eBay's Management Presents at Citi 2013 Global Technology Conference (Transcript)

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eBay Inc. (EBAY) Citi 2013 Global Technology Conference Call September 4, 2013 9:45 AM ET

Executives

Mark Lavelle – Senior Vice President-Strategy, PayPal

Analysts

Mark A. May – Citigroup Global Markets, Inc.

Mark A. May – Citigroup Global Markets, Inc.

Good morning, everyone. I am Mark May, the Internet Analyst at Citi and it’s my pleasure to welcome Mark Lavelle, who’s SVP of Strategy and Business Development at eBay.

Mark Lavelle

That’s correct.

Mark A. May – Citigroup Global Markets, Inc.

And who is also one of the co-founders of Bill Me Later.

Mark Lavelle

Correct.

Mark A. May – Citigroup Global Markets, Inc.

So I’d to make the session interactive, there are quite a few folks in the crowd so if it’s okay with you Mark, just let people kind of chime in, feel free to interrupt if I’m not looking to be yes someone making noise or something and feel free to ask questions during the session. Maybe if we could just jump right in and what did you want to make any prepared remarks or?

So a lot of focus on PayPal and the offline opportunity, obviously it’s significant in terms of the opportunity, there is some confusion out there, I’ll get questions from investors why hasn’t it worked? Why haven’t we seen the revenue impact and can you just kind of help us think about or understand where we are in the roll out of the PayPal offline business, and what we should be expecting as we look out over the next year or two or three.

Mark Lavelle

Sure. Glad to we’re not done yet with the offline opportunities, matter of fact when I came into the business something around 2010 PayPal would have said, it was just focused on online, predominantly and we’ve redone the strategy based on our view that the distinction between online and offline is irrelevant now to consumers that was the opinion, we have back a couple of years ago, now I think it’s sort of assumed, and we are making transactions, we are buying either on a device or on a laptop or standing in front of a monitor in a store, consumers no longer saying, I am an online customer and offline customer, so that is definitely an established trend.

We’ve seen that in our mobile – growth of our mobile business, and fascinating charts we look at where an e-commerce business used to have purchases before you went to work at lunch time, and then in the night time when devices came in the number of purchase occasions we get just moderate through the day and we get people buying on the bus, sit out at a break, in the middle of a meeting, hopefully not in the middle of this one, but the opportunity therefore to go forward and have the entire purchase experience, be intermediated by a smart point of sales system, a mobile device and a cloud based wallet is the vision we see in the future.

It’s different in the offline world because we walk around with physical pieces of plastic or a paper that we feel very comfortable with, and so where we are in the life cycle we’re just figuring out how these devices in effect that the consumer can access their PayPal wallet anywhere, how does that really improve someone’s life? How does it make something easier to do and more enjoyable and so what we’ve been doing over the last year is testing a variety of these cases with a number of retailers and we like what we are seeing. We like that in things like ordering ahead, Qbus thing, checking in to your favorite barista. There is a number of areas that we think we’ll become a tipping point for a lot of people beginning to buy using their PayPal wallet everywhere.

Mark A. May – Citigroup Global Markets, Inc.

And where are we in terms of, if you think about the steps that need to take place before you really step on the pedal in terms of customer acquisition laying out incentives, I assume that giving someone to ubiquity is one step before that where are we in that process.

Mark Lavelle

Ubiquity is definitely important aspect to it and we’ve done a number of things with the announcement of our credit card partnership, we’ve made major partnerships with basically all of the major point of sale retailers like NCR, Micros and a lot of the destructive start-ups that are using tablets and an application technology to sort of change the physical point of sale experience.

So we’re laying the groundwork for that ubiquity and that technology is there, the smart phone penetration is high enough for us to be really bullish about this. What has to happen next, really is to have these use cases, have these all come together in our ecosystem, where online relationship, being able to store financial information in the cloud behind a safe and secure credential, which is something we’ve done for 15 years, and then being able to access it whether you’re in your car, whether you’re on iPad, whether you’re on a tablet or whether you’re in a drug store or a gas station, those things all have to kind of come together at the same time to have a meaningful change in consumer behavior.

Well, that’s why I said as we’ve kind of given guidance at our last Analyst Day, the tremendous growth in our PayPal business doubling to over $300 billion in volume in the next three years, really doesn't’ account for much of this, but there is tremendous upside in what we’re seeing already.

Mark A. May – Citigroup Global Markets, Inc.

Do you see the main incentive for consumer adoption being some of these convenient factors that you’ve talked about or might there will be other incentives financials and those another rewards related…

Mark Lavelle

I think that will work in layers so the great thing about having a business where we have a $135 million active customers already using us and having their financial instruments is that simply making it available, having such a large customer base, the express their preference for us, so at that level there is not much we need to do to our core customer. Our core customer just gets more valuable, in the more places we make available to them and we’ve seen that network affecting our business online, and we’ve seen in mobile and we’re starting to see it happen in point of sale.

To get that next level of growth, I think we will and we know we will need to add things that combine either consumers respond being save me time or save me money, and make things easier for me, so that’s where the mobile device connected to the point of sale in either, search, help me find what I am looking for easier, help me check out faster, give me more choices on how I am going to buy or going to be the element that we focus on as this become little more pervasive.

Mark A. May – Citigroup Global Markets, Inc.

What about in addition to some of the initiatives offline any other interesting new kind of big market opportunities that you could highlight I think there is recently some report that was published around the cross boarder brick opportunity, maybe talk about some of the other kind of major initiatives that could drive growth for the business.

Mark Lavelle

Well in our core play book is still just a wonderful business model because basically we have every place we open a new kind of PayPal outlet, that’s our merchant services business, that’s our eBay business and every new consumer we buy both of those add to the network and add value to the network. So our playbook is selling Merchant Services, adding more and more merchants every month and adding more customers. We’re acquiring more customers than in the company’s history, 5 million customers in last quarter and then the global playbook is to just open up new corridors where PayPal customers can send and receive money or make purchases for goods and the BRIC countries represent huge opportunity for us. We just started in Brazil a couple of years ago. We opened up Russia this year. We’ve done a JV in Japan, which is the third largest e-commerce market. So we’re being very aggressive about covering all of the major growing commerce markets with our network.

Mark A. May – Citigroup Global Markets, Inc.

Within Merchant Services, maybe just taking the U.S. market, what’s the percent in terms of penetration of eBay, I guess maybe also of Amazon. If you just looked at that segment in market what’s the PayPal’s penetration today and what are the drivers that continue to kind of grow the outcome for you?

Mark Lavelle

People argue about the Dominator. I think we do in the high-teens of commerce, electronic e-commerce across the world and that varies based on geography. Obviously we have higher penetration in places like UK. In the UK we have tremendous growth potential, in Germany and like I said we’re just getting started in places like Brazil and Russia and we still have India, China in front of us. So we think about where – any place that there is a purchase occasion occurring, where there is a merchant relationship and a customer relationship attempting to transact. That’s the place where PayPal is to be integrated, so then we don’t see an end in the opportunity for us to continue that organic growth.

Mark A. May – Citigroup Global Markets, Inc.

PayPal’s roots in person-to-person payments, I mean the remittance market globally is huge. It’s a $500 billion market according to the World Bank. What portion of PayPal’s business today is in that segment of market and how much investment or focus is there in serving that segment or is it really just like the investments around the Merchant Services side of business?

Mark Lavelle

Well, P2P has been a part of our business since we started. I can send anybody money today and pick anyone of 27 currencies and you can have that instantly in your wallet. So, it’s a phenomenal P2P, person-to-person capability that our customers really enjoy. Remittances per se involve a lot of physical location capabilities, the exit funds or bank relationships to exit funds. We’ve done partnerships recently with MoneyGram to help integrate PayPal into their network to allow those things to happen and I think you’ll see us doing more of that type of thing that makes the wallet more useful to our consumers around the world.

Mark A. May – Citigroup Global Markets, Inc.

Okay. In PayPal’s penetration on eBay outside the U.S. is clearly smaller in the ‘60s versus over ‘80 in the U.S. What are some of the initiatives that you could highlight, try to get PayPal penetration on eBay outside the U.S. Maybe talk about why are those wallets [ph], discuss the timeframe.

Mark Lavelle

Yeah. It’s sort of where the business has got started in a lot of cases and the network effects are, those numbers go up every year. And what we look at is from eBay’s perspective how can we serve eBay as a payment provider in which one of our products is PayPal, and how do we then make PayPay very, very useful to the eBay buyer or the eBay seller. And as we do that, those penetration numbers go up. So, eBay is an extremely dynamic business. It’s changing its user experience all the time and we work directly with them to make the check out experience on eBay the best possible experience that they can have and as we do that we see that PayPal numbers go up.

Mark A. May – Citigroup Global Markets, Inc.

Is there anything that’s unique about the markets outside the U.S. that would preclude penetration from being as high as it is in the U.S.?

Mark Lavelle

Yeah, I mean, if you take any place where you see differences and reliance on credit cards you’ll see a difference in penetration. So you have in Germany, for instance, CLV, the bank transfers as a different experience. So we need to go into those markets and integrate them both negatively as an option for customers to use and within the PayPal wallet as a way that customers can transact using PayPal.

Mark A. May – Citigroup Global Markets, Inc.

If we can shift to BML now given – especially given the background there. What’s sort of the company’s strategy for growing that business more broadly and what are the trade-offs and benefits from promoting BML within the wallet and maybe just talk a little bit about that?

Mark Lavelle

The strategy has always been to integrate that capability, the transaction-based credit capability into the wallet and the Merchant Services business in a way that makes the checkout experience easier and removes friction. That was sort of the invention that we did at Bill Me Later. That worked phenomenally well at working on the convenience aspect and to a larger extent the security aspect of checkout in e-commerce market and that goes hand in hand with what PayPal’s core value proposition of safety and security of purchases and financial information. So we’ve integrated that into the wallet. It’s grown phenomenally well. We’ve integrated it into eBay and that business continues to grow as a way to provide consumers choice and to few the convenience and security of our products.

Mark A. May – Citigroup Global Markets, Inc.

And can you talk a little bit about the ABS [ph] partnership that you recently announced, and what we should expect to see coming out of that? And also how it relates to…

Mark Lavelle

We’re very excited about that. It’s always been a business that I’ve – when we started Dominator, I thought it was fantastic business because they focus on helping retailers sell. They focus on information and value of information. So we found a kind of a great partnership there. As you think about the next phase of retail, retailers are going to need to use these tools like wallet, like credit more imaginatively and use the information they have about their customers more innovatively in order to compete. And so the basis of that partnership is just two like-minded companies and we felt that that would be a good place to grow, continue to grow our credit business.

Mark A. May – Citigroup Global Markets, Inc.

Maybe some practical implications. What we should expect to come out of that partnership?

Mark Lavelle

I think what we announced is we are looking at ways where their clients can take advantage of some of the capabilities that we have like their wallet, like credit, transaction credit and vice versa. How can we take advantage of some of their capabilities that they have in royalty and customer information.

Mark A. May – Citigroup Global Markets, Inc.

There is a perception just generally around PayPay that maybe it’s not the most innovative technology business. There have been other payment companies out there that have innovated a little faster, maybe, particularly in the mobile world. Can you talk about how that’s changed? It seems like there has been a noticeable change over the last year or two. In terms of the pace of innovation, maybe highlight a few things that PayPay has done, particularity on the mobile platform to compete more effectively.

Mark Lavelle

Well, I mean, since the update in the business we have obviously innovated quite aggressively with our credit offering in the wallet. We’ve fundamentally changed the user experience with PayPal in a number of different ways. In terms of what our PayPal application, our mobile application looks like going from iOS to Android and becoming, having mobile transactions, the 20% of our – $20 billion of our business from almost nothing three or four years ago. And the product pipeline that we have at PayPal right now is one of the most innovative than I have ever seen.

With the types of new engaging experiences we have coming up in the wallet with the things that customers can do like add credit, like add points and loyalty, like add third-party cards and the ability to innovate how the checkout experience works whether you are in a physical point of sale on a device or even the e-commerce checkout, we’re changing petty aggressively. We’ve opened up new areas of growth for us with our PayPal Here product that we’ve launched in five countries that allows for a mobile device to turn into essentially a cash register. We put out a mobile application that works on iPad devices that essentially a merchant can run their entire point of sale. And so, I wouldn’t hold a second to really anybody in the area of payment innovation.

Mark A. May – Citigroup Global Markets, Inc.

It seems like on the mobile app side, there were some innovations that were launched. So probably across all your channels, but particularly in mobile reducing friction to the transaction is super important in a competitive edge and even some changes that you’ve made to the PayPal APIs over the last year or two to sort of improve the experience, but for the user but also for the developers they are having…

Mark Lavelle

It’s a bigger question. Last year in South West we rolled out an entirely revamped interface and toolkit instead of the API capabilities for developers. So we continue to put a lot of investment behind because we believe that that’s where the next level of disruption and innovation will come from is new applications that developers see as opportunities to change entire markets and that will happen, both wholly on mobile devices, but it will also happened on platforms that form sort of new retail opportunities. So having our product, our platform be the choice for developers and destructors is a huge strategy for us going forward.

Mark A. May – Citigroup Global Markets, Inc.

Maybe I’ll just pause there and see if there are questions.

Earnings Call Part 2:

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