eBay Inc.
Q4 2009 Earnings Call Transcript

Published: 21 Jan 2010

[Operator:]

Hello and welcome to eBay Incorporated's fourth quarter 2009 earnings call. Today’s call is being recorded. At this time, I would like to turn it over to Mark Rowen, Vice President of Investor Relations. Please go ahead.

[Mark Rowen:]

Thank you, Kevin. Good afternoon. Thank you for joining us and welcome to eBay's earnings release conference call for the fourth quarter and full year of 2009. Joining me today on the call are John Donahoe, our President and Chief Executive Officer; and Bob Swan, our Chief Financial Officer. We are providing a slide presentation to accompany Bob’s commentary during the call. This conference call is also being broadcast on the Internet and both the presentation and call are available through the investor relations section of the eBay website at investor.ebayinc.com. Before we begin, I’d like to remind you that during the course of this conference call we will discuss some non-GAAP measures in talking about our company’s performance. You can find the reconciliation of those measures to the nearest comparable GAAP measures in the slide presentation accompanying the conference call. In addition, management may make forward-looking statements relating to our future performance that are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. These statements include, but are not limited to, statements regarding expected financial results for the first quarter and full year of 2010; the focus of the payments and marketplaces business units going forward; and future growth in the marketplaces and payments businesses. Our actual results may differ materially from those discussed in this call for a variety of reasons, including but not limited to

[John J. Donahoe:]

Thank you, Mark and good afternoon, everyone and welcome to our Q4 earnings call. Today I will talk about our results from both the Q4 and full year perspective, and I will then outline our key priorities for 2010 before turning it over to Bob for more details on the quarter and our 2010 Q1 and full year guidance. Let us start by taking a quick look at our Q4 results. Revenue growth was up 16% to $2.4 billion; non-GAAP EPS was up 9% to $0.44 and we generated free cash flow of almost $600 million. In addition, we successfully completed the sale of 70% of Skype for approximately $1.9 billion. This move allows us to focus our energies on our two core businesses, payments and marketplaces. All in all, we had a strong Q4 with both of these core businesses accelerating sharply from the third quarter. Let’s take a look at what we have accomplished in each business unit in Q4, and for the year. PayPal posted terrific results, significantly expanding its global presence. For the first time, PayPal’s total payment volume past $20 billion in a single quarter. PayPal is truly a global business, now supporting 24 currencies in 190 markets with 81 million active accounts. In 2009 for the first time annual revenue and TPV from PayPal’s Merchant Services business exceeded PayPal’s volume on eBay. And PayPal’s volume is predicated on a core, fundamental strength

[Robert H. Swan:]

Great, thanks John. During my discussion, I’ll reference our earnings slide presentation that accompanies the webcast. All growth rates mentioned in my prepared remarks represent year-over-year comparisons unless I clarify otherwise. Also, I would like to remind you that we sold the majority of Skype on November 19, so financial results for Skype are only included up to that date. Overall, we delivered strong fourth quarter results. We outperformed on both the top and bottom lines and we increased the financial strength and flexibility of the company. We executed against our strategic priorities during the quarter. PayPal continued to gain market share as transactions and TPV growth accelerated sharply. And we completed the first phase of Bill Me Later integration into the PayPal wallet. As John highlighted, marketplaces achieved improvement in all three of the key metrics

[Operator:]

(Operator Instructions) Your first question comes from Mark Mahaney – Citi.

[Mark Mahaney:]

Thanks, I would like to ask a two-part question. First, is it clear to you from a macro read that the internet consumer, and consumer discretionary spend has come back? Is that part of your cautious optimism for 2010? Secondly, Bob, just in terms of the EPS, organic and revenue growth, organic guidance for 2010, if there isn’t a change in the tax rate that implies that margins are up? Or, should we assume that the tax rate is consistent with Q4 levels going forward?

[John J. Donahoe:]

Mark, maybe I’ll take the first part of that and Bob the second. On our macro outlook I would say two things. One, on the economy we don’t have any additional insights versus anyone else. I would say we are cautiously optimistic about slow, steady progress in the global economy. So there is no intended message on that. What we do see, however, goes back to what I said at analyst day last March, which is ecommerce continues to gain share versus offline retail. We saw that in the fourth quarter, where I think when it is all said and done ecommerce growth rates will be higher than offline retail. I continue to believe we participate in a large and growing market where there is going to be a lot of opportunity for multiple winners. I think we feel good about the market we are competing in, and cautious about the economic outlook.

[Robert H. Swan:]

Mark, in terms of your second question on our full year guidance, we gave roughly 10% top line growth and about 11% to 12% bottom line growth. From a tax rate perspective, we expect the tax rate to go up year on year, and quite a bit from Q4 which as you can see was at a pretty low level. We are looking at 20% to 21% tax rate for the full year of 2010. What that implies is we will see modest operating margin expansion from 2009 to 2010 reflected in our guidance.

[Operator:]

Your next question comes from Doug Anmuth – Barclays.

[Doug Anmuth:]

John, you talked about how the international business is further along in the turnaround than the U.S., and I am curious what you think the primary things you need to do here in the U.S. are, and why the international business is really further ahead? Secondly, Bob, can you talk about the $1 billion plus that you basically have now in U.S. cash and what your intentions are, now that you’ve brought some back?

[John J. Donahoe:]

Sure, Doug. On the international business one of the benefits we have, particularly in Germany and to some extent in the U.K. is we can clearly differentiate business sellers from consumer sellers, and so when we put in place the pricing changes we did at the end of ’08, we differentiated business pricing from consumer pricing across fixed price and auctions more aggressively in Europe. And in particular, we particularly lowered insertion fees on fixed price. As I said, what that did is that allowed a huge inflow of fixed price items from business sellers and it allowed consumer sellers to add their items, but more in an auction format, which I think is increasingly the better way for consumer sellers to sell on eBay. In the U.S., we don’t have the luxury, if you will, of being able to mechanically differentiate consumer sellers from business sellers so we didn’t go to quite the same extremes in our pricing here. We also have such big selection in the U.S. So I think what we’ll do in 2010 is take some of the learnings that we generated outside the U.S. and apply them as appropriate and as tailored to the U.S. market. I think we feel we’ve proven out some of these things outside the U.S. and they will apply inside the U.S.

[Robert H. Swan:]

Doug, on your second question we end the year with a great cash position, but as you know the makeup of our cash has been predominantly offshore historically, and that was exacerbated by the proceeds from the Skype transaction. That being said, we’ve continued to pursue ways to get in more equal distribution of our cash geographically, provided we can do it as efficiently and the restructuring we did in the fourth quarter allowed us to do that to bring more of our total cash position here domestically. I would say our priority is we will continue to maintain a conservative balance sheet, but to give us the flexibility to first be able to finance the growth of our expanding Bill Me Later portfolio here domestically and also the capacity or the flexibility to pursue acquisitions both internationally and domestically as they arise and materialize. So our priorities haven’t really changed. I think our fourth quarter allowed us to get a more equal distribution of where our cash sits and gave us a good chunk of cash here domestically.

[Operator:]

Your next question comes from James Mitchell - Goldman Sachs.

[James Mitchell:]

Thanks for taking my one-part question on the marketplace segment margin. I guess the marketplace segment margin was down year on year because you are consolidating G-market now and those unusual bonus reversals in the fourth quarter of last year. Can you talk about why the marketplace segment margins were down quarter on quarter? Is it mostly due to non-recurring items like litigation expenses or mostly due to recurring items like lower fees?

[Robert H. Swan:]

James, first maybe if I could just characterize the change in margins year over year in terms of what is going on underneath the covers, and this is I would say an ink comment but definitely pertains to the marketplace business. First our program that we term as Operational Excellence which essentially is finding better ways to do more things efficiently enabled us to generate great productivity in the marketplace business during the course of the year, including the fourth quarter. We’ve taken that productivity and we’ve reinvested it in lower take rates and higher product related expenses. So those two, good productivity going into lower take rates and higher product-related expenses. The margin decline is really due to the acquisition of G-market, number one. Number two, in the fourth quarter two things that you highlighted. One was a good guy last year, the reversal of bonuses in the fourth quarter, and the other was a bad guy in 2009, which was higher litigation reserves and expenses. So a little bit of both. The sequential decline Q3 to Q4 was primarily due to a lower take rate and the impact of higher litigation expenses. If I roll the clock forward in terms of implied margins in our 2010 guidance, we have essentially implied, as I indicated to Mark, that margins overall will go up modestly from 2009 to 2010 and in our marketplace business they will be relatively stable. We will continue to absorb the impact of lower take rate changes that we did in Q4, which will impact the full year of 2010, but we will fund those by continuing to operate smarter in all the different components of our costs in the core business.

[Operator:]

Your next question comes from Scott Devitt - Morgan Stanley.

[Scott Devitt:]

On the recent acquisitions, G-market and Bill Me Later seem to be doing very well. I was wondering if you could comment on the integration progress that you have had between eBay Korea and G-market, both from a sales standpoint in terms of infrastructure, as well as any early progress that you’ve made with Bill Me Later and PayPal Checkout.

[Robert H. Swan:]

Let me do those in order. First on G-market, as you know, Scott, we closed the transaction in June. The objective of the combination was to consolidate our leading position in Korea to continue to operate two different platforms by generating significant synergies from the integration of the back office function. I would say our team in Korea, both the G-market team and the ISC team have made tremendous progress on essentially all fronts in a relatively short period of time, so we feel very good about the back office integration, the inherent synergies. Secondly, the combined business gaining market share in Korea while continuing to operate two different front offices, if you will, or platforms. On Bill Me Later, we are just over a year into the combination, just to refresh your memory, the intention was to take the number one – PayPal – and the number two alternative online payment businesses with very complementary skills and put them together, leveraging the complements. Bill Me Later with a very strong, large merchant presence; PayPal with a very strong, small sole-proprietor SMB kind of presence. With the combination of the product, the platform and the sales force that we would be able to increase our presence with large and small merchants to offer our consumers more choices at relatively low cost transaction expense as we monetize both merchants and consumers. One year in we feel very good about the continued presence with merchants here domestically and we saw those reflected really in the accelerating TPV for PayPal during the course of the second half of the year. We just launched the product integration for Bill Me Later and the PayPal wallet in the fourth quarter and we feel good about the trajectory. We have another product launch early in 2010. We feel pretty good about the combination of those two platforms. So all in all we have invested quite a bit and strengthened our Asian presence with G-market in expanding our reach of the PayPal business with Bill Me Later. Six and 12 months in respectively, we feel very good about our positioning.

[Operator:]

Your next question comes from Imran Khan - J.P. Morgan.

[Imran Khan:]

One, take rate. How should we think about the take rate long-term as you try to give better experience to sellers, what is the optimized take rate that you have in your mind? Secondly, as the credit costs stabilize or even credit costs start going down, how aggressively will you push Bill Me Later? How should we think about near to mid-term Bill Me Later as a percentage of your total payment volume?

[John J. Donahoe:]

Thanks, Imran. I will take the first and Bob, why don’t you take the second. On take rate, I appreciate the way you asked the question because people tend to focus quarter to quarter and the way we really think about take rate is stepping back. I will remind you that it was only 24 months ago when I first took over in this role we had one take rate applied to all categories in all geographies across all sellers around the world. The structure of that take rate really hadn’t changed since the beginning of eBay. So we set out on what we knew was going to be a three to four year process to make changes in our take rate that would better align ourselves with our sellers and make a robust marketplace. So we have really focused on three things during that time. One, we have gone to category-based pricing, which makes sense. Two, we’ve made significant changes in rebalancing front-end versus back-end fees, which is to say we were probably 70/30 front end to back end since the beginning of ’08, and today going into 2010 we are more 30/70 – 30% front end, 70% back end. What that really means is we have aligned our incentives with that of our sellers. If they don’t succeed in selling we don’t succeed in collecting fees. The last thing we have done is we have incented our sellers such as that sellers that give the best service to buyers gets the lowest rates on eBay. So we are two-thirds of the way through. We have put some things in Q4 which took a further step in that direction, and we will make a few more changes in ’09 that I think have to do with taking the learnings from Europe and applying them in the U.S. about rebalancing. But I feel good that coming out of 2010 we will have the structure and alignment of our pricing in the marketplace that is aligned with sellers and optimized for marketplace success.

[Robert H. Swan:]

Imran, in terms of your question about Bill Me Later and just general credit environment, a couple things. Obviously our intention with the integration of Bill Me Later into the PayPal wallet in the product flows, the intention is to give consumer choice. With that choice we believe that with the unique Bill Me Later offering that they will increasingly choose Bill Me Later as a way to settle their online payments and Bill Me Later will grow as a percentage of PayPal volume. That being said, in the near to medium term it will still be a relatively small piece of overall PayPal volumes. Secondly, in terms about credit decisioning or our underwriting, we don’t expect in the medium term to really change how we think about credit decisioning in this current economic environment; i.e. we will continue to be fairly disciplined on keeping net charge-offs relatively low and expanding risk-adjusted margins for the portfolio until we see better consumer sentiment and economic environments going forward. It will be a bigger piece, it will be relatively small in the short to medium term and we will continue to be very disciplined in how we underwrite it.

[Operator:]

Your next question comes from Stephen Ju - RBC Capital Markets.

[Stephen Ju:]

What do you think the fixed price of the percentage of the total mix can go, longer term, for the marketplaces forum? Items sold growth outstripping GMV growth by continued ASP compression, is this due to the increasing mix of fixed price or are there other factors?

[John J. Donahoe:]

On the fixed price versus auction, I would make one very important point upfront, which is our goal is to offer buyers and sellers choice and to make our marketplace as seamless and indifferent between that choice as possible. So one, we are not driving one versus the other. That said, what is clearly happening is fixed price is growing more rapidly than auction as the marketplace rebalances because that is the format that many business sellers choose to sell in and many consumers choose to buy in. We don’t know where it will land. Again, I think Bob said at analyst day we started 30/70, that is 30 fixed, 70 auction and my guess is we could end up somewhere around 70/30. That varies a lot, by the way, by category. There are certain categories like collectibles where auctions is a natural way to set a market price, and others like consumer electronics where there is more clear pricing. In an efficient market, fixed price makes sense. So the important point is we are indifferent in terms of margin, in terms of our marketplace. Then on items sold and GMV, I think it is important to just note the economy is impacting ASPs, we see that both on eBay and PayPal, PayPal ASPs have been coming down off of eBay as well as on eBay. Two, one of the things that eBay offers, I think has been a source of advantage for us is in a tougher economy where consumers are trying to get more out of what they spend, we see them trading down on eBay, which is to say instead of buying the latest model Blackberry they are buying a brand new Blackberry that was last year’s model for less. Or, instead of buying a brand new bicycle they are buying a used bicycle. We see actually within categories people getting what they want but just trading down in terms of what they are buying and what they are getting for their dollars, and in that way eBay is a fairly unique marketplace in offering the ability to do that.

[Operator:]

Your next question comes from Gene Munster – Piper Jaffray.

[Gene Munster:]

My question is a follow-up to Stephen’s just a point of clarification. The shift from auction to buy it now impact on your margins, I thought I heard you said that it has no impact and you are indifferent, but I just want to clarify that.

[Robert H. Swan:]

That is correct, we have done a variety of price changes over time but in essence, whether it is fixed price, buy it now, auction there are common themes. Lower upfront, fewer features and the shift of conversion has gone more from our sellers to eBay, and the fee structure, there is no dramatic change between the different formats. So we wanted to provide consumers the right choice, and oh by the way, the margin structure is tapered, it is not dramatically different in terms of overall impact.

[Operator:]

Your next question comes from Justin Post – Bank of America/Merrill Lynch.

[Justin Post:]

I think one of your real important goals is to grow as fast as ecommerce this year, and as I look at the Merchant Services business, ex-FX, it went from 35% growth to 47%, so improved 1200 basis points. When I look at the marketplace business, it improved about 400 to 500 basis points, whether you look at revenue or GMV, ex-FX. Do you think the marketplace business is just taking a lot of share versus the market? Or do you think it is doing okay and your core business still has a ways to go? What do you think are the one or two most important initiatives for 2010 to get it to as fast as ecommerce? Thanks.

[John J. Donahoe:]

Well Justin, let me answer what you intended. The Merchant Services business is absolutely gaining share of online payments. As I said, it is kind of stunning, but the Merchant Services business grew 50% in Q4 in terms of TPV, and that is 10 times faster than the market in the U.S. and comparable outside the U.S. So that business is still in, I believe, its early days of the global roll out of what is a very attractive and differentiated product for merchants and for consumers. So we envision that business continuing to gain share. The core eBay business, including the PayPal on eBay, that is the one that we said was going to grow more slowly than the market in ’09, at market growth rate in 2010 and faster in 2011. There is no silver bullet in what is driving it. That said, I am pleased with where we are coming into 2010 and I don’t know, I love all my children, not just one, so I will list three things that I am looking forward to in 2010 in the marketplace business. One, we are going to further extend trust by offer enhanced buyer protection, so buyers can buy absolutely confidently and safely on eBay. Two, value and selection will continue to extend with both pricing and the continued improvement in search. You recall Mark [Hargis] talking about our approach to technology in search at our analyst day. We are absolutely becoming a more technology-driven company and our search team is increasingly top notch. Then lastly, I think what is going to be fun about 2010 is you are going to see some real differences in the eBay user experience. You will see this most notably in clothing, shoes and accessories about mid-year where the eBay experience as you know it will look very different and you will see us taking advantage of how we bring the unique inventory we have to buyers in some new and creative ways. So again, that is on top of a technology platform we have been building under the eBay business that I think will really hit its stride in 2010 and 2011. I am looking forward to this year and think that we will continue to build on the momentum that we are building up.

[Operator:]

Your next question comes from Spencer Wang – Credit Suisse.

[Spencer Wang:]

A question on the PayPal take rate, given the expansion of the Merchant Services business, should we continue to expect the take rate to drift lower beyond 2010? Can you give us a rough sense of the take rate difference between Merchant Services and the on-eBay TV?

[Robert H. Swan:]

Let me emphasis our priorities in terms of how we manage the volume and the economics associated with the core platform. Obviously more presence on merchants, more preference for consumers drives volume growth. Then the thing that is most important for that volume growth for us is the transaction margins that we generate as a result of three related variables

[Operator:]

Your next question comes from Heath Terry – FBR Capital Markets.

[Heath Terry:]

Bob, you mentioned bringing the billion back to the U.S. included roughly $300 million in tax costs. When thinking about the remainder of cash that you have got overseas, is 20% or so the right rate to think about in terms of the costs, eventually, at some point to bring the rest of that back?

[Robert H. Swan:]

Not really. There are obviously lots of different variables that go into the effectiveness and the efficiency of getting our cash equally distributed around the globe, and I think that those variables include potential internal restructurings, potential repatriated dividends, potential financing of onshore assets with offshore cash, I mean there are a variety of different variables, all of it within today’s regs have different implications for effectiveness of repatriation strategy. I think what we have said is we will continue to look at how to get an equal distribution of our cash across the globe so we have the ultimate flexibility to pursue opportunities as they arise, with a real big bias for doing it as fast and efficiently as possible, and every one of the strategies has different kinds of implications. The ability now versus where we were bringing back while it had tax cash costs associated with it, relatively speaking it was a fairly attractive and efficient way to restructure our balance sheet with a legitimate business purpose at relatively low tax costs. We will continue to pursue all sorts of different strategies and each and every one of them are somewhat dependent on the circumstances.

[Mark Rowen:]

Operator, we have time for one last question.

[Operator:]

That question then will come from Brian Pitz – UBS.

[Brian Pitz:]

A quick question on mobile. Is it becoming a more meaningful contributor to revenue? Are there any specific product categories where adoption has been greater? Second unrelated, any prospects for announcements regarding new, exclusive product inventory from the likes of Tiger Direct or other new vendors into 2010, as you guys had previously announced? Thanks.

[John J. Donahoe:]

Thanks, Brian. Mobile absolutely is in the phase of an inflection point, and there is no doubt that the iPhone and smartphones in general have just illustrated to consumers all over the world the power of what a mobile device can provide. We have been quite fortunate in that both eBay and PayPal lend themselves to the mobile format well. The engaging nature of eBay auctions is something that can be really brought to a mobile device and our best sense is that our mobile commerce offering at $600 million could be half the volume in the mobile goods market thus far. So we intend to be all over it. We have released another app, the eBay Deals app and we will continue to find new and interesting and creative ways to bring our inventory to the mobile device in ways that are engaging for consumers. How much of that will be incremental volume versus just a device shift, we don’t know and to some extent we don’t care. We view mobile as simply one more device as a way to connect buyers and sellers. What is interesting is you don’t see people necessarily starting, doing and then concluding their whole shopping experience on one device or another. They may do a search at home and put it in their My eBay, they may finish the transaction while standing in line in Starbucks and pay right there with PayPal, or the reverse. So mobile will be an important trend. We feel we are out on our toes innovating both with eBay and PayPal in mobile. In terms of the exclusive inventory, our marketplaces seller team is out talking with several brands and several people that have inventory. I think 2009 was the year of proving we could move high volume SKUs in very short periods of time, and I think we’ve done that, so there are certainly a growing number of people who want to talk about distributing on eBay. In some cases, that will be exclusive and others it won’t, but we feel poised to take advantage of this private sales trend where retailers are looking to get rid of high quality branded goods in quick and efficient ways online. So that’s it. Thanks everyone, we look forward to talking to you in 12 weeks.

[Operator:]

Ladies and gentlemen, again thank you very much for joining us today. That will conclude today’s call. Again, have a good day.