eBay Inc (EBAY) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the eBay second-quarter 2014 earnings call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Tom Hudson, Vice President of Investor Relations.

Please go ahead.

Good afternoon.

Thank you for joining us and welcome to eBay's earnings release conference call for the second quarter of 2014.

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

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

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

And all segments' results are adjusted for the effects of foreign currency exchange.

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.

You can visit our Investor Relations website for the latest Company news and updates.

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

Before we begin, I'd like to remind you that during the course of the 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 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 third quarter and full year 2014, the future growth in payments, marketplaces and eBay enterprise businesses, the Company plans regarding its share repurchase programs and the impact of the cyber attack on the Company's results of operations.

Our actual results may differ materially from those discussed in the call for a variety of reasons.

You can find more information about the risks, uncertainties and other factors that could affect our operating results in our most recent annual report on our form 10-K and our subsequent quarterly reports on our form 10-Q, available at the investor.ebayinc.com site.

You should not rely on any forward-looking statements.

All information in this presentation is as of today's date, July 16, 2014.

And we do not intend and undertake no duty to update this information.

With that, let me turn it over to John.

Thanks, Tom, and good afternoon, everyone.

Welcome to our Q2 earnings call.

We enabled $62 billion of commerce volume in the second quarter, up 26%.

Mobile and cross-border trade continued to be major contributors to enabled commerce volume.

Mobile attracted 6.6 million new buyers in Q2 and cross-border trade was up 26%.

Overall, revenue was up 13% in Q2 and non-GAAP EPS was up 9%.

EBay and PayPal both generated double-digit customer growth, with PayPal surpassing more than 150 million active registered accounts.

Our Company faced two extraordinary events in the first half, the proxy fight in Q1 and the reset of eBay user passwords in Q2.

In the face of these challenges, we have remained focused on execution and we've maintained our strong commitment to creating sustainable value for all shareholders.

As I've said before, the proxy fight in Q1 gave us the chance to engage with our largest shareholders and hear what's most important to them.

They told us three things: First, they see significant value creation in our plans and want us to execute.

Second, they want us to aggressively pursue our announced $5 billion share buyback.

And third, they believe that synergies make eBay and PayPal better together for now, but they want us to continue to be open-minded to alternatives.

We agree with all three points.

We are blessed with two great businesses and will continue to aggressively drive growth for PayPal and eBay, investing to enable each business to fully capitalize on the respective growth opportunities and we'll continue to capitalize on our synergies.

In addition, we and our Board will remain objective and open-minded in assessing alternatives which we continue to do.

We will make decisions that maximize long-term shareholder value and we will do what's best for PayPal and eBay to enhance their growth and competitive positions.

Now with that let me give you a little detail about the second quarter.

PayPal had a great quarter.

Merchant services TPV grew 33% in Q2, accelerating for the fifth consecutive quarter.

Revenue was up 20% on an FX-neutral basis.

And in spite of David Marcus' unexpected departure in the quarter, the team did not miss a beat.

They stayed focused, are executing well and PayPal's momentum is accelerating.

Increased consumer adoption and expanded merchant coverage helped drive strong results.

Braintree had a strong quarter, gaining new merchants and accelerating growth.

And Braintree just launched a new set of software tools that allowed developers to integrate both Braintree and PayPal in a single integration into apps in less than 10 minutes.

At eBay Marketplaces, global GMV grew 8% and revenue was up 6%.

Top-rated sellers in the US, UK, and Germany grew their same-store sales 14%.

And our global fixed-price volume was up 19%.

Now, the cyber attack clearly impacted eBay's performance in Q2.

Bob will speak to this in more detail in his remarks, but I want to provide a little context.

For the first half of the quarter, eBay was performing in line with our expectations.

Then in early May we discovered unauthorized access to our corporate network.

We subsequently found that an eBay database had been compromised.

This database contained non-financial information on eBay users, including encrypted passwords.

Now I'll reiterate that no financial information was compromised in this incident.

We have no evidence that the compromised encrypted passwords were breached in any way.

But our focus was to do what's right for our customers and to ensure a safe and trusted marketplace.

So realizing the potential short-term impact to our business, we made the right decision to ask all eBay users to reset their passwords.

Our focus is now on recovery.

Buyers representing approximately 85% of affected volume have reset their passwords.

But some of these buyers have not yet returned to their previous activity levels.

So we're stepping up targeted marketing efforts in the second half to fully reengage these and other users who have not yet reset their password.

I'm proud of the way the eBay team, which is dealing with these challenges, is working to get the business back on track.

At eBay Enterprise, gross merchandise sales were up 15% and revenue was up 3%.

We're thrilled to have Craig Hayman join the Company from IBM as the new Head of eBay Enterprise.

Craig brings the perfect blend of experience to lead this business going forward.

Before closing, let me take a moment to highlight our continued progress in the four competitive battlegrounds: mobile, local, global, and data.

In mobile, our total mobile volume grew 68% in Q2 and we've hit 260 million downloads of our apps.

Mobile continues to dramatically influence consumer behavior.

For instance, 59% of eBay buyers shopped across multiple screens in Q2.

And PayPal mobile continues to accelerate its momentum with PayPal's mobile volume off of eBay now surpassing its mobile volume on eBay.

We intend to continue to be a leader in the mobile commerce and mobile payment space.

In local, eBay announced plans with Argos in the UK to expand Click and Collect to approximately 650 stores.

The expansion puts this convenient shopping experience within 10 miles of most of the UK population.

By year-end we expect 65,000 eBay sellers to offer items that can be purchased online and picked up at an Argos store.

On the global front, cross-border trade continues to be a competitive strength.

PayPal is accelerating this volume.

In fact 79% of international shoppers identify PayPal as their preferred payment method when making cross-border purchases.

To enhance the consumer experience, PayPal is testing free returns on cross-border purchases in four European markets.

And PayPal's passport program was launched in Q2 to help merchants grow their cross-border businesses.

And last but not least, data.

We continue to leverage the power of our closed-loop transaction data to help merchants grow and deliver better experiences for our customers.

For example, PayPal is now leveraging eBay Inc-wide data to extend credit to small merchants to help them grow.

This program is now loaning $1 million a day to our small business merchants, giving them access to much-needed capital.

In summary, we faced unexpected challenges in the first half, but our teams remained focused on execution and doing what's best for our customers.

And strong execution will continue to be our focus in the second half.

Meanwhile, we'll continue to invest for the long term, strengthening our core commerce platforms, and positioning our Company to win in the key competitive battlegrounds.

And we will stay focused on delivering sustainable shareholder value.

Now, I'll turn it over to Bob, who will provide more details on the quarter, and then we'll take your questions.

Thanks, John.

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

As a strategic partner of choice for merchants of all sizes, the role we play in global commerce continues to grow.

eBay's commerce ecosystem continued to gain share and enabled $62 billion of volume, up 26%, at a take rate of 7.1% for the quarter.

Our take rate declined 80 bps, driven primarily by business mix, as our fastest growing business, PayPal, has a lower take rate.

Mobile ECV increased 68% to $12.3 billion, representing 20% of volume.

Cross-border trade grew 26%, representing $13.4 billion or 22% of volume.

Revenue increased 13% and non-GAAP EPS was $0.69, up 9%.

We generated $1.2 billion of free cash flow.

We executed $1.7 billion of our stock buyback program and had $2.2 billion left in our authorization for further repurchases.

In Q2, we generated net revenues of $4.4 billion, up 13%.

Organic revenue growth was 10% in the quarter.

Currency contributed a little more than 1.5 points of growth, while the Braintree acquisition added about 0.5 point.

Second quarter non-GAAP EPS was $0.69, up 9%, which was driven by solid top-line growth, good productivity, the stock buyback and the weaker dollar, which were partially offset by a lower take rate.

Non-GAAP operating margin was 24.4%, down 190 basis points.

The decline in operating margin was driven by expenses related to the cyber attack and increased investment to increase the vibrancy of the site, partially offset by an expanding PayPal transaction margin and good operating expense leverage across the Company.

Operating expenses were 45% of revenue, up 110 basis points, due predominantly to increased investment in marketing.

We generated free cash flow of $1.2 billion in the quarter.

CapEx was 6% of revenue, lower than full-year expectations due to investment timing.

We continue to expect full year CapEx to be 7% to 9% of revenue.

We ended the quarter with cash, cash equivalents and non-equity investments of $12.4 billion, including approximately $2.6 billion in the US.

We improved our financial flexibility, funding 70% of the PayPal credit principal loan portfolio with offshore cash.

In the quarter, we opportunistically repurchased 32.4 million shares of our common stock for approximately $1.7 billion.

We utilized $1.2 billion of commercial paper to fund the buyback.

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

PayPal had a great quarter.

Revenue reached $1.9 billion, up 20% on an FX-neutral basis.

Revenue growth was mainly driven by accelerating Merchant Services growth, which included strong growth from PayPal credit.

A few quick highlights on PayPal operating metrics.

Total active accounts growth was 15%.

TPV on an FX-neutral basis grew 26%, driven primarily by continued expansion of PayPal and merchant sites around the world, and a 260 basis point increase in PayPal penetration on eBay.

Merchant Services FX-neutral TPV accelerated 1 point to 33% in the quarter.

Transaction margin increased 70 bps, resulting from an increase in our annual GE share gain, lower transaction expense and loss rates, partially offset by a lower take rate from large merchant mix, losses on our foreign currency hedges and lower cross-currency transaction growth.

PayPal segment margin came in at 24.5% for the quarter, up 150 basis points.

The increase was due primarily to a 70 bps increase in transaction margin and good operating leverage, while we continue to invest in the business.

Let me touch on a few quick highlights for our credit business.

Credit is still in its early stage of growth.

It allows PayPal and eBay merchants to increase their volume growth by providing financing choice to consumers.

In addition, it improves the Company's ability to manage its transaction expense.

Bill Me Later TPV growth accelerated 5 points in the quarter, driven by increased usage of eBay Inc data for credit approvals, as well as adding Bill Me Later on PayPal's recurring subscription products.

BML as a funding source represented a 4.9% share of US addressable GMV, and 2.5% share of Merchant Services US TPV.

Additionally, PayPal signed an agreement with GE Capital to extend our relationship, where we offer a dual-branded retail credit card.

We also committed to purchase the associated loan portfolio in 2016 for an estimated $1 billion based on the size of the portfolio at that time.

This increase is PayPal's flexibility to expand its credit offerings to consumers and merchants while improving its ability to manage transaction expense and reinvest back into the business to accelerate payment volume.

Now let's turn to the Marketplaces business.

Marketplaces delivered $2.2 billion in revenue which grew 6%.

GMV grew 8% and operating margin declined 340 basis points.

It was a challenging quarter.

As John indicated, we got off to a good start, but we hit significant obstacles late May.

The combination of the cyber attack and the Google SEO changes had an immediate and dramatic impact on GMV growth.

June GMV growth was 7%, driven by slower active buyer growth and lower conversion.

In light of these events we have made significant investments to get eBay users re-engaged, including couponing, seller incentives and increased marketing spend.

We've begun to see some recovery in the first part of July and we're confident we'll get these challenges behind us.

But it will take a bit longer and we'll invest more as we work to get back to double-digit growth.

Now let's turn to eBay Enterprise.

EBay enterprise generated $940 million in gross merchandise sales for its clients.

GMS grew 15%, driven by the addition of new logos and same-store sales growth of 14%.

Revenue was $267 million, up 3%, driven by increased volume growth.

Marketing Services revenue growth continues to be impacted by re-platforming and branding efforts to consolidate nine companies into one.

Segment margin came in at 1.1%, flat year over year.

Now let me turn to guidance.

We've had a challenging start to the year.

As we enter the second half, our PayPal business has good momentum.

Our eBay Enterprise business has stabilized, but our Marketplaces business has to dig out of a hole.

While we are confident we will work through the global password reset and the SEO changes, it will take longer and cost more.

As a result, we are lowering our high-end full-year revenue guidance by $200 million from $18.5 to $18.3 billion.

We are now at $18 to $18.3 billion, representing growth of 12% to 14%.

We are maintaining our full-year non-GAAP EPS guidance of $2.95 to $3 per share, representing growth of 9% to 11%.

We expect that PayPal's strong operating leverage and a lower share count will offset the impact of the slower revenue growth.

For the third quarter of 2014 we expect revenue of $4.3 billion to $4.4 billion, representing growth of 10% to 13%.

We anticipate non-GAAP EPS of $0.65 to $0.67, representing growth of 2% to 5%.

In summary, we had a challenging first half of the year with several distractions.

However, through the first six months of the year, we enabled $120 billion of volume, 13% revenue growth and we met our EPS commitments.

We delivered $2.2 billion of free cash flow and bought back $3.5 billion of stock.

This is a testament to the power of the portfolio and the resiliency of our team.

And now we would be happy to answer your questions.

Operator?

Thank you.

(Operator Instructions)

Our first question comes from the line of Douglas Anmuth with JPMorgan.

Great.

Thanks for taking the question.

I just wanted to ask about Marketplaces.

I understand that you're talking about how it'll take longer and cost more to dig out.

I know that's mission number one right now.

But what are you most excited about in the Marketplaces business in terms of the initiatives?

If we think about some of the things we've heard about recently in terms of data and personalized seed and search and driving more merchant selection, what do you think are the hooks that can get you back up into the overall e-commerce growth rates on an overall basis?

As part of that, are there any initiatives that can offset the decline that you're seeing in the options business?

Because obviously fixed price is certainly above perhaps industry growth rates.

Thanks.

Yes, Doug.

Well I think I'd just go to the competitive battlegrounds, where this was really driving a lot of our investment in the Marketplaces business.

So mobile continues to be an important area of focus.

We are continuing to update and iterate on our smartphone mobile apps, our tablet mobile apps.

What's interesting is, I mentioned almost 60% of consumers are now using multiple screens and shopping experiences.

So we're bringing the mobile experiences together so that you can have a core and seamless experience.

Global, we're continuing to expand globally.

Our cross-border business continues to be quite strong.

We launched Portuguese and Spanish languages to our global buying hub during the second quarter, which now allows sellers in those markets to list.

And buyers in markets with those languages to buy.

We believe that will fuel greater cross-border trade, which it already is seeing some good signs on that.

Data, as you mentioned, is a key area of focus.

There's three or four areas where we're leveraging our data more effectively than we ever have been.

One is on our specialization.

As you mentioned, the feed, the ability to offer personalized offers and a personalized set of recommendations, as well as the engagement features you're seeing at the top of the funnel.

So whether that's collections or curation or other things that engage consumers based on our collective data as well as individual data.

And then we never take our eyes off the fundamentals in the Marketplaces business, because improvements in search still really move the needle.

Improvements in trust still move the needle.

Our selection has never been higher.

We've not 80 retailers on eBay and we're adding additional brands and designers and others to bring the best and widest selection.

So yes, we got a couple of body blows in Q2 with having to reset the passwords and the SEO change, but we're continuing to invest in this business.

We think it's going to be one of the winners in e-commerce and we'll have strong double-digit growth.

That's our goal.

We're focused on it.

We still believe that's achievable.

And just as a follow-up there --

Doug, just the fixed-price growth that you highlighted.

John talked about strong double-digit growth.

Again, we saw continued strong growth in fixed-price.

And our challenge as you know, is always to give consumers choice on what is most relevant for them for the particular occasion.

What we continue to see is the mainstream consumer shopping online looks for convenience as a key variable, and we need to give them that opportunity.

At the same time, things like the feed and broad-based selection and the alternative format of auction continues to be an important format.

But consumers keep choosing fixed-price as the key shopping format for them.

And any more color that you can shed on the international decel in particular?

Is there disparity between the way the international markets have come back in June around the cyber attack and the SEO changes?

Yes, so a couple things very consistent and then a slight deviation by geography.

The consistency was quick, swift and immediate impact when we were not letting people in the door until they reset their password.

And/or we weren't getting the new buyer traffic from SEO.

That impacted us immediately in the latter part of May.

Then we gradually started to stabilize and grow out of it in June.

Then as I indicated, continued into July.

Those common threads were around the globe with two exceptions.

One, our Asia business was not impacted as much.

Obviously Korea is on a different platform, so they were not affected as much.

And then, I think, in Europe while we were immediately impacted and things had gotten better, the recovery has been a little bit slower than it has been here in the US.

Those are two geographic differences I'd highlight, Doug.

Okay, great.

Thanks, guys.

Our next question comes from the line of Heath Terry with Goldman Sachs.

Great, thanks.

John, with regard to the widening gap in enabled e-commerce growth, which despite all the issues you talked about, actually stayed pretty steady this quarter, and revenue growth, would you rank order the contributors to that gap?

And provide some clarity on which ones you feel like are one-off, like the step-up changes?

Versus ongoing, like the makeshift that we have between payments?

And then, Bob, if you could, could you give us any sense as to whether or not there's a change in the way that you're thinking about the cash that you took the non-cash tax charge on in 1Q?

And your cash balance debt ratios in general?

Sure, Heath, as you said our growth, the growth our platforms are enabling, I don't think has ever been stronger.

So the core essence of capitalizing on this convergence of online and offline, or convergence, I should say, of online mobile and offline, I don't think has ever been stronger.

You see that in the 26% growth.

The biggest contributors to obviously the blended take rate across the portfolio is coming down.

And PayPal, if you pick that apart, PayPal, which is our lowest take rate business, is growing the fastest.

And then within PayPal, large merchants, which have the lowest take rate, are growing the fastest.

Braintree is actually6 growing evan faster than them.

That's probably the lowest take rate.

That's growing even faster.

So the net effect inside of PayPal is, what I would characterize as a declining healthy take rate, a take rate that's reflective of strong growth in the segments that we want.

And then in the Marketplace businesses, we've got a couple of effects here going on that's impacting monetization.

One, you referenced StubHub, where to be clear, we have a leadership position.

Someone, a couple competitors, have lowered price a little bit.

And so we're going to fight and compete to maintain our leadership position.

We've done that in Q1.

And we see the value of that in Q2, of holding or gaining share.

That hurts our revenue in the short term.

That hurts our margin in the short term.

But we believe it protects the long-term franchise of what's a great business.

Advertising, one of the implications of this mix shift to more mobile is we've made a decision on mobile to have no or very low ads to date.

We think that's been essential to our frictionless mobile experience.

It's helped drive our mobile volumes, but has lower overall monetization.

We'll begin to -- on mobile now, there's some, I'd say, tasteful ways to begin to add some ads into a mobile experience that doesn't detract.

We'll be experimenting with those in Q3 and Q4.

I'd say those are the major efforts, or the major things impacting take rate, so revenue growth versus volume.

I think in terms of that, John hit the priorities, Heath, at 26% growth or enabled commerce volume driven by 33% growth in Merchant Services TPV.

So our success on Merchant Services growth is the biggest contributor to an overall lower take rate.

And then secondly, John, you said our success in larger retailers and brands within Merchant Services has lead to a lower take rate.

So those two are the fundamental biggest drivers.

On your second question, non-cash charge, how are we thinking about cash.

We took a non-cash charge in the first quarter, as you know.

Because in light of a series of events and circumstances in the quarter, we no longer felt like we could support our historical election that our offshore earnings would be permanently reinvested.

So in light of that and the series of events in the quarter, we took a non-cash charge.

We have more flexibility to use the offshore cash domestically when we need it.

However, two things to be clear.

What we said at the time, this is not an indication that we're contemplating a large US acquisition.

That was true then and it's true now.

But we are continuing to execute on our $5 billion share repurchase program.

We did another $1.7 billion in the second quarter.

We've now bought back $3.5 billion of stock in the first half of the year.

We've used our US cash and commercial paper, or access to commercial paper, in the second quarter to finance that $3.5 billion.

Where we sit today, we obviously will continue to be an acquisitive Company here domestically, but we're not anticipating anything of size.

And we'll continue to opportunistically buy back stock and complete our remaining authorization.

But the good news is right now we still have $2.6 billion in US cash and significant access to commercial paper markets and we have significant debt capacity left.

So as we evaluate decisions in front of us, we'll always look at the most efficient and effective use of cash available to us.

We have lots of levers, lots of availability.

Great.

Thanks, Bob.

Thanks, John.

Our next question comes from the line of Colin Sebastian with Robert Baird and Company.

Great, thanks.

I have a couple questions.

First is a follow-up on the May issues.

I wonder if the implied Q4 guidance assumes a recovery back to normalized marketplace volumes and margins?

And then secondly, from a bigger-picture perspective, want to ask about the in-store initiatives for both marketplaces and payments, which obviously was a fairly important initiative in the past, and may still be.

But I'm wondering if some of the investments here, particularly on the payments side, are moving to the back burner as you see some better traction in cross-border trade and other areas.

Thanks.

John, maybe I'll handle first one and you can handle the second.

Colin, the short answer is yes.

In our implied guidance there is an acceleration from Q3 to Q4.

Stepping back from that, in effect what it suggests though, is a first-half growth rate roughly equal to a second-half growth rate.

But you have a bit of a divot in the second quarter, as we talked about.

And we anticipate, as we invest for the recovery, there will also be a bit of a divot in the third quarter.

As we exit third quarter into fourth quarter, the acceleration is really going to be driven by a few things.

One, continued and increased seasonality of our business as PayPal Merchant Services grow as a Company, we get more exposure to larger retailers and brands.

There is a increased seasonality component of our business that will benefit from Q3 to Q4.

Second, as John indicated, Braintree, we expect to continue to grow into the second half of the year.

And how we monetize Braintree will continue to expand going into the second half of the year, including from Q3 to Q4.

Third, we expect continued PayPal momentum in the second half of the year.

And then fourth, we're looking at a modest acceleration of marketplace from Q3 to Q4.

But at this stage, we're really focused on addressing these short-term issues in front of us.

And our guidance implies it will be a marginal acceleration from marketplace, but not dramatic Q3 to Q4.

And then, Colin, on your second question around in-store, you hit the nail on the head in the following sense.

That the way we look at this is we've got online or e-commerce, where we're the leader and that's a roughly $1 trillion market.

We used to think of offline as everything else and now we break that into two categories.

Mobile-enabled commerce, which is roughly half of what we used to call offline, that's roughly $4 trillion takes us from $1 trillion to $5 trillion.

And then the stuff going on in the physical stores.

As we've learned along the last couple years, what's very clear to us is that consumers are using their mobile devices more than ever before.

That's become our top priority, the mobile-enabled commerce.

That has real traction.

You see us shifting our investment toward that by something like the acquisition of Braintree.

Or which PayPal in-store experiences we're prioritizing, they are ones that tend to be on the mobile-enabled experiences, like OrderAhead or Order From Table.

By buying Braintree we're central to the major apps in the sharing economy like Uber or like Airbnb.

And then, the last piece of this stuff that is actually happening at the point of sale in the physical stores.

And change is frankly happening more slowly there.

Ultimately it will, but we're using more of a test and learn approach there, where we're working with a couple of retailers to try to get their in-store experience in a form or format that consumers can relate to and the retailers and their employees and the whole experience can come together.

An example, let's say, in the marketplace where we are seeing a lot of traction in the UK around Click and Collect, or buy online, pick up in store.

So you see us doubling down on that.

As where the same-day delivery like eBay Now, we see good consumer demand for that, but it doesn't have quite the same electric traction that Click and Collect does.

So we're continuing to move in the general space.

We think there's a lot of opportunity, but we just shift our investment toward the things that have traction.

And we're keeping a more test and learn steady pace on the ones that don't.

The only other thing I would add to that is what we see where testing and learning is important to us, is more when it's technology-enabled data, information is the key variable.

And where we can use other people's assets, whether it's excess capacity and somebody else's currier network and/or excess capacity and somebody else's warehouse source or small store.

For us these test and learn on the edges is around technology and data and leveraging other people's assets and capacity.

That's where we think that we're going to test and learn more and have a real differentiated proposition.

Okay, thanks very much, guys.

Thank you.

Our next question comes from the line of Mark May with Citi.

Thank you.

Some further questions on marketplace, if I could.

Essentially the deceleration in marketplace revenues was more notable in the international segment versus the domestic segment.

Did the password security and Google issues have a greater impact outside the US?

And then secondly, with I think you said 7% GMV growth in June, what kind of GMV growth assumptions are you making in your Q3 guidance?

And the new calendar 2014 or implied Q4 guide?

And then one quick last one.

Given the early results of the PayPal brand marketing campaign, which I believe began in the April-May time frame, should we assume that you'll be accelerating or decelerating the pace of spend there in the second half of the year?

Oh, man, Mark.

(laughter) Let me try.

I think first, from a volume perspective, on GMV in the marketplace.

Again, immediate impact around the globe with the exception of Asia, in particular, Korea.

Begin a recovery in June, a bit of a stability and some momentum coming into the month of July.

As I indicated, those were fairly consistent.

The recovery in Europe, a little bit slower than in the US.

And therefore, the Q-on-Q growth rates for volume were down.

Can I just add on to that, before you get to the second piece, Bob?

Part of what drove that market is the media in Europe is definitely more privacy-sensitive.

And the EU, there was all sorts of talk from legislators and regulators, so the whole thing got a lot more media, particularly in Germany and into the UK to a lesser extent.

So I think that got the recovery going more slowly.

I think there's no doubt about that.

But now, I think that the trend is good, but it's definitely running behind and partly driven by just the environment of Europe around these cyber attacks.

That makes sense.

And then what's implied as the guidance--

And, Mark, that's a bit on the volume side.

I think on revenue, or transaction revenue, just a bit differently in terms of volume to revenue walk international versus the US.

What's different there is we have a great business here called StubHub in the US.

And as we talked last quarter the take rate on StubHub from some pricing changes that we made, are lower.

And therefore, that is a gap between volume and revenue in the US.

The second thing is we've got a wonderful Daily Deals business, where it's bigger here in the US.

We continue to get great traction.

That Daily Deals format is a slightly lower monetization.

So those two dynamics, from a volume to revenue standpoint, are a bit different here in the US.

It has that gap a little bit wider.

I think the second question was, may have already answered it, but US GMV.

GMV in particular, we said was stable in the first part of the quarter.

It dropped to 7% in the month of June.

We've seen some recovery into July.

And as usual, all those impacts and trends are the kind of things that we incorporate into our guidance to give you the best snapshot that we have.

Brand campaign, maybe I'll just comment.

As you mentioned, Mark, where PayPal is running its first ever global brand campaign, powering the people economy.

Its been going in four markets thus far.

Very hard to read early on, but the early qualitative data we've gotten back is strong.

We'll continue that in the second half.

It's one of the things we talked about, one of the areas we're investing in PayPal this year is really for the first time ever beginning to do some marketing.

Thanks.

Our next question comes from the line of Justin Post with Merrill Lynch.

Thank you.

We saw the Merchant Services growth accelerating.

Can you tell us about some client wins?

Or initiatives there to help that accelerate?

And do you think that's a sign that maybe the overall broader markets may be getting a little better off a soft 1Q?

Thank you.

Would tag team John.

First, Justin, I think what you've seen for the last five or so quarters, I think, whether 26 to 29 or 30, to 31, to 32, to 33, that is indicative of really what we've said are three things.

More ubiquity, so PayPal being accepted increasingly on merchant sites.

And I wouldn't necessarily point to a particular name brand or retailer.

I would just say that we continue to march to have PayPal offered on all merchant sites, large, medium and small domestically and around the globe.

That's the core play book on the merchant side of the equation.

On the other side of the equation is just increasingly give consumers the chance or the opportunity to select PayPal when we're offered.

And getting better and more consistent cleaner placement.

So those two dynamics are the core fundamentals of merchant ubiquity, consumer use.

The other one, I won't belabor it, but John talked about Braintree.

And expanding our network into the shared economy where mobile is really the key leadership vector.

That's one that's been an important source of growth to us and a real important leadership position as well.

One of the interesting things, and it goes back to one of the earlier questions, that as this omni-channel world has played its way out thus far, what's tended to happen is less that people are buying in a different way when the physicals stores, more that they are actually buying more on the web or on their mobile phones.

Even if it's on a retailer's website.

So that's bull-way into PayPal's core products.

It's our core products that are in the right place at the right time.

And in particular mobile payments continues to be really strong.

And the fact that PayPal, when you pay on a mobile phone, you don't have to enter in your credit card information.

It's one click payments.

It's safe so your financial information never flows through the cellular network or into your phone.

I think consumers are really responding by high conversion rates on mobile.

PayPal web, PayPal mobile is driving that strong performance.

We'll continue to, I think we see good momentum and we expect that to continue.

Thank you.

Feature functionality like credit growth, expanding our served market geographically.

We announced 10, well they aren't obviously needle movers in the quarter, but 10 new markets in PayPal during the course of the quarter.

And then P2P payments, part of Braintree have been and PayPal's P2P payments on mobile devices are feature functionality that drive adoption in the ecosystem.

Great, thank you.

Our next question comes from the line of Brian Pitz with Jefferies.

Great, thanks for the questions.

Can you give us more color on your new partnership with Sotheby's and how you believe it may impact your auctions business?

And separately, any update on PayPal Beacon, what has been the level of interest from merchants thus far?

Thanks.

Brian, we announced earlier this week our partnership with Sotheby's, which we're very excited about.

Because in many ways it's a great example of two parties bringing their core capabilities together to create, I think, even better experiences for both buyers and sellers.

Obviously Sotheby's is one of the, if not the best in the world, at in-person auctions.

They have a seller base, if you will, what we would call sellers, but a provider base that provides outstanding inventory, unique inventory.

And inventory that often begs for a global market.

What we can bring obviously is a strong technology platform that can help enable that Sotheby's inventory to get access to global buyers in a safe and effective and convenient way.

So we're excited about it and we think it's a nice way to blend our core competencies.

Bob talked about technology and data with someone else's assets, in this case their inventory.

And then second question was what?

Oh, Beacon.

Beacon is right in that test and learn bucket I talked about earlier.

Which is how do we find a couple of examples of small places where we're putting Beacon in, where we're working with the merchant and with consumers to see if we can provide a great experience that consumers like, and the merchant's able to follow through on.

There's been a lot of interest in it, but it's still in the test and learn stage.

I think what's happening in the physical store point of sale world is there's a lot of interest in these things, but executing them and pulling them off is a lot of hard work.

We recognize that.

I think retailers recognize that.

So we're working in a few targeted areas to work it out, iterate, learn, iterate, learn.

And I have no doubt over the next several years we're going to find product market solutions here that will be quite scalable.

Great, thanks.

Thanks, Brian.

Our next question comes from the line of Eric Sheridan with UBS.

Thanks for taking the questions.

John, on the PayPal search, wondering if we can get an update on what you might be looking for, for a new head of PayPal?

Any sense you can give us around timing of naming someone to that post?

And are you thinking about going after that search?

And then second, maybe more for Bob.

As you dialed up the marketing on the marketplace aside to get a normalized state for the marketplaces business, is there anything you're learning from an ROI basis about deploying more capital to promote growth that you might want to continue as marketplaces gets back to a more normalized rate?

Which could actually lead to marketplaces growing faster, but maybe at a slightly lower margin going forward as we exit 2014 and go into 2015?

Thanks.

Well, Eric, on the PayPal search, I'm using almost virtually the same approach I did last time, in that in the first month all of the focus is on execution, not on the search.

And I must say that PayPal leadership team is stepping up in a wonderful way.

Very similar to what they did two and a half, three years ago.

Execution, I think, has gotten even better.

So the good news is that's a strong team that's got a great diversity of skills on it.

And it's a team that I have a lot of confidence in.

And then with respect to the search over the next couple of months, I will work with them and others to identify what are the characteristics that we think should be embodied in the next leader of PayPal.

I'll make a selection and we'll let you know when I do that.

The one thing I'll say is that you need a portfolio of skills to run a highly innovative business at scale.

And the good news is regardless of who we pick as the President, that team has a strong portfolio of skills within it.

I think it gives us a nice degree of freedom.

And leaping tall buildings and single bounds, I think, was one of the criteria.

(laughter) Eric, on your second question, marketing ROI to drive growth, just a generic and then a couple specifics.

I think generically last year, and coming into this year, one of our learnings on the analytical ROI equation is we have probably been too tight in managing the ROI.

As a result, while our margins last year were at the high of our historical range, we came into this year saying that we were going to be investing more in marketing as a percentage of total to drive more demand.

That was one of those generic learnings from last year to this year.

So pre-password reset and SEO, we were in fact stepping up our level of spend.

In terms of how we drive traffic more specifically, obviously we got a great brand, so a majority of our traffic continues to come direct because of eBay brand.

Then on keyword buy, being less generic about where it makes sense and more specific in particular geographies is one of the test and learn things we do to take a generic spend and be more specific.

Then third is CRM.

All this data that we accumulate on this site, we're going to be increasingly smarter and sharper about how do we use that data to reach back out directly with CRM and e-mail campaigns to bring that traffic back to the site.

The fourth one, I'd just say, is we continue to, in the test and learn bucket that John highlighted, is social.

How do we divert or reallocate some of our money to more social channels to drive engagement and curation.

Let me take one more question.

Yes.

Our final question comes from the line of Gil Luria with Wedbush Securities.

Thank you for taking my question.

You talked about the fact that SEO and the breach are fairly fleeting phenomena.

You expect them to ramp out in Q3.

How about StubHub?

The topic you talked more about in Q1.

How much of the decline in growth rates in marketplace is attributable to those changes in that market and changes in your pricing?

Have you bottomed out yet there?

Or are you still competing very hard and harder as the year goes along?

Maybe, Bob, I'll take the second part of that and you take the first.

The thing we did at StubHub earlier in the year was we went to all-in pricing.

For the last several years, one of the things we've heard about from buyers in the secondary ticket market, is they hate the fees.

The fees would come at check out.

It felt like a surprise.

So after we have been testing the last couple years, and StubHub is a very much a consumer driven business.

Great buyer experience.

We back it up, make it right.

We made the decision to go to all-in pricing.

So we showed buyers what the true cost is going to be all the way through.

At the same time, there was a competitor or two that came in with slightly lower take rates and they didn't have all-in pricing.

The perception out of the gate was that tickets on StubHub cost more.

When in reality, other than a couple of percentage point take rate difference, that wasn't the case.

So what we've done is we said, you know what?

We've got a leadership position here, a leadership franchise, we're going to make sure we compete aggressively.

It is an outstanding take rate business.

We've lowered our take rate.

It's still a very good take rate business, and we're competing.

We feel comfortable and good about how we're competing and the effectiveness.

We think we're going to be -- our leadership position is strong, we think we will continue it.

But for the next couple quarters when we're lapping, they will be lower revenue growth and lower margin growth.

But we're building a leadership position that's going to sustain for many years to come in what is a fundamentally good business.

And a business we believe will grow over time and have very good economics over time.

Just two other things I would add is it's a business where the majority of the traffic is now coming from mobile, even more so than other platforms.

And the team has been invested in when that traffic comes, the right landing page for the mobile user has been a big component.

And then the growth rate from Q1, John talked about the take rate and the competitiveness.

I think what we saw Q1 to Q2 is a rebound in the growth rate.

Our expectations are in light of the things that we've done that that growth rate, volume growth rate, will continue.

But we'll have a take rate degradation year on year for another two more quarters.

Got it.

Okay, well thanks a lot.

Thanks everybody.

Thank you, everyone.

Thank you very much.

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

This does conclude the program and you may all disconnect.

Everyone have a good day.