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Edited Transcript of EBAY earnings conference call or presentation 17-Jul-19 9:00pm GMT

Q2 2019 eBay Inc Earnings Call

SAN JOSE Jul 19, 2019 (Thomson StreetEvents) -- Edited Transcript of eBay Inc earnings conference call or presentation Wednesday, July 17, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Devin N. Wenig

eBay Inc. - CEO, President & Director

* Joe Billante

eBay Inc. - VP of IR

* Scott F. Schenkel

eBay Inc. - Senior VP & CFO

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Conference Call Participants

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* Colin Alan Sebastian

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Daniel Salmon

BMO Capital Markets Equity Research - Analyst

* Heath Patrick Terry

Goldman Sachs Group Inc., Research Division - MD

* Justin Post

BofA Merrill Lynch, Research Division - MD

* Mark Alan May

Citigroup Inc, Research Division - Director and Senior Analyst

* Mark Stephen F. Mahaney

RBC Capital Markets, LLC, Research Division - MD and Analyst

* Ross Adam Sandler

Barclays Bank PLC, Research Division - MD of Americas Equity Research & Senior Internet Analyst

* Stephen D. Ju

Crédit Suisse AG, Research Division - Director

* Thomas Ferris Forte

D.A. Davidson & Co., Research Division - MD & Senior Research Analyst

* Ygal Arounian

Wedbush Securities Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good afternoon. My name is Cheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the eBay Q2 2019 Earnings Conference Call. (Operator Instructions)

Joe Billante, Vice President, Investor Relations, you may begin your conference.

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Joe Billante, eBay Inc. - VP of IR [2]

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Good afternoon. Thank you for joining us, and welcome to eBay's earnings release conference call for the second quarter of 2019. Joining me today on the call are Devin Wenig, our President and Chief Executive Officer; and Scott Schenkel, our Chief Financial Officer. We're providing a slide presentation to accompany Scott's commentary during the call. All revenue and GMV growth rates mentioned in Devin and Scott's remarks represent FX-neutral year-over-year comparisons unless they indicate 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 investors.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 at least 3 months 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 related to our performance. You can find the reconciliation of these measures to the nearest comparable GAAP measures and the slide presentation accompanying this conference call.

In addition, management will make forward-looking statements 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 the future performance of eBay Inc. and its consolidated subsidiaries, including expected financial results for the third quarter and full year 2019 and the future growth of our business. Our actual results may differ materially from those discussed in this call for a variety of reasons.

You can find more information about risks, uncertainties and other factors that could affect our operating results in our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q, copies of which may be obtained by visiting the company's Investor Relations website at investors.ebayinc.com or the SEC's website at sec.gov. You should not rely on any forward-looking statements. All information in this presentation is as of July 17, 2019, and we do not intend and undertake no duty to update this information.

With that, let me turn the call over to Devin.

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Devin N. Wenig, eBay Inc. - CEO, President & Director [3]

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Thanks, Joe, and good afternoon, everyone. Our plans for this year is to deliver a great customer experience, grow our active buyer base and scale our immediate growth initiatives, Advertising and Payments. As we build on our strengths of value and unique selection in our marketplace, we are increasingly intermediating and managing that marketplace to better control both the consumer and the seller experience while creating new growth opportunities.

In Q2, we executed that plan. We made tangible customer experience improvements, we delivered good active buyer growth and we continued to scale ads and payments. In addition, we drove efficiency to fund our investments while making progress on our portfolio review. For the quarter, total GMV was flat, revenue was up 4%, while our active buyer base grew 4% to 182 million.

Underlying these results, GMV in our Marketplace platform is down 1%, StubHub volume was up 6% and our Classifieds platform grew revenue at 12%. We also returned $1.6 billion in capital to investors through share repurchases and dividends. Scott will go into more detail on our financial results shortly.

First, let me provide some context on our core business. We've been reducing and redeploying low ROI marketing spend, resulting in less GMV in the short term, but stable sold item and active buyer growth. Although we've reduced certain types of incentives, we've maintained our focus on driving healthy customer growth while evolving our brand. We're seeing improvements in buyer acquisition, driven by higher conversion of new and lapsed customers, in part due to product enhancements and also from more targeted marketing and promotion. We have effective levers to acquire buyers and are expanding our effort to drive frequency and reduce churn.

In Q2, we improved the buyer experience by increasing the number of ways buyers can discover value and unique selection. By leveraging data on existing listings, we launched new pages that transformed previously unstructured listings into a more intuitive set of product results. We also recently released our Brand Outlet, an experience of aggregates products from top consumer brands all with fast and free shipping.

Following changes to our returns experience introduced last year, more than 1/3 of our U.S. buyers are now able to instantly receive labels and track their returns, and we started rolling this out to more major markets in Q2. We also introduced significant seller improvements, including Offers to Buyers, Buy Again and Trending in Your Interests. We extended seller protection by making it easier to identify and take action against abusive buyers. We dramatically simplified volume pricing, offering more ways for sellers to offer discounts. And we provided better ways for sellers to contribute more complete structured product information to help buyers find their listings while building new capabilities to drive conversion by better leveraging this expanded catalog.

One emerging challenge for our small business sellers in the U.S. is the rapidly evolving landscape for Internet sales tax. At the start of the year, only a handful of states had active legislation requiring marketplaces to collect sales tax. By the end of the year, that number will grow to more than 30 states and it will cover the majority of U.S. GMV. In Q2, this impacted the U.S. business by more than 1 point, and we're taking active measures to mitigate this challenge. However, this headwind is likely to further pressure U.S. results until we lap a fully rolled out Internet sales tax landscape.

Looking at our international core markets, overall performance was relatively stable with some notable highlights. In Korea, we drove 2 points of GMV improvement in the quarter through investments in our loyalty platforms supported by promotions such as Big Smile Day. Our European markets were slightly down due to continued macroeconomic pressure in the U.K., while Japan continues to gain share primarily due to strong buyer acquisition and marketing investments.

Our revenue growth continues to outpace GMV in part due to acceleration in Advertising and Payments. For ads in Q2, Promoted Listings drove $89 million of revenue, up over 130% from a year ago. Over 940,000 sellers promoted over 250 million listings in the quarter. Sellers are increasingly choosing to invest in Promoted Listings and are seeing strong conversion in velocity. We plan to expand these capabilities further while always balancing the impact on the buyer experience. We expect to end the year with more than $700 million in total ad revenue, and we're well on track towards our goal of $1 billion in ad revenue over time.

For payments, we continue to see accelerated adoption of managed payments in the U.S. Since the launch in late Q3 last year through the end of Q2, we've now processed over $636 million in payments for over 6,000 sellers participating to date. Sellers on eBay managed payments are seeing good conversion and their buyers are able to pay using credit cards, Apple Pay, Google Pay and PayPal. Most sellers are saving on payment fees and they've simplified their experience with eBay by managing their business in one place.

In Germany, we're on track, and subject to regulatory approval, we intend to be live by the end of the year. We're confident in our managed payment plan, and we look forward to realizing $2 billion in revenue and $500 million in operating income at scale.

At StubHub, Q2 volume benefited from increased conversion, active buyer growth, first-party sales acceleration and favorable market conditions, including the longer series for the NBA and NHL playoffs. In our international markets, a strong Champions League final and Women's World Cup helped offset lapping pressure from the Men's World Cup. In addition, we launched the new loyalty program for top buyers, and we continued to improve fulfillment with more technology integration, leading to reduced service costs and improved margins.

Turning to Classifieds. We continue to execute our playbook of building market-leading horizontal marketplaces, complemented by scale vertical experiences in categories, including motors and real estate. In Q2, we generated another quarter of double-digit growth based on the execution of the strategy. In Germany, momentum in our motors platform has extended our leadership position, and our horizontal platform is rapidly increasing customer engagement, leading to advertising revenue growth.

In the U.K., our expanded motors offering continues to scale and drive growth in both our organic and acquired businesses. Core eBay integration continued to deliver substantial synergies with over $85 million of GMV to eBay in Q2 while over 1 point of revenue growth to Classifieds.

Now let me update you on our portfolio review. We're making significant progress and actively reviewing the role and value of StubHub and Classifieds in our portfolio. Review is underway, and we're focused on determining the best path forward to create shareholder value. In addition to that ongoing work, today, we are announcing 2 other actions aimed at further strengthening our portfolio.

First, we've reached a commercial agreement with Paytm Mall to bring our global inventory onto one of the largest marketplaces in India. eBay will open a store on Paytm Mall, which will provide hundreds of millions of Paytm and Paytm Mall's customers with access to our global inventory. As part of this collaboration, eBay is making an investment in Paytm Mall for a stake of approximately 5.5%.

Second, we've reached an agreement to sell our flash sale German business, brands4friends. Divesting this business will allow our German team to focus on the opportunities in the core business. Finally, throughout this year, we are continuing to drive margin improvement through disciplined cost management and reinvesting savings in our growth initiatives. Later this year, we'll further communicate our approach to drive growth in margins.

In summary, we are executing our plan to deliver outstanding customer experiences now while scaling growth opportunities and driving meaningful shareholder value. Now let me turn it over to Scott to give you more details on our quarterly financial results.

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Scott F. Schenkel, eBay Inc. - Senior VP & CFO [4]

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Thanks, Devin. I'll begin with my prepared remarks with our Q2 financial highlights, starting on Slide 4 of the earnings presentation. In Q2, we generated $2.7 billion of total revenue, $0.68 of non-GAAP EPS, 2 points of non-GAAP operating margin accretion, $607 million of free cash flow, and we have returned $1.6 billion to shareholders through repurchases and dividends. Based on these results, we have increased confidence in our 2019 earnings outlook. We are reaffirming our organic FX-neutral revenue growth rates and raising GAAP and non-GAAP EPS guidance for the full year.

Moving to active buyers on Slide 5. In the quarter, we increased our total active buyer base by 2 million to a total of 182 million, up 4%. Similar to Q1, we're maintaining stable buyer growth by increasing marketing spend that targets new and lapsed buyers, which is offsetting a modest increase in existing buyer churn.

Turning to Slide 6. In Q2, we enabled $22.6 billion of GMV, flat year-on-year, accelerating 1 point versus Q1. The U.S. generated $8.8 billion, down 5% while international delivered $13.8 billion of GMV, up 2%.

Moving to revenue on Slide 7. We generated net revenues of $2.7 billion, up 4% organically. We delivered $2.1 billion of transaction revenue and $557 million of Marketing Services & Other revenue, up 4%.

Turning to Slide 8. Our Marketplace platform GMV was minus 1% in Q2, flat versus the prior quarter. U.S. GMV was minus 6% on a year-on-year basis, driven by 5 points from the continued reduction in non-platform marketing and more than 1 point from Internet sales tax. Specific to Internet sales tax, in January, we highlighted that the landscape was fluid and rapidly evolving. At that time, a small number of states had active legislation requiring marketplaces to collect sales tax regardless of marketplace or seller nexus. As we exit Q2, we are now seeing more states enact with faster effective dates than we originally expected. In January, 3 states had enacted marketplace collection laws. By June, 9 states have required marketplaces to collect sales tax, and 23 more will be live in the second half, many with compressed time lines. We're seeing an impact mostly on higher-priced items and in Q2, this drove more than 1 point reduction of year-over-year growth in the U.S. We expect this dynamic to continue and likely accelerate for the rest of the year.

International GMV grew 2%, decelerating 1 point, driven by U.K. macroeconomic pressure, somewhat offset by acceleration in Korea driven by our Big Smile Day promotion. Total Marketplace revenue was $2.2 billion, up 3%, decelerating 1 point from the prior quarter. Transaction revenue grew 5%, a 1 point deceleration and 6 points higher than GMV. The gap between GMV and revenue continues and is being driven by 2 factors: triple-digit revenue growth in Promoted Listings, which made up approximately 3 of the 6 points; and category mix effects, which contributed approximately 2 points.

Marketing Services & Other revenue was minus 6%, accelerating 2 points versus Q1 based on growth in our Korean first-party sales. Our third-party ad business continues to decline as we shift efforts away from nonstrategic third-party ad placements towards our first-party Promoted Listings product. Marketplace margin was 32%, up over 2 points, primarily due to the continued cost leverage and year-on-year gains from our currency hedging program partially offset by a stronger U.S. dollar and investments in Payments.

Moving to Slide 9 on Payments. Since our launch in September, we've intermediated $636 million of GMV. In Q2, we intermediated $273 million of GMV with a June penetration rate of 3.8%. Our buyers on the new platform are demonstrating their desire for increased choice. In June, they chose to pay with credit cards, Google Pay and Apple Pay approximately 2/3 of the time. Our run rate of annualized GMV is now well over $1 billion as we continue to make steady progress towards our financial targets.

Turning to Slide 10. StubHub GMV grew 6%, accelerating 8 points on the strength of our initiatives and favorable market conditions as Devin mentioned. StubHub revenue grew 7%, accelerating 7 points from Q1. Transaction revenue grew 1%, a 4-point acceleration driven by volume, partially offset by lower take rate from price changes and event mix. MS&O more than tripled, delivering $21 million of revenue in Q2. Most of StubHub's MS&O revenue is first-party sales, which provides buyers access to unique and exclusive inventory.

In addition, MS&O includes insurance for purchased tickets while they're nascent, but have potential for significant revenue growth. StubHub segment margin was 4%, up 2 points driven by operational leverage and a stronger U.S. dollar, partially offset from the increase of first-party sales, which operates at lower margins.

Moving to Slide 11. Classifieds grew revenue 12%, flat with Q1. Revenue continues to grow in double digits, driven by ongoing strong performance in both platforms in Germany and our motors offering in the U.K. Segment margin for Classifieds was 38%, flat year-on-year as operating leverage is offset by marketing investments and a stronger U.S. dollar.

Turning to Slide 12 in major cost drivers. In Q2, we delivered non-GAAP operating margin of 26.9%, which is up 170 basis points versus last year, 50 basis points of which was driven by a stronger U.S. dollar impacting all spend categories. I will focus my remaining comments on the operational dynamics of our expenses as we continue to grow margins in 2019 while investing in payments.

Cost of revenue increased 1 point year-over-year, driven by Korea and StubHub's first-party cost of sales and site operations. Q2 sales and marketing expense decreased 1 point driven by a reduction in marketing that we've discussed previously, partially offset by our acquisition in Japan. Product development costs were down over 1 point from increased productivity even as we continue to invest significant resources in the strategic opportunities such as payments and ads. G&A was down year-on-year, our seventh consecutive quarter of productivity. Our disciplined execution continues to drive leverage.

Moving to EPS on Slide 13. We delivered $0.68 of non-GAAP EPS, up 28% versus the prior year, our fifth consecutive quarter of double-digit EPS expansion. EPS growth benefited from our share repurchase program and margin expansion, partially offset by our investment in Payments. Favorability versus our guidance in April was mostly driven by tax and strong cost control. GAAP EPS for the quarter was $0.46, down 27% versus last year. The decrease in GAAP EPS is primarily driven by lapping a gain created by acquiring Giosis and lapping the warrant agreement, which we can now confirm as Adyen. As always, you can find a detailed reconciliation of GAAP to non-GAAP financial measures in our press release and earnings presentation.

On Slide 14, in Q2, we generated $607 million of free cash flow, up 223%, driven by the timing of cash taxes and CapEx as well as strong operational growth.

Moving to Slide 15. Our capital allocation strategy in our key tenets and targets have not changed. We've executed our second dividend payment of $120 million while continuing to aggressively buy back shares, demonstrating our confidence and commitment to return capital to shareholders in a disciplined and diversified manner. In Q2, we repurchased nearly 40 million shares at an average price of $37.62 per share, amounting to $1.5 billion. We ended the quarter with $4.2 billion of share repurchase authorization remaining. For the quarter, we ended with cash and investments of $6.3 billion and debt of $9.3 billion.

Turning to Slide 16. I'd like to remind you of our specific capital allocation plans for 2019 and the progress we've made through the first half and since separation. As planned, we've initiated a quarterly dividend and made 2 payments. We announced a $5 billion of share repurchases in 2019, and we've repurchased $3 billion worth of shares in the first half. Since separation, we've bought back 14.3 billion, representing nearly 31% of shares outstanding, net of dilution, which amounts to more than 150% of our free cash flow over that time.

Our mid-term leverage targets remain 1.5x net debt and gross debt below 3x EBITDA. We expect to pay down $1.6 billion of debt in Q3 without refinancing. We expect our net debt over the long term between -- to be between $3 billion and $4 billion while maintaining its BBB+ rating.

On Slide 17, before we look closer at Q3 and full year guidance, I want to call out a couple of dynamics that are impacting our revenue outlook this quarter but not our -- and for the rest of the year, but not our organic FX-neutral revenue growth rate or our non-GAAP earnings estimates. The sale of brands4friends and the stronger U.S. dollar will lower full year revenue dollars by approximately $100 million and in Q3 by approximately $30 million.

For Q3, we are projecting revenue between $2.61 billion and $2.66 billion, growing 1% to 3% on an organic FX-neutral basis. We expect non-GAAP EPS of $0.62 to $0.65 per share, representing 10% to 15% growth. EPS growth is driven primarily by the net benefit of our share repurchase program. In addition, operational growth, including margin expansion, will be offset by our investments in payment intermediation. We are expecting GAAP EPS in the range of $0.40 to $0.44 per share in Q3.

For the full year, revenue guidance is in the range of $10.75 billion to $10.83 billion, maintaining the organic FX-neutral growth rate of 2% to 3%. Operating margin expansion continues at 28% to 29%, and non-GAAP effective tax rate decreases slightly to 15% to 17%. We are increasing our full year non-GAAP EPS guidance to $2.70 to $2.75 per share based on a stronger Q2, a modestly improved go-forward tax rate, volume leverage and disciplined cost control.

Cash flow remains $2.1 billion to $2.3 billion as does CapEx at 5% to 7% of revenue. Finally, we are increasing full year GAAP EPS to $1.97 to $2.07 per share, driven by cost control, lower stock-based compensation and a modestly lower tax rate.

In summary, we entered 2019 focused on delivering shareholder value through modest revenue growth, expanding margins, strong double-digit non-GAAP EPS growth and more capital return. Halfway through the year, we continue to deliver on this plan with 3% FX-neutral organic revenue growth, 1 point of margin expansion net of foreign exchange, 27% non-GAAP EPS growth and over $3.2 billion in total capital return to shareholders.

We continue to operate as disciplined capital allocators, balancing strategic acquisitions and investments that provide buyers around the world with value and selection while continuing to repurchase shares and divest assets that provide a better return for our investors. We continue to be confident in this year and beyond, holding organic FX-neutral revenue growth and raising GAAP and non-GAAP EPS guidance for the second quarter in a row. Looking further out, we'll preview 2020 during our third quarter earnings call as we've done in the past.

And now we'd be happy to answer your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Heath Terry of Goldman Sachs.

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Heath Patrick Terry, Goldman Sachs Group Inc., Research Division - MD [2]

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When we look at GMS growth, I was wondering if you could kind of help disaggregate for us some of the drivers behind that particularly as it relates to the efficiency that you're seeing in marketing. How should we separate sort of the impact of those marketing efficiencies versus the ongoing technology improvement and sort of the efforts that you're making around structured data, which I know we've talked about for a while but also the new product pages? Just wondering, we see the net effect. Just hoping you can kind of give us a little bit more on the pluses and minuses behind that.

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Scott F. Schenkel, eBay Inc. - Senior VP & CFO [3]

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Yes, Heath, maybe I'll just comment on numbers and then Devin can elaborate maybe a bit on the product stuff. But generally speaking, overall, if we focus on the U.S., we accelerated points so more or less the same. But if you really tease out the underlying, some of our export corridors out of the U.S. stood a little bit better and that was partially offset by the Internet sales tax dynamics that I laid out.

If you look year-over-year -- that was versus Q1, but if you look at year-over-year, the deceleration really is driven by and large by the reduction in marketing spend as we redeploy and reallocate and also cut marketing costs, and then a little bit, as I called out in my prepared remarks year-over-year, a little bit more than 1 point from Internet sales tax. Underneath that, we did make a series of product changes that, in aggregate, haven't yet moved the bigger picture number in the U.S., but -- or I think making a difference to the ecosystem, and we feel good about the future.

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Devin N. Wenig, eBay Inc. - CEO, President & Director [4]

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Yes. I mean I'll just add that this year is playing out exactly as we have said it would. And I guess our confidence is that we have line of sight to the reason GMV is suppressed right now. It's marketing, which is in our control. It's Internet sales tax, which will roll out and it will -- we'll lap out of it at some point next year. So we know those things. They're explainable and, to some extent, controllable. Underlying that, the marketplace is healthy. We've never had more buyers. We've never had more inventory. The product is improving. We're hitting another good stride right now in our product development process. So I have a lot of confidence in the core health and strength of the Marketplace because I can understand why there's a short-term suppression in GMV, and that's what we said would happen early in the year. It's exactly playing out as we have said.

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Scott F. Schenkel, eBay Inc. - Senior VP & CFO [5]

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Yes. The other thing I'd add, Heath, is internationally, as I called out, there are some pressure. We were down 1 point quarter-to-quarter. That's really driven by mix, then a little bit of downside from the U.K. partially offset by a little bit of benefit from Korea. And so those dynamics continue to play out. And as we go forward, there's a lot of dynamics at play, including Internet sales tax, that are implied in our guidance, and we'll continue to work through those and hopefully, the product changes that we made will continue to amplify as we get to the second half of the year.

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Operator [6]

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Your next question comes from Ross Sandler of Barclays.

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Ross Adam Sandler, Barclays Bank PLC, Research Division - MD of Americas Equity Research & Senior Internet Analyst [7]

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Guys, just a question on the Marketplace segment margin. So it's been improving 200 bps. It's still in the low 30s. I guess where do you see that going kind of medium to long term? How much more upside in terms of expense efficiency and just kind of the natural lift in that margin do you see? And then second question on the portfolio review. Just curious to hear your thoughts on the idea that's out there about selling Classifieds, but then should we, in separate pieces, kind of country by country versus doing it like a spin or a sale for the whole entity? Just any thoughts on that.

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Scott F. Schenkel, eBay Inc. - Senior VP & CFO [8]

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Yes. So first off on margin, let me comment in the short term. So we had nice margin expansion this quarter in Marketplaces. I think you can expect continued margin expansion driven by marketing that we've talked about over the course of the year. But in the second half of the year, as you might remember I called out last quarter, there's a dynamic first half versus second half from foreign exchange, and we've been calling those differences out, roughly 0.5 point this quarter.

That normalizes in the second half of the year so there won't be as much margin leverage in the second half of the year, and that -- some of that will show up in Marketplaces. But we expect to continue to be rationalizing and reallocating the marketing and focusing it in ways that we've spoken about. So I would expect some marketing benefits going forward as well as just ongoing continued cost control. So in the longer to medium and longer term, we'll talk about at least 2020 in October at earnings call then, and I'll give you a bit more definitive of an answer on that front.

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Devin N. Wenig, eBay Inc. - CEO, President & Director [9]

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Ross, on the portfolio review, we're just not going to say anything about it. We'll let people know when there's something to say, but until then, we're just not going to say a word about the process or what's going on.

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Operator [10]

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Your next question comes from Mark May of Citi.

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Mark Alan May, Citigroup Inc, Research Division - Director and Senior Analyst [11]

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On Internet sales tax, you've talked about a 1% or, I guess now, a greater than 1% impact, but there've been very few states that have had it implemented with the pretty significant ramp that's starting up in the back half of the year. How are you guys thinking about the impact? What are you assuming in your guide? And then I believe in the May, June time frame, Google made some search algo changes. Some data out there suggest that eBay may have been negatively impacted by that. Obviously, over the years in the past, this has happened and just curious what, if anything, you've seen so far.

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Devin N. Wenig, eBay Inc. - CEO, President & Director [12]

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I was just going to say on Internet sales tax, implied in our guidance is that more states will roll out and that the impact will get worse before it gets better. That is implicit in our guidance is that as you're going to reach a sort of the peak of states rolling out probably in Q4 and that's implied in what we're seeing.

I think some of it, we're not 100% sure how it plays out, because there are replacement -- there's a replacement inventory and as this gets more penetration in the Marketplace or other dynamics that may end up substituting. But right now, what we're assuming is that the impact on the U.S. business will continue to grow, and then we'll start lapping out a bit and then it will shrink and basically fade into the background.

But it is certainly -- we're certainly not through it. And I'll just take the opportunity to say for a second, as a policy matter, this is exactly what we said which would happen, which is small U.S. businesses are being disfavored. The impact is disproportionate on small U.S. businesses. It's favoring larger businesses and retailers and it's also favoring international businesses. So we, again, will call for federal legislation on Internet sales tax and a small business exemption, and I'll say that you'll continue to hear me say that because what we're seeing is exactly what we had feared and what we had said. On the algo change, we haven't seen a material change in search in the May, June time frame from Google.

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Operator [13]

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Your next question comes from Stephen Ju of Crédit Suisse.

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Stephen D. Ju, Crédit Suisse AG, Research Division - Director [14]

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Devin or Scott, I guess, we got the sense the last time we talked to you guys that you're being extraordinarily careful with the Payments rollout and moving sellers into the program almost one by one as opposed to chunks at a time so nothing gets broken on the way. So you have that at what looks like 1,700 sellers versus about 800 last quarter. So should we take this to assume that the process to transfer the incremental seller is getting progressively easier? And once you start doing this more formally in Germany, do you expect the transfer to be more easy or more difficult?

And separately, not that you are in a position to offer us 2020 guidance but some of the GMV deceleration this year is self-inflicted due to marketing and additionally, as you said, from the sales tax friction. So should we be thinking or even hoping for it in line with retail type of GMV growth for the U.S. next year? And further for your Marketplaces revenue, the GMV growth can no longer disconnect like it did this year?

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Devin N. Wenig, eBay Inc. - CEO, President & Director [15]

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On Payments, a couple of dynamics that I think are interesting. So first of all, today is the 1-year anniversary of -- a year from today will be 5 years and that's where the restriction on the rollout will fade away. So you can expect us to pick up the pace. I think some of it has been the product build. Some of it has been there's no need to go faster because we're capped under the OA anyway.

As we start to roll up here to 12 months from today, you will see us begin to pick up the pace. And I'm particularly pleased with the seller experience. Sellers are seeing really good conversion. Buyers are seeing choice. Sellers are seeing unified accounts and they're saving money, everything that we would have hoped. So I'm very pleased with the payments execution.

And on the buyer side, it's very interesting. You heard in Scott's remarks that now with PayPal rolled out, buyers are showing that they want choice. We're seeing, after PayPal has been rolled out, penetration of PayPal of approximately 35% roughly. And that's compared to almost double that on the rest of the Marketplace. So buyers are voting with their wallets and they are choosing for choice. So you will expect us to pick up the pace.

In terms of GMV, obviously, we're not giving you '20 guidance. We'll just see what we say all the time, which is we think the long-term sustainable growth rate of the business is probably somewhere above retail and below e-commerce. And at these margins, we think that's a great business and a sustainable growth rate, but where we'll be next year, we'll obviously talk about that in October.

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Scott F. Schenkel, eBay Inc. - Senior VP & CFO [16]

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Yes. And remember, Steve, the other dynamic for next year and the year after will be that scaling of Payments revenue into our business. And so while we'll get into what GMV looks like later in the year from a guidance perspective, you can expect that the revenue will be reasonably higher than that in addition to the first-party ads dynamics that we've talked about in the past. So I think we feel pretty good about the revenue, and we've got a lot of work to do between now and the end of the year and when we start talking in October about 2020.

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Operator [17]

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Your next question comes from Dan Salmon of BMO Capital Markets.

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Daniel Salmon, BMO Capital Markets Equity Research - Analyst [18]

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I'll go to the other driver and Advertising and Promoted Listings. I think Devin, you mentioned that you've expanded now to 940,000 sellers from, I think, 800,000 last quarter. But I think it was in May, you announced sort of a broader rollout to all sellers in good standing. Just curious if you can help us understand the impact of that announcement and where we expect that seller. Should we expect the number of sellers using Promoted Listings to start to accelerate as well as a result of that?

And then just on the flip side, just any color you can add on the continued wind-down of the third-party ads. Is there maybe not a specific guidance to when we might see that trough out, but a time line that could help us field that out a little bit better? Any color you can add would be helpful.

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Devin N. Wenig, eBay Inc. - CEO, President & Director [19]

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Yes. On the first part, yes, it's a good callout. I think we said last quarter that growing the first-party ads business is both sides of the funnel. It's supply and demand. For supply, we've opened it up to more sellers. We're giving them more tools. We're giving them better data so that they can understand and calculate an ROI on their ad spend on eBay, which we think is actually very strong. We think we have a very compelling value proposition. I mean sellers advertise on eBay and they have -- they look at that as a choice just like they could advertise on other ad platforms. And actually, what we see is that we have a really good value proposition for them, and that's playing out in the growth that we're seeing in the sellers and the density of ads and the way that they're using it.

I should also point out that next week, we have a very large seller event called eBay Open, and we have thousands of our customers coming to that and we'll have more to say about the future of ads, and we'll have more to say about that and other things, and it should be an exciting week for us next week.

And on the buyer side obviously there is the exposure of those ads in both search and in browse and merchandising. And that also, as we get confident that we're not cannibalizing organic results, if you will, we can expand the results there. So the growth this quarter, which was really outstanding as a result of both the sell side and the buy side expansion.

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Scott F. Schenkel, eBay Inc. - Senior VP & CFO [20]

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Yes. To your second question in terms of time line, I'll just point to that third-party wind-down is highly correlated with first-party acceleration, right? First-party acceleration in terms of where ads are going to be in place, what the efficiency of those ads and conversions of those ads are and how we change the user experience. You can do the math, but we've had some acceleration in the third-party wind-down over the last couple of quarters. I will expect that to continue as we head forward. And we'll continue to break these growth rates out for you so you understand the underlying dynamics.

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Operator [21]

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Your next question comes from Colin Sebastian of Baird.

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Colin Alan Sebastian, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [22]

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Devin, you've called out some opportunities to address higher buyer churn and, I guess, just given the efforts to control marketing spend at the same time, is that something that you still can address over the near term? Or is that more of a longer-term effort? And then hoping for any updates on what you're seeing from some of the pilot initiatives with fulfillment and shipping, and in particular, if you're going to plan any expansion of those efforts ahead of the holidays.

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Devin N. Wenig, eBay Inc. - CEO, President & Director [23]

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Thanks for the question, Colin. On buyers, we are very focused now on buyer frequency, on reducing buyer churn. We're seeing outstanding new customer acquisition really strong brand-new customers coming to eBay, which is encouraging. Those -- many of those are millennial. We're seeing a better skew towards women who are shopping with us. Some of those cohorts have lower spend than our existing cohorts, but they're all on the right side of positive CLV. So we're happy with what we see.

And the hope is that we can drive frequency and we're very focused on that. That's both product and marketing right now. We're very dialed into driving frequency. And my hope is that, that isn't a long-term plan, that's something that we can do soon. And some of that is implicit in our steady buyer growth that we've seen over the last several quarters. On fulfillment, nothing to say right now. I think it's worthwhile to stay tuned.

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Scott F. Schenkel, eBay Inc. - Senior VP & CFO [24]

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What I'd say, Colin, on our fulfillment, just specific to question, we constantly leverage our size and scale on a global basis to provide services to our sellers that are cheaper. And we've talked about that with respect to helping sellers position inventory in country with coordinated and essentially negotiated lower fees from fulfillment.

And as we look at this fulfillment trial in the U.S. because most of what we've been talking about are -- is international and different international markets, 70% of what's sold on the site already comes with free shipping in the U.S. And in the U.S., nearly 2/3 of items arrive in 3 days or less. So I think the intent of the program is to further enhance via guaranteed shipment delivery program, those types of metrics, to further improve the user experience.

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Operator [25]

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Your next question comes from Mark Mahaney of RBC.

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Mark Stephen F. Mahaney, RBC Capital Markets, LLC, Research Division - MD and Analyst [26]

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You have put up 2 quarters of nice leverage in sales and marketing on a year-over-year basis, and you've talked about finding efficiencies, I think in your marketing spend, removing some of your lower ROI channels. How long of a transition is this in marketing? I realize it's constantly being optimized. But is there a greater level or attention to optimization this year that then kind of normalize just going into next year? And any color at all on what those lower ROI marketing channels are that you have been reducing?

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Scott F. Schenkel, eBay Inc. - Senior VP & CFO [27]

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Yes, the simple answer on lower ROI channels, Mark, is last year, we pushed the curve quite aggressively on things like promotions. Saw a lot of kind of site-wide sales and coupons and things like that. And as we started to measure those cohorts, we would have kept it going if we were happy with the value of the customers we were bringing in and their spend profile. The fact is we've always been disciplined marketing allocators. And it was worth trying and pushing that limit, but as we saw the returns coming back, particularly the cohort of buyers we were acquiring through that activity, it wasn't worth it, quite honestly.

So a lot of this is a reduction from us really pushing the marketing curve last year. And there maybe more. We're always trying to push efficiency in our channels, but we're also trying new channels. Some of them may have lower ROI early on and we grow it over time. In particular, we're diversifying from Google and search channels into social channels. We're diversifying into affiliate channels. We're diversifying and always trying to bring direct traffic. One of the best attributes of our business is its very strong mix of direct traffic compared to paid traffic. So we'll keep advertising the brand, keep working the other channels. And for the rest of the year, we'll keep removing and somewhat lapping the low ROI spend from last year, and that's in the dynamic we've been talking about since February or March.

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Devin N. Wenig, eBay Inc. - CEO, President & Director [28]

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Mark, let me just call out a couple of things that came out in my prepared remarks, but just to pull them together based on your question. First off, both StubHub and Classifieds spent more in marketing this quarter. We called those out in the prepared remarks and in the margin dynamics. And so that's going to, at the company level, mute the reduction that you would have seen. That's one dynamic.

And the second dynamic is within the Marketplaces business, Korea and Japan actually spent more in contract, which then further mutes the fact that contra and other marketing expense is further down and call it the core on eBay Marketplaces businesses. And so it's a bit muted at the company level and a lot of the dynamics we're talking about are core and platform, ex StubHub, the Classifieds and ex Japan and Korea. So just try and navigate through from what you see in the prepared remarks and in the presentation and ultimately in the Q.

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Operator [29]

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Your next question comes from Thomas Forte of D.A. Davidson.

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Thomas Ferris Forte, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [30]

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So during the quarter, you announced that you are going to potentially participate in Facebook Libra. I wanted to know what you thought eBay's opportunity could be there because I think that's quite an interesting initiative by Facebook and how that could fit into kind of eBay's 2.0 payment options in the future.

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Devin N. Wenig, eBay Inc. - CEO, President & Director [31]

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I think that I've been following crypto and blockchain for quite some time. And without going on a tangent, the short answer is the opportunity for the blockchain to reduce settlement costs, improve security and improve transparency is definite. I'm a believer that a public distributed database can reduce settlement costs. People still pay a lot for interchange. They pay a lot for settlement and clearing.

And that are in systems that at times are not secure and at times don't serve the needs of particularly small businesses. So we're advocates about the possibility. One of the things that's prevented crypto from really having any penetration with retail is the volatility. And nobody's going to pay with a currency that moves up and down 15% a day. So the opportunity with Libra is for buyers because it's pegged to a basket of fiat currency to build a currency that's stable.

The opportunity for sellers is to lower their costs even further. We're going to lower their cost with payment intermediation. The potential, if this ever got up and running, was we can lower their cost even further. So I think Libra is speculative. I think Libra may or may not work. I understand that the regulatory scrutiny, it is led by Facebook. We'll let them lead that. But we're participants as advocates on behalf of our customers.

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Operator [32]

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Your next question comes from Justin Post of Merrill Lynch.

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Justin Post, BofA Merrill Lynch, Research Division - MD [33]

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Scott, I wondered if you could revisit the Advertising opportunity. I think you reiterated $1 billion. Where are you on total ad dollars today? And then when you think about $1 billion being a little bit over 1% of GMV, Amazon is a lot higher. Do you think $1 billion is conservative? Is there room to go higher?

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Scott F. Schenkel, eBay Inc. - Senior VP & CFO [34]

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Well, look, let's get to $1 billion first. I guess the way I'd frame it, I think Devin in his prepared remarks said $700 million. We'll continue to expand above that with a mix of first party, which is I'll remind everyone I think you know it shows up in transaction revenue. And as the third-party ads unwind, that will lower our overall MS&O and ads reported number. And that's why we keep talking about it in aggregate.

But $700 million continuing to grow, we'll get to $1 billion here in the next year or 2 and continue to expand our capabilities. And I think the balance is making sure there's a good user experience. So we'll get to $1 billion when we get to $1 billion. That will be as soon as we possibly can. We're pushing on that on all fronts with the balance being let's make sure the product experience doesn't get destroyed in that and that people can find what they're looking for and that the searches that they do and the ads that we serve them are extremely relevant and continue to convert and are worth having our sellers invest in.

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Operator [35]

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Your last question will be from Ygal Arounian of Wedbush Securities.

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Ygal Arounian, Wedbush Securities Inc., Research Division - Research Analyst [36]

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So in the press release, you noted that you launched new gauges to transform from unstructured listings to structured and product listing pages. So just want to hear -- maybe there was more color around that. Is that different than the ongoing strategy you guys have had to roll out more pages on to your product listings? And then just one quick follow-up on the existing buyer churn. I know you said it was modest, but was there anything specific driving that? Was it the lower marketing spend or was it something else?

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Scott F. Schenkel, eBay Inc. - Senior VP & CFO [37]

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On the first part, I think we continue to evolve our catalog and structured data approach, and it's really both top-down and bottom-up, and I'm very excited about the bottom-up. The top-down has been what we've been progressing and still are. It's really about attachment to products, and that's really important.

What's also important are the attributes of those products, the aspects, the bottom-up like the characteristics of a phone. Here's the memory. Here's the color. And what we see is that as our product listings have more richness in those descriptions and in those attributes, they convert better. In part, that's because they attached to buyer searches better. So we're encouraging and, in some cases, mandating sellers add more to those products listings and then we are incorporating that in search and that's driving better conversion.

And you'll see us continue to make it easier for sellers to contribute and having bought our search engine on the buyer side, pick up those attributes more and more aggressively over time. And again, we will have more to say about that next week at our big seller event. But we're really pleased and excited about the way forward on our catalog and structured data.

Sorry, and on existing buyer churn, part of what that is reflecting is a year ago, we had some experiments in mainland China. We're lapping out of some of those buyers in mainland China. So some of that increased churn reflects that. But it doesn't -- it's not a material difference in any of our core on platform markets.

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Operator [38]

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I will now turn the call over to the presenters for closing remarks.

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Devin N. Wenig, eBay Inc. - CEO, President & Director [39]

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I think we're all set on our side. So I think we can close the call.

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Scott F. Schenkel, eBay Inc. - Senior VP & CFO [40]

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Thank you very much.

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Operator [41]

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This concludes today's conference call. You may now disconnect.