Gabrielle Rabinovitch
Acting Chief Financial Officer, Senior Vice President, Investor Relations and Treasurer at PayPal
Thanks, Dan. I'd like to start by thanking the entire PayPal team for their continued commitment to serving our customers and executing our priorities. PayPal delivered another solid quarter in a dynamic environment. We're reporting revenue at the high end of our guidance range and earnings per share consistent with our expectations. Our results are tracking with the guidance we gave for the full year and reflect steady progress against our long-term growth aspirations. We continue to invest in our key initiatives, while demonstrating discipline in delivering on our operating expense commitments.
In June, we were delighted to share more about our long-term strategic plan and product road maps at our investment community meeting. Importantly, the product launches we discussed are on track, and we continue to gain conviction in our ability to accelerate our branded checkout volumes and drive greater profitability across our PSP services.
During the quarter, we were pleased to announce a multiyear agreement to sell both our existing European Buy now Pay Later receivables as well as future originations to KKR. During my remarks, I will discuss the impact of this externalization on our financial results. We have also included additional details in our investor update presentation.
Before discussing our outlook for the remainder of the year, I'd like to highlight our second quarter performance. As Dan mentioned, revenue increased 8% on a currency-neutral basis and 7% at spot to $7.3 billion. Transaction revenue grew 5% to $6.6 billion, driven primarily by Braintree and PayPal branded checkout. Headwinds to growth in the quarter included the lapping of $75 million in contractual compensation from merchants last year, which was de minimis this year, $72 million less in hedge gains relative to Q2 last year and the impact from migrating and consolidating legacy PayPal payment services.
Other value-added services revenue grew 37% to $731 million. This performance was predominantly due to increased interest income on customer store balances and to a lesser extent, revenue growth from consumer credit products. In the second quarter, U.S. revenue grew 9% and international revenue increased 5%. On a currency-neutral basis, international revenue increased 7%, accelerating sequentially and year-over-year. Transaction take rate declined 11 basis points to 1.74%. Approximately two thirds of this decline was driven by a decline in foreign exchange fees, in part driven by lower currency volatility, a decline in gains from foreign currency hedges, which are recorded as international transaction revenue and the headwind from lapping elevated contractual assessments from merchants last year.
While merchant mix continued to pressure our branded checkout take rate, the second quarter was an improvement from Q1. Our total take rate declined 6 basis points to 1.94%, affected by the same factors as transaction take rate. Transaction expense as a rate of TPV came in at 94 basis points, 4 basis points higher than Q2 last year. This increase was primarily driven by growth in Braintree volumes, partially offset by rate benefits in core PayPal and Venmo.
Overall, transaction expense dollars grew 16%. Transaction loss as a rate of TPV was 8 basis points for the quarter, a 3.6 basis point improvement versus last year. Transaction loss dollars declined 25%. The decrease this year was primarily due to an atypical merchandise solvency last year, which drove a sizable loss in the second quarter with no comparable exposure this year. Our ongoing risk mitigation activities and mix of volumes also contributed to this performance. Credit losses were $112 million or 3 basis points as a rate of TPV. On a dollar basis, credit losses increased 65%. Provisions in the quarter were driven by a build of $146 million, partially offset by a $33 million reserve release from the reclassification of our European Buy now Pay Later portfolio to held for sale from held for investment.
The operating income benefit from this release of reserves was entirely offset by the fair value discount on the portfolio classified as held for sale. The increased provisioning resulted from increased expected losses in our PayPal business loans portfolio as well as growth in our U.S. Paylater portfolio. Like the broader industry, we're seeing a normalization of our credit portfolio to pre-COVID delinquency levels across our consumer and PayPal working capital portfolio. That said, we have seen some deterioration in our business loans portfolio. This portfolio represents less than 15% of our overall net credit receivables. And as we discussed last quarter, we have taken remedial actions to address this performance.
We've tightened originations and have already seen improvement in new cohorts. We'll be managing the book with similar rigor as we move through the remainder of the year. As a result of designating $1.9 billion in Paylater receivables to assets held for sale, we ended Q2 with $5.5 billion in net credit receivables, a 3.5% decline year-over-year and a 26% decline sequentially. The decline in receivables due to held for sale accounting also contributed to an increase in our reserve coverage ratio. This ratio increased to 10% from 7.8% in Q1.
In the aggregate, volume-based expenses increased 13% in Q2 relative to an increase of 30% in the second quarter of 2022. Transaction margin dollars grew 1% to $3.3 billion, and transaction margin was 45.9%. While our transaction margin declined in the quarter, the rate of decline slowed considerably from both Q1 and the second quarter of last year, and we're executing on our strategy to grow transaction margin dollars. We're encouraged by the progress we're making against our longer-term initiatives that will support improved transaction margin performance over time.
Q2 marked the third quarter in a row that we've delivered meaningful expansion in our operating margin on both a GAAP and non-GAAP basis. Ongoing discipline in managing our cost structure allowed us to more than offset transaction margin compression with operating expense leverage. On a non-GAAP basis, nontransaction-related operating expenses declined 11%, with reductions across each of our principal operating expense categories contributing significant leverage.
Strong expense performance resulted in 20% growth in non-GAAP operating income to $1.6 billion. This is the highest growth in operating income that we've delivered in more than two years. Non-GAAP operating margin expanded 228 basis points to 21.4%, which was slightly below the guidance we gave for the quarter. This is principally attributable to our credit portfolio, where we earned less revenue than expected and increased loss provisions.
For the second quarter, non-GAAP EPS increased 24% to $1.16, which was the midpoint of our guidance range. We ended the quarter with cash, cash equivalents and investments of $14.4 billion. The net cash outflows for originations of loans held for sale reduced cash flows from operations by $1.2 billion in the quarter, resulting in free cash flow for the quarter of negative $350 million.
Later this year, when the sale of the European BNPL back book closes, the proceeds will be recognized in cash flows from operations and offsets this decline. So while the timing of accounting treatment will affect the quarterly profile of our free cash flow, there is no change to our outlook for the year, and we continue to expect to generate approximately $5 billion in free cash flow.
In the quarter, we completed $1.5 billion in share repurchases. For the full year, we now expect to allocate approximately $5 billion to our buyback program. Our recently announced credit externalization will help optimize our balance sheet and improve our capital efficiency. Given our desire to return capital to shareholders and the confidence we have in our business, we've taken a more aggressive approach to share repurchases. Since the end of 2021, our diluted share count has declined 6%.
I would now like to discuss our outlook for the remainder of 2023. As Dan shared, based on our results from the first half of the year, we're reaffirming our guidance for the year for non-GAAP operating margin expansion and earnings per share. In the aggregate, for the first and second quarters of 2023, we've delivered revenue growth of approximately 9% on a currency-neutral basis. We expect revenue growth in the back half of the year to be in line with this performance, if not slightly ahead, given the momentum we're seeing in the business.
In addition, we're on track to meet our expense guidance for the year and are committed to delivering at least 100 basis points of non-GAAP operating margin improvement. We also continue to expect to deliver non-GAAP earnings per share of approximately $4.95, representing 20% growth from 2022. We're reiterating our full year guidance while absorbing incremental pressure from our credit portfolio, given strengthening business performance driven by checkout initiatives and our ongoing realization of productivity gains.
For the third quarter, we expect revenue to grow approximately 8% on both a spot and currency-neutral basis to approximately $7.4 billion at current spot rates. In addition, we expect non-GAAP earnings per share to be in the range of $1.22 to $1.24, representing growth of approximately 13.5% at the midpoint of the range.
In summary, we're proud of our solid operating results this quarter. PayPal's unique competitive advantages, including our portfolio of differentiated assets and our global scale and ubiquity continue to drive us forward. We're committed to investing in our core strengths and building PayPal for the future, and we're guided by our relentless focus on creating the best possible experiences for our customers. Our revenue momentum and customer engagement trends position us well to achieve our growth objectives this year and beyond. Given the uncertainties in the macroeconomic environment, we remain focused on managing the things we can control and allocating capital with discipline to ensure we optimize for long-term value creation and resiliency.
And with that, Dan and I are happy to take your questions. Sarah, please go ahead.
