eBay Inc (EBAY) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to eBay's second-quarter 2011 earnings conference call.

At this time, all participants are in a listen-only mode.

Later, we'll conduct a question-and-answer session, and instructions will be given at that time.

(Operator Instructions).

As a reminder, this conference call is being recorded.

I would now like to hand the conference over to Ms.

Jennifer Ceran, Vice President of Investor Relations.

Ma'am, you may begin.

Thank you.

Good afternoon, everyone, and thank you for joining us.

And welcome to eBay's earnings release conference call for the second quarter of 2011.

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.

This conference call is also being webcast on the Internet.

Both the presentation and call are available through the Investor Relations section of the eBay website at investor.ebayinc.com.

In addition, an archive of the webcast will be accessible for 90 days through the same links.

Before we begin, I'd like to remind you that during the course of this conference call, we will discuss some non-GAAP measures in talking about our Company's performance.

You can find a reconciliation of those measures to the nearest comparable GAAP measures in the slide presentation accompanying this conference call.

In addition, management will make forward-looking statements relating to our future performance that are based on our expectations, forecasts, and assumptions and involve risk and uncertainties.

These statements include, but are not limited to, statements regarding expected financial results for the third quarter and full year 2011, and the future growth in the payments, marketplaces, and GSI businesses.

Our actual results may differ materially from those discussed in this call for a variety of reasons, including but not limited to, global economic events, including sovereign debt uncertainties; changes in political, business and economic conditions; foreign exchange rate fluctuations; our ability to integrate, manage, and grow businesses recently acquired or that may be acquired in the future, including GSI; our increasing need to grow revenues from existing users, particularly in more established markets and increasingly competitive environment for businesses; 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, IP, and litigation risks, including risks specific to PayPal, Bill Me Later, and the financial industry; and our need to timely upgrade our technology and customer service infrastructure at reasonable costs while adding new products and features, and maintaining site stability and performance.

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 at investor.ebayinc.com.

You should not rely on any forward-looking statements.

All information in this presentation is as of July 20, 2011, and we do not intend and undertake no duty to update this information.

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

Thanks, Jenny, and good afternoon, everyone, and welcome to our Q2 earnings call.

Q2 was a strong quarter for eBay.

We generated strong financial results and strengthened our portfolio.

I want to start out today by taking a moment to recap our growth strategy.

We intend to compete and lead in the new retail global environment that we see emerging.

Technology-driven innovation is changing how consumers shop and pay, and these changes are blending online and offline into a new global commerce landscape.

In this new retail world, consumers expect a seamless experience across multiple channels, whether it's a physical store, a mobile phone, a laptop or any Internet-connected device.

In this new world, physical stores will become just another point of access, and location alone is no longer a sufficient competitive advantage.

The advantage is the ability to connect with consumers -- any time, anywhere.

And in this new environment, retailers of all sizes are seeking new competencies and capabilities.

They are looking for partners who will provide flexible global platforms in technology-driven innovation that deliver consumer access, insights, and engagement.

We aim to be such a partner, enabling the future of commerce.

We're a different eBay today, a global commerce company.

We enable consumers to get what they want, when they want, how they want it.

And we enable merchants of all sizes to compete in this new commerce environment and we won't compete with them.

We're delivering on our commitments and we're taking bold steps.

Simply put, we're playing offense.

And I feel good about our performance, our momentum, and our opportunities.

Now let's talk about our results.

We had a strong quarter.

Our revenue and non-GAAP earnings per share exceeded the top end of our guidance, with revenue growing 25% in Q2 and non-GAAP earnings up 20%.

PayPal continued to deliver strong momentum, hitting two milestones -- achieving its first $1 billion quarter in revenue and surpassing 100 million active registered users.

And Marketplace has had a strong quarter as well, with 19% revenue growth and a significant acceleration of growth in the US market.

We also announced a number of acquisitions in Q2, adding technology capabilities in important areas such as platform services, local commerce and mobile payments.

And GSI is now our third business unit, which significantly expands our capabilities and relationships with large merchants and brands.

Now let's take a look at the results for each business unit.

PayPal has over 100 million active users and serves 9 million merchants worldwide.

This provides a powerful foundation for attractive, sustainable growth.

PayPal's merchant services business continued its strong growth momentum in all regions of the world.

This business, which now accounts for over two-thirds of PayPal's total payment volume, grew 37% in Q2, and we see significant runway for continued strong growth.

PayPal's TPV growth on eBay accelerated 4 points in Q2 and penetration topped 71%.

Bill Me Later had another strong quarter.

In fact, Bob will cover more about Bill Me Later's business in more detail in his remarks, but this business has strong traction both on and off eBay.

PayPal mobile also continues to accelerate.

While others talk about the promise of mobile payments, PayPal is delivering.

An estimated 8 million people are now using PayPal mobile and we expect mobile payment volume to exceed $3 billion this year.

That's more than four times the volume we did in 2010.

This growth is being driven by the fact that PayPal mobile is driving strong sales and new customer acquisitions for merchants.

For example, Crutchfield, the North American online consumer electronics retailer, recently saw conversion jump almost 34% during a two-week period in April for its customers who are using PayPal Mobile.

And since Crutchfield added PayPal last December, 65% of customers using PayPal Mobile are new to the Company.

In Q2, the UK restaurant chain Pizza Express also embraced PayPal Mobile as an in-store payment option across its 370 outlets.

Customers can now pay their checks right from the table using their iPhones.

This is the kind of innovation PayPal is delivering merchants and consumers today -- real applications, real sales, real customers.

Now several of our recent acquisitions strengthened PayPal's mobile and digital goods portfolio.

By combining Where's capabilities with PayPal mobile, we'll help make local commerce a reality.

Consumers will have a fast, safe way to pay on the spot, with coupons and discounts integrated directly into their PayPal account.

And we believe that Zong, which has direct carrier billing relationships with more than 250 mobile network operators around the world, will help us strengthen our leadership position in mobile payments and digital goods.

With our strong position and growth momentum in online payments, we plan to extend PayPal's capability to point of sale locations.

We intend to help retailers grow their businesses offline in the same way we helped merchants grow online around the world.

By the end of this year, we expect PayPal to be testing Point of Sale innovation with a major US retailer.

And during 2012, we expect to be rolling out new Point of Sale experiences with up to 20 national retailers.

So stay tuned.

Turning to Marketplaces, we're making great progress.

Our US business demonstrated significant momentum in Q2 as [core TMV] accelerated 4 points to a 14% growth rate.

We now believe that our US business is growing in line with market growth rates.

In Europe, eBay's business remains strong and stable overall.

Growth in the UK continues to outpace that market.

And in Asia-Pacific, we saw the business stabilizing Q2, driven by increased traffic to our Korean business and strong growth in cross-border trade.

eBay is delivering a better shopping experience, and buyers are happier and our most trusted sellers are winning.

Search improvements, such as the removal of duplicate listings, are making it easier for buyers to find what they want on eBay.

And trusted sellers now account for 38% of GMV in our three largest markets.

Same-store sales for these sellers grew 22% year-over-year, continuing to outpace eCommerce.

We're continuing to innovate.

For example, in the eBay Garden, we're currently testing a new search preview experience that eliminates the need to jump back and forth between search and item listings pages, making shopping easier.

Mobile commerce also continues to drive strong growth.

Our eBay mobile apps have been downloaded more than 45 million times.

In Q2, the eBay Motors app launched as one of the top 10 free app lifestyle apps in the iTunes app store.

And now more than 2,000 cars and 70,000 auto parts are sold on eBay's mobile platforms each week.

Overall, we're on track to more than double eBay's mobile GMV to over $4 billion in 2011.

We're also continuing to innovate in local commerce.

In Q2, we unveiled Milo's new product called Fetch, which allows small and medium-size retailers to upload their local inventory and automatically share it real-time on eBay.

And we're also testing a local shopping tab on eBay search results, showing buyers the availability of items at stores in their local area in addition to eBay listings.

Turning briefly to our adjacent formats, Classifieds is up 18% in Q2 on an FX neutral basis.

StubHub had another strong quarter, with revenue and ticket sales up double digits year-over-year, driven primarily by major league baseball and concerts.

Before closing, let me add how excited we are about GSI and the opportunities this acquisition creates.

I've had the pleasure of meeting with many of GSI's top customers over the last several weeks, and I can tell you they're excited about their growth potential online with GSI and the additional value that eBay brings to the table.

All of my conversations reinforce what we already believed -- retailers need partners who will help them compete, innovate, and grow in a multichannel commerce environment.

And we're well-positioned to help.

In summary, we had a strong Q2 and first half of the year.

Our core businesses are strong and getting stronger, and we're adding to our portfolio.

Our opportunities have expanded and we feel well-positioned, if not uniquely positioned, to capitalize on this potential.

That said, we know that a success is all about execution.

Earlier this year, we laid out our three-year plan to become a $15 billion company in 2013.

Six months into that plan, we've delivered two strong quarters, and our outlook for 2011 says we're well on our way.

We feel more confident than ever about our opportunity and our competitive position.

With that, I'll turn it over to Bob, who will provide more details on Q2 and our outlook before we take questions.

Thanks, John.

During my discussion, I'll reference our earnings slide presentation that accompanies the webcast.

All growth rate mentioned in my prepared remarks represent year-over-year comparisons, unless I clarify otherwise.

As John said, earlier this year, we shared with you our three-year plans, including a framework for growth, a framework for execution, and a framework for capital allocation.

We said these plans would enable us to generate approximately $15 billion in revenue; approximately 14% EPS CAGR; and cumulative free cash flows of $8.5 billion through 2013.

Our first-half results reflect a strong start to our three-year journey, and we are increasingly confident in hitting our long-term goals.

In summary, we exceeded our Q2 guidance on the top and bottom line.

From a growth perspective, we grew the top line 25%, with contributions from our core businesses, our adjacent formats, and our seeds.

Our core businesses generated solid growth with non-vehicles GMV up 17% and PayPal TPV up 34%.

Our adjacent formats grew 45%, with strong organic growth from Classifieds and Advertising, and inorganic growth from the acquisition of brands4friends, which closed in Q1, and Where.com, which closed in Q2.

Our seeds such as credit, mobile, and PayPal digital, had high double-digit and triple-digit volume growth rates.

These investments will help drive our future growth.

From an execution perspective, operational excellence has increasingly become the way we work, and we are reinvesting operating leverage and accelerating innovation, and driving topline growth.

From a capital allocation perspective, we continue to strengthen our portfolio, closing six acquisitions during the quarter, including GSI Commerce, and announcing our agreements to acquire Magento and Zong.

We repurchased approximately 13.6 million shares and expect to receive $2.3 billion for our minority stake in Skype upon closing.

We're very pleased with our progress in the first half of the year and we're raising our full-year guidance to reflect this strong momentum.

In the second quarter, our combined businesses generated net revenues of $2.8 billion, up 25%.

Organic revenue growth was up 18%; foreign currency movements increased growth by roughly 4 points; and the inclusion of recently closed acquisition increased growth by roughly 3 points.

Second-quarter non-GAAP EPS was $0.48, a 20% increase year-on-year.

The increase and the outperformance versus guidance were primarily due to solid topline growth and productivity.

Non-GAAP operating margin was 27.6%, down 150 basis points from Q2 2010, due primarily to the inclusion of recently completed acquisitions.

We generated strong free cash flow with $543 million in the quarter, despite the negative impact of a one-time tax payment related to a prior period of tax settlement.

Return on invested capital was 25.3%, a slight decline due to the acquisition of GSI.

Now let's take a closer look at our segment results.

PayPal posted another great quarter, achieving the strongest revenue growth in the past three years.

Total payments revenue was $1.1 billion, representing growth of 31%, and total payment volume increased to $28.7 billion, up 34%.

We continue to expand our global footprint, as international TPV increased 31% year-on-year and made up 45% of PayPal's TPV in the quarter.

A few quick highlights on PayPal operational metrics.

Merchant services TPV grew 37% on an FX-neutral basis in the quarter, as we continue to expand our global footprint, merchant coverage and share of checkout.

Merchant services TPV accounted for 66% of PayPal's TPV.

On eBay, PayPal's TPV showed continued strength, increasing 17% year-on-year on an FX-neutral basis.

Penetration of addressable GMV increased 60 basis points sequentially to 71.4%, with penetration increases in Germany, the US, and Australia.

In terms of the transaction margin components, we made a few changes to better reflect the growing importance of credit and other revenues to the PayPal wallet.

Primarily [Cake] rate is based on total revenue, while transaction expense and losses include the full impact of Bill Me Later.

Based on these changes, the new transaction margin was 63.6% in the quarter, up 60 basis points year-on-year -- essentially the same as it would have been with the old definition of transaction margin.

PayPal segment margin was 21.9%, up 200 basis points from last year, trending towards the 24% to 26% target we set for PayPal margins in 2013.

Margin performance was driven by stable transaction margins, solid operating leverage, and continued improvement in Bill Me Later performance.

Let me touch on a few key operating metrics for Bill Me Later.

We've revised Bill Me Later TPV to include volume on eBay and inside the PayPal wallet off eBay, in addition to the previously broken-out volume outside the wallet off eBay to give you a full picture of the credit business.

Bill Me Later's TPV was up 67%, as consumers turned to Bill Me Later for both convenience and choice, driven by continued strong penetration both on and off eBay.

Bill Me Later penetration in the US has quadrupled in the past year to nearly 1% in the second quarter.

While small compared to other funding methods, this penetration reduces our funding costs as consumers shift away from credit cards to Bill Me Later.

Risk-adjusted margin increased 370 basis points over prior year to 16.5%, as improved credit quality drove net charge-offs down substantially on a year-over-year basis.

It's been over two years since the acquisition of Bill Me Later, and we feel great about the business and even better about the outlook.

It is not only increasing consumer choice and an additional source of modernization, but it also reduces PayPal's overall processing cost.

Before moving on to Marketplaces, I wanted to take this opportunity to discuss the implications of the Durbin Amendment.

First, we believe that the rules announced by the Fed in June do not treat PayPal as a payment card network.

Second, we expect the overall net impact of the Durbin Amendment on our margins to be slightly positive in the short to medium-term.

And finally, we're pleased to report that our US ACH contract was extended during the second quarter for another five years, preserving our cost structure with this funding method.

Now let's move to our Marketplaces business.

Overall, Marketplaces achieved net revenues of $1.7 billion, a 19% increase.

Marketplaces FX-neutral revenue was up 12%, driven by solid non-vehicle GMV growth of 10%; accelerated growth from adjacent formats like Classifieds and Advertising; and the addition of the brands4friends acquisitions.

Marketplaces has generated 59% of its revenues internationally this quarter.

We had a great quarter from our Marketplaces adjacent formats, with marketing services and other revenue up 34% on an FX-neutral basis.

The growth rate was primarily driven by strength in ad-based revenue, continued strong performance across our global Classifieds business, and the addition of brands4friends.

Today, these adjacent formats represents 19% of Marketplaces revenue and are an increasing contributor to the overall Company growth rate.

A few quick highlights on Marketplace's operational metrics.

Active users increased to 97 million, accelerating growth to 6% year-on-year.

Sold items grew 8% year-on-year, a 1 point acceleration from Q1, driven by growth across all our three key regions.

Non-vehicles GMV was up 10% in the quarter.

US GMV accelerated 4 points to 14%, and international GMV accelerated 2 points to 10%.

Our global take rate, excluding vehicles and StubHub, was 8.3%, 20 bps lower than last year, as we lacked the initial impact of the pricing changes implemented in the US business in March of 2010.

Marketplaces segment margin was 38.8% in the quarter, down 150 basis points from a year ago, mainly driven by recently completed acquisitions.

Turning to our newest addition, we're very excited to welcome the GSI team, led by Chris Saridakis, to the eBay family this quarter.

We closed the transaction on June 17, financing it with cash and $700 million in commercial paper.

The integration is well underway, and we're very excited about the opportunities that the combined capabilities of GSI, eBay, and PayPal will open for large retailers and brands in this new retail environment.

A few highlights from the quarter as we are now reporting GSI as a third segment in our results.

Revenue for the two weeks we owned GSI totaled $24 million and the impact on non-GAAP EPS was negligible.

The GSI team is making good progress on their v11 technology platform, and we plan to increase spending, so we can accelerate the deployment schedule and create capacity for new clients.

Cross-business unit integration has already started.

We are on track to realize the roughly $60 million in total revenue synergies and cost savings by 2013 that we laid out when we announced the transaction.

And we have five GSI clients Live on eBay today and 56 clients now use PayPal.

On this next slide, we provide a few key metrics to give you a better sense for GSI's business performance.

Please note that the historical information has been adjusted for the divested businesses to be more comparable to the business acquired.

Global eCommerce Merchandise Sales, or GMS, grew at 20% on a comp store basis, driven by continued retail shift from offline to online.

Total revenue is up 16% year-on-year, as solid organic growth was offset by the shift away from the owned inventory model and the global eCommerce business.

The marketing services business increased 33% year-on-year in Q2, driven by continued adoption across GSI clients.

Turning to operating expenses, they were 45% of revenue, slightly higher on a year-over-year and sequential basis, driven primarily by sales and marketing, investment in product, and acquisition-related expenses.

From a capital allocation perspective, we generated strong key free cash flow of $543 million during the quarter after adjusting for a tax payment of $75 million.

We've improved our financial flexibility by funding over one-third of the US Bill Me Later loan receivables portfolio with our offshore cash.

We've invested $2.7 billion to strengthen our portfolio with the acquisitions of GSI, Where, and GittiGidiyor.

And we continue to use a portion of our cash on our share repurchase program.

We ended the quarter with cash, cash equivalents, and non-equity investments of $6 billion, including approximately $1.2 billion cash in the US.

From an M&A perspective, we've taken several steps in the quarter to strengthen our portfolio.

Accelerating our mobile payments, expanding our platform, extending our geographic reach, and strengthening local commerce efforts, will help us with our vision of becoming the eCommerce partner of choice on and offline.

Now let me turn to guidance.

For the third quarter of 2011, we anticipate revenue of $2.85 billion to $2.95 billion.

This represents growth of 27% to 31%.

We anticipate non-GAAP EPS of $0.46 to $0.47, which represents growth of 15% to 18%.

Our EPS guidance reflects slightly higher sales and marketing costs, and costs associated with the integration of GSI and acceleration of the v11 platform.

Turning to full-year guidance, we are raising our guidance on the top line by approximately $700 million, and on the bottom line by approximately $0.04.

A couple of things drive the improved outlook -- first, we expect continued momentum in the Marketplaces and PayPal businesses, specifically driven by stronger GMV in the US.

Second, the acquisition of GSI and several smaller acquisitions will add significantly to the top line, and be accretive on a non-GAAP EPS basis by approximately $0.01, as we invest in integrating the businesses.

For full-year 2011, we now anticipate revenue of $11.3 billion to $11.6 billion, representing growth of 23% to 27%.

We anticipate non-GAAP EPS of $1.97 to $2.00, representing growth of 14% to 15%.

We expect free cash flow to exceed $2.2 billion for the year, despite approximately $350 million in one-time tax payments and higher CapEx, due to increased capacity requirements and investment related to data analytics.

In summary, we had a strong first half with double-digit top and bottom line growth.

The Marketplaces business is gaining momentum; PayPal continues to increase their market share online; and our adjacent formats continue to perform well.

We're very excited about our future with the addition of GSI to serve large brands and retailers.

We continue to invest in growth, and we're focused on accelerated innovation in making strategic acquisitions, while maintaining a dilution-neutral buyback strategy.

And we are well-positioned to deliver on our three-year plans.

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

Operator?

(Operator Instructions).

Ken Sena, Evercore Partners.

So I was wondering if you could maybe talk about the Point of Sale experience a little bit?

And I know you mentioned that you're going to be rolling out a comprehensive product through next year; but can you just say how much of that will actually have Milo and Where and Offers, and some of the other service as a part of that product?

Thank you.

Sure, Ken.

You know what's interesting is I would say 12 to 18 months ago, if you had asked us where our growth really lay, we would have said we're an eCommerce company, and that eCommerce is an enormous market that is growing quickly and was going to gain share from offline retail.

And we still believe that to be the case.

And so eCommerce will continue to gain share from offline retail, and both of our core businesses are very well-positioned in that.

But the mobile device is absolutely lowering the boundary or blurring the boundary between online and offline.

And what that's done is that's created incremental opportunity for both of our businesses -- really, all three of our businesses -- far greater than we would have expected.

So, on the eBay business, we see it already with the eBay mobile application, which our analysis says is actually used in stores not infrequently.

So the almost $4 billion of volume on eBay mobile many times has people using their mobile device while in a store, or at least being in a store at some point of the shopping cycle.

And our acquisition of Milo is a way to bring that local inventory from stores into the shopping experience, whether it's on the eBay site, or on our eBay or Red Laser mobile applications.

And so that will be one of the ways we're bringing local products and local inventory into the eBay shopping experience, both online and mobile.

And then with PayPal, we've had merchants reach out to us quite aggressively, and saying they want us to bring PayPal into the Point of Sale.

And we see it as an incremental opportunity, and a fairly significant incremental opportunity that will play out over the next three to five years.

We think we bring three things to that picture.

There's going to be a lot of announcements and a lot of speculation about Point of Sale.

I'll remind you that's a slower growth part of the market, but we feel very well-positioned because we start with 100 million active digital wallets -- each that have two financial instruments in them.

And we start with 9 million active merchant accounts.

And so we bring that to the offline or Point of Sale world.

Second, we bring risk and fraud detection that we have today.

We have $100 billion of volume that trade through our platform with less than two-tenths of a percent of loss.

And so we are equipped to bring that loss performance to PayPal mobile, where we're successfully underwriting $3 billion of volume, and to Point of Sale.

And merchants recognize that.

They trust that.

And then lastly, what we're bringing to Point of Sale is an approach that merchants like, in that it will accept all tender types, be they card or hands-free or mobile, and any mobile solution -- our solution will work with any mobile device or mobile software platform or operating system.

And so it's payment-type agnostic.

And merchants like that, because it's going to enable them to help scale the PayPal solution across, not just one store or one shop, but across nationally all their stores and all their checkout lanes.

And so we're designing our product and our Point of Sale much like we did the merchant services business five years ago -- we're designing it to build a business that can grow significantly over a long period of time.

So, as I said, we'll have a pilot up and running by the end of this year.

We'll have active operations in multiple merchants next year, and I think it will lead to material growth in the next -- you know, the three to five-year period after that.

Thank you.

Ken, the only other thing I'd add is, as John mentioned in his prepared remarks, are Milo, Where, Red Laser, Critical Path Software teams are not waiting for a PayPal Point of Sale product; they are out gaining traction with large merchants and retailers today.

So they're not waiting for PayPal's Point of Sale -- they're out there getting traction, as we speak.

And would eBay consider partnering to potentially expand beyond just retailers, but potentially with, like, a navigation platform in terms of offers, whether it's like Groupon or some other partner?

I mean, would you be open to that idea?

Sure.

I mean, we feel like we have 9 million partners today called customers and merchants.

And we partner with -- when we buy Zong, we're partnering with mobile carriers; we partner with the card associations today.

And we certainly would consider partnering with any of the deals providers or others that, in essence, would be merchants on our platform.

Thanks, Ken.

Doug Anmuth, JPMorgan.

-- taking my question.

I wanted to ask two things -- first, just on the outlook for the rest of the year, if you could just clarify on the pro forma EPS.

Just trying to understand how much is core eBay specific and how much is related to acquisitions?

I know you lay it out in the deck, obviously, but just trying to dig into that operating performance number in particular -- the $0.03 number that you have there.

And then secondly, can you just clarify how you're going to be handling the reduced transaction expenses related to debit cards going forward?

Yes, thanks.

On the second question first, the lower transaction costs related to debit will flow through the transaction expense line that we give you on a quarterly basis.

So the 111 bps for Q2, all else equal, when Durbin gets implemented in the fourth quarter, you should expect that to come down.

In terms of our guidance for the rest of the year, we've said there's -- let's just isolate it, Doug, to GSI, because that's the primary driver on both revenue and profitability.

When we announced the deal back earlier this year and we said our expectations would be essentially EPS-neutral on a non-GAAP basis for 2011, today, what we're saying is that we expect revenues to be roughly $550 million, generating about $0.01 of EPS.

So, a little bit better than we expected back when we announced the deal, despite the fact that we will be making higher investments to roll out the v11 platform.

So, a little bit better than we said at the time -- relatively modest impact on non-GAAP EPS guidance for the full year.

Thanks.

Shawn Milne, Janney Capital Markets.

Thanks for taking my questions and nice quarter.

John, you talked a little bit about some of the changes you've made in the US marketplace.

We've seen a pretty significant acceleration in the past couple of quarters.

As you look out into the second half or closer to the holiday -- and you said previously, no silver bullets -- what are some of the things that you're working on?

You know, you've talked a little bit about the shopping cart and some of your vertical strategies.

Is there any more color you can provide there to get a sense if we can continue to see good acceleration of that business?

Yes, sure, Shawn.

We feel good about the progress in the US.

And in many ways, it is playing out much as we've been saying it would.

As we've applied the search changes, the pricing changes we made last year, and those worked their way in, the vertical experiences -- [EBITDAR] protection.

And the business is responding much like it did in the UK.

Looking out in the second half of the year, I think what you see is a bit of an acceleration of innovation.

And so, whether it's mobile, commerce and increasingly getting into different mobile environments; whether it's changes in our vertical experiences.

I don't know if you've been to our Consumer Electronics segment, but the product base experience has now been rolled out from what was three subcategories -- which were MP3 players, DVDs, and GPS devices -- now to 30% to 40% and rising of the Consumer Electronics.

And consumers like that.

And then our auto parts experience is growing.

So our Technology, Mark Carges, has done a great job of getting our technology in a place where we can iterate faster.

And cart is available.

We've got it completely developed and it's now roughly in about 10% of the UK; 2% to 5% of the US.

And we are rolling it out carefully, because what turns out that while consumers like carts, some consumers like the cart where we can cross merchandise.

Other consumers like buying directly from the product page.

The main thing that will be different, however, in the second half is we're going to increase our marketing investment.

I've said for now a couple of years, that we're holding off increasing marketing and focusing on our current customers until we get our user experience to the place where we feel it's ready.

And we feel like we've passed that point now.

And so we'll be increasing our marketing expenditures second half of the year, both to re-raise the visibility of our brand and engage our buyers.

You'll see us on TV in late Q3 and in Q4 in the US.

And we think that will have benefits for the business.

So that's both in the US as well as in Europe.

Okay, great.

Bob -- just one quick follow-up for Bob.

You talked about investing a little bit more in GSI and accelerating the rollout on v11 and some of the capacity.

When do you think we'll get a first look at the new front-end platform with some of their large clients?

We're expecting the first launch late in the third quarter.

John and I have had the opportunity to go around with Chris and see a lot of the GSI clients and demo the v11 platform.

And I'd say the Tech team at GSI has done a really nice job in building out that platform, working out the kinks.

And we're excited to get the first one launched here at the end of Q3.

Okay, great.

Best of luck.

Thanks, Shawn.

Colin Sebastian, R.

W.

Baird.

Thanks for taking my question.

Just one quick follow up on the mobile question -- if you can talk about, John, maybe how much of the acceleration in Marketplace growth that we should credit to the rise in mobile transactions.

And then turning to the largest category, Vehicles, I wonder if you could address where you see this business heading directionally over the next couple of quarters?

If there are any initiatives in place now to help re-accelerate that business?

Or is it really just tied to the broader headwinds in that market?

Thanks.

Yes, Colin, you know what's interesting is we've stopped trying to worry about how much of mobile is incremental versus not, for the simple reason that what we see is consumers are using mobile as just another device.

That when you look at what consumer behavior is doing is, often, they'll use a laptop and an iPad and a mobile device in their purchasing transaction.

And so what the mobile device is really doing and the real value is it allows eBay to be present and available to consumers seven days a week, 24 hours a day -- whether they're standing in an offline store or whether they're sitting on their couch at home watching TV, or whether they're sitting at their laptop.

So we know that people that use our mobile devices -- and there are 45 million of them now -- are four times as active as those that don't.

And so we know it increases customer engagement.

So we feel like it's expanding both the pie that we have to play in as well as deepening our engagement.

And we don't think about it as mobile or online; we think of it as almost a multiplier.

Interestingly, that we're seeing a little bit of a similar thing in Motors.

I mentioned that this Motors app, I'm just stunned by how much early traction it got, because Motors buyers -- at least Motors enthusiasts -- love browsing our Motors inventory.

And I'd break Motors into two parts -- our auto parts businesses is absolutely doing fabulously.

We've added an enormous amount of inventory in the parts business and it's got real traction.

It's a much better user experience.

If you haven't seen it, it allows you to store your cars that you want to filter the parts for.

And then the vehicles business is, as a business, it's, you know, to some extent, a business that has uneven performance or uneven demand around the world.

We're seeing a little stronger performance in Europe where we have [Mobile], and a strong Motors Classifieds footprint.

We're seeing decent Motors transaction performance in the UK.

And in the US, it's kind of fair, I would say.

And the thing I'll remind you about our Motors business is it's a mix of transaction and lead generation.

And so we're trying to get to a point where we're basically indifferent between whether it's a transaction or a lead generation.

So GMV I think will continue to be modest -- GMV growth.

We're focusing more, though, to just getting in the flow of vehicles transactions.

John, one last point on the mobile side -- you talked about the buyer adoption and usage of mobile.

Is it fair to say as well that, given some of the seller tools on the mobile apps, that these applications are also increasing the velocity of listings as well?

Yes, and there's two parts to that, Colin.

One is consumer listings are going up, because you can do a listing with your mobile device in a minute.

And so we're seeing more longtail consumer listings.

And then the second thing that we're just beginning to see is -- and I think the GSI folks are telling us could be a real opportunity -- is you could see people in retail stores beginning to list their liquidation inventory on eBay.

And so, again, that mobile device gives them a tool to list and ship from a store, and allow local store managers, even in big chains, to be making decisions about having another distribution channel.

And so the mobile device is clearly another avenue or channel, if you will, for retailers, big and small.

Thanks, Colin.

Ross Sandler, RBC Capital Markets.

Thanks, guys.

One quick housekeeping question for Bob and then a follow-up on mobile payments for John.

So Bob, was there anything besides the acquisitions that you called out that contributed to the margin compression in Marketplaces in the second quarter?

Is this the new run rate to expect?

Or was there anything one-time in there?

And then on the mobile side, John, as you mentioned, and we've seen a lot of interesting technologies being developed in the NFC area, my question is, who really has control over the mobile wallet in NFC?

Is there any risk that operating system developers for smartphones or OEMs can prevent PayPal from becoming the de facto wallet?

And is PayPal's strategy here to be a funding source for these wallets?

Or do you need to be the wallet of choice?

Thanks.

Yes, Ross, a little more color on Marketplaces' margins.

As I indicated, they were down about 150 basis points.

The dynamics I mentioned of slightly lower take rate.

And that was offset by productivity.

Secondly, a slight mix degradation because the high-growth Classifieds and StubHub businesses are lower margin than the core eBay business.

But those essentially kind of offset each other.

And then the primary change was simply the acquisitions that we did that weighed down our margins.

And Ross, on the mobile payment question in NFC, our perspective is that the people that are really going to drive this at the end of the day are going to be the merchants.

And in particular, the merchants, the large scale merchants who drive 80% of the Point of Sale spend -- that's grocery, that's drugs, that's clothing.

And while I think there will be experimentation with NFC, I don't think you're going to see widespread adoption of NFC in the large merchants for quite a while until they're standards.

In fact, I was with a large merchant last week who described NFC as Not For Commerce.

Simply because, when you're a large merchant and you have 500 stories and 14 checkout lanes per store, you want zero friction at checkout and Point of Sale.

And they're not going to allow anything that has friction -- no proprietary systems.

So we're building solutions that work for their Internet-enabled devices -- their Internet-enabled card readers, and can handle card or mobile, of all types of technologies.

I think it's a long way away before any major merchants accept anything proprietary.

In terms of the wallet, again, our starting point is we have 100 million active wallets in the cloud with each -- [two] financial instruments.

And I don't know if you'd call that the de facto wallet or not, but I think it is an enormous advantage and starting point as we enter into what is going to be an emerging Point of Sale environment.

Next question.

Spencer Wang, Credit Suisse.

My first question is for John.

Just on the online/offline commerce convergence strategy that you articulated, John, I was wondering if you could just walk us through the business model or the revenue model there?

Is this something that's more of a lead gen type of business that shows up in the commerce line?

Or do you monetize it through PayPal or some other mechanism?

And then secondly, just for Bob, real quick, could you just talk a little bit about Marketplaces' margin trajectory in the second half, just with the incremental marketing?

Thank you.

Yes, Spencer, on your first question, the online/offline and monetization, here's how we think about it.

We feel very fortunate in that in the highest growth segment of this, which is online, the part that's gaining share, and when you add online and mobile, we have proven monetization business -- or models with proven -- business models of proven monetization approaches that are gaining traction and share.

And that's sort of the foundation of our forecast.

And that's, frankly, the only thing we've included in any of the forecasts and outlook we gave in our Investor Day earlier this year.

We said that we'd become a $15 billion company and that was without any offline business in those forecasts.

So we view offline as new incremental opportunity that's still in its early days.

Exactly how it will monetize, that we don't know.

Milo, our focus on Milo is getting traction, getting it into the eBay mobile app; getting it into Red Laser; getting it onto eBay, and generating consumer engagement with it.

Consumers like it.

And once we get consumer engagement with it, we can look at how we monetize, be it lead generation or otherwise.

PayPal is a little more straightforward, that to the extent PayPal and when PayPal gets pulled into the offline world, it will monetize much the same way it does today.

So it doesn't really need a new monetization model.

Spencer, on the Marketplace segment margins in the second half, it will -- John said slightly higher sales and marketing expense, so -- and it will be higher but it will be slight.

And therefore, the dynamics of Marketplaces' segment margins will go their traditional pattern of first quarter and fourth quarter being highest; Q2 and Q3 being lowest.

So I would expect Q3 to likely be marginally lower than Q2 and it will accelerate in the fourth quarter.

Thank you.

Mark Mahaney, Citi.

Two questions, please.

The active user growth of 6% year-over-year -- I know in the deck, you talk about the US, UK, and Australia as contributing to that.

Is there any particular other things you would point to outside of geographies to that growth?

Is there new marketing plans that you think were already contributing to that in the June quarter?

And then, secondly, just in terms of the guidance, you're raising the revenue by $700 million.

It doesn't seem like there was anything that you've raised in terms of your back-half numbers; the outperformance really seems to have all come from the June quarter.

I assume there wasn't anything new in the September quarter that made you more cautious on the business; but I just want to check that.

Thanks.

Mark, on the user growth, it is, frankly, I think just a function of better improved experience and word-of-mouth that's coming from improved experience.

And so there was no particular thing we've done in any of the past previous quarters to try to grow user growth.

And as I said, we'll begin stepping up ourselves in marketing expense and investment in that both to -- around our brand and around -- come back and try eBay again, to inactive users.

One area I do also think there's going to be an interesting source of new user growth over the next -- I don't know if it's the next one to two quarters, but certainly over the next 12 to 18 months, is the impact mobile can have both in our existing markets and in new markets.

We -- as you know in many emerging markets around the world, more and more consumers are coming online, be it for the first time with a computer or with a smartphone.

And with a global platform like eBay has and a strong cross-border capability, we believe there's a great opportunity to have a transaction on eBay -- eBay's global platform -- be the first eCommerce transaction that many people in some of these emerging markets have.

So I think that's going to offer -- we're stepping up our focus in those -- I think that will offer a source of new users over the next -- again, more in the 12 to 18-month time-frame rather than one to two quarters.

Mark, on the guidance question, I'd characterize it as follows -- first half revenue growth up 20%; second half revenue growth up 30%; raised overall revenue guidance by $700 million -- $550 million acquisition, $150 million operations.

On the operations side, I would think about roughly $100 million having come from the second quarter, if you strip out FX and acquisitions; and roughly $50 million more -- $50 million of operational revenue, stronger Marketplace, stronger PayPal performance coming in the second half of the year.

So, all in all, just to recap, strong first half growth, going up to 30% topline growth in the second half; good operational momentum to the first six months; and stepping up our guidance in the second half to reflect both that momentum, in Q2 outperformance and the acquisitions we did that -- they strengthened the portfolio.

Operator, we have time for one more call.

Thank you.

Our final question comes from Scott Devitt from Morgan Stanley.

It's a question for Bob.

I was wondering if you can share same-store TPV for merchant services?

And if it's not in the deck, I don't know your willingness to share that metric.

And then, separately, can you just update us on the top 100 retailer penetration US and Europe for PayPal?

On the first one, it's not in the deck.

I think my recollection is that you ask this every quarter.

(laughter) Maybe every other one, Scott, and I think I give you the same answer.

You know, I would say, overall, that globally, we looked at eCommerce rates of growth roughly 10% to 12% in the markets that we serve around the world, and merchant services TPV up 37%.

So if the clients that use PayPal are growing faster than overall rates of growth, we'd like to think PayPal has something to do with that.

And we continue to add new clients, small, medium and large, into the backlog.

In terms of the top 100 merchants, I think for -- I think in the US, we got 62 out of the top 100; Europe, 35; and in Asia, it's between 15 and 17.

I don't remember what.

But that's the penetration.

And we make progress kind of every step of the way, including the progress that we're making on GSI's clients that increasingly are adopting PayPal as the way to pay at new checkout flows.

Thanks, Scott.

All right.

We'll see everyone next quarter.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes our program for today.

You may all disconnect and have a wonderful day.