eBay Inc (EBAY) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to eBay's Q1 2012 earnings call.

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

Later we will conduct a question-and-answer session and instructions on how to participate will be given at that time.

(Operator Instructions).

And as a reminder, today's conference call is being recorded.

And now I would like to turn the conference over to Jennifer Ceran, Vice President Investor Relations.

Good afternoon everyone.

Thank you for joining us, and welcome to eBay's earning release conference call for the first quarter of 2012.

Joining me today on the call are John Donahoe, our President and Chief Executive Officer, and Bob Swan, our Chief Financial Officer.

We are providing a slide presentation to accompany Bob's commentary during the call.

All growth rates mentioned in John and Bob's prepared remarks represent year-over-year comparisons unless they clarify otherwise.

This conference call is also being broadcast on the Internet, and both the presentation and call are available through the Investor Relations section of the eBay website at investor.ebayinc.com.

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

Before we begin, I would 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 the reconciliation of these 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 current expectations, forecasts and assumptions, and involve risks and uncertainties.

These statements include, but are not limited to, statements regarding expected financial results for the second quarter and full year 2012 and the future growth in the Payments, Marketplaces and GSI businesses, mobile commerce and mobile payments.

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; 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; an increasingly competitive environment for our 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 cost 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 available at investor.ebayinc.com.

You should not rely on any forward-looking statements.

All information in this presentation is as of April 18, 2012, 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.

Good afternoon everyone, and welcome to our Q1 earnings call.

We had a strong first quarter and an excellent start to the year, driven by strong performance across eBay, PayPal and GSI.

Our portfolio is enabling commerce around the world and we are excited about our future.

We are building a set of capabilities that is reshaping how people shop and pay.

We're helping merchants of all sizes compete in a rapidly changing, multichannel retail environment, and we will never compete with them.

And we are creating compelling and engaging experiences for consumers all over the world.

At the beginning of last year we laid out bold three-year growth goals, and our strong performance in 2011 was a big down payment toward achieving those goals.

And our first-quarter results of 2012 continue that momentum.

First-quarter revenue grew 29% and non-GAAP EPS was up 18%.

All of our businesses performed well.

First, let's take a look at PayPal.

We see enormous opportunity for PayPal online, on mobile devices, and increasingly in the offline environment as well.

And PayPal is delivering this innovation on a global scale.

In fact, for the second consecutive quarter more than half of PayPal's revenue came from outside the US, highlighting PayPal's expanding global footprint as people around the world look for a safer, easier way to pay in their domestic markets and across borders.

PayPal's TPV on eBay was up 18% for the quarter on an FX neutral basis.

This is driven by a strong Marketplaces performance and increasing penetration on eBay to nearly 76%.

That is 1 point above the prior quarter and achieves PayPal's 2013 on-eBay penetration goal a year ahead of plan.

In Merchant Services TPV grew 28% on an FX neutral basis as more retailers and consumers chose PayPal online.

PayPal continued to add more than 1 million new active accounts per month in Q1, ending the quarter with almost 110 million active accounts.

Innovation is a central focus for PayPal in 2012.

During Q1 PayPal launched its first major point-of-sale product at a Home Depot.

And today that product is now available at nearly 2,000 Home Depot stores across the country.

This enables PayPal's customers to pay in Home Depot stores by simply swiping a PayPal card or entering their mobile telephone number and PIN.

Customers can shop without their wallets, credit cards or even their mobile phones, just pay with PayPal.

And this is just the beginning.

We have signed contracts with several additional retailers and will begin deploying these retailers over the remainder of this year.

We also launched a new point-of-sale product for small businesses called PayPal Here.

PayPal Here offers small businesses a fully encrypted card reader for Android devices and iPhones, and it accepts all types of payment options.

And unlike other solutions in the market, it is global, available in the US, Canada, Australia and Hong Kong at launch.

The response thus far has been fantastic.

More than 200,000 merchants have signed up to receive PayPal Here, which we expect to be widely available in Q2.

The use of PayPal in mobile applications is also growing.

For example, retailer Cumberland Farms recently introduced an app known as SmartPay at 50 of its Boston-area convenience store locations.

You can now start the gas pump from your smartphone and pay for your gas safely with PayPal.

As you know, I recently named David Marcus as President of PayPal.

David is a successful technology entrepreneur with a real passion for innovation, great products and consumer engagement.

He leads with a founder's perspective, and I look forward to closely working with David to help define the future of money in PayPal.

PayPal also has a strong leadership team, and I want to thank the entire PayPal team for their leadership as we managed through this transition.

PayPal didn't skip a beat and we have great momentum going into Q2 and for the rest of the year.

Now let's turn to Marketplaces.

Our Marketplaces business has turned the corner, shifting from defense to offense, and is delivering accelerating results.

Our efforts to make the shopping experience on eBay faster and easier are paying off.

We added more than 2 million new active users in Q1, the largest increase in three years.

On an FX neutral basis Marketplaces' core GMV growth accelerated 3 points to 13%, both in the US and internationally in the first quarter.

Fixed price, which accounted for 64% of our GMV, grew 18%, up 4 points from the prior quarter, and auctions grew 3%.

We are seeing great results from our investments in tailored and trusted shopping experiences.

Fashion, parts and accessories and ticket categories all delivered strong double-digit growth rates.

And we continued to improve trust on our sites with nearly half of US GMV coming from top-rated sellers during Q1.

Same-store sales for these top-rated sellers also grew in the US, up 22% in the quarter, significantly outpacing e-commerce.

And eBay sellers are offering free shipping more than ever on eBay, and free shipping now represents 45% of transactions in Q1, up 16 points year-over-year.

On the mobile front we continue to deliver innovative shopping experiences.

In March we launched Watch With eBay, our first iPad app that combines shopping and entertainment.

Watch With eBay surfaces merchandise related to what you're watching on TV, enabling you to shop based on inspiration from your favorite TV shows.

And in Q1 alone there were 12 million downloads of eBay mobile apps, bringing total downloads to 78 million since the launch of eBay mobile.

We are also excited about StubHub's international expansion into the UK during Q1.

StubHub now offers tickets to popular music, sporting and entertainment events across the UK with all-in pricing at the point of purchase.

This is a first for the UK tickets industry, underscoring StubHub's strong commitment to innovation and a great fan experience.

Let me share some of the Q1 highlights from GSI and our X.commerce platform.

As a reminder, both GSI and X.commerce enable merchants of all sizes to compete in this new commerce environment -- GSI focusing on larger merchants, X.commerce on smaller.

GSI had another strong quarter, driving a 26% increase in same-store sales for its clients, again, outpacing e-commerce.

During the quarter GSI signed or extended 29 client contracts across their suite of services.

And in Q2 we are planning a limited rollout of the next generation of GSI's Web service technology, or the v11 platform, which will give clients even more flexibility and control over their multichannel commerce experience.

And X.commerce, our open commerce ecosystem, launched 2,000 new apps for businesses of all sizes during the first quarter.

In all we feel confident about our continued progress at GSI and X.commerce and the synergies that cut across our businesses and platforms.

In summary, I am pleased with our strong Q1 performance and our great start to 2012.

With our focus on enabling commerce we are delivering innovative products and great shopping experiences.

We are a diverse global commerce company and we continue to operate with discipline and clarity, leveraging our scale, technologies and capabilities to shape the future of shopping and payments.

Now I will turn it over to Bob, who will provide more details on Q1 and our outlook for Q2 and the full year.

Thanks, John.

During my discussion I will reference our earnings slide presentation that accompanies the webcast.

As John indicated, Q1 was a great quarter for the Company and a strong start to the second year of our three-year journey.

PayPal, Marketplaces and GSI all performed well.

Revenue increased 29% and non-GAAP EPS grew 18%.

From a capital allocation standpoint we announced two acquisitions and the divestiture of Rent.com.

And we repurchased approximately 7 million shares of stock.

We feel great about our portfolio and our capabilities.

PayPal continues its strong trajectory, while innovating on the next generation of payment capabilities.

The Marketplaces core business overall is healthy, and investments in new features and functionality continue to make the customer experience even better.

And GSI is focused on helping larger retailers succeed in a multichannel world.

As a result of our strong first-quarter operating performance we are increasing our outlook for the full year.

In Q1 our combined businesses generated net revenues of $3.3 billion, up 29%.

Organic revenue growth was 18%, and the inclusion of acquisitions closed in the last 12 months increased our growth by approximately 11 points.

First-quarter non-GAAP EPS was $0.55, an 18% increase year-over-year.

Strong topline growth drove our outperformance relative to guidance.

Non-GAAP operating margin was 26.9%, down 250 basis points from the first quarter of 2011.

The decrease was mainly due to acquisitions and business mix.

We generated free cash flow of $289 million in the quarter, which was reduced by a one-time tax payment of approximately $300 million related to the gain on the sale of our remaining equity interest in Skype in the fourth quarter.

CapEx was 7% of revenue in the quarter.

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

PayPal had another strong quarter.

Revenue reached $1.3 billion and total payment volume increased to $33.9 billion, up 31% and 25% respectively on an FX neutral basis.

We continued to expand our global footprint with international TPV increasing 30%, and today it comprises 46% of overall TPV.

A few quick highlights on PayPal operational metrics.

The net number of payments grew 31%, a 1 point acceleration versus fourth quarter.

On-eBay TPV grew 18% on an FX neutral basis, driven by strong eBay GMV growth and a 480 basis point increase in PayPal penetration.

Merchant Services TPV grew 28% on an FX neutral basis.

This growth was driven by continued expansion of PayPal on merchant sites around the world and an increase in share of checkout.

Transaction margin was 65.6% in the quarter, up 190 basis points.

The increase was mainly driven by a higher take rate and lower transaction expense.

PayPal segment margin came in at 26.4% in the quarter, up 410 basis points from last year.

This improvement was mainly due to transaction margin expansion and operating leverage from strong topline growth.

PayPal's transaction segment margins are at the highest level in the last five years, while we continue to make significant investments to position for long-term growth.

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

More consumers are turning to BML for both convenience and choice.

BML's TPV was up 51% in Q1, driven by continued strong penetration on and off eBay.

And Bill Me Later penetration in the US on eBay and in the PayPal wallet has increased in the past year to more than 1.6% in the quarter.

While small compared to other funding choices, this penetration helps to reduce our funding costs.

Risk-adjusted margin for the quarter was 16.8%, up 211 basis points year-over-year.

Now let's move to the Marketplaces business.

Overall, Marketplaces achieved net revenues of $1.7 billion, up 13% on an FX neutral basis.

This was driven by FX neutral transaction revenue growth of 12% and marketing services revenue growth of 16% from our adjacent formats.

A few quick highlights on Marketplaces operational metrics.

Sold items grew 17%, a 6 point acceleration from Q4, driven by strong growth in the UK, China, US and Korea.

US non-vehicles GMV grew 13%, driven by a strong growth in active users and category sales in fashion, tickets and parts and accessories.

International FX neutral non-vehicles GMV grew 13%, driven by accelerating growth in APAC, strong performance in the UK and continued stable growth in Germany.

From a format perspective, fixed price, a good proxy to compare e-commerce growth, grew 18% on an FX neutral basis.

Marketplaces segment margin was 38.7% in the quarter, down 180 basis points due primarily to increased investments in technology and marketing.

Now let's turn to our newest business unit, GSI.

GSI had a strong quarter.

Revenue for Q1 was $237 million, up 15% driven by strong volume growth, partially offset by the mix of merchant sales.

Adjusting for the impact of the continued shift of clients to the service fee model, year-over-year growth would have been 19%.

GSI's global e-commerce merchandise sales, or GMS, grew 26% on a same-store sales basis, a great result for GSI merchants who have successfully enabled strong e-commerce businesses utilizing GSI's technology platforms and complementary services.

GSI marketing services, which is primarily demand generation activities, grew 30%, and accounted for 23% of GSI revenue in Q1.

GSI's profitability is improving as we capitalize on the synergies we laid out at the time of the acquisition, resulting in a segment margin of 9.5%.

The GSI integration continues on plan.

We expect to begin a limited rollout of the v11 platform during the second quarter.

We are confident that the new platform will provide more flexibility to GSI merchants and give them greater control over their multichannel experiences.

We are nine months post the acquisition of GSI and continue to be excited about the opportunities ahead to help large retailers succeed in commerce both on and offline.

Turning to operating expenses.

In Q1 they were 44% of revenue, slightly higher on a year-over-year basis.

This was driven by increased investments in product and the customer experience, as well as acquisitions, offset by trust improvements and lower buyer protection expense.

From a capital allocation perspective we generated free cash flow of $289 million in Q1.

We have improved our financial flexibility by funding approximately 50% of the US BML loan receivables portfolio with offshore cash.

We closed one acquisition and we repurchased 7 million shares for $240 million.

And we announced an agreement to divest Rent.com because it had limited synergies with our core business.

We ended the quarter with cash, cash equivalents and non-equity investments of $7.8 billion, including approximately $1.1 billion in the US.

Now let me turn to guidance.

We feel great about the start of the year and we are increasing our full-year guidance by $100 million on the top line and $0.05 on the bottom line.

Let me provide you a little more context.

First, we are increasing our expectations for strong operating performance by approximately 2 points to reflect the strong results.

Second, we have reduced the negative impact of a stronger US dollar by 1 point to reflect a more stable currency environment versus our expectations back in January.

And, finally, we are increasing full-year non-GAAP tax rate to 19% to 20% to account for some one-time discrete items in the first quarter and expectations for stronger growth in North America for the full year.

For the full year 2012 we now expect revenues of $13.8 billion to $14.1 billion, representing growth of 18% to 21%.

And we now anticipate non-GAAP EPS of $2.30 to $2.35, representing growth of 13% to 16%.

For the second quarter we expect revenues of $3.25 billion to $3.35 billion, representing growth of 18% to 21%.

And we anticipate non-GAAP EPS of $0.53 to $0.55, representing growth of 10% to 15%.

In summary, we had a strong beginning to the year, and are excited about the opportunities that lie ahead.

PayPal continues its trajectory.

The core business is strong and we are driving innovations both on and offline.

The Marketplaces business is doing well; more users are coming to the site.

And we continue to invest in search, mobile, local and social to enhance the platform capabilities.

And GSI is performing well.

We are investing in our business for the long term and we are focused on delivering the next generation of global commerce and payments capabilities.

And now we would be happy to take your questions.

Operator.

(Operator Instructions).

Heath Terry, Goldman Sachs.

John, I was wondering if you could give us a little bit more color in terms of the rollout plan for point-of-sale beyond Home Depot?

What does the path to getting to those 20 additional retailers look like?

And what has the experience so far been with leveraging what you have learned at Home Depot in terms of making that rollout process easier this time around?

Sure, well, the first thing I will say is we continue to be very excited about the offline opportunity for PayPal.

It expands PayPal's served market from a $500 million market to a $10 trillion market.

And if we just capture 2% of the offline retail, it is another PayPal.

So we are treating this with the same kind of seriousness we did with the Merchant Services business five years ago, and, frankly, using a little bit of a similar playbook.

So as you know, our focus in 2011 was to build a set of products that could work in large, small or medium-sized offline retailers.

And 2012 is all about piloting, testing and learning.

This is not a scaling year, it is about piloting, testing and learning.

And so in the first quarter we got the product into Home Depot.

As you know, it works with the existing hardware point-of-sale -- and it worked.

We worked with Home Depot on scalability and reliability to the point where they were confident by the end of the quarter of rolling it out to all 2,000 stores nationwide.

And thus far we have done no marketing to consumers.

Frankly, the only people using it thus far are eBay and Home Depot employees, and others that have happened to have seen it.

We are now working with Home Depot to start a phase of marketing to consumers which will come in the May/June time frame.

And you will see then -- you will probably see some signage in the Home Depot stores.

They will be doing some mailing to their customers.

We will be doing mailings to ours.

And that is when we will really begin to focus on trying to get some consumer engagement around it.

And so a good part of the summer we will be working on that phase of things.

Now in the interim we have continued to have a pipeline.

Don Kingsborough and his team have been working hard signing up other retailers.

We have several under contract.

And during the second half of the year we will be bringing those live to site.

But, again, with very much of a test and learn mindset, really.

We are trying to get some retailers in different segments to learn.

So I feel very good about our progress.

And this year is a test and learn year and so that we will be ready in 2013 and 2014 to rollout across different industry categories and globally.

And then the last piece, which we didn't really talk about until we announced it was our offline product PayPal Here, focused on smaller offline retailers and merchants.

And that we are very excited about.

I think is a very innovative product.

It is again a product that we can go global with.

And our biggest problem there is we're not sure we can manufacture enough devices in the next 60 days to meet up with the demand.

But that is the kind of problem we want to have.

So all in all it is a test and learn year for offline, and we feel good about the progress.

Spencer Wang, Credit Suisse.

Thanks.

Good afternoon.

Two quick questions probably for Bob.

In payments it looks like the core take rate was up year-over-year, which I think is the second quarter in a row, and it is a bit of a deviation from the last few years.

So I know you called out foreign exchange fees as a driver of that.

Is there any other dynamic at work, and do you think that is sustainable?

And then, secondly, on Marketplaces margins it came in a little bit under 39%.

So I was wondering if you could just speak to your expectations for the full-year Marketplaces contribution margin?

Thank you.

Spencer, thanks.

First on the PayPal taker.

We have seen expansion during the course of the year, and on a year-over-year basis it is up roughly 24 bps.

And it is really driven by three factors, two that are sustainable and one that is a bit of a wildcard.

The sustainable components are first Bill Me Later growth.

As we continue to grow the Bill Me Later portfolio that we monetize in a different way, we expect our take rate to continue to go up in conjunction with Bill Me Later's component of the overall portfolio -- that will continue.

Secondly, as you know, we got a significant cross-border trade business in PayPal.

It is roughly 25% of our total volume.

And we have made some very modest changes into FX fees over the course of the last year to have a competitive offering, but tweaked up slightly.

And small little tweaks on that big cross-border business has a positive impact on our take rate.

Those two, Bill Me Later growth and buyer FX fees, will continue.

The third is just the gains on the hedges that we have in place -- the revenue hedges that we have in place that flow through the PayPal line.

That, obviously, is more dependent on how currencies go, and I wouldn't be counting on that one, it is a ongoing core piece of the business.

So some sustainable, some not, but good continued performance, primarily Bill Me Later growth.

Second question, Marketplaces operating margin.

As we said, four years ago 35% to 45%, and a year ago 38% to 42%.

We feel very good about that range.

And the natural dynamics for us are it usually comes down a little bit in Q1 and Q2 and Q3 as we invest ahead of the back-to-school and holiday season, and then goes up in Q4.

So I would say that this year will be no different than prior years.

And as we indicated back in January, we still feel good about our 38% to 42% operating margin next year as well.

Gil Luria, Wedbush Securities.

Thank you for taking my question.

I have a couple of quick ones.

The first one is some of your customers link PayPal to their checking accounts, and therefore when they process their transactions some of those get routed through the automatic clearing house.

Do you -- are you concerned that as you continue to grow at these rates, banks that operate the ACH and participate in it will try to impede your access to it by either increasing your prices or charging consumers for linking their PayPal accounts to their checking accounts?

Gil, good question.

And maybe I'm going to just elaborate a bit, because the frequency in which we get asked this question is higher, and the practical reality is we don't consider it that big a deal, but let me elaborate a little bit.

First, to your point, yes, ACH is one of the multiple funding sources in the PayPal wallet.

And relatively speaking it is a fairly low cost -- a low cost funding source, so it is an important part of our business.

Secondly, I think as you know, the Fed kind of sets the rates and charges financial institutions a fee to process those payments.

And we do not expect the Fed or the governor of the network to make any changes to rates.

If anything, we would expect the trend of going down to continue.

The third then is then the financial institutions pass on a rate to their clients.

And on that front this is a fairly competitive world and lots of the banks provide this service.

And for us, we go through a very competitive process leveraging our scale, EBay Inc.

as a whole and our scale within PayPal, to get very competitive rates in a very competitive environment on behalf of our merchants and our consumers.

So given that, we -- lastly, I should say, we have four more years left on our contract, and within that contract we are not -- we are well protected for any inflationary pressures that may come along the way that we don't think are going to happen.

So I think we feel pretty good about that as a funding source in the wallet, and that its cost will stay relatively low.

All that said, let me maybe put this into context a little bit.

Even though we don't expect any inflationary pressures, if our ACH costs went up 5X of where they are today, it is less than 1 point of operating margin on PayPal.

So we don't expect them to go up.

We are contractually locked down for four more years.

In our wildest imaginations if they go up 5X, it is less than 1 point of operating profit today, and much less than 1 point four years from now when our contract expires.

So, yes, it is a good question.

I apologize for the lengthy answer, but the frequency that we get asked, I think it is important enough for us to just elaborate on that one a little bit.

Ron Josey, ThinkEquity.

Great.

Thanks for taking the question guys.

So real quick on Marketplaces, John, I think you said that Marketplaces has turned the corner and now playing offense.

And I just want to understand a little bit more what gives you confidence there, what we can look for from Marketplaces going forward.

I know there was some discussion about launching in emerging markets.

But also if you could just focus on the domestic business a little bit more as well.

Thank you.

Sure, Ron.

Well, you know the nice thing about the first-quarter results are frankly that they are a accumulation of the hard work we have been doing over the last three or four years to improve the user experience, both the product experience, the trust, the quality of products on the site, the quality of sellers.

And so the data I look at is buyer retention, and buyer retention is up in the US and across the globe.

The second thing, as you know over the last several years people have been saying -- when are we going to start marketing to bring back inactive users or bring new users to the site?

And under Devin's leadership over the last really six months we have really ramped that up.

As you know, we did a brand campaign in the fourth quarter, and we are starting to start marketing.

And Devin and I were just sitting down.

He was showing me some data yesterday where our active buyer growth is up 9.5% in the core Marketplaces business.

So we're beginning to reach out to people that haven't used eBay in a while or who have never used eBay, and they're responding.

And they like what they see.

So I think that is adding to the growth and that is adding to our optimism.

And then, as you said, another focus Devin has brought is his focus on the BRIC markets.

And we were going through some data just some of the user growth, the buyer growth in some of the BRIC markets in India, in Brazil, in Russia, in Eastern Europe and in China.

And they are very significant user growth rates.

Now they are on a relatively small basis, and right now they're importing products, but as large numbers of new users come online in the BRIC markets and in the emerging markets, they won't have a local e-commerce market at first, and they're going to be looking to global e-commerce sites that specialize in cross-border trade.

That, of course, is what we do.

EBay does it; PayPal enables it.

And so, again, I think that we will see increased focus and we will increase focus on bringing buyers to the site, both in the US and around the globe, and then trying to deliver a great experience so that we retain those buyers.

And you add that together, and that is why we are optimistic.

I will also say we had a couple -- a nice series of product enhancements during the year.

You're going to see some really good stuff around the checkout experience on eBay.

We are finally going to -- given the fact that we own eBay and PayPal, we are going to improve the checkout experience on eBay.

You're going to see some search improvements.

You're going to see some fun areas in discovery and so things -- you know, more to come on the steady stream of product enhancements on eBay.

So all in all we are feeling good about that business.

Justin Post, Merrill Lynch.

A couple things.

I think on your commentary you mentioned parts getting better, and maybe fashion.

Do you see some real easy categories ahead for you to start to work on and catalog and improve?

And then maybe you could comment a little bit about the search engine improvements, what you think that could do for the marketplace.

And then, lastly, you did see some deceleration in GMV in Q4, and it looked like it really picked back up in Q1.

Was there anything abnormal in Q4 or do you think the whole e-commerce market may have improved in Q1?

Thank you.

Boy, Justin, you got three questions in there.

On vertical categories --.

So many we might not remember all of them.

Yes, exactly.

(laughter).

Parts and accessories, obviously we had strong vertical focus -- that business is growing.

Fashion, you have seen a more visual experience both on our Web experience and on mobile.

I think you're going to see even more on that.

Some of the stuff I am really personally excited about is some of the stuff that Steve Yankovich and our mobile team are doing around visual recognition and search, which is how you want to engage with a fashion experience.

And then consumer electronics is a category that lends itself to cataloging, as you said.

And as you saw, we have rolled out the product-based experience in consumer electronics.

The kinds of things that are on the to-do list going forward, it varies a little bit by market, but collectibles.

You will see us do some things in collectibles.

Sporting goods and baby goods are two sort of subcategories where we are working hard to bring the right inventory on and provide a good experience.

With respect to search, Mark Carges and his team have done a great job with some of the vertical shopping experiences and different search algorithms by vertical.

They are now building the underlying search platform, which will roll out during this year.

And the implication of that is -- that we call the Cassini internally -- is historically the search on eBay has been matching keyword match in the title, and that is really how we recall a search on eBay.

What Cassini will now do is we will search the entire listing for search terms and match the search query with that.

So we think that will improve the accuracy and comprehensiveness of search recall.

And, lastly on first quarter, Bob can probably comment on specific things.

The thing I will note is e-commerce is growing.

Mobile is having a big impact on the e-commerce market.

The e-commerce stats came out yesterday in the US and they were up a couple of points for the month of March -- and 17%.

And we are benefiting from that, and frankly, I think our mobile apps are helping to drive that.

Yes, I think you got it.

Good, how about that, all three.

All four of them.

Scott Devitt, Morgan Stanley.

A question on the sold items growth, which was also very strong.

And you called out UK, China, US and Korea.

You gave some description on the US.

I was just wondering if you can describe UK, China and Korea a little bit more.

And then, secondly, John, just to clarify on the top-rated seller data that you gave, is that US only or global?

Thanks.

Let me take the first one first.

On China and Korea, let me bundle those two.

First, as you may remember from a year ago, for different reasons but the same impact, growth from China and Korea was relatively slow.

In China because we took some actions to ensure the volume coming from our Greater Chinese sellers were providing great experiences for our consumers in our developed markets, growth slowed until they could adjust their business models to provide great experiences.

So in China we saw a real healthy growth on volume and sold items, because our sellers have really responded to the increased expectations of consumers.

That was one.

And I think, too, Korea, a little bit of the same.

Our competitive position in Korea is getting stronger.

We are investing more behind it, and our sold item growth is accelerating because our business is stronger and our comps were relatively easy.

I think on the US, John covered it.

On UK, this has been a very good, strong suit for us for a long period now.

It is the market -- Scott, as you know, we did our -- it was a launch from a lot of the innovations that we do.

They have been in that market the longest.

And for a good eight quarters now we have seen really strong growth in the UK, and Q1 sold items was no exception.

And on top-rated seller what I said earlier was US.

And again it just shows that this has been a continuous focus of ours to focus more and more of the marketplace on our top-rated sellers that provide the best service.

It is now half of GMV in the US.

Their businesses are growing, same-store sales up 22%.

They are offering more free shipping.

And interestingly we made the decision in Q1 to raise the bar to qualify as a top-rated seller even more, adding in return policies and certain shipping speed expectations and tracking expectations.

And so we will continue to use the benefit of the carrot to allow those sellers on eBay that provide retail-like fantastic consumer experiences to be the ones that will really succeed and grow.

And they're stepping up to it as eBay sellers do sort of inevitably.

It is fun to see.

And, Scott, if I could just connect the dots in terms of what the implications of that is downstream.

I mentioned some of the operating expense improvement was a result of lower buyer protection costs.

So in the ecosystem of great sellers providing great services, technologies serving them up more often, they become a bigger component of our overall growth.

The implications downstream are, all else equal, less calls to the contact center, and less us having to step in to provide satisfaction guaranteed because our sellers are providing that service themselves.

Mark Mahaney, Citigroup.

Thank you for taking my question.

This is Rohit Kulkarni.

I am filling in for Mark.

I just have one question about payments, Merchant Services growth.

We have seen sequential resell over the last couple of quarters and the ex-FX growth rates have come in below 30%.

You have called out a couple of unusual events, be it currency volatility or lower ASPs.

Will you comment on what you expect would be reasonable Merchant Services growth going forward, or do you think we are at a new normal rate of growth?

Thank you.

A great question.

First, maybe a little bit of context.

As we indicated early last year, expectations for PayPal over the three-year time frame is we would roughly double the size of the business.

And that would really come in three different components.

One, we continue to grow on eBay in the mid- to upper-single-digits.

Secondly, Bill Me Later would grow north of 40%.

And, third, to your question, Merchant Services would grow over that three-year time frame of 25% to 30%.

Those three components are what would drive the doubling of PayPal from essentially 2010 to 2013.

So we said 25% to 30% for Merchant Services.

Last year Merchant Services performed much higher than that.

It was up in the mid-30s, about 34%.

So we are off to a great start one year in.

And we increased the guidance in effect for the three-year journey at the beginning of this year.

This quarter, another good strong quarter of Merchant Services TPV of 28% growth, which keeps us well on track, maybe even a little bit ahead of our three-year plan.

So we feel very good about where we are.

In terms of maybe context around the deceleration that happened last year, I would say two things.

One, while changes in currencies, particularly for Europeans, impacts our cross-border trade, and that started to happen in Q3 and again in Q4, and that was a big component of the deceleration.

Currencies from Q4 to Q1 have been relatively stable, and therefore, our business, Merchant Services has remained relatively stable growth from Q4 to Q1, because there is no wildcards.

I think underneath the covers a little bit European growth is slower.

As the growth in Europe -- we had a great quarter as a Company.

EBay in Europe was very strong.

PayPal growth in Europe slowed.

And when we look at same-store sales for our merchants in Europe, we are contending with some slowness that we would say is really more economy-centric than the progress that our teams are making getting new merchants and more consumer share of wallet.

So 25% to 30% is what we said.

Five quarters into our 12-quarter journey we are in very good shape.

Some things working for us, some things working against, but we feel very good about the plans we laid out.

And then as John mentioned -- one last thing, in that three-year plan we didn't include anything in the offline world.

And our ambitions are to take what we did in the online world, take them into the offline world for small, medium and large merchants and dramatically increase the denominator of the served market to accelerate growth even more as we exit 2013 and into 2014 and beyond.

Gene Munster, Piper Jaffray.

In one of the earlier questions you talked about Home Depot and other merchants getting on board this year, kind of the test and learn phase, and then kind of in years out broader adoption.

And also in the past you have tempered some of the Street's optimism around NFC, not for commerce and so forth.

And the reality is it is going to happen.

It is a function of time.

I thought you said 2013/2014.

So my first question is, if you were going to guess when the inflection point is in NFC, is it 2014, 2015, 2013?

Is there any -- I realize it is just a guess, is there any guess from that perspective?

And my second question is, you said you are on the offense on -- in the Marketplaces and 2 million new users.

Was the majority of those -- did they come from the BRICs?

Thanks.

Gene, you know, on NFC, I think we are proven to have been right.

My flip answer is when is it going to be ready?

Never.

But the -- I think other technology solutions, things like PayPal Here, things like what we are doing at point-of-sale where you pay hands-free mobile number and PIN -- you don't even need your mobile number -- are ways to provide compelling consumer experiences that don't require the actual use of an NFC technology.

So I think location-based payments is something that you will see a lot of innovation around.

And just as we -- in PayPal Here you see us using the check-in feature and the location-based payment piece to be quite powerful -- the GPS devices and smartphones.

But again it is not dependent upon an NFC for the last inch.

So, I don't know, I think you'll see more -- and I think it is going to be a least a couple years before you see widespread adoption of NFC in large retailers all over the world.

There will be some examples of innovation, but I think the real innovation that we will be driving are in the actual consumer experience and the merchant experience.

Just I would say, on the user growth, the user growth is primarily from our developed markets.

And I think what we are seeing now off a relatively low base, we see very attractive growth rates in the emerging markets.

So that is an opportunity for us going forward, not necessarily moving the needle in the 2 million new users in the quarter.

Let me just come back saying one more thing on NFC.

And just again our approach is we will be tender type indifferent.

If a consumer wants to pay with a card, they will be able to pay with a card.

If the consumer wants the hand-free mobile number and PIN, they will be able to do mobile number and PIN.

If the consumer wants to use their mobile phone to pay, we will be -- we will work with all the major devices, all the major operating systems.

And whatever last inch technology, Bluetooth, NFC, or a new -- new ones that emerge, our goal is to give the consumer an easy payment experience.

And the technology is an enabler of that, not the product.

Ben Schachter, Macquarie.

John, you mentioned some of the growth coming from mobile.

I was wondering if you could just parse that out a bit more and talk about the differences in consumer behavior on tablets versus smartphones, and really how that is driving -- any stats you can share with us in terms of percentage of traffic, percentage of sales?

Thanks.

Well, what -- I will say a couple things.

The mobile is fundamentally changing the retail landscape, and there is no going back.

It is -- and it is stunning to see.

And I am thrilled we are at the front end of that in two ways.

One, having applications and products that allow you to actually close a transaction on a mobile device.

And so eBay mobile volume continues to be just on fire.

PayPal mobile payments volume continues to be on fire.

And so consumers are using their mobile devices to shop and to pay.

And our applications are compelling, and I think we will certainly beat some of the goals we set out for the year on those two fronts.

The other story though is consumers are using mobile devices as part of their shopping experience, even if they don't actually close the transaction on a mobile device.

And some of the innovations that we are driving and doing I think are quite interesting on that front.

I will highlight two.

One, -- or three really.

One is what we are doing around local commerce with RedLaser, Milo and PayPal, which we believe is providing an experience that will help drive foot traffic into large retailers.

And we are working with retailers like Toys"R"Us and Best Buy and others to make that a compelling experience.

The second example on the iPad is this notion of shop while you're watching TV.

I think Nielsen produced a report that says something like 80% of smartphone and iPad or tablet users use their devices while watching TV.

And so our mobile team came up with this application where while you're watching TV with the eBay iPad app, you enter whatever channel you're watching and the TV show that you're watching, eBay inventory associated with that TV show pops up.

And it is a very compelling experience.

And now we are doing some experimentation with some celebrity curation and other things.

So this whole notion of a dual device experience, having an iPad or a smartphone in your lap while you're watching TV, I think you'll see a lot of shopping innovation around that.

And, again, we hope to be enabling that.

The last thing I would say, Ben, is the -- I think some -- the innovation around mobile is actually just beginning.

It is some of the location-based capabilities that these mobile devices enable are going to have an impact on shopping and paying.

PayPal Here, that check-in feature, which allows a small retailer or small merchant to know you by name and by face when you come in.

I think the visual search capabilities and visual recognition will have an impact on our fashion experience and on shopping.

And so we are doubling down on our mobile investment and feel very good about the innovations that are happening.

And are finding a growing number of retailers and merchants are coming to us saying, can you help us in this mobile world?

So it is fun and it is not going away.

Last question, Operator.

Colin Sebastian, Robert W.

Baird.

Two quick ones for me here.

Number one, on the Marketplaces side, John, I guess I'm curious how much of the improvement there do you attribute to the specific changes you have outlined that you're making to the Marketplaces versus perhaps just a natural equilibrium point setting in for eBay, which would suggest growth in line with e-commerce regardless of the conscious changes you're making?

And, then, secondly on PayPal, just looking at the growth in accounts and the spread there versus the growth in the number of payments, we see users are paying with PayPal more frequently.

So I wonder if that is -- that higher engagement is coming from the incremental growth on mobile or perhaps more or broader acceptance of PayPal on e-commerce sites or something else if you could talk about that?

Thank you.

Well, Colin, it would be very hard for me to sit here and say that everything we have done in the last four years doesn't really matter in the Marketplaces business.

I think two things.

I think the answer to both your questions is both.

I think the changes we have made were essential.

I think the Marketplaces would not have turned around.

It wouldn't be where it is today without the changes we have driven.

It is a more trusted, better experience.

And I believe we are at a new equilibrium.

And now Devin and his team are trying to build off of that new equilibrium.

Our aspiration is now going to be above e-commerce.

And over time that is what we will be driving towards.

So I feel that the Marketplaces is in a strong and sustainable place today that we will build off of.

And then, PayPal, I think mobile is enhancing the engagement and the ubiquity of PayPal.

And when you look at ubiquity on the Web we continue to sign additional merchants around the world up, or they are putting PayPal on their online site.

PayPal on a mobile device is proven to have higher conversion, and so more and more people are putting PayPal checkout on their mobile applications.

And then moving into the offline world is that third leg of ubiquity, both with large merchants and small merchants, with our point-of-sale product and PayPal Here.

And our strategy is quite clearly if PayPal is everywhere that is going to increase the likelihood that consumers engage with it, which is good for the business, both online and off.

So I guess the answer to your question is yes on both fronts.

All right, everyone, thank you very much, and we will talk to you in three months.

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

This does conclude the program, and you may now disconnect.