaw provisions and any associated documents to include the following two changes for the purpose of decreasing the average amount of company common stock the typical member of a nominating group would be required to own for a continuous three years to satisfy the total ownership requirement to form a nominating group and to increase the possible number of proxy access director candidates. The first item is no limitations shall be placed on the number of stockholders who can combine their shares to achieve the 3% of common stock required to nominate directors under our company's proxy access provision. The second item is the number of shareholder-nominated candidates eligible to appear in proxy materials will be 25% of directors, but not less than two. Even if the 20 largest pension funds were able to combine their shares, they would not meet the current 3% criteria for a continuous three years in most companies, according to the Council of Institutional Investors. This proposal addresses the ironic contradiction that our company now has with proxy access for only the largest shareholders who can be the least likely shareholders to use it. It is especially important to improve a shareholder right, such as proxy access, to make up for management taking away an important shareholder right, the right to an in-person annual meeting. We did not even have an opportunity to vote on giving up this right. For decades, shareholders of U.S. companies have had a once-a-year opportunity to ask questions in person to a $10 million CEO and directors. Now our directors can casually flip their phones to mute during the entire meeting. Our management is now free to run a make-believe meeting with investor relations devising softball questions in advance while tossing out challenging shareholder questions. Our $10 million CEO can simply read the scripted investor relations answers to a microphone. Absolutely no opportunity for live audience feedback. The lack of an in-person annual meeting means that a board meeting can be scheduled months after the virtual meeting, by which time any serious issues raised by the shareholders under these conditions will be long forgotten by the directors. Plus, a virtual meeting guarantees that there will be no media coverage for the benefit of all shareholders. A virtual meeting is a complacency plan for our directors and top management. Top management has no incentive to avoid making mistakes for 365 days out of the year out of concern that there will be an in-person accounting at the annual meeting. Please vote to improve proxy access to help make up for management taking away the in-person annual meeting right. Proposal 6, shareholder proxy access enhancement. Please vote yes. Thank you, Mr. Chevedden. The board of directors recommends a vote against the stockholder proposals for the reasons set forth in our opposition statement included in our proxy statement. The 2nd stockholder proposal was submitted by Mr. James McRitchie and Ms. Myra K. Young. Mr. McRitchie will be presenting the proposal on behalf of the proponents. Operator, please open the line for Mr. McRitchie. Hello, this is James McRitchie presenting item number 7, political transparency. This proposal is a good governance proposal, simply requesting a report to give an account on political contributions. It would do nothing to prevent any such contributions. The U.S. Supreme Court's decision in Citizens United was based on a false premise. Justice Kennedy's majority opinion justifies the decision by pointing to the Internet. I quote, "With the advent of the Internet, shareholders can determine whether their corporation's political speech advances the corporation's interests in making profits, and citizens can see whether elected officials are in the pocket of so-called moneyed interests." Unquote. The decision also said that disclosure "permits citizens and shareholders to react to the speech of corporate entities in a proper way. This transparency enables the electorate to make informed decisions and give proper weight to different speakers and messages." Unquote. The court expressed enthusiasm that technology today makes disclosure "rapid and informative." Unquote. Yet corporations are not required to disclose political contributions to shareholders, as Justice Kennedy seems to have believed when he wrote Citizens United. Vote for proposal number six to make such disclosures real at PayPal. I would also like to take this opportunity to second Mr. Chevedden's remarks regarding virtual-only meetings rather than a hybrid meeting. PayPal could reach out to just as many people with a hybrid meeting, and that would also keep in place an in-person meeting, which is so valued by many shareholders. Thank you. Thank you, Mr. McRitchie. The board of directors recommends a vote against this stockholder proposal for the reasons set forth in our opposition statement included in our proxy statement. The third stockholder proposal was submitted by John C. Harrington, trustee for Harrington Investments, Inc., 401 plan. Ms. Brianna Harrington will be presenting the proposal. Operator, please open the line for Ms. Harrington. Good morning. This is Brianna Harrington. I would like to present Proposal eight, a stockholder proposal regarding human and indigenous peoples' rights. On behalf of John C. Harrington Investments Incorporated, and all of our clients. Reports of PayPal's discriminatory practices surfaced as early as 2016, alleging that Israelis living on illegal settlements, in defiance of international law, enjoy full access to PayPal services while Palestinians can't even open a PayPal account. Harrington Investments Incorporated has previously purchased PayPal stock for our clients up until our discovery of the inconsistencies in PayPal's operations and accusations of discrimination. Based on our comprehensive social criteria regarding discrimination on the basis of race, gender, sexual orientation, or perceived disability. To date, there is no mention of human rights and/or indigenous peoples' rights in any of the PayPal governing documents, nor is there a consistent policy on PayPal's stance regarding human and indigenous peoples' rights on the company website. All we are asking is that PayPal establish a fiduciary policy delineating its position on human and indigenous peoples' rights in its governing documents. Respect and affirmation of human rights is a fiduciary duty of our board of directors. I would also like to voice my support for Proposals six and seven. Thank you. Thank you, Ms. Harrington. The board of directors recommends a vote against this stockholder proposal for the reasons set forth in our opposition statement included in our proxy statement. That concludes the presentation of items of business that you've been asked to vote on at today's meeting. The polls are now closed. I have received the preliminary voting results from the Inspector of Elections based on the proxies received as of the opening of the polls at today's meeting. The preliminary voting results are as follows. First, each of the 11 director nominees has been duly elected. Second, the compensation of our named executive officers has been approved by advisory vote. Third, the amended and restated 2015 Equity Incentive Award Plan has been approved. Fourth, the amended and restated employee stock purchase plan has been approved. Fifth, the appointment of PricewaterhouseCoopers LLP as our independent auditor for 2018 has been ratified. Sixth, the stockholder proposal regarding proxy access enhancement has been rejected. Seventh, the stockholder proposal regarding political transparency has been rejected. Eighth, the stockholder proposal regarding human and indigenous peoples' rights has been rejected. All votes are subject to final count certified by the Inspector of Elections, who will report the final vote results on Form 8-K within four business days. There being no further business to come before the meeting, the 2018 annual meeting of stockholders of PayPal Holdings, Inc. is now adjourned. Our CEO, Dan Schulman, will now give a short presentation, followed by our question and answer session. As a reminder, today's presentation may contain forward-looking statements that are based on our current expectations, forecasts, and assumptions and involve risks and uncertainties. Actual results may differ materially from these forward-looking statements due to various risks and uncertainties about our business, which are described in our filings with the SEC, including our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q. You should not rely on any forward-looking statements. All information in the presentation is as of today's date. We expressly disclaim any obligation to update any forward-looking statements. With that, I'll turn the call over to Dan. Thanks, Brian, and thanks everyone for taking the time to join us today on the webcast. We had a transformative year in 2017, but I believe that PayPal is just scratching the surface of the opportunity in front of us. We've successfully moved from being a commoditized button on a website to a full-services digital platform with some 237 million active customers. We've evolved our tech infrastructure, we've developed or acquired new products and services, and we're now truly benefiting from our global scale. We're a company that can now recruit and retain the best talent and a management team that consistently delivers on its promises. The opportunity in front of us is large and it's growing, and we're ready to seize it. We're confident in that assessment because we have a collection of assets and competitive differentiators that are truly unique and very difficult for others to replicate. We obviously have large scale, that helps our network effect. We're at a tipping point where more and more consumers and merchants are coming onto our platform. You can think of our platform as an umbrella with multiple services underneath it that enable merchants and consumers to engage with PayPal more and more frequently. We control our value proposition on an end-to-end basis, that's unlike many others. We control the onboarding, we control the risk processes in between the customer service, and as a result, we can offer differentiated value propositions like buyer and seller protection that others cannot do. Our brand is one of the most trusted in the world. Interbrand, back in 2015, had us at the number 97 most trusted brand in the world, most recognized brand in the world. In 2017, that's jumped up to number 80. Other large brand surveys has the PayPal brand as high as number 56 in the world. We have a tremendous foundation, our company is built upon enterprise risk management, fraud and risk controls, and compliance. We have put a tremendous amount of resources into those to assure that we are best in class in those processes. We've changed our whole business model with the introduction of choice, enabling consumers to pick and choose the financial instrument they want to pay for every single transaction that they do. That, in combination with our move to an open platform, has enabled us to partner with financial institutions, networks, tech platforms, mobile carriers around the world who now look at our open platform as the platform of choice in terms of partnering for digital payments. Finally, we have fully revamped our tech stack. Several years ago, there were numerous questions about, do we have the most modern technology architecture? We've put a tremendous amount of resource into that as well, we have been able to increase the number of our production deployments by over 200% compared to last year. We serve two major customer segments. Consumers, we have almost 220 million of those, and merchants, where we have 19 million. For merchants, we want to be the underlying operating system for digital and mobile commerce and offer a full suite of solutions and services to enable them to compete in this new omni-channel digital mobile world. That transition to digital mobile is making it hard for many merchants to compete, especially smaller businesses that don't have immediate access to the latest technology or the necessary scale to be able to get the services they need. That's driving incredible contraction across the entire retail landscape. For example, in the U.S. last year, more than 105 million sq ft of retail space closed, so far in 2018, more than 90 million sq ft has closed. We feel we have an obligation to level that playing field and enable more merchants to compete in this new world. By having a full-service platform, by adding and enhancing our services, furthering our commitment to be an operating system agnostic, a point-of-sale technology agnostic platform, truly multi-channel, we continue to add incremental value, increase our share of checkout, drive incremental sales for our merchant partners. For our consumers, we are focused on becoming an everyday service. Our customers typically today use our services three times a month, although those numbers tend to skew a lot higher for our Venmo customers. Our biggest opportunity is to get the engagement of our consumers by offering them more and more services to use PayPal at least once or twice a week, aspirationally, to use our app almost every day. We can do that by continuing to increase the reach and relevance of our platform through innovation and partnerships, by bringing new consumers to PayPal a full package of basic consumer financial services that are aimed directly at the underserved, those who don't traditionally have access to the financial services industry. We're very focused on delivering on our ultimate mission of democratizing financial services and driving an inclusive economic opportunity for all citizens around the world. Our success in executing against that strategy is reflected in our financial results. In 2017, we added 29 million new accounts. We extended our leadership in mobile commerce. We launched a number of new innovative products for both consumers and merchants, and continue to execute on our partnership strategy. We've now formed strategic alliances with some of the biggest companies in finance and technology. Importantly, we delivered on our commitments, and we are pleased to have been one of the top-performing companies in the S&P 500. As I said at the start of this presentation, I believe the opportunity in front of us has never been greater. We've made a lot of strides, and our differentiation, I believe, has never been clearer, and our ability to help current and prospective customers join and thrive in the digital economy is as strong as it's ever been. The last few years have shown our ability to execute and be a true customer champion, and we look forward to building on that success. I want to end my presentation by first thanking all of our employees for their efforts, our customers for their trust, and all of you, our shareholders, for your support. Thank you, and I think we can now begin the Q&A portion of the meeting, and I'll turn it over to Gabrielle Rabinovitch. Thanks, Dan. You may continue to submit questions for the Q&A session by typing them into the text box on the meeting website screen through the end of the Q&A session. We will attempt to answer as many questions as time allows, and only appropriate questions will be addressed. The first question is, the stock has done very well. How about a stock split to reward shareholders? Thank you, Gabs. We currently don't have a plan for a stock split. At this time, we do not believe that a stock split would enhance shareholder value. Thanks, Dan. Our next question is, with the tech giants intending foray into financial services offerings, although PayPal is currently offering aspects of traditional banks and credit unions, is PayPal considering acquiring financial institutions in order to combat this and expand user and business products? If not, how would PayPal respond to one of these companies delving deeper into financial services? As an independent company, we made the decision to embrace partnerships as a core strategy. They were a key driver of our success in 2017. In fact, over the past 18 months, we've signed more than 20 strategic partnerships. We're now working with banks, networks, and issuers all over the world, including, by the way, some of the largest tech companies like Google, Alibaba, Facebook, and Microsoft. By combining the best of our assets with the best of their assets, I think we can provide a best-in-class experience for our mutual customers that none of us could do alone. These deals have helped us take significant steps towards achieving our mission, and we believe that they're fundamental to driving long-term sustainable business growth. They push our platform into new geographies, new verticals, and new audiences. As a result, we can offer that same benefit to our partners by making their services more readily available to our 237 million active accounts around the globe. Thanks, Dan. Our next question is, why can't I pay my federal or state taxes with funds from PayPal? It seems that you are missing a huge business opportunity. Thanks. PayPal is always looking to identify ways for customers to quickly and seamlessly make payments and move money. You can now pay your federal income taxes with PayPal in the United States, Italy, Australia, and Canada. You can also pay for local property taxes, court fines, transit fees, child support obligations, and many other government transactions in a growing number of jurisdictions across the U.S. and globally. Thanks. Our next question is any change to the company's dividend policy being considered? Thank you. Our capital allocation priorities have not changed. We continue to focus on organic investments within the business, on M&A, and returning capital to shareholders through stock buybacks. At this time, we do not anticipate any changes as it relates to our capital allocation priorities. Thanks, Dan. Our next question is, will the elected directors sell off the horrible, losing, and corrupted platform, Venmo? Venmo is a huge liability. Venmo is being used excessively for fraudulent activities by financial criminals and undermines PayPal's credibility and reputation for secure transactions. I want PayPal to get rid of Venmo. Thanks. I don't really agree with all those underlying sentiments there, because I believe that Venmo is a real strength for PayPal. It processed more than $40 billion in the past 12 months, growing substantially. Our users are highly engaged. They open the app multiple times a week, and they're increasingly telling us that they want to use Venmo in more ways. We're going to continue to add incremental services that enable Venmo in more places and contexts. Last year, we announced the expansion of Venmo's capability by allowing users to shop in millions of merchants that accept PayPal. We're also excited about Pay with Venmo, which will allow us to connect these engaged customers to PayPal merchants. You'll note that we're following the same playbook with Venmo as we did with PayPal. Both were originally established as peer-to-peer payments platforms, and then they expanded into merchant services. Adding incremental services like Pay with Venmo and connecting our Venmo users with PayPal merchants is a key value proposition that I believe will help Venmo to continue its strong growth. Thanks, Dan. Our next question relates to Venmo as well. It is: what is PayPal's strategy to regain a competitive advantage over Venmo? What will PayPal do to regain lost ground? This is a common question that I get, and just for clarification for everybody, Venmo is a part of PayPal. Together, we are a very strong combination, and we bring options to our P2P customers, our peer-to-peer customers on how they make payments. While competition is intensifying, we feel very good about our P2P assets and the unique value that they offer our customers. Keep in mind that this competition isn't new. Banks have been offering P2P payment options for more than a decade now. In fact, P2P mobile payments volume is expected to grow into a more than $300 billion market by 2021. As a result, we're confident there's plenty of market share to go around. The transition to more mobile P2P payments won't be a winner-take-all phenomenon, and we expect there'll be many winners in this market. Venmo, in fact, benefits from significant loyalty and massive brand recognition within the segment of the market that it's targeted at. The social media component of Venmo remains a true competitive differentiator. We're a clear leader in this market. We believe that Venmo and PayPal will continue to drive strong consumer adoption of mobile P2P payments. Thanks. Our next question is: can you elaborate on how PayPal will respond to competitive offerings like Apple Pay, which Apple is promoting almost as a mandatory feature with an incessant reminder on their devices? Yep. Thanks for that question. PayPal has thrived in one of the world's most intensely competitive industries for 20 years, and we have a very successful track record of collaborating across the retail and financial services ecosystem with the goal of making payments safe, simple, better, and more inclusive for everyone. Now that we're a standalone company, there are increased possibilities for competitors to become partners. As we've seen in the last two years, we've taken these 20 successful partnerships across financial and technology industries, including with companies that people once thought would be competitors to PayPal, and turned those into partnerships. Those include companies like Google, Samsung, Apple, and their digital payment offerings. We see tremendous opportunity for growth in a $25 trillion global retail market, and the digital wallet is at the core of our strategy, and that's really just beginning. Thanks, Dan. Our next question is: there seems to be quite a large board of directors. Is it typical that every director shows up to each meeting? We are very fortunate that PayPal has a world-class board of directors who individually and collectively bring extraordinarily valuable insight, expertise, and perspective. We have 11 directors on our board, and I feel like that's a very good workable size. Our directors regularly attend board meetings and the meetings of the committees on which they serve. It's also important to me and to PayPal that we have a diverse board. I'm proud that we've added two outstanding women directors, Belinda and Ann, as well as an African American director, Rod, and now 45% of our board is comprised of women and underrepresented ethnic groups. This is an important step, it sets the pace for our entire organization and all of our D&I initiatives. Thank you. Our next question is: I find the varying definitions of the role of a board of directors, they tend to include balancing stockholder representation and good business management. Particularly then in these times of corporate corruption, public suspicion, and increasing government leniency, with all due respect, why does this board pointedly appear to recommend against all stockholder proposals, the adoption of which might appear to set the company as an example of a dazzlingly transparent and progressive, in the sense of moving ahead, action-supported vision? A candid, concise, documented, non-bureaucratic response to shareholders would be appreciated. Thanks, Gabrielle. We give careful consideration to each stockholder proposal that we receive because they're focused on the issues that are top of mind for our stockholders. We review proposals on a case-by-case basis and assess whether they're in the best interest of the company and its stockholders. As part of that assessment, we consider the policies and practices that we have in place, market practices, and potential changes that may be appropriate to address particular concerns raised by our stockholders. With respect to the three stockholder proposals that were presented at this meeting, we carefully considered each of them. For the reasons that we stated in our proxy statement, we do not believe they're in the best interest of the company and its stockholders. Thanks, Brian. Our next question is: what further steps are we taking to remedy TIO? Thanks. We made a decision to wind down the operations of TIO in March of 2018. Thanks, Dan. Our next question is: Following our 2016 letter representing a group of socially responsible investors with long-term holdings in PayPal who invest a total of over $15 billion, and following our question in the 2017 meeting of stockholders, our concerns are growing with regard to PayPal's discriminatory operational practices in Israel and Palestine. PayPal provides services to Israeli settlers in the occupied Palestinian territories, counter to international law. At the same time, Palestinian residents in the same areas do not have access to PayPal merchant services. This disparity translates into a discriminatory practice and represents a growing risk to the company's reputation and social license in the region. Since our meeting last year, two additional groups have joined the international campaign against PayPal because of this issue, and the largest Palestinian solidarity group in Australia called for a boycott of the company. At last year's meeting, Mr. Schulman assured us that PayPal is taking this matter seriously and is, quote, "In an ongoing dialogue with advocates and key stakeholders in an effort to resolve this issue." What has the company done about this since last year's meeting? How many stakeholders has PayPal engaged, and how many of them are Palestinian? What concrete steps have been made to remedy PayPal's discriminatory practice? When does PayPal expect to offer equal services to Palestinians and Israelis? Thanks. PayPal's ambition is for everyone to have access to our services for digital payments and commerce in accordance with applicable regulatory requirements. We very much appreciate the outreach and the interest that certain Jewish, Palestinian, and other advocacy groups have shown in working to bring PayPal services to Palestine. We've had dialogue with these organizations because, although we are not currently providing services in the Palestinian territories, we hope ultimately to be able to address the risk, compliance, regulatory, and resource allocation issues to properly serve customers in this region and other markets where PayPal is not yet present. While we do not have anything to announce for the immediate future, we continuously work to develop strategic partnerships, address business feasibility, regulatory, and compliance needs and requirements, and acquire the necessary local authority permissions for new market entries. Thank you for that question. Thanks, Dan. We have no further questions from our stockholders, that concludes the question and answer portion of the meeting. I'll turn the meeting back to Dan to conclude. Thanks, Gabrielle. I want to close by thanking everybody who participated in the virtual meeting and those stockholders who submitted questions. Everybody have a good day.