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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, ladies and gentlemen, and welcome to PayPal’s Fourth Quarter and Full Year 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to introduce your host for today’s conference, Ms. Gabrielle Rabinovitch, Head of Investor Relations. Please go ahead.
Thank you, Sherrie. Good afternoon and thank you for joining us. Welcome to PayPal Holdings’ earnings conference call for the fourth quarter and full year 2017. Joining me today on the call are Dan Schulman, our President and CEO; John Rainey, our Chief Financial Officer; and Bill Ready, our Chief Operating Officer. We’re providing a slide presentation to accompany our commentary. This conference call is also being webcast and both the presentation and call are available through the Investor Relations section of our website.
We will discuss some non-GAAP measures in talking about our company’s performance. You can find a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in the presentation accompanying this conference call. In addition, management will make forward-looking statements that are based on our current expectations, forecasts and assumptions, and involve risks and uncertainties. These statements include our guidance for the first quarter and full year 2018 and the expected impact of tax reform. Our actual results may differ materially from these statements.
You can find more information about risks, uncertainties and other factors that could affect our results in our most recent annual report on Form 10-K, and quarterly reports on Form 10-Q filed with the SEC and available on the Investor Relations section of our website. You should not rely on any forward-looking statements. All information in this presentation is as of today’s date, January 31, 2018. We expressly disclaim any obligation to update the information.
With that, let me turn the call over to Dan.
Thank you, Gabrielle, and thanks everyone for joining us on today’s call. 2017 was a transformative year for PayPal with consistently strong and in many cases record breaking results.
I'd like to highlight couple of areas in particular. First, we achieved record net new actives and engagement on our core platform, by increasing our reach and relevant with both consumers and merchants. Importantly, we anticipate this elevated level of net new actives to continue in 2018. As we experience increasing network effects from our scale. Second, we continue to grow our market share through our increasing leadership in mobile and by introducing a suite of new and innovative services and project experiences for our customers.
Third, we meaningfully strengthen our competitive positioning due to rollout customer choice. The combination of customer choice and our move towards an open platform architecture enabled strategic partnership with many of the world leading companies. Several of these companies had previously been perceived as potential adversaries. The partnerships have opened new avenues of growth from geographic expansion to in-store payments.
Fourth, we announce a new long-term strategic partnership with Synchrony Financial, which will result in PayPal receiving more than $6 billion in cash proceeds at closing. The deal also freeze up more than $1 billion in free cash flow each year, which we will allocate the higher yielding organic and inorganic growth opportunities. Finally, we did all this while delivering consistently strong financial results.
I'll discuss the first four areas in more detail in a moment, but I want to start with our financial results for Q4. I am pleased to say that Q4 was our strongest quarter of the year, capping off landmarks 2017. Payment volume grew 29% on a currency neutral basis to a $131.4 billion, generating revenue of 3.71 billion. Revenue grew by 24% and this is our third consecutive quarter of accelerating revenue growth.
The strong revenue performance combined with disciplined OpEx management drove non-GAAP EPS of $0.55, which was up 30% year-over-year. Our customer metrics were particularly strong. We drove a record 8.7 of new active account [Technical Difficulty]
Ladies and gentlemen, please stand by your conference will begin momentarily. Thank you. Speakers your line is now open.
Okay, I’m back. I was in the middle of these exciting results and shocked even our speaker. So, okay, so let me start off just recapping our fourth quarter. As I mentioned, our payment volume was up 29% on a currency neutral basis to $131.4 billion, generating revenue of $3.71 billion. Revenue grew by 24% and this is our third consecutive quarter of accelerating revenue growth. This strong revenue performance combined with disciplined OpEx management drove our non-GAAP EPS to $0.55 up 30% year-over-year.
Our customer metrics were particular strong. We drove a record 8.7 million net new active accounts and that was up 61% over Q4 of 2016. And we ended the year with 227 million active accounts, adding more than 29 million net new actives for the year. And it’s worth noting that we now serve 18 million merchants on our platform. Importantly, engagement was once again higher at 33.6 transactions for active account.
I think it's started to note that our accelerating net new active growth hides the true underlying growth of engagement. If our total net new ads have grown at the same rate last year, our growth in engagement would have increased a 11% to approximately 34.5%. It’s particularly encouraging that our net new active cohorts acquired in 2017 are showing an acceleration and engagement versus similar cohorts from 2016.
The net take away as we are bringing on record, net new actives with higher engagement than ever before and that obviously bodes well as we look ahead. Our partnership with Synchrony Financial accomplishes every goal we set out for our asset life strategy. The transaction substantially reduces our overall risk profile. It provides us the opportunity to double down on our innovative credit experiences for our merchants and our consumers, while sharing in the profit growth.
And as I said earlier, it frees up approximately 1 billion in annualized cash flows and more than 6 billion in cash. If we combined this cash windfall with the ability to repatriate these funds due to the recently passed tax reform bill, we dramatically increase the flexibility of our cash position, enabling us to more efficiently outgain our capital, the higher yielding opportunities. John will be sharing more detail later in the call about the strategic benefits of our Synchrony Partnership and will discuss the impacts of the Synchrony transaction on our Q4 results and our expectations for 2018.
This past year, we saw strength in our leadership position in digital payments and we substantially expanded our opportunities for future growth. We introduced a host of new product experiences and they are driving further differentiation from our competitors. Customer choice essential to this effort and continues to be an important element in the evolution of Phase out. In the fourth quarter, we completed to rollout of choice in the United States, the UK, Australia, Canada and Japan with 30 million consumers now opted in.
In the United States where choice has been live to say more than 12 months, we continue to see a meaningful lift and engagement in payment volume and a significant reduction in churn. And consistent with previous quarters, our transaction expenses remain well within our expectations as evidenced by our increasing OI margin. Across the globe, contact rates into our customer service centers continue to decline.
In fact, in the fourth quarter of this year, we experienced lower overall call lines into our customer service centers than we did in Q4 of 2014, despite our base increasing by 65 million active accounts and literally billion of additional transaction. I attribute our reduction in call volume to not only choice, but to the tremendous strides Bill and as Steve have made in enhancing our core experiences from improved availability to decrease latency to increase feature functionality and reduce friction across our platform.
This quarter was particularly significant in the number of new and notable large merchants who joined the PayPal platform. Merchants are increasingly choosing PayPal for our ability to deliver the tools that need to compete and thrive in an increasingly competitive global and mobile environment. If you combine that with the value of the 209 million engage consumers we bring to their omni-channels, you can see why we have such a strong and compelling value acquisition for merchants.
This quarter, we signed a global agreement with the Walt Disney Company. We welcome Dillards, which ranks among the nation's largest fashion retailers. QVC has agreed to make PayPal available to their customers. The QVC Group is the number three in e-commerce in North America and number three in mobile commerce in the U.S. according to Internet Retailer.
In Europe, ePRICE which is the largest Italian market place began accepting PayPal payments and Dell began offering PayPal credit in the UK. In India, PayPal is available as a way to pay on BookMyShow and MakeMyTrip, the largest online entertainment ticketing platform and the largest online travel company in the country. This holiday season clearly demonstrated the powerful trends that are reshaping retail and driving new consumer behaviors driven by the increasing penetration of smartphones.
These trends drove strong mobile engagement on our platform over the busy holiday shopping season. PayPal processed 48 billion in mobile payment volume in the fourth quarter and that was at 63% growth year-over-year and 36% of our quarterly TPV. For the full year, mobile represented 34% of overall payment volume on our platform with total mobile payment volume growing 52% to 155 billion for the year. Our leadership in mobile continuously driven by the exceptional experiences we're able to deliver.
We continue to drive fast, frictionless and engaging consumer expenses with our One Touch product. We ended the fourth quarter with over 80 million consumers opted into One Touch, up from 40 million a year ago. And the number of merchants offering One Touch now totaled more than 80 million compared with 5 million a year ago. Venmo continues to define digital payments for a generation of passionate users here in the U.S. For the first time in the quarter, they're more surpassed 10 billion in payment volume with 10. 4 billion processed in Q4, an increase of 86% year-over-year.
For the full year, Venmo's volume increased 97% with almost 35 billion in payment volume process. We also experienced another very strong quarter of net new asset to Venmo and added the largest cohort of annual net new actives to Venmo in its history. We continue our rollout to pay with Venmo providing our Venmo users with more ways to pay with the service they love and giving our merchants access to this covenant demographic.
While we're still in the early stages of monetization, we're very encouraged by our initial leads on engagement. In fact, the adoption of services that we're able to monetize on Venmo is tracking above the P2P adoption Venmo experienced at a similar point in its history. Given our experience this past year, we believe our future opportunities are extensive and compelling. We’re writing powerful and accelerating tailwinds created by two global trends, the digitization of cash and the mass adoption of mobile devices.
We're actively positioning ourselves to take full advantage of these trends and strategically moving our business into areas where we believe these transformations are creating the strongest opportunities. Throughout 2017, we redefined our competitive position in our echo system and during strategic partnerships with many of the companies leading the digital mobile transformation around the world. We are down the process of the implemented productive and expensive partnerships with Visa, MasterCard, Discover, Bank of America and China UnionPay.
We are working closely with over 20 of the largest credit card issuers in the world. The majority of which are kicked off campaigns to encourage and in many cases incent customers to engage with PayPal. For example, we are working with both Citi and FIS to create experiences that are driving enhanced consumer engagement and activation. With Citi customers can provision their Citi cards to new or existing PayPal accounts directly from Citi's online property. With FIS, the ability to link accounts directly to PayPal is now available to all of FIS banking customers.
We signed an agreement with Bank of America to enable PayPal as a way to disburse payments on behalf of their corporate clients. And this year, we will integrate credit card reward points from major issuers into our PayPal Wallet, as a funding source for consumers to use when they purchase at PayPal merchants. And we will also begin to rollout the use of industry standard tokens to pay in-store wherever NFC is accepted.
In the quarter, we expanded our partnership with Facebook Messenger, adding a contextual commerce experience that allows sellers send invoices to buyers as well as to adding PayPal as a way to fund P2P transactions within Messenger conversations. In China where mobile payments are a thriving part of everyday life, our relationships with strategic partners have the potential to substantially increase our opportunity.
PayPal is now used by 10s of 1000s of Chinese merchants on the AliExpress website in order to transact seamlessly with PayPal consumers outside of China. We are also purely looking forward to the upcoming launch of our Baidu partnership. In November, we announced a launch of our domestic operations in India opening another substantial market for PayPal, while we have been supporting Indian merchants for years by helping themselves to international buyers. We are now able to work with key merchants to sell domestically as well.
We planned our aggressively expand this programs to more merchants in India throughout 2018. Indian is the market in which the government is actively working towards demonetization and building a modern digital economy, and we view India as a strong and compelling opportunity for PayPal. With well more than a billion digital consumers and a thriving online merchant community deepening our engagement in China and India will continue to be a priority for PayPal in 2018. We believe these markets offers significant opportunities to drive substantial scale.
I would also like to comment on our relationships with eBay. We have a very close partnership and a long history with eBay. This is governed by an operating agreement that runs for another 2.5 years through July 2020. The operating agreement lays out a thoughtful transition and allows for smooth migration from jointly owned entities to independent companies through the five years following separation.
The agreement allows for eBay to eventually become merchant of record and play a more direct role in managing the payment experience on their platform and we’re actively partnering with eBay to help their implementation of merchant of record capabilities. The operating agreement also allows for eBay to work with alternate payment service providers overtime as a transition to merchant of record. As part of that, I am very pleased to announce, the PayPal and eBay have signed a term sheet to provide our brand to services at least through July 2023.
Both our 2018 and our medium-term guidance already includes the anticipated economic impact of the eBay transition, which is quite manageable over a multi-year period. As such we see no need to change our medium-term guidance. Given our long history with eBay buyers and sellers, both Devin Wenig and I believe a manageable transition and sustained relationship is in the best interest of our mutual customers. I am very pleased we have agreed to extend our partnership and look forward to building on strong relationship we've established since separation.
As I said at the beginning of my remarks, 2017 was a landmark year for PayPal on multiple fronts. We entered 2018 with strong and accelerating trends, supporting our increasingly differentiated and expands the value propositions and scale. We’ve expanded our branded PayPal relationship with eBay through July 2023, which was one of our primary goals in 2017. These accomplishments set us up for sustainable and predictable growth over the foreseeable future.
Before we understand the need to work even harder to leave up to and deliver on the value, our customers and shareholders expect from us. We have a substantial opportunity to shape the future of digital payments over the next decade and we are looking forward to another strong year in 2018.
And with that, I will turn the call over to John.
Thanks, Dan. I also want to thank our PayPal customers, partners and employees for making 2017 a great year. We achieved many significant milestones in 2017 and are well-positioned to continue delivering on our commitments and executing against our strategic plans.
Before I go into details of the fourth quarter, I would like to provide a few highlights for the full-year. For 2017, active accounts grew 15% to $227 million and acceleration of 500 basis points over the 2016 growth rate. Payment volume grew 27% on a currency neutral basis to $451 billion. Approximately 34% of this volume was mobile where we saw 52% volume growth for the year.
Revenue for 2017 exceeded $13 billion growing 21% on currency neutral basis. For the full year, revenue related to eBay market places grew 7%, while our merchants' service revenue grew 24% more than three times the rate with our legacy eBay market places business. For the year, non-GAAP earnings per share grew 27% to $1.90 and we return more than $1 billion to shareholders.
I'd first like to discuss the impact of tax reform. We believe the modernization of U.S. tax code is a significant step forward in a clear path of PayPal and its shareholders. The ability to work efficiently and strategically allocate capital is an unmitigated benefit. The full value of which we expect to utilize over the medium and long term, I would note if we’re still the number of open items that require clarification and we may define our estimated impact in future quarters, its further information and interpretation become available.
Our fourth quarter GAAP results include a one-time charge for the 180 million related to the deemed repatriation of unrelated earnings on foreign subsidiaries and the revaluation of deferred tax assets and liabilities. We expect our non-GAAP effective tax rate to be in the range of 17% to 20% over the next three years. We will tight this range as we'll give more clarity. I would now like to review the items included in non-GAAP results from the reclassification of our U.S. consumer credit receivables portfolio to held for sale relating to our November agreement with Synchrony Financial.
These changes reduce comparability to prior periods. We're relevant to the discussion. I will provide normalized results to adjust from these changes. Following the closing of the transaction which we expect to occur in the third quarter, the U.S. consumer credit portfolio will no longer sit on our balance sheet, and we will no longer encore any cost related to the charge off of principal for interest. First, other value added services revenue benefited by approximately $26 million in the quarter as a result of no longer recognized reserves on interest receivables for the U.S. consumer credit portfolio.
Second, transaction and loan losses benefited by approximately $74 million for no longer recognizing reserves on principal receivables for the U.S. consumer credit portfolio; and third, non-transactional related expenses were negatively impacted by $92 million from the recognition of incurred charge offs of principal and interest. There is also a GAAP earning impact from the transaction consistent with our prior quarters related to the agreement and those are noticed in the investor update closer to that.
Moving to our results, for the fourth quarter our total payments volumes was $1.31 billion up 30% on a spot basis and 29% on a currency neutral basis. Merchant services volume grew 33% on a currency neutral basis to $114 billion represented 87% of our volume in the quarter. Volume associated with eBay represented 13% of the total compared to 16% for the fourth quarter of 2016 and 19% two years ago. P2P volume, which is a component of merchant services, and includes volumes across core, Venmo and Zoom grew 50% to $27 billion and represented approximately 20% of total payment volume.
During the first quarter, growth in active accounts was 15%. We ended the quarter with 227 million customer accounts. We added 8.7 million active accounts in the quarter. This marks the fourth consecutive quarter where we have experienced an acceleration in the growth of active accounts, and in each of the last five quarters, we've added a record number of net new customer accounts. Account growth in the quarter was primarily driven by our core PayPal business followed by strong growth in Venmo accounts.
Revenue grew 24% on a spot basis in Q4 with 23% growth in transaction revenue and 32% growth in other value added services. Transaction revenue growth was primarily driven by our core PayPal and Braintree businesses, normalizing for the effect of held for sale accounting revenue growth from other value added services was driven by strong credit growth from the consumer side as well as the acquisition of Swift Financial, both total and transaction take rates are affected by our hedging program, as we recognized hedge gains and losses in international transaction revenue.
In the fourth quarter, we incurred a hedging loss of $29 million compared to a $50 million gain in Q4 of 2016 resulting in a $79 million headwind in the period. For the fourth quarter, our transaction take rate was 2.45%, a decline of 18 basis points from the fourth quarter of 2016, and our total take rate was 2.82%, also down 18 basis points year-over-year. Growth in our P2P businesses led by Venmo and impact from the hedging loss resulted in approximately two thirds of the take rate decline, with the remaining 5 basis points decline resulting from the business mix effect of lower eBay growth in conjunction with strong Braintree growth.
Volume based expenses grew 26% in Q4. Normalizing for the effect of held for sale accounting, these expenses would have grown in line with volume growth. Transaction expense was $1.3 billion and represented 96 basis points of TPV, consistent with the expense rate in Q4 2016, and our expectations that we would see less pressure in the back half of 2017 relative to the first half of the year. Increased core PayPal funding expenses were offset by lower funding costs from growth in P2P.
Transaction loss in the quarter was $248 million or 19 basis points of TPV flat for the same period last year as well as Q3 2017. Loan losses were $75 million, down nearly 40% from the fourth quarter of 2016 as a result of the effect of held for sale accounting on the income statement. We estimate that this change in accounting designation benefitted loan losses by approximately $74 million. Due to the change to held for sale accounting we no longer maintain the result for losses and are reflecting incurred losses in the line item called restructuring and other charges on our income statement as part of our non-transaction related expenses.
Our consumer credit portfolio continues to perform in line with our expectations. Transaction margin in dollars was 2.1 billion growing 23%. Adjusted for the impact of held for sale accounting transaction margin was $2 billion, representing 17% growth versus last year. This represents the highest rate of growth since separation. For the quarter, transaction margin as a rate was 57.1%. On an adjusted basis, transaction margin was 54.8%. Non-transaction related expenses or other operating expenses grew 19% in the quarter. Normalizing for the held for sale accounting adjustments, these non-transaction related expenses would have grown approximately 10.5% resulted in 385 basis points to operating leverage.
Further adjusting for the acquisitions of Swift Financial and TIO Networks, we would have seen non-transactional rate of expenses grow at approximately 6% for the quarter. Relative to Q4 ’16, fourth quarter this year sales and marketing expenses grew 25%, product development costs increased 10% and customer support in operations costs grew 7%. Consistent with the cadence of discretionary spending that we have previously discussed. In the quarter, they were incremental costs related to our acquisitions of Swift Financial and TIO, which expected to grow of our sales and marketing and customer support costs.
In addition, we launch marketing campaigns for our P2P businesses and support at the global launch of our choice initiatives. And in product development, we invested in our India domestic payments business, pay with Venmo and an improving our core merchant in consumer experiences. After adjusting for held for sale accounting treatment non-transactional related expenses increased $0.17 in Q4 for every incremental dollar revenue. After back out incremental revenue and costs associated with our acquisitions of Swift Financial and TIO, these expenses increased only $0.11 for every incremental dollar of revenue.
And for the full year, these expenses increased only $0.10 for every dollar increasing revenue indicative of the underlying leverage and scalability enhance in our operating model. In the fourth quarter, operating income grew 30% to 807 million on 24% top-line growth resulting in the 100 basis points of operating leverage. Non-GAAP earnings per share grew 30% in the fourth quarter to $0.55. Q4 capital expenses were $180 million or approximately 5% of revenue. As a result of changes from the designation of our U.S. consumer credit receivables portfolio, net new loans of $1.3 billion reduced cash flow from operations in the quarter.
Prior to this change in designation, this amount would have been recognized in cash flows from investing activities. As a result, cash flow from operations in the fourth quarter was negative $147 million with free cash flow in the quarter of negative $327 million. On a normalized basis, we would have recognized approximately $972 million in free cash flow generating approximately $0.26 free cash flow for every dollar of revenue. We ended the quarter with cash, cash equivalents and investments of $7.7 billion. In 2017, we return $1 billion to shareholders in the form of stock repurchases buying back our stock and the average price of $51.
Our business generates significant free cash flow. In addition, cash reform in conjunction with the expected proceeds from the Synchrony transaction and its implication for our go forward cash requirements position PayPal with meaningful liquidity, flexibility and optionality as it relates to capital allocation decisions. We expect to continue to deploy a disciplined and balanced approach to capital allocation to preserve this flexibility and make strategic investment to deliver durable increases in shareholder value and long term growth.
In 2018, we planned to continue investing organically pursue acquisitions and partnerships and increase our level of stock repurchases. We are currently executing on tax planning strategies to serve our long term business objectives. The consequences of these strategies in conjunction with regional regulatory and liquidity requirements may affect our cash repatriation plans. We continue to move toward more optical capital structure to support capital allocation decisions and maximize value. In the fourth quarter, we announced a new $3 billion unsecured credit facility and drove down $1 billion at the end of December.
I would now like to discuss our guidance for the first quarter of 2018 and the full year. For the full year 2018, we expect revenue between $15 billion and $15.25 billion representing currency neutral growth of 14% to 16%. This is in line with the guidance update we provided in mid-January and incorporates the expected impact of approximately 3.5 points through the sale of our U.S. consumer receivables.
Our guidance contemplates modest expansion in our non-GAAP operating margin in 2018 and we anticipate non-GAAP effective tax rate to be between 17% and 20% and we expect non-GAAP earnings per share of $2.24 to $2.30. For 2018, we anticipate free cash flow to exceed $4.5 billion. This is higher than normal due to the sale of our credit receivables next year. The proceeds of which will be split between operating and investment activities on our cash flow segment.
For the first quarter, we expect revenue in the range of $3.58 billion to $3.63 billion or 20% to 21% growth on a currency neutral basis. We also expect non-GAAP earnings per share of $0.52 to $0.54. In closing we are pleased with 2017 and the progress we have made across many fronts.
We focused our efforts on building great experiences to our customers which led to a record consumer enrichment patterns to our and an acceleration of revenue and earnings growth. We've demonstrated the stable improvements to our cost structure and significantly de-risked our business with the U.S. consumer credit transaction with Synchrony. We look forward to the opportunities we have in 2018 to continue this progress and further increase shareholders value.
With that, I'll turn it over to the operator for questions. Thank you.
Thank you. [Operator Instructions] Our first question comes from Heath Terry with Goldman Sachs.
Dan and John, there seems to be a bit of a disconnect between the way that eBay is presenting the new partnership or expansion versus the way that that it's coming across on this call in the press release, primarily that the difference being the Adyen partnership that their Adyen partnership that the eBay is talking about is being their primary partner now and that they intend to transition the majority of their marketplace customers to this new payment experience that Adyen's powering. Can you help clarify for us a little bit for how -- basically try and connect the dots between those two? And I know you've talked about they're not being any sort of meaningful financial impact here as we get to the end of the original 2020 date, how does that change?
So I start off with just saying that eBay and PayPal have had a close relationship and a long history together. And I’m really pleased that we're expanding that partnership on the branded through July 2023. As I think most people on the call know, there is a five-year operating agreement that governs our separation, and we're halfway through that, we’ve got another 2.5 years left till the end of July 2020. And with this announcement, here there are no changes to any of the terms. And the operating agreement was meant to assure both the thoughtful and a smooth transition for both companies post-separation. And it assumed in the operating agreement that as have we, that eBay will gradually transition to become an MOR.
And consequently all of our numbers, all of our plans have always included that assumption. So as we've given our medium-term guidance, that’s a part of our assumption. And as a result, this announcement does not change our medium-term guidance or the way that we think about our long-term outlook. And let me give you some facts around that because we strongly believe that the eBay transition to MOR is quite manageable for us. So why do we think that? So today, eBay as John mentioned is about 13% of our TPV, our total process volume, transaction process volume and that down about 900 basis points in the last 2.5 years.
So let's just assume that exactly the same thing happens over the next 2.5 years. And that we have no acquisitions of ourselves which finds way as you know we are acquisitive, we are aggressive on that. We had a large cash balances coming to us. So we can talk about acquisitions that will be a part of our strategy going forward. But assuming no acquisition, eBay becomes approximately, at the end of the operating agreement about 4% of our TPV. That’s assuming again the same amount first 2.5 years to the second 2.5 years. And they give less than 10% of our revenues.
If eBay is follows the example and we actually have the great insight because we actually see what happens to marketplaces as they go to MOR because we worked with a number of marketplaces. And where marketplaces go to MOR, it typically takes them several years before the majority of their moves MOR. And we’ve seen this and we've experienced and host MOR, we still retain about a 50% share of check out, and so it takes several years post the end of the OA for the majority of customers to move that’s with our experience that’s been in the real market and post that we retain about 50% share of checkout.
So, we think that this is going to be a very manageable transition over a multiple years post the end of OA. And I'll give you two more thoughts on this and it's very important. One, we renewed the branded relationship with eBay because it is far in a way the most profitable element of the relationship. And two, it’s the most important to our usual customers. And three, it also happens to see a large part of the business as far in a way today. On branded processing, it is highly undifferentiated, it's commoditized and as a result it yields little to low profit. And as we go through this, we're going to be able to set substantial cost because we’re going to be doing that unbranded piece of it.
We'll still maintain the branded, we'll still maintain the most profitability part of this business and what is today the largest, but there is one other really important element, the OA, the operating agreement, also restricts PayPal from partnering with the largest and fastest growing market places in the world as an MOR. So, we’ve simply done an extension of the full operating agreement that would keep that prohibition in place and prevented us from becoming a fully neutral third-party platform. And the opportunity to partner with the world largest market places is immense.
Today, the top 10 market places that were allowed to fully service, generates tens and tens and tens of billions of dollars of TPV, growing at 56% year-over-year and this is just a fraction of what it could be. So, if you sum it all up for us. One, we always assumes MOR. It's in our guidance, it's in our plans. Two, we think there is going to be a very manageable transitions over multiple years, three it opens up a very large and very real opportunities for us to work with the largest next generation market place post the OA.
And so all in this is the best thoughts for PayPal, we’re now well position to continue our strong growth both on the top line and the bottom line actually look at. And so, we feel good about where all this is come out, we look that it very, very carefully, it's always been in our plans and we feel good, now that we have certainty on the direction that we're going.
Thank you. Our next question comes from Bryan Keane with Deutsche Bank.
I just want a follow-up on that. Just trying to understand -- my understanding is in 2020 that's when you guys will no longer be the MOR. And then just thinking about going forward then, my understanding is PayPal will still be a button of choice, but it just won't process some of the card payments. And just trying to figure out the economics, what that exactly means when you don't become the MOR? And how that impacts the P&L?
It's a great question. One of the things to understand that is, as we work with many other retailers out there, they are merchant of record as we work with them and as we are able to go command, even a premium relative to card processing because we deliver greater customer acquisition, higher conversion rates, all those things, we're doing that across much of our business with the merchants or marketplace and it's now functioning as a merchant for the record.
So as Dan was commenting on earlier quite, a lot of insight into exactly how this plays out, and that led to us being able to fully contemplate that as we've laid our future plans and have been doing separation because we know how that works in other marketplaces and other small business forums and have either moved the merchant record or started the merchant record with PayPal still as a predominant way of paying inside of those marketplaces or small business forums.
Bryan, this is John. I would add to that maybe that I think what you're getting to is sort of the economic impact overall and there's a couple of things that point you to. First is, as Dan has suggested in his prepared remarks that our -- in terms of their percentage of our business, it's declined 900 basis points, over the last couple of years. And during that period, we've actually been able to keep margins flat to growing, all right. And if you look at the 10 quarters that we've had, since separation, the average revenue growth of those quarters for our eBay part of our business has been 4%.
If you look at the other 87% of our business that has grown 23%, so if you -- history is not necessarily -- you can't project that forward, but if you were just to take those numbers and project them through to mid 2020 at the end of the operating agreement, that would suggest that in 2021 our revenue growth each year is roughly 50% larger than the entire of the eBay business at that point in time.
So, the other thing I'd point to is that we actually incur quite a cost to support eBay today. So, when we look at things like our losses or our call volumes into op center, those disproportionately skewed towards eBay relatively to their percentage of the TPV. So, we feel very confident that we can continue this trajectory going forward and there's nothing about what's been announced today that changes our thoughts and our ability to continue to grow our top line and bottom line after we operate it here.
Thank you. Our next question comes from Tien-tsin Huang with JP Morgan.
A couple of follow-up questions to that, I am not sure if you could share, how much of your profits come from eBay today? But is your ability and your confidence to maintain your midterm guidance, does it require any sort of unusual mediation efforts like cost cutting or share repurchase like get the organic cost cutting or savings from the change? But just curious, if it requires any extra remediation efforts or even the assumption of new marketplace whence? And if I could just hack on one more, is it fair to think that your checkout share, the 50% numbers helpful. But it is fair to think that your checkout share would be higher longer term here just because of how integrated you’ve been with eBay after all this year? Sorry for all the questions.
So Tien-tsin, I’ll start. The assumption that we have going forward is that, we will continue to realize the benefits from our scale and our leverage going forward. And so this is not required massive restructuring or layoffs to continue kind of performance that we seen; as I suggested, we’ve been doing this for two years. And we would expect this. We continue to grow other parts of our business that we can continue to generate this kind of leverage. I’ll point you back to the fact that half of our cost based this year and we’re growing $0.10 for every incremental dollar.
Now for other part of your question, does that assume like anything in terms of acquisitions anything like that? It does not and so we think about the -- and if you go back to my answer to Brian’s question, and you think about losing some share of that business going forward. We’re talking about a few points of impact to revenue growth of profitability and that can easily be backfill going out and looking at inorganic opportunities, and this doesn’t also address the fact that with the operating agreement in the mid-2020. We now have the ability to go out and partner with the largest marketplaces in the world, largest and fastest growing market places in the world.
All of these give us an opportunity to backfill, we kind of gap that we might have as we transition to this next chapter with eBay.
Yes. And I think also say that our guidance assumed this. So what that means is that we knew this is going to happen and that guidance that we’ve been giving in the medium-term guidance that we put out there has assumed this happening. So, that means that we've built into our models, costs and things that we know, we can target and take out revenues that we can target. So, this is not anything that we haven’t covered in all of our modeling and all of our plans.
Otherwise, we wouldn’t have been giving that medium term guidance. This isn't a surprise this is exactly what we assume, it was contemplated in the operating agreement and constantly, when I think about kind of the experiences we have, where eBay will be at the end of the operating agreement is multi-year transition and our place as they branded check-out solution. I feel like, this would be one of the events that will, that obviously will have to move, but it will be one of the quite manageable for us going forward.
And one of the Tien-tsin, you talk about, one of the market places things like that. As Dan alluded to earlier and as you know, we’re hiring payment platform for many of the best next gen marketplaces in the world already Uber, Airbnb and many others. But as Dan alluded to, not only that many tens of billions of dollars of volume for us and growing 50% plus already, that growths in that business as we think in our other large marketplaces. As growth we seen on an absolute basis is already outpacing the growth we see from eBay. So just the way, we’re already engaging our marketplaces outpace of the growth that we see from eBay and as we are able to contemplate are engaging there and at an un-federal way we think there is a lot more opportunity ahead for us there.
You touched one other points around share of checkout about being over penetrate to given our launch is for the relationship and we don’t disclose specifics about the share of checkout that was certainly it's reasonable to expect as we see 50% approximately with other small business forum when we've been made and embedded overtime what would be a place where we yes or strongly preferred and if you've seen in our consumer base our engagement is going up consistently across our consumer base.
So your point there about our share of checking all we tend to see that our consumers are using PayPal and becoming more engagement with us overtime now left and so their preference for PayPal is increasing and so we think that is goes well for us across any marketplace we work with and certainly as a big part of the branded deals we've done with eBay why that's important to both us and eBay is a continuity of how a significant portions the buyers have been choosing to personally on eBay for a very long time and like we will continue to into the future.
Our next question comes from Sanjay Sakhrani with KBW.
Just on that point on these other partnerships that you can have with marketplaces. How many discussions that you had with some of the larger ones, that are opportunities? And how significant economically could those be road into sort of what you have with eBay? And then maybe just thinking about the transaction cost element of being a lesser merchant for the networks, does that have any impact to your interchange expenses?
We've just had conversations with other marketplaces, as part of the operating agreement, we're prohibited from offerings MOR services to I don't name it -- to the largest consensus for our marketplaces that are out there that are really direct to competitors with these that was part of the operating agreement.
Obviously, each of them have spoken with us, you've spoken to them, but they all know that we are respecting the terms of the operating agreement just as eBay does this well. And so, I do believe that those conversations are quite sincere, and they all do want to think about how they can work with us. But until we get closer to the end of DRA that's what we will be able to give you more about today's information everything out to this point is confidential.
Our next question comes from James Fawcett with Morgan Stanley.
I wanted to ask always the qualitative, an additional qualitative follow-up question on eBay. And I'm just wondering how we should think about then what maybe you had to agree to give or give up in terms of being able to secure the extra years of presence of as checkout on eBay and next so that you would have a presence there through 2023? And I guess as part of that, I'm curious like why agree to whatever now instead of waiting to see there were some additional services that PayPal can deliver to eBay that to improve your positioning in long-term relationship there?
Yes. James, when we thought that within the OA, this year coming up versus first year that permitted eBay to experiment with MOR capabilities. It’s laid out in the operating agreement as they can choose two countries and do up to 5% of the volume on an MOR solution. So it was the right time and we’ve always thought that we’d never do all these negotiations at the very end. We both feel like we’re going to be partners for a long time and we looked carefully at all parts of this deal, both the unbranded and the branded.
And we felt that the unbranded piece of this was not something that made sense for us. One because we felt the most profitable part of the business was on the branded side and it’s the largest part of the business today. And number two, we in no way wanted to be restricted post the OA in terms of our ability to work with the largest marketplaces around the globe. So for us to be really -- we thought like we didn't give everything up, it’s going to do this now. It was a natural extension. This is important to eBay, it’s important to us that we both signal that we're going to be very close partners going forward.
Yes. I’d just say on this point whatever given these things, it is as Dan was alluded to very much slightly with firm another large retailer. So when we serve large retailers, we certainly give them rates that are commensurate with their volumes. But we’re not restricted in ways of how we would do that as of others or things like that. So it’s very along the line of a standard commercial relationship that we would have regular retailer.
I’ll just add too one other thing, James. As it relates to the unbranded part of the business, volume is obviously important to us but so is profitability. And where this was ending up is something that we weren’t interested in from a profitability perspective. We can certainly go acquire volume as we’ve demonstrated each quarter since separation from many other places. And we have a lot of confidence and conviction in our ability to do that going forward and do it at more profitable rates than what this unbranded agreement would have been.
Thank you. Our next question comes from Paul Condra with Credit Suisse.
I just wanted to -- can you just clarify a bit, I know that eBay, it sounds like they’re starting this process now with Adyen. So I’m wondering when are you actually no longer restricted to start looking partnerships of other marketplaces, and then my follow-up is just on a different topic. You did mention something about industry standard tokens in the point of sale setting, I wonder if you could just give a little bit more detail about that?
Yes. I’ll take the first part of that and then Bill can take the second part. So, we have the ability to partner with many of marketplaces as you probably know, here the underlying payment platform for Airbnb, for Uber and for others. But there was a set of eBay competitors that were carved out within the operating agreement, in which we could not serve them as an MOR. And that goes away at the end of the operating agreement. So at the end of July 2020 that restriction is lifted.
So, and eBay has the ability to start to experiment with alternative PSPs beginning this year, so they can do up to 5% of volume in two countries they select and then that can go up to 10% within a volume within those two countries of the last year of the operating agreement. So they have a change to experiment. Just as we have chance to work with leading market places out there, it's just slow that we might think of this being competitive with eBay we then presented from working with them as part of their operating agreement and that makes sense for both of us as we separated from eBay.
So for in-store, what we were really like about there just is the continuation of our implementation of Visa and MasterCard took it and network standard tokens around our in-store offering. So, as we discussed previously, we work with GooglePay and with other around in-store efforts, and we’re continuing to rollout our deployment of standard network tokens around those things consistent with RBs and MasterCard relationship that we previously announced.
Thank you. Our next question comes from Ashwin Shirvaikar with Citi
CAN you comment on both the merchant and consumer engagement trends separately? And I think one related question is, it seems payment transactions and revenue per active are countered I mean higher, but the payment transaction per active account decelerated as well? And then would your answer change, if you separated out eBay or non eBay merchant engagement? Sorry for the multipart but just kind want to get there and get an idea of that.
So in terms of the overall engagement, which grew by 8%, in my opening remarks I said if you normalize that anything that change to be decelerating is because we're bringing on so many net new actives in comparisons to the year before. And so when a new customer comes on we would bring them on throughout this year they obviously had it ramped up to the engagement levels that somebody is been here for a year or two have been. So when we take a look at it, we look at every one of those cohorts that came on and we look at their patient levels to 2017 works versus the 2016 co work that we brought on.
And what we see is that our 2017 co work which was 20 over 29 million net new actives have more engagement than the cohort that we brought in 2016. So what that does, that bodes very well for the future of it as those large cohorts of net new actives that are more engaged there before start engaging with the platform overtime, that takes our engagement levels help. And so you would actually see from a double-digit increase and engagement if you normalize with the increase in net new actives.
I think and on the other things we don't break those out, and so we just do a one number although I will say one thing we could also see that we're having acceleration in the number of merchants that are coming out of the PayPal platform as well. So, we now have 18 million merchants on the platform, that's also experienced the same type of growth as we've seen, with our merchant -- our consumer growth as well.
Thank you. We've time for one last question from Darrin Peller with Barclays.
Look I mean I know you're describing the eBay contribution to be relatively minor, but this rolls off obviously, give you a lot of opportunities. One, other things you mentioned was deploying capital to help diversify further. I guess I just wanted to hear more given you now post Synchrony deal tax reform, there should be a ton of cash available for you guys like a considerable some unlevered cash. So can you give us more color on potential thoughts around incremental buybacks they way you've done before? And then what kind of M&A, how fast, it's been a while since we've seen the material size M&A?
It's John. So, in terms of our priorities for capital allocation, those haven't changed. Our top priority is always to invest for profitable growth and that can be both organic opportunities, and also be looking at the M&A landscape and we certainly do allude to given cash balance and the ability to move that across borders, that we can be much more aggressive there perhaps then we have in the past, we are pretty rigorous in looking at all of the different opportunities out there, but we're also pretty disciplined in making sure that there is the right return that creates shareholder value.
So, you can expect us to be active there. At the same point in time, we fundamentally believe that returning cash to shareholders is absolutely a good thing. The thing that I would want to press upon you know is that, we don't feel pressured to go loud and do that immediately to try to show additional accretion or anything like that. Being measured and thoughtful in this area creates opportunities and it creates opportunities that over the long term could pay -- payback much more going out and for example taking a large chunk of our international cash and doing a stock buyback.
So we believe there's a fine balance there and we'll do that and we'll acquire companies and return cash to shareholders as we -- when the time is right for all of those but you could expect us to be active on all of those fronts.
And I'd just say that to add to John's point that, we are happy with the set of assets and capabilities we have today. We've got a very robust product pipeline, and we're ready to compete as the leader of the market and I think we're planning from the position strength. I have to agree with John. I think that our balance sheet is a strong weapon for us, 7 billion of cash, bringing in another 6 billion that strong free cash flow, each year, and we intend to stay resilient and be a consolidator in the industry.
We do look at 100s of opportunities every quarter from small investments to larger ones, and as a set of criteria that we look at, we are very disciplined, needs to fit into our vision and mission and need to accelerate our progress across either key vertical and geography or some piece of technology that we don’t have. But bottom-line expect this to be acquisitive, but as John said and both discipline and the thoughtful matter.
Okay. Well, I want to thank everybody for your time to joining us today. We really appreciate it and we look forward to speaking with you soon. Thank you. Thank you, operator.
Thank you. This concludes today’s question-and-answer session. Ladies and gentlemen, thank you for your participation in today’s conference call. This concludes the program and you may disconnect now. Everyone have a great afternoon.