eBay, Inc. (EBAY) Morgan Stanley Technology, Media & Telecom Conference Call March 5, 2014 2:00 PM ET
Bob Swan - SVP, Finance and CFO
Scott Devitt - Morgan Stanley
Scott Devitt - Morgan Stanley
We’re going to get started. Very happy to have Bob Swan, CFO of eBay with us this morning, Bob thanks coming back this year.
Yes, great to be here. Thank you.
Scott Devitt - Morgan Stanley
I’ve been struggling with what’s topical on your Company I can’t really think of questions to ask you. And one that I thought of is you run a marketplace business. You run a payments business, and they’re pretty interconnected. And maybe a good place to start is some of the more recent events that have been going on with yourselves and some in the investment community and just the way that the eBay management team thinks about the integration of the assets today given the form and platform that you have to do so.
Well, yes that seems to be fairly topical, so thanks for getting that out and so I’m sure top of mind. I think if I just kind of step back and think about how we’ve been thinking about this Company for over the years is how do we in light of where the market is going what is the right set of capabilities and assets we need as a Company to enhance the role that we play in commerce overall. And we are absolutely sure the collection of capabilities that we pull together organically and acquisitively are helping us expand the role that we play in the industry that allows us to in that sense gain share and that we’re making the right decisions to create value for the folks in this room overtime I mean that’s the -- there is nothing new about that.
I think the way we’ve been thinking about it for the last several years has been we look at an industry of commerce where primarily driven by mobile the lines between online and offline have blurred dramatically in a relatively short period of time. The second observation we’ve made along the way is there has been a real conversion of e-commerce to commerce but also commerce and payments. And how do we as a Company, pull our set of capabilities together that allows us to leverage those assets, to help merchants grow and meet more consumers around the world. That is what’s been our focus.
And as you know last year we enabled $212 billion of commerce volume that is between eBay, PayPal and eBay Enterprise and all the collective capabilities by bringing them together for merchants we enabled $212 billion of commerce volume. And we’re always asking ourselves are we making sure we’re doing the right thing for the collective assets so that they individually and collectively can meet their full potential. And that particularly goes to the question we’ve asked ourselves about PayPal over the years is, is there anything about PayPal and its growth prospects that we can enable as part of eBay Inc. or that we constrained because it’s part of a larger Company. And for the most part on that second question we are not PayPal’s part of eBay Inc. is not being constrained by its prospects for growth because it’s part of a bigger Company. On the contrary we are increasingly -- PayPal has accepted on increasingly all the top Internet retailers in the world, we’re not quite there yet but increasingly. So we’re not constraining its growth.
On the contrary we see the ability to accelerate PayPal’s rate of growth within the enterprise. And it essentially comes in three primary ways. One is innovations that PayPal makes get launched on eBay. Those innovations get a flywheel going that flywheel drives consumer adoption. That consumer adoption we take off of eBay and we grow new businesses with PayPal. The second is PayPal leverages all of eBay Inc. data to the extent our user agreements allow to drive more growth for its merchants at -- by managing fraud more effectively. And the more data PayPal has the better off it could manage fraud and make credit decisions that are effective.
And the third thing that PayPal gets as part of the ecosystem is it gets access to relatively low cost of capital, a significant user base from eBay that is a real good foundation for its growth and for its organic growth in credit it gets funded by eBay Inc.’s cash flows and by using eBay Inc.’s cash flows to accelerate its growth through inorganic things like the acquisition of Braintree.
So when we step back and think about what’s makes the most sense for this business it’s how do we pull this set of capabilities together, capitalize on the natural synergies that exist within and across the portfolio to help merchants grow and how do we monetize that more effectively. And we look at the next couple of years and we feel great about how we can leverage these capabilities in a world where payments and commerce are converging and online and offline are blurring now we feel like we’ve got the right set of capabilities to capitalize on that.
Scott Devitt - Morgan Stanley
Okay. Just digging into this topic a little bit and then we’ll take a step back and then look more broadly at the marketplace of business and PayPal. One of the components that you have highlighted in terms of driving the success of the eBay platform has been the introduction of trust features, most notably buyer protection in terms of unit. If you buy something on eBay, you know that you can trust. And one thing that you’ve highlighted is the low PayPal penetration in Germany and the way that the inability to actually offer eBay buyer protection affects the growth in that market. Could you talk about that a little bit more in terms of both the way that it benefits the business in the markets where you can do and if some of the constrains that exist in a market like Germany where PayPal penetration is low?
Yes I mean, first at the most macro level, it’s one of the ways that we leverage data across the enterprise to drive growth on a particular platform and overtime with PayPal’s risk management capabilities, if a merchant accepts PayPal, with PayPal’s underwriting we learn a lot more about the inherent risk of the merchant and the consumer that they are transacting with. For us that’s the tradeoff, that we make on how do you grow the business while keeping fraud losses relatively low. That’s been a constant.
In each market around the globe the higher the PayPal penetration on eBay the more comfort we take in expanding our protections, PayPal protections for the merchant and the consumer on eBay in a particular market. That’s always been the case, over the years. Because two things about Germany, it’s a fairly efficient payment system that consumers are used to and there like it and therefore PayPal penetration in that market was slower than it’s been in a lot of other markets.
Secondly it’s in terms of eBay, it’s a large C2C business versus B2C business, so the inherent trust in the protections have got to be better and better. So that’s the dynamic that we’ve solved around the world by leveraging eBay and PayPal to provide more and more protections. And Germany has been tougher. All that being said we started at close to zero penetration of PayPal on eBay five or six years ago. And today we are well over 50%. And it’s gotten better every quarter for a long period of time as we continue to innovate on eBay with PayPal in the German market. And the higher that penetration gets the more protections we provide.
So it’s one of those natural data-oriented synergistic things that we can do to leverage the power of commerce and payments to drive -- power of commerce payments and risk management to drive more frequency and activity on a platform. Germany has been one of the -- it’s one of our biggest markets. Obviously it’s been one of the toughest challenges to drive that penetration. But we have made quite a bit of progress. We still have ways to go because as you know in our developed markets penetration of PayPal and eBay is in north of 80 for the most part. So we have made some progress but still ways to go in Germany.
Scott Devitt - Morgan Stanley
And last question, but it is multipart, on different topics. So cross-border it is a big driver of both the eBay marketplace and PayPal it’s a highly profitable component of PayPal’s business. Talk about integration there and how that you’re benefited as a Company with the PayPal attach rate on cross-border, extend that conversation to markets like say Russia, where eBay historically does not have a physical presence if you will, but consumers are buying goods and then attaching PayPal, giving PayPal the opportunity to build the business in that market. And third and this is done really at a piece for keeping us on one question. Bill Me Later, is the business that you bought, that seems to potentially highly benefit from being integrated into the eBay ecosystem given the way that you can acquire customers, can you touch on that a bit and then we will move on?
If in the unlikely event, that I don’t cover the very rational thought of related questions, please come back to me. But I think first, cross-border trade is a huge component of our business overall. On PayPal, roughly 25% of PayPal’s volume is merchants reaching consumers and markets outside their domestic markets. And a little less than 20% of eBay’s volume is that same dynamic. The inter-relationship is penetration of PayPal on eBay for cross-border trades, for cross-border trade is very high and penetration share of checkout of PayPal on other merchants, merchant services. PayPal’s share of checkout is higher than just the average.
And the reason is rather simple when consumers are making an online purchasing decision with a merchant in a different part of the world, they want to know that somebody standing between them and that merchant and if they have a problem they know that somebody is protecting their data, their financial information in a very safe and secure way that’s what PayPal means to consumers around the world. So, their level of comfort on eBay and with merchant services for our cross-border transactions goes up and in-turn our share of checkout for merchant services or eBay with PayPal is higher.
So, consumers trust PayPal and they trust them more when they are dealing with merchants that don’t know that might be on the other side of the world because they know that PayPal has already embedded that merchant in some way, shape or form and they won’t be giving their financial information to somebody on the other side of the world that they don’t know.
So, that’s why PayPal’s cross-border trade business is so large because it started on eBay, it facilitated cross-border trade on eBay. We leveraged that relationship to expand in the merchant services. In new markets like, for the most part when we enter a market as a Company we lead with eBay and we pull PayPal through and PayPal grows on eBay in that market and then grows off eBay in that market, that’s a little bit what we are doing now in Russia. So, we launched a new market with eBay. We have gotten the license for PayPal in Russia. PayPal is the way to pay and be paid on the eBay platform. And PayPal will grow in emerging market like Russia on eBay and that flywheel will be being able to have PayPal grow in Russia off of eBay.
Bill Me Later in your related but unrelated question is the same dynamic and the dynamic is this, when we innovate things for PayPal that will drive more volume between merchants and consumers, we take those innovations first and we launch them on the eBay platform because it’s big, because the process is $75 billion of volume. So, innovations of PayPal on eBay get a flywheel of merchants and consumers trying new products and new ideas, cross-border trade, paying with PayPal, Bill Me Later mobile checkout. We launched PayPal innovations on the eBay platform like Bill Me Later and drive adoption then it drives because it’s a large platform with 130 million users almost, PayPal gets acquisition of new consumers for their new innovations in essence for free. It drives that penetration of Bill Me Later on eBay which in-turn will help us accelerate Bill Me Later off of eBay.
So, I think in all the markets we are in whether they are developed markets like Germany, whether they are emerging markets like Russia, we try to take PayPal innovations, deploy them on those platforms on eBay to drive a relatively efficient consumer acquisition channel and adoption of the products on eBay that we can expand off of eBay. And you have touched on essentially three really important ones, penetration, PayPal Bill Me Later cross-border trade, PayPal’s mobile express checkout was built on its innovation that it did within eBay mobile app. So, those are how we leverage PayPal technology and get rapid adoption across the ecosystem. It’s really powerful for PayPal’s growth to have a huge commerce platform that it can innovate on to drive relatively cheap and efficient acquisition of customers for its product launches.
Scott Devitt - Morgan Stanley
Okay. So, end of that conversation, we will take a step back and start with the marketplaces business. You okay? Last year you had an Analyst Day in February, Last year 2013 a few things changed throughout the year and you modified guidance most recently in most recent result. Where do you think that you are now as a Company in terms of your visibility to growth relative to numbers that you have now reset? And then secondly and kind of a broader question is you went through a multiyear turnaround and the business has started to stabilize, how do you think about the run rate growth on the marketplaces side of the business now that so much of the low hanging fruit, if you will and some of the fixes that you have put in place have played out over the past number of years those are related?
Yes, and so first off as you know, we have looked at the industry overall and e-commerce, mobile, blarney lines what it means for us is an opportunity to leverage a leadership position as a Company in ecommerce which is still a relatively small piece of overall commerce. But how do we leverage that position that we have given the dynamics going on in the market particularly mobile blarneyed lines driving omni-channel growth to expand our served markets from 1 trillion e-commerce to 5 trillion web enabled commerce to 10 trillion commerce that’s kind of how we see the industry and are rolling it.
In March of last year when we laid that out what we said in effect is we would take the role that we play in that industry from $175 billion of commerce volume in 2012 to $300 billion of commerce volume in 2015. So that’s kind of the market that we operate in the role that we would play. We said mobile would be a significant -- leading in mobile would be a significant component enabling us to play that bigger and bigger role, and we said mobile would grow 65% per year on a e-commerce volume growth of roughly 20% a year, so mobile is going to be increasingly important.
The third thing we said is how we monetize that expanding role in e-commerce would come down overtime, and we said as a Company we would go from roughly an 8% take rate to a 7.5% take rate. So those were how we saw the industry and then the three things, e-commerce volume, mobile growth and the relative value that we provide in the take rate that we earn. That would generate $22.5 billion in revenue in 2015.
So a year later kind of what happened on the way along that journey. At the end of year one and our outlook for the next two years, we still expect to enable more than $300 billion of e-commerce volumes. So one year in the role we see us playing is even bigger than where we were back in March. Secondly one year in our global volume grew by almost 90%, so we feel good about leading in mobile in the role it will play for us in the role that we will play in the industry. So we feel relatively good about that. The third thing is our take rate, our take rate decelerated more last year in year one and we expect it to continue to decelerate and as a result why the volume we play in the industry is as big if not bigger, how we monetize is lower and therefore the revenue that we projected for 2015 is lower than it was at the time, roughly $22.5 billion then is roughly $21 billion now. So that’s kind of how we think about things.
Underneath the covers the take rate is lower because of a few things, one is mix. PayPal is the fastest growing business within our portfolio particularly as it deploys its technologies on the eBay platform it’s growing faster, its take rate is the lowest. Secondly our highest take rate business eBay Enterprise is going the slowest. So that dynamic while the role we’re playing is larger how we monetize is actually lower. Some of it is good news and some of it’s not so good news.
The second thing within the take rate is particularly within the business unit enterprise is not dramatically different eBay is not dramatically different, but the take rate in PayPal is different, it’s lower, it is lower through year one, and we expect it to be lower through two to three year timeframe. And that lower take rate is a function of a few things; one is our growth off of eBay is roughly 2.5 times and we’re growing at roughly 30% merchant services volume. That growth and that progress weighs on our overall take rate, our take rate is lower off of eBay.
Secondly within that growth winning with large merchants is a bigger and bigger priority, getting PayPal on larger merchants has been a thrust for the last couple of years and as we get success the take rate with larger merchants has a tendency to be lower. That’s the second dynamic. And the third dynamics is as we look at cross-border corridors, which is a great business for us with relatively large margins. We look at particular quarters and whether there is a price volume trade off we make where take rate or fee structure being lower will accelerate more volume.
So within PayPal you have those three dynamics that have a take rate that’s going to come down more than we thought but the revenue of the business is no different than what we said for PayPal we’re kind of still today where we were a year ago for PayPal, the monetization will be a little bit lower our variable margins for this business will stay in the 62% plus arena which is the one that we keep highlighting, why are we accelerating the amount of investments in this PayPal business, because we see lots of prospects for growth for a 62 plus % transaction margin business and we will invest behind that all day long to accelerate growth.
That’s a little dynamics about how we saw the world a year ago, one year through we were are, what we feel good about going forward, the monetization is lower than we expected. The implications for the portfolio then Scott, as we look at the eBay business a year ago, we said 14% growth per year over the three year timeframe. eBay within eBay Inc. and now what I would say is a year later we think about this business as a strong, double-digit significant operating margin business where we will continue to invest and grow around the edges of mobile and the core, but around the edges in our local on emerging markets and on data and engagement and if those things drive accelerating growth, great, but right now implied in our two year outlook is a Company that will grow volume 20% a year, revenue in the mid-teens and eBay at the strong double-digit rate margins in that two year journey.
Scott Devitt - Morgan Stanley
Does that, you have a history as the CFO of eBay over a long period of time, up until the point of last year of setting expectations, at which the Company has, the progress of the Company has had the ability to exceed those expectations over a pretty long period of time, up until last year. And so, now with where you are and what you just walked through, do you believe you’re kind of back to the visibility that you had, you’re back to that type of setting in terms of what you have put out relative to what you actually think the business can do and there’s a moderate gap between the two?
Yes, I think what’s been consistent is, we look out over a three year timeframes, we don’t find it too helpful to go beyond that but we look out over three year timeframes and given all we know, where we see the industry going, the investments we make across the portfolio. We try to give you our best view of how we see things playing out, and you know I think we have a healthy bias to meet the commitments that we’ve made and I think over the years, with the exception of last year, that’s worked for us. Last year we missed, we came in, we hit our full year guidance but it was the lower end and that’s not what we’re accustomed to doing. We’re not accustomed to coming in at the low-end of what we say.
So as always we take what we learned through the course of the period whether it’s a year or a quarter and take all that information and try to project forward what you can expect from us and I think now we’ve kind of told you we think we’ll grow to be north of $300 billion volume business where we’ll continue to maintain mobile leadership, our take rate will be relatively strong and we got a set of assets and capabilities that we think are well positioned in light of where the overall market is going, commerce and where the technologies are converging, commerce and payments, where we give you our best view about what you can expect of us and that’s what’s reflected in what we’ve said in January.
Scott Devitt - Morgan Stanley
Okay, so last question and then I’ll switch to PayPal, competitive position, so there is different views of the world depending on which market is that an investor tends to sit, there’s a U.S. centric view of the world that hybrid e-commerce, the Amazon model if you will, wins. There is views from other parts of the world that the marketplace model, particularly in non-skew based the UPC categories, wins. You kind of sit you’re a natural third-party marketplace, you have a payments business, would like to, as investors think about the next five to 10 years in e-commerce, how does eBay sit in that world of those different perspectives that exist depending on the economy that your reside in?
So I think the consistency that we see globally and it has its own variations but what we believe that we are in a unique position to sell for is consumers increasingly are going to spend more and more of their commerce spend in the online and the web enabled world and the things they’re looking for is how can I find the broadest selection that I could possibly get my hands on. I would like a great deal and I want to be sure that the person standing between me and the person that delivers the package to my door I can trust. And trust evolves overtime, I just get it used to be a factor, now it’s I get it, it’s -- I don’t pay for it. I get it quickly and I get it reliably. So I think the trust dynamic has changed overtime and consideration set on trust has something to do with selection and the value. If I can’t find it anywhere else I will -- you know consumers are making the decision is this great deal I can’t possibly get anywhere else and therefore how important are the other two considerations and that dynamic is fairly consistent in all of the markets in which we operate in.
Our role is relatively simple. How do we, as a technology platform provide the abilities of merchants of all sizes, small, medium, large, how do we help them compete and win in a world where e-commerce or web-enabled commerce is going to be a dramatically larger percent of their overall business, no matter what market that they are in. They need technology service provider to help them navigate that minefield. And they want somebody that is going to help them win versus somebody that’s going to compete with them and we bring technology to that equation and we don’t compete.
And our challenge is how do you solve the logistical aspects of connection and even though you don’t deploy capital to build warehouses or to hold inventory, how do you use technology, data and other people’s capabilities to still solve that same consumer endpoint, which is I just want to be able to shop whenever I want for whatever I want and get it delivered to me in a reliable way, broad selection, great deals and a trusted experience. And that’s the role that we think that we are uniquely advantaged to help connect commerce. Not to be a retailer but how do we help connect commerce by bringing these capabilities in a world where technology is rapidly changing and it’s hard for the average merchant; largely the more smaller, to keep pace with the level of innovation. And that’s where we see our role; whether it’s commerce, whether it’s payments, and in some select cases particularly with eBay Enterprise, whether it is the physical movement of goods.
Scott Devitt - Morgan Stanley
Okay so a couple of more questions on PayPal, leave 10 minutes or so for questions, just raise your hand and wait for the microphone to show up, when we get to that point. I’ve always thought that with PayPal there is so much focus on the PayPal business as it relates to efforts such as mobile endpoint of sale, you’ve been super successful in mobile, in attaching PayPal to TPV to eBay GMV on mobile devices, that’s been a huge success from the outset. Merchant services on mobile is beginning to grow at a faster pace, very small, and then the point of sale opportunity is still very open and there are lot of players in that.
That said, and I usually get the percentage wrong, but you have about 16ish percent of e-commerce, traditional e-commerce that is PayPal enabled commerce paid for with PayPal. And that to me is all seem like a massive opportunity first to increase your share of overall commerce, and I know you have a newer product initiative in launch that’s happening throughout 2014, around that, that reduces friction and checkout. I was just wondering if you can just talk about that, how you think about that opportunity to take the 16%, 15%, 17% up over time, and how product improvements and enhancements can do that?
Okay. So first the e-commerce market, a 1 trillion, our volume, 180 billion, so including eBay, roughly 18% market share, our focus in that core business, that online business is essentially twofold. One is how do we get PayPal placement on every merchant site in the world, i.e., give consumers the ability to choose. So we move up to what we call the ubiquity equation to get all merchants to offer for us.
The second thing inverting in to your question Scott is once we are offered how do we increase the likelihood that consumers will choose PayPal as the way to pay. And in this world of commerce and payments convergence, it’s how do you make it simpler and more seamless on a merchant site to pay for something because consumers don’t necessarily think about I’m going to go shopping how am I going to pay; or it’s like I am going to go shopping, what am I going to buy. So how do we introduce innovations that are seamless and frictionless for the consumer to drive up conversion for the merchant. And then there’s a variety of different things that we do to try to make that happen.
The recent product that we developed last year and that we’re rolling out this year is what we call in context checkout. And simply put, you’re shopping on a merchant site, you pick your item, and you want to pay, and historically PayPal is taking you off to a PayPal site, so you’re leaving that merchant and going to PayPal to consummate your transaction. In context checkout means that we in essence do not take you off the merchant’s site. So what’s good for the merchant, if you don’t go off their site all else equal there is less of a chance that they’re going to have an abandoned card. Their conversion will go up. The implications for us are as their conversion goes up because of PayPal’s in context checkout our share of checkout would go up. So we get more ubiquity, more reasons, for consumers to choose PayPal as the way to pay by increasingly eliminate friction along the way and making it paying that simple for them to choose or given them additional reasons to choose PayPal long before you get into the checkout flow.
Scott Devitt - Morgan Stanley
And that in context payments the adoption of that among the merchant base how simple or complex is it in terms of IT queuing the modifications they need to make the checkout. And as it relates to that what’s the timing in terms of when that actually becomes a bigger piece of the relationship that you have?
Okay. So, it’s an integration so it takes effort per merchant it’s kind of the way you pay on eBay. So in essence we have in context checkout in eBay with 80% penetrations it will rollout during the course of the year it will be simpler and simpler and we’ll integrate it more and more during the course of the year. In instances like again like eBay Enterprise we can integrate it in essence once for many. And so I think as we roll it out you will increasingly see it on platforms where it’s one integration rather than many but we’ll roll it out during the course of the year and we feel very good about what it means for the merchants i.e. higher converge and less abandoned card and in turn what it does to that key metric that you highlighted which is when we’re offered that the consumer chooses us, that’s the real opportunity for growth in the core business because we’ve made quite a bit of progress on getting on merchant sites. Now it’s how do you innovate to get consumers to choose you and in context checkout is one of those variables.
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