eBay Inc. (EBAY) Q1 2014 Earnings Conference Call April 29, 2014 5:00 PM ET
Tom Hudson - Investor Relations
John Donahoe - President and CEO
Bob Swan - CFO
Glenn Fodor - Autonomous Research
Stephen Ju - Credit Suisse
Colin Sebastian - Robert W. Baird
Gil Luria - Wedbush Securities
Heath Terry - Goldman Sachs
Mark Mahaney - RBC Capital Markets
Sanjay Sakhrani - KBW
Naved Khan - Cantor Fitzgerald
Good day, ladies and gentlemen. And welcome to the eBay's First Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder this conference call is being recorded.
I'd now like to introduce your host for today's conference, Tom Hudson, Vice President of Investor Relations. Please go ahead.
Good afternoon. Thank you for joining us and welcome to eBay earnings release conference call for the first quarter 2014. 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 they 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 Web site at investor.ebayinc.com. You can visit our Investor Relations website for the latest Company news and updates. In addition, an archive of the webcast will be accessible for 90 days through the same link.
Before we begin, I'd like to remind you that during the course of today's conference call, we'll 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 a slide presentation accompanying the call.
In addition, management will make forward-looking statements related to our future performance that are based on current expectations, forecasts and assumptions, involve risks and uncertainties. These statements include, but are not limited to, statements regarding expected financial results for the second quarter and full year 2014, the future growth in Payments, Marketplaces and eBay Enterprise businesses; and the Company's plans regarding its share repurchase program.
Our actual results may differ materially from those discussed in the call for a variety of reasons, including, but not limited to, changes in political, business and economic conditions, foreign exchange rate fluctuations, our need to successfully react to the increasing importance of mobile payments and commerce and increasing social aspect of commerce; an increasingly competitive environment for our businesses; changes to our Company's capital allocation or management of operating cash, the complexity of managing an increasingly large enterprise with a broad range of businesses at different stages of maturity. Our need to manage regulatory tax and litigation risks including risks specific to PayPal and Bill Me Later. Our needs to timely upgrade and develop our systems, infrastructure and customer service capabilities at reasonable cost, while maintaining site stability and performance and adding new products and features.
Our ability to integrate, manage and grow businesses recently acquired or that maybe acquired in the future. You can find more information about factors that could affect our operating results in our most recent Annual Report on our Form 10-K and our subsequent quarterly reports on Form 10-Q available at investor.ebayinc.com. You should not rely on any forward-looking statements. All information in this presentation is as of April 29, 2014 and we do not intend and undertake no duty to update this information.
With that let me turn the call over to John.
Thanks, Tom. Good afternoon everyone and welcome to our Q1 earnings call. We had an eventful first quarter to say the least. And I'm pleased that despite the potential distractions of our proxy fight, our team stayed focused and delivered strong results.
We enabled $58 billion of commerce volume in the first quarter, up 24%. Mobile and cross-border trade continued to be major contributors to enabled commerce volume, underscoring the strength of our commerce platforms and our mobile commerce capabilities. Overall, revenue was up 14% in Q1 and non-GAAP EPS was up 11%, and eBay and PayPal both generated double-digit customer growth.
I want to take a moment to talk about our proxy fight and our strong commitment to creating sustainable value for all shareholders. This process afforded us a great opportunity to engage with our largest shareholders and listen to what's important to them. They told us four things. First, they want us to execute on our plans because they see significant value creation in those plans, so do we. Second, they applauded our announced $5 billion share buyback and they encouraged us to execute aggressively. Third, they affirmed that eBay and PayPal are better together and that full separation doesn't make sense at this point and they reinforced our commitment to continue to assess our strategic alternatives over time. And fourth, they encouraged us to get this distraction behind us and focus on growing the business. This is what we heard and this is exactly what we're doing.
First, our teams did in fact focus on execution during Q1 and delivered a strong start to the year. Second, we executed 1.8 billion in share repurchases in the first quarter. We also announced today that we're taking a non-cash tax charge to facilitate the repatriation of approximately $6 billion net in foreign earnings. This decision increases our available U.S. cash and enhances our financial flexibility. Bob will talk more about this in a couple of minutes.
Third, we agree that our Company is better together for now. eBay and PayPal are both great businesses and they support and reinforce each other. We will continue to aggressively drive synergies that enhance our overall growth and competitive position. And our board is committed to continuing to evaluate all strategic options over time. We will make the right long-term decisions for shareholders.
And finally, we have put this distraction behind us. With our agreement with Carl Icahn who now is a long-term investor in eBay, our full attention is focused on growth and execution. And we're delighted to have Dave Dorman join our board as a highly qualified and experienced Independent Director. I know that we'll benefit from Dave's insight and expertise. So with that, let me give you a little bit more detail on the first quarter.
At PayPal, Merchant Services TPV grew 32%, accelerating for the fourth consecutive quarter. Revenue was up 20% on an FX neutral basis. Increased consumer adoption, expanded merchant coverage and Braintree volume help drive strong growth. At eBay Marketplaces revenues was up 9% and global GMV grew 11%. We continue to invest in marketing, trust and technology to enable merchants to compete more effectively and to create great experiences for consumers.
eBay's Top-Rated Sellers in the U.S., U.K. and Germany grew same-store sales 19% sharply ahead of ecommerce growth. At eBay Enterprise, gross merchandise sales were up 16% and revenue was up 8%. In Q1 we began integrating Magento into eBay Enterprise better utilizing this business to provide scalable commerce solutions to merchants of all sizes.
I'd like to take a minute to highlight our progress in the four competitive battlegrounds -- mobile, local, global and data. In mobile, PayPal and eBay continue to lead. In the first quarter we enabled $11 billion of mobile commerce volume up 70% and we added 6.5 million new customers via mobile in Q1. We also announced innovative mobile partnerships with industry leaders, Samsung and Deutsche Telekom. PayPal is now the first global payment company to enable finger print authentication for payments on the new Samsung Galaxy S5 smartphone. And
Deutsche Telekom's 144 million customers will soon be able to make purchases directly to their mobile phone account with PayPal.
On the local front, we're seeing great consumer engagement with our Argos Click & Collect partnership in the U.K. eBay customers can buy from more than 100 sellers and collect their purchases in more than 100 Argos stores across the U.K. We currently have more than 6 million listings enabled with Click & Collect. And in the U.S. eBay is pursuing a similar buy online pick-up in store local commerce strategy with select retail partners. And both eBay and PayPal continue to test and learn from various local initiatives designed to offer consumers choice and flexibility and enable retail partners to compete effectively and drive consumer engagement.
On the global front, cross-border trade continues to be a competitive strength of our eBay and PayPal platforms. Exports from China are strong with eBay and PayPal connecting Chinese merchants to tens of millions of consumers worldwide. And on eBay, we continue to make it easier for sellers to reach consumers all over the world with expansion of our global shipping program to 53 countries now at the end of Q1.
And last on the data front, our eBay and PayPal teams are working closely to leverage our closed transaction data where appropriate. For example, PayPal uses eBay data to improve risk algorithms and make better decisions, particularly for new mobile and international transactions.
In summary, we remain focused on capitalizing on our strengths, seizing opportunities in the global commerce market and executing our strategies with discipline every day. We will continue to invest for the long-term strengthening our core commerce platforms and positioning our Company to win in the key competitive battlegrounds.
Now I'll turn it over to Bob who'll provide more details on the quarter, and then we'll take questions.
Thanks, John. During my discussion I'll reference our earnings slide presentation that accompanies the webcast. We've made some changes to our reported business metrics and financials to simplify reporting and to better align with the internal focus to the business units.
You can find a list of the changes in the appendix of the presentation. As the strategic partner of choice for merchants of all sizes, the role we play in global commerce continues to grow. We enabled $58 billion of commerce volume, up 24% at a take rate of 7.3% in the quarter. Our take rate declined 70 bps driven by business mix as our fastest growing business PayPal has a lower take rate.
Revenue increased 14% and non-GAAP EPS was $0.70, up 11%. We generated 968 million of free cash flow. And as John mentioned earlier, we executed $1.8 billion of our stock buyback program and have $3.8 billion left in our authorization for further repurchases.
In Q1, we generated net revenues of 4.3 billion, up 14%. Organic revenue growth was 13% in the quarter. The Braintree acquisition and currency each contributed about 0.5 point of growth.
First quarter non-GAAP EPS was $0.70, up 11%. Non-GAAP operating margin was 26.9%, down 50 basis points. Our operating margin was driven by good operating expense leverage, while we continue to grow our investments. Operating expenses in the quarter were 42% of revenue, down 30 basis points. Our operating cost leverage was offset by increased marketing spend and proxy related cost.
We generated free cash flow of 968 million in the quarter. CapEx was 5% of revenue, lower than full year expectations due to timing of investments, and we continue to expect the full year CapEx to be 7% to 9% of revenue. We ended the quarter with cash, cash equivalents and non-equity investments of 11.9 billion including approximately 2.2 billion in the U.S.
We improved our financial flexibility, funding 69% of the PayPal credit principal loan portfolio with offshore cash. And in the quarter, we opportunistically repurchased 33.1 million shares of our common stock for approximately $1.8 billion.
We made two changes in the quarter, both of which will increase our U.S. financial flexibility. First, a discrete GAAP tax related charge of $3 billion on $9 billion of foreign earnings, which will enable us to deploy approximately $6 billion net in foreign earnings in the U.S. And second, our 2014 foreign tax election will allow us to return a greater portion of foreign earnings going forward. Related to this foreign tax election change, we anticipate that our non-GAAP effective tax rate will increase by more than a point for 2014.
Our capital allocation philosophy has been to maintain our financial flexibility to capitalize on opportunities as they arise. The reality is, we're seeing growing opportunities in the U.S. We announced the large stock buyback in the quarter and we are executing aggressively. Additionally, we're an acquisitive company and we need to ensure we have the resources available to capitalize on targets that become available both domestically and abroad.
Just to be clear, we are not announcing any large U.S. based acquisition nor are we committing to finance our share buyback with offshore cash. What we are doing is ensuring we have the capital available for U.S. needs. In light of the sequence of events in the quarter and the opportunities in front of us, we now have greater financial flexibility to capitalize on them.
Now let's take a closer look at our segment results. PayPal had a strong quarter. Revenue reached 1.8 billion, up 20% on an FX neutral basis. Revenue growth was driven by accelerating Merchant Services growth and solid growth on eBay. A few quick highlights on PayPal operating metrics. Total active accounts growth was 16%. TPV on an FX neutral basis grew 26%, driven primarily by the addition of Braintree, continued expansion of PayPal on merchant sites around the world and a 200 basis point increase in PayPal penetration on eBay.
Merchant Services FX neutral TPV accelerated 1 point to 32% in the quarter. Transaction margin increased 20 bps, resulting from lower transaction expense and loss rate, partially offset by a lower take rate from large merchant mix, losses on our foreign currency hedges and lower cross currency transaction growth. PayPal segment margin committed 25.7% for the quarter, up 160 basis points. The increase was due primarily to a slightly higher transaction margin and significant operating leverage while we continue to invest in the business. We expect investments to continue to ramp during the year.
Let me touch on a few quick highlights for our PayPal credit offerings. Credit is still a relatively new flywheel and in its early stages of growth. It allows eBay to increase its volume growth by providing financing choice to consumers and opportunities to merchants. In addition, it improves the Company's ability to manage its transaction expense. BML TPV growth accelerated 2 points in the quarter. And Bill Me Later as a funding source was a 4.4% share of U.S. addressable GMV and 2.1% share of Merchant Services U.S. TPV.
Now let's move the Marketplaces. Marketplaces delivered net revenues of 2.2 billion, up 9% on an FX neutral basis. Transaction revenue grew 10% and marketing services revenue grew 4% on an FX neutral basis. A few quick highlights on Marketplace operational metrics. Active buyers grew 14% to 145 million. FX neutral GMV was 11%, which decelerated one point from Q4 as international strength was partially offset by a deceleration in the U.S.
Let me provide a little more color on the U.S. performance. Fixed-price, which represents 76% of our business grew 19%, but auction volume declined 9 points due to changes in consumer preference and slower consumer selling. In addition, there was a material deceleration at StubHub due to competitive dynamics and a change we made to all-in pricing.
The combination of slower U.S. growth, a significant deceleration at StubHub, which is our highest take rate business, and StubHub fee changes resulted in U.S. transaction revenue growth decline of seven points. We expect the fee changes at StubHub to impact U.S. transaction revenue for the remainder of the year.Marketplaces segment margin was 39.7% in Q1, down 240 basis points from last year, primarily due to investments in trust and marketing.
Now let's turn to eBay Enterprise. eBay Enterprise generated 936 million in gross merchandise sales for its clients. GMS grew 16% driven by the addition of new logos and same-store sales growth of 11%. Revenue was 269 million, up 8%, driven by increased volume growth. Marketing services revenue growth continues to be impacted by replatforming and branding efforts to consolidate nine separate companies into one. Segment margin came in at 4.7%, up 520 basis points.
Now let me turn to guidance. We feel good about the start of the year and we are maintaining our full year non-GAAP guidance. Let me provide you a little more context. First, we had a solid start to the year with some of the benefit from delayed spending at PayPal. Second, we were opportunistic buying back shares of our stock in the quarter and this will be offset by the increased tax rate from the change in our foreign tax election.
Third, we have and will continue to protect our franchise and make fee changes as appropriate to compete and win, much like the changes we are making at StubHub for the year. And finally, favorable currency tailwinds will be offset by our higher proxy related costs.
So, for the full year 2014 we expect revenue of 18 billion to 18.5 billion, representing growth of 12% to 15%. We anticipate non-GAAP EPS of $2.95 to $3 a share, representing growth of 9% to 11%. And we now expect our full year 2014 non-GAAP tax rate to be in the range of 20% to 21%. For the second quarter 2014 we expect revenue of 4.325 billion to 4.425 billion, representing growth of 12% to 14%, and we anticipate non-GAAP EPS of $0.67 to $0.69, representing growth of 7% to 10%.
So in summary, the role we play in global commerce continues to grow as measured by our enabled commerce volume growth. Our portfolio has been constructed to position us for these trends and to compete and win. We believe our unique set of capabilities work best together to enable our partner's success and therefore our own. Given our increased U.S. opportunities, we have changed our tax election which has increased our available U.S. cash and enhanced our financial flexibility. We continue investing for the long-term, strengthening our core commerce ecosystem, focused on key battlegrounds of mobile, local, global and data.
Now, we'd be happy to answer your questions. Operator?
Earnings Call Part 2: