eBay Inc.
Q2 2012 Earnings Call Transcript

Published:

  • Operator:
    Good day, ladies and gentlemen, and welcome to eBay Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to hand the conference over to Ms. Tracey Ford, Director of Investor Relations. Ma'am, you may begin.
  • Tracey Ford:
    Good afternoon. Thank you for joining us, and welcome to eBay's earnings release conference call for the second quarter of 2012. Joining me today on the call are John Donahoe, our President and Chief Executive Officer; and Bob Swan, our Chief Financial Officer. We're providing a slide presentation to accompany Bob's commentary during the call. All growth rates mentioned in John and Bob's prepared remarks represent year-over-year comparisons, unless we clarify otherwise. 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. In addition, an archive of the webcast will be available for 90 days through the same link. 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 this conference call. In addition, management will make forward-looking statements relating to our future performance that are based on our current expectations, forecast and assumptions and involve risks and uncertainties. These statements include, but are not limited to, statements regarding expected financial results for the third quarter and the full quarter 2012 and the future growth in the Payments, Marketplaces and GSI businesses, mobile payments and mobile commerce. 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:
    Thanks, Tracey, and good afternoon, everyone, and welcome to our Q2 earnings call. We had another great quarter. Every part of our company showed strength and we feel good about our momentum as we reshape how people around the world shop and pay. In the second quarter, revenue is up 23% and non-GAAP EPS is up 16%, a strong finish to the first half of the year. As we consistently execute against our 3-year growth plans, there is no question that an inflection point is occurring in retail. Mobile is revolutionizing how people shop and pay, becoming the digital nexus of consumers' lives. They want what they want, when they want it, anywhere, any time. We now expect eBay and PayPal Mobile to each handle over $10 billion in volume transacted this year, a stunning surge in purchases and payments on devices that did not even exist just a few short years ago. Online and offline commerce is becoming seamless and global, and retailers of all sizes need a partner who will help them navigate in this new world, compete effectively and deeply engage their consumers. And this is our focus
  • Robert H. Swan:
    Thanks, John. During my discussion, I'll reference our earnings slide presentation that accompanies the webcast. Q2 was a great quarter for the company. Revenue increased 23%, margins expanded for each of our 3 businesses versus last year and non-GAAP EPS grew 16%. We feel excellent about our portfolio and our capabilities. PayPal continues its strong growth while innovating on the next-generation of payment capabilities. The Marketplaces business is healthy and getting stronger, and GSI continues to help large retailers succeed in a multichannel world. From a capital allocation standpoint, we generated $411 million of free cash flow. We repurchased approximately 9 million shares of common stock and announced the $2 billion increase to our stock buyback program. We feel confident about our performance and are maintaining guidance for the full year. In Q2, our combined businesses generated net revenues of $3.4 billion, up 23%. Organic revenue growth was 18%, foreign currency movements decreased growth by roughly 3 points and the inclusion of recently closed acquisitions increased growth by roughly 8 points. Second quarter non-GAAP EPS was $0.56, a 16% increase year-over-year. Strong top line growth drove our outperformance relative to guidance. Non-GAAP operating margin was 27.3%, down 30 basis points from the second quarter 2011. The decrease was mainly due to acquisitions and business mix. Let me provide a little more context on our Q2 results. Compared to the guidance we gave back in April, there are 3 things worth highlighting that impacted our actual performance
  • Operator:
    [Operator Instructions] Our first question comes from Scott Devitt from Morgan Stanley.
  • Scott W. Devitt:
    The question relates to frequency of purchase, really in the past 2 to 3 quarters, purchase frequency in Marketplaces or the gap between sold items growth and the active user growth seems to have inflected. And if I'm thinking about this the right way, there seem to be 4 broad buckets. The first would be trust and search improvements you've made over to past several years. The second would be the recent marketing campaign, third would be mobile engagement and fourth would be potentially SKU growth from large merchants in the fashion inventory that you've added, which is improved selections. I'm just wondering, John, maybe if you could rank order those in terms of their effects on this change in frequency of purchase or any other factors that would've driven it and how sustainable that you think that is.
  • John J. Donahoe:
    Yes. Thanks, Scott. The answer is yes, yes and yes. As you said, there -- the way I look at it, there's really 2 things going on here. One, we've made an enormous amount of change to the site over the past several years, including trust in search, including bringing more selection. And that was clearly driving greater frequency of our existing users or more transactions per user. And that continues to be the case. Starting 9 months ago was really the first time we began marketing to new users, right? It started in the fourth quarter last year, Buy It New, Buy It Now. And we're seeing a nice response in new users coming. And when we poll them, they like what they're seeing and they're doing a second and third transaction. And then -- the thing that I think underlies both is Mobile, because if you think about it, 4 years ago, the only time you could access eBay is when you were in front of a laptop or in front of a desktop, which is maybe a couple of hours a day. Now, you can access eBay 7 days a week, 24 hours a day with your mobile device. And that's helping with existing users and it's helping acquire new users as you saw. 600,000 new users in Q2 alone. So to be honest, even our internal metrics, we can't tease these out separately to force rank them, but I'll just say, the way I'm thinking about it is our existing users like it, MPS is going up and they're buying more. And the new news, really, in the last 9 months is an accelerating growth rate of new users who are trying us whether it's through mobile or through the web. They like what they see and they're coming back. And we want to keep pouring kerosene on that latter fire to keep it going.
  • Operator:
    Our next question comes from Colin Sebastian from R. W. Baird.
  • Colin A. Sebastian:
    I guess, first, curious on the impact for mobile, more specifically some very impressive stats there. And I wonder if you can talk about what usage is specifically driving this growth, for example, in Marketplaces, the people are carrying their phones into the stores or is it perhaps tablets where we're seeing couch commerce become more impactful? And then related to PayPal, roughly how much of the mobile volume is related to eBay transactions versus the other applications of PayPal in the phones?
  • John J. Donahoe:
    Well, Colin, Mobile, it's really interesting because -- I'll give one statistic upfront then I'll comment more on your direct question, but for -- as we're now saying, $10 million of volume is closing on a mobile device on the eBay business. What's interesting is our analysis indicates that at least that much of volume that closes on the Web, their consumer access their mobile device at some point in the shopping experience. So as you said, mobile is impacting a significant portion of eBay's business, either at some point in the shopping experience and/or the transaction closes on it. The kinds of things we're seeing that's interesting on eBay Mobile is, let me just take the parts category, the motor parts category I referenced earlier, as I said 340,000 parts a day are being closed. As we unpack that, we're finding more and more users, in this case, our target motorist buyer, which is a male, 30 to 50 years old, they're actually using their mobile device while they're under the hood. And they can scan the VIN code or take a picture of the back of the car. And when they see the parts they want, if they do a search on their mobile device while they're under the car, our search results only show them parts that fit their car. And so that they're ordering right there on the spot. So similarly, as you described it, we're seeing consumers go into stores or walk down the street, use their mobile device either to do their investigation or in some cases, to shop. So what we're certain about is mobile is having a profound impact in consumer behavior, and are -- we are aggressively driving innovation, both to close transactions on mobile but also to enhance the shopping experience, even if the transaction doesn't close on mobile. In many ways, PayPal is the same thing. If you look at PayPal Here, it's a great example of driving new use cases where PayPal can be used. So to your direct question, PayPal is used as the way to pay on a significant portion of the eBay transactions closed on mobile devices but not all. But what's really growing is PayPal off of eBay in the mobile arena, because retailers and merchants are finding when they put PayPal Mobile Express Checkout on their app or on their website, they're seeing significantly increased conversion. And what we know in both business units is mobile shoppers and mobile payers are 3 to 4x more valuable than Web-only, simply because they're more engaged with our products and they're buying more. So it's -- I can't underestimate the importance of mobile to what we see as the future of commerce and payments.
  • Colin A. Sebastian:
    That's very helpful. And then just one maybe a follow-up quickly, perhaps it's philosophical in nature and the marketplace. Just given more high-profile brands and retailers on the site now, the sweet spot for eBay historically hasn't been new in season merchandise. So I guess my question is whether eBay, as a platform, is now ready to compete in these new product categories, and where you're seeing incremental strength in transaction volumes potentially.
  • John J. Donahoe:
    The way I'll tease that out, Colin, is I don't think new in season is ever going to be our sweet spot. But new items is absolutely our sweet spot. And retailers and brands are finding new items that may be one season out of season, or 2 seasons out of season, all the way through liquidation stock. That's their sweet spot for eBay. So we estimate over 70% of the items are new on eBay. And buyers are responding to expanding selection because what you're having is more and more sellers, be they retailers or be they traditional eBay sellers, are bringing more of their new but somewhat out of season inventory on to eBay. There's one other category, it's interesting, that's kind of evolving, which is the scarce category. eBay has always been the place where something may be new and scarce, and so the auction format is really an interesting vehicle for that. And recently, we just announced a holiday collective of designers who are designing exclusive goods for the Holiday on eBay. The reason designers love it. It allows them to go directly to consumers and that will create scarcity value. So that's, I would say, a small but growing category of goods on eBay.
  • Operator:
    Our next question comes from Gil Luria from Wedbush Securities.
  • Gil B. Luria:
    To follow up on the mobile theme. Can you quantify, even just a little bit, what the uptick on conversion is when a retailer adds PayPal to their mobile offering? And then how is that driving a higher share of online transactions? Have you quantified what share you believe you now have of online transaction -- of mobile transactions versus online transactions?
  • John J. Donahoe:
    Well, Gil, let me just make a comment upfront. I think one of the decisions we made early on in mobile that has served us very well is from the beginning, we said, "We're not going to worry if it's incremental or not." And so it's a kind of thing we could've spent years having our financial analysts figuring out, is this incremental? Is mobile profitable, dot, dot, dot. We said, "We believe mobile is a movement that consumers want." And we've invested heavily in that. Now when we sit down with a retailer, what we can say is, "When you put Mobile Express Checkout on your mobile websites or on a mobile app, cart conversion will go up because it's very proven that consumers don't want to enter in their credit card information into a mobile device, and PayPal is the safest way to pay." And we think conversion can go up to 10%, 20%, 30%. I mean, we've not released exact statistics because it varies by retailer, but I think retailers find that their cart version goes up when they put Mobile Express Checkout on their mobile web or app. And by the way, Mobile Web -- Mobile Express Checkout is the same integration as Express Checkout. So and what it's doing is -- for the retailers is the same thing I described it was doing for eBay earlier. It allows the retailer to extend their reach outside the limitations of their store. And so now, if you're a retailer like Office Depot, who just signed with PayPal, no longer will the only way -- time you reach your consumers be when they're in the Office Depot store or when they're on the Office Depot website, but through mobile, Office Depot can be reaching their consumers 7 days a week, 24 hours a day. So retailers see the value of mobile and increasingly, they're embracing PayPal Mobile in aggressive ways.
  • Gil B. Luria:
    And a quick follow up...
  • Robert H. Swan:
    Yes, the only -- maybe the only other comment that I would make is just in terms of percent of overall volume, last year, we said we did $5 billion of GMV on a mobile device, of a total of $69 billion. Now this year, GMV has been growing in the midteens. And we expect $10 billion to be on a mobile device. So the share of mobile transactions as a percent of our total is growing dramatically. And to John's point, the share of PayPal at -- PayPal's share of wallet or share of checkout is significantly higher on a mobile device than it is on the desktop.
  • Gil B. Luria:
    And then the quick follow-up, is this a U.S.-based phenomena? Are you seeing more of this shift to mobile in the U.S. or is it just in line with the penetration of smartphones in other countries as well?
  • John J. Donahoe:
    It's the latter, Gil. It's sort of stunning to see how globally consistent this is. And the U.K. and Australia are furthest along because they have the highest smartphone penetration, following by U.S., followed by Germany. But the slopes, the slopes are all very consistent.
  • Operator:
    Our next question comes from Tom Forte from Telsey Advisors.
  • James Cakmak:
    This is James actually calling in for Tom. The first, this is following on -- when you look at the usage patterns of legacy users versus newly active users, are the adoption patterns for mobile similar for both? And when you look at the purchase sizes, can you speak to the differences between the 2 different cohorts? And then secondly, there's been a lot of news going on with the Federal, potential Federal legislation on the online sales taxes. Can you speak to where eBay stands and the implications for your business?
  • John J. Donahoe:
    James, on the first, to be honest, we -- there is nothing that we see that's particularly insightful or actionable about the difference between new users and, as you call them, legacy users or we call them our existing users. We see new users coming in through the mobile channel and staying on mobile channel, some come in the mobile channel and move online. But there's no, I'd say, no standout patterns or standout differences in the pattern between the 2. And with respect to online sales tax, our position is the same as it has been for years now, that our focus is on protecting small business from undue taxation or taxation that is differentially difficult for them to handle administratively. And so while online sales tax will probably happen at some point in the future, our focus is to do nationally what we did last year in California where we worked with the California legislature and created a small business exclusion, where a small business that sold less than $1 million in California didn't have to collect cross state sales tax. And that's just -- because it's a burden -- administrative burden they can't handle. So we'll continue to do that to protect the smallest of our sellers.
  • Operator:
    Our next question comes from Heath Terry from Goldman Sachs.
  • Heath P. Terry:
    Just a couple of quick questions, and then one maybe broader, one that we're thinking about. Bob, is there a way for you to parse out for us what guidance would have looked like for the full year on an FX-neutral basis? And then John, do you have a sense of what mobile growth that you're seeing is incremental or -- versus a shift of purchases between the platforms?
  • Robert H. Swan:
    Yes, I'll go with the first one. Heath, the -- just for the first half of the year, organic growth rate, so excluding FX and M&A, was 18%. And essentially implied in our guidance for the second half is 18% organic growth rate. That's the middle of the range. So stripping out currency and any M&A activity in the second half, it's pretty much flat throughout the year. I'll just say the only nuance there is Q3 organic growth is a little bit lower and Q4 it's a little bit higher. And that's just our anticipation of what transpires in Europe during the third quarter.
  • John J. Donahoe:
    And then, Heath, on Mobile, as I said a minute ago, the -- we are not overly focused on what is incremental or not because the way we're thinking about it is, the fact is consumers like using their mobile devices, whether they buy or pay on their mobile device or just use it as part of a shopping experience. And we know that consumers that engage with their mobile apps are 3 to 4x as valuable as to those that don't. So that's how we're thinking about it. We are -- we believe it's helping our growth rate. We believe we're very well positioned to be the leader in mobile commerce and the leader in mobile payments. But we're just going to keep investing in the general area.
  • Heath P. Terry:
    Okay. Got it. With the growth of PayPal again being well above overall e-commerce, how much of that would you say is new merchants accepting PayPal and how much of that is PayPal gaining share within that existing merchant base? And is there anything in particular that you would attribute that share gain to?
  • John J. Donahoe:
    Well, I think PayPal's historical growth formula continues where I would -- on one dimension, we're simply expanding new merchants, right, adding new merchants. And we continue to add new merchants globally. I mean the -- whether it's in places like Brazil and Latin America, whether it's Asia, whether it's Europe. We're adding more merchants online. And now we're adding those merchants with mobile and with offline. So that you begin to see PayPal everywhere. So kind of ubiquity. Then, we're trying to focus on building great products so that it increases more volume per user. People are using PayPal more and you see that happening. Today, we're adding digital uses, we're adding BML uses, we're adding mobile uses. And then the third area where there's absolutely more focus and David has brought -- David Marcus has brought more focus is adding more consumers to the top of the funnel. The truth is we've been adding sort of 1 million -- roughly 1 million new consumers a month for the last 3 years, and as the denominator gets bigger, our active user growth rate is coming down a little bit. And Dave has really brought an increased focus on the product experience for new users signing up to streamline registration flows, allow someone to sign up on a mobile device. You may have seen we bought Card.io yesterday. You can envision a world in the not-too-distant future where you can just frankly snap -- take a snapshot of your driver's license and credit cards to form a PayPal account. So I think one of the pieces of the PayPal play book that I think you'll see increased focus on is just consumer acquisition, which then again leads to consumer engagement, which leads to -- which is supported by the merchant ubiquity. And as you said, we're growing. We think we're going 2 to 3x faster than the market. So we're clearly gaining share in Web. We're gaining share in mobile, and our aspirations in offline is if we can get a little piece of that offline market, we think that can really add to our business.
  • Operator:
    Our next question comes from Ronald Josey from ThinkEquity.
  • Ronald V. Josey:
    So a few here. One, maybe a quick one on housekeeping. For guidance, Bob, can you tell us a little bit more on what you're basing FX rate -- the base FX rate is for guidance for full year? And then sticking with guidance I think you had just mentioned that 3Q is a little bit lower, 4Q needs acceleration. But specifically, 3Q is lower due to Europe. And I wonder if you can talk about Europe as it relates to Marketplaces versus PayPal. I feel that PayPal was more impacted. And in the last question, I promise, is just in terms of -- do you still believe that Marketplaces can grow sort of in line with e-commerce?
  • Robert H. Swan:
    So our guidance for the second half of the year in essence, it has this S pot [ph] in effect. So that's what the guidance is based on. That being said, at this stage of the year, our hedges have us fairly well protected for clearly for bottom line and for the most part, for top line. So we feel relatively good on how protected we are for the second half of the year. In terms of the second half guidance, I refer to organically our growth rate of 18%, a little bit lower in Q3, a little bit higher in Q4, but 18% on average. And the reason we expect Q3 to be a little bit lower is in general, Q3 is our softest quarter, driven by Europe. And this go around with the Olympics. We expect a little more impact in the quarter as a whole. So that's what -- that's why Q3 is a little bit lower. I would just say, by business units in our Q2 results, Marketplaces, despite the relative headwinds we're dealing with in the macro economic environment in Europe, Marketplaces had a great quarter across-the-board in Europe. So we're expecting continued strength there. And PayPal who's got a little a broader exposure to the overall environment was a bit slower. And in our guidance, we're assuming that is well going into the second half of the year. Your third question, market...
  • John J. Donahoe:
    Yes, I'll do this one. Since you couldn't get it down fast enough. We're going to -- instead of having only a 1-question rule, we're going to have to start imposing the 3-question rule.
  • Robert H. Swan:
    At least, Ron, was kind enough.
  • John J. Donahoe:
    Yes. So, Ron, on marketplace growth rates relative to e-commerce, what I said last year at Investor Day is that the number I look at to compare marketplace to market growth is our fixed price growth rate because it's the apples-to-apples comparison. And fixed-price grew 20% this quarter. So it's clearly growing faster than e-commerce. And that's true in almost every market. What's also happening is auction growth rates are coming back a little bit and simply, the mix of fixed-price and auction are such that our blended growth rate, GMV growth rate, this quarter is 15%. So we actually think the marketplace grew roughly at e-commerce growth rates in Q2. Where all the dialogue for us is going forward and the kind of focus Devin Wenig is bringing to the marketplace is, "All right, how do we build on top of that?" And he's got focus on how we leverage our data more effectively, a strong multiyear focus on leveraging our data and he brings some great experience from his experience on Reuters on leveraging data across the platform. How do we expand more aggressively to BRIC markets, initially with cross-border and then overtime with domestic. Again, a second big multiyear initiative. And then a third is, how do we bring more selection on to eBay, be it C2C selection, be it local selection from local retailers, be a Milo or be it from large retailers. And so those are 3 broad areas, the whole area of local; local, BRIC and data are areas that we think there's incremental growth opportunity and over the next 3 years in Marketplace, and that's what Devin's really got his team focused on.
  • Operator:
    Our next question comes from Brian Nowak from Nomura.
  • Brian Nowak:
    I have a question on PayPal incremental margin. It came in a little bit higher than expected again this quarter and it's kind of the highest we've seen since 2010. So I'm just curious about why they couldn't kind of stay in this low 40s range or even trend higher as you continue to grow and get positive leverage off the model. And in particular, in 2013 as investment flows. And then kind of stepping back, what's a better way to think about the 25% to 26% segment margin guidance on 2013?
  • Robert H. Swan:
    Yes, thanks, Brian. So yes, segment margins through the whole first half of the year, very strong and driven by 2 things
  • Operator:
    Our final question comes from Spencer Wang from Credit Suisse.
  • Spencer Wang:
    Just a couple of housekeeping questions for Bob. Bob, I know you called out the FX impact on cross-border trade. I was wondering if you could just maybe quantify what exactly the impact was on both on TPV and GMV. And then for Marketplaces, could you help us just quantify that onetime item that impacted the segment margin in Marketplaces, or is that the Korea tax issue?
  • Robert H. Swan:
    On the second question, yes, it's the $29 million and it was -- it is the Korea international VAT issue, and it flows both through Marketplaces, international transaction revenue and through to segment margins. The first question, in terms of FX impact on TPV and GMV. I'm not -- I'm not sure I understand the question, Spencer, because it's kind of directly in the -- it's directly in the materials we gave you as reported, an FX for both GMV and TPV. So maybe...
  • Spencer Wang:
    Sorry, I was wondering if you could isolate maybe just the cross-border impact, Bob. Is that possible or in terms of the demand impact.
  • Robert H. Swan:
    Yes, I would -- it's not -- I'll give you -- for deceleration for PayPal TPV Q1 to Q2, we declined by 2 points Merchant Services. And I would think about half of that being cross-border trade. So roughly 1 point. So 25% of PayPal is cross-border. And 1 point overall impact. You can get a sense as to what the impact was on TPV. It wasn't -- it was less significant on GMV. So not terribly material for the Marketplace business. Thank you, operator.
  • John J. Donahoe:
    Okay. Thank you, everyone. We'll see you next quarter.
  • Operator:
    Thank you, and ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect, and have a wonderful day.