eBay Inc (EBAY) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the eBay's fourth-quarter 2014 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

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

Good afternoon. Thank you for joining us, and welcome to eBay's earnings release conference call for the fourth-quarter and full-year 2014. 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. And all segment 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 the call are available through the IR section of eBay's 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 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 a reconciliation of these measures to the nearest comparable GAAP measures in the slide presentation accompanying the call.

In addition, management will make forward-looking statements related to the planned separation of eBay Inc.'s Marketplaces and PayPal businesses. And our future performance that are based on our current expectations, forecasts and assumptions, involve risks and uncertainties. These statements include, but are not limited to, statements regarding expected financial results for the first-quarter and full-year 2015; the future growth in Payments, Marketplaces and eBay Enterprise businesses; and the completion and timing of the planned separation, and the Company's exploration of strategic alternatives for the Enterprise business.

Our actual results may differ materially from those discussed on 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, or on our Form 10-K, or in future Quarterly Reports or 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 January 21, 2014, and we do not intend nor undertake no duty to update the information.

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

Thanks, Tom. Good afternoon, everyone, and welcome to our Q4 earnings call. In a year marked by unexpected events and distractions, our double-digit revenue growth, solid earnings growth, and strong cash flow reflect the fundamental strengths of our Company.

We have some challenges. But overall, our focus and operating discipline delivered solid company performance in a year that, quite frankly, we are glad to see come to an end.

Before I talk more about Q4, let me take a moment to provide some context as we head into 2015, an important year of transition for our Company. With the planned separation of eBay and PayPal in 2015, we are moving forward with clarity and speed. We are taking aggressive decisive actions to address both the opportunities we see and the challenges we face.

At the same time, we are creating sharper strategic focus at eBay and PayPal, and we are implementing more competitive cost structures in each business. All of these actions are designed to set up eBay and PayPal to succeed. We remain deeply committed to doing what's best for eBay and PayPal, and to delivering sustainable value for shareholders. And we believe more strongly than ever that separation is the right path for our Company.

Now let's take a look at the results for the quarter. We enabled $72 billion of commerce volume in the fourth quarter, up 21%. Mobile continues to be a major contributor. For Q4, mobile commerce volume was $17 billion, up 59%, and mobile now represents 23% of enabled commerce volume. Overall, revenue was up 9% in Q4 and non-GAAP EPS was up 10%.

eBay and PayPal both generated double-digit customer growth, with PayPal reaching nearly 162 million active registered accounts, and eBay exceeding 155 million active buyers. At PayPal, Dan Schulman joined in Q4 as President and CEO designee, and we are excited to have him on our leadership team. Dan is quickly immersing himself in all aspects of PayPal's business, and providing strong focused leadership on 2015 priorities and on positioning PayPal for continued competitive success.

PayPal had another strong quarter, finishing a very strong year. Merchant Services' TPV grew 36% on an FX-neutral basis in Q4, and revenue was up 18% on an FX-neutral basis. Throughout the holiday season, PayPal drove strong consumer engagement, adding nearly 5 million active accounts and processing record payments volume.

PayPal continues to deliver great product experiences that offer choice and flexibility for consumers, and help merchants grow their business. For example, PayPal's One Touch has continued its international expansion effort. And for both consumers and merchants, PayPal extended its credit offerings, including adding installment payment options. And PayPal working capital launched in Australia and the UK, offering merchants more convenient ways to invest in and grow their businesses. In a rapidly changing Global Payments environment, we believe that PayPal is positioned to leverage its global footprint, digital payments leadership, and unique competitive strengths.

Turning to eBay Marketplaces, Q4 was disappointing. Significant events in 2014 have disrupted our ecosystem and overwhelmed the progress we were making on a number of fronts, impacting our performance. We have experienced these ecosystem disruptions before, and they simply take time to work through and correct.

Here's what's happened and here's what we're doing about it. First, the password reset and SCO changes significantly impacted traffic, which did not recover in the second half as expected. eBay's loyal customers are back following the reset of our passwords, but our more occasional customers have not returned as quickly as expected in Q4. And the SCO changes significantly diminished eBay's presence in natural search results, which impacted new user growth in the second half, and had a cumulative effect on Q4 results.

Second, a stronger dollar impacted eBay's cross-border trade, depressing US exports and affecting Q4 results for North America. In total, we simply underestimated the combined effect of these events on eBay's ecosystem. And these events occurred in a more competitive environment, where eCommerce and omnichannel players are upping their game.

But these are not excuses and this is not business as usual. In this environment, we need to sharpen our strategic focus and execute better. And Devin Wenig and his team are doing just that. They are moving decisively and aggressively with clear priorities.

First, improved traffic and conversion; second, deliver strong product experiences that engage our target customers. And third, manage our cost structure to help fund investments that reengage eBay buyers.

We are also sharpening our strategy with greater focus on the core consumer segment where we believe eBay can win -- savvy shoppers who love great value, unique selection, discovery, and engagement. And we are redeploying resources to our top priorities and scaling back or stopping other initiatives. That said, 2015 will be another challenging year, and we expect eBay's performance to soften further before we see stabilization and improvement. We still have work to do.

However, eBay continues to be a great business. In 2014, eBay enabled $83 billion in GMV and generated $3 billion in free cash flow. And even at low growth rates expected for 2014/2015, eBay can still deliver strong cash flows to healthy margins. Separation strongly supports eBay's need to focus on where it can win, and to fully align its strategy, cost structure and capital allocation. And that's good for eBay's customers and for eBay shareholders.

Turning briefly to eBay Enterprise, gross merchandise sales in Q4 were up 9% and revenue was up 9%. eBay Enterprise is a good business, and Craig Hayman is bringing a sharper strategic focus to how eBay Enterprise can compete and win as a leading commerce partner to brands and retailers.

We are taking a closer look at eBay Marketplaces and eBay Enterprise going forward. And it's clear that the two businesses have increasingly divergent opportunities. As a result, we've decided to explore strategic alternatives for eBay Enterprise, including a full or partial sale or IPO. Until this process is complete, we do not anticipate commenting further.

In summary, we are on the right strategic path, and we are acting decisively and aggressively as we position eBay and PayPal for success. We are sharpening our strategic focus and streamlining our cost structure and our portfolio. And we are creating operating agreements that preserve both synergies and strategic flexibility.

Regarding our cost structure, our decision announced today to eliminate approximately 2,400 positions, or about 7% of our global workforce, was a difficult one. Eliminating jobs is never easy. But these decisions were necessary at eBay, PayPal, and eBay Enterprise to simplify their organizations, reduce complexity, speed decision-making, and create competitive cost structures.

Before closing, I want to update you on our progress toward creating two strong Boards for eBay and PayPal. NBC Universal Executive Bonnie Hammer joined our Board earlier this month. And today, I'm pleased to announce the addition of seasoned Wall Street Executives, Perry Traquina and Frank Yeary. Bonnie, Perry, and Frank will bring tremendous value and expertise to our current Board.

In addition, we announced today an agreement with Carl Icahn, our largest active shareholder. This agreement reflects our alignment on separation and our shared belief in the benefits of avoiding distraction. As part of this agreement, Icahn Capital Executive Jonathan Christodoro will be joining our Board as our fourth new Director. We look forward to welcoming Jonathan to the Board.

Looking ahead, we are clear in what we need to do to deliver our 2015 plans and ensure a smooth separation process. And we'll continue to do what's best for our business, for our customers, and for our shareholders.

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

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

In the fourth quarter, we enabled $72 billion of commerce volume on behalf of our customers. Mobile commerce volume was $17 billion, up 59% from last year. Revenue was $4.9 billion, up 9%. Non-GAAP EPS was $0.90, up 10%. We generated $1.3 billion in free cash flow in the quarter and we bought back $1.2 billion of stock.

In Q4, we generated net revenues of $4.9 billion, up 9%. Organic revenue growth was 10% in the quarter. Braintree contributed approximately 1 point of growth, while currency negatively impacted growth by roughly 2 points. We delivered revenue near the high-end of the guidance range despite the impact of the stronger dollar, which impacted revenue by approximately $30 million since our guidance in October.

Non-GAAP EPS was $0.90, up 10%. EPS growth was driven by 9% topline growth and lower share count, partially offset by lower operating margins. Operating margins declined by 150 basis points due to the higher customer service and site ops costs, and slightly higher operating expenses.

A little more color on operating expenses, which were 41% of revenue in the quarter, up 50 basis points. The biggest driver was sales and marketing, up 70 basis points. The incremental spend was to drive traffic at Marketplaces and to drive comprehension and usage by our customers at PayPal. We gained operating leverage on our G&A line, which was down 110 basis points.

We generated free cash flow of $1.3 billion in the quarter, and CapEx was 8% of revenue. We had excellent free cash flow for the full-year 2014, ending with cash, cash equivalents, and nonequity investments of $14.6 billion, including $4.5 billion in the US. During the year, we generated $4.4 billion in free cash flow. We lowered our cost of capital by repurchasing 88 million shares of stock, and issuing $3.5 billion in debt at attractive rates. And we funded our PayPal credit portfolio primarily using our offshore cash.

We have significant capacity to capitalize two independent companies while providing them each with the financial flexibility to invest and grow. Now let's take a closer look at our segment results.

PayPal had a great quarter and a strong close to an excellent year. For the first time, we achieved revenues of more than $2 billion in the quarter, reaching $2.2 billion, up 18% on an FX-neutral basis, driven by strong account growth and accelerating transaction growth, which was partially offset by a 3 point sequential deceleration in -- on eBay growth. More than 50% of PayPal's revenues came from outside the US.

A few quick highlights on PayPal operating metrics. Total active accounts growth was 13% with rising engagement per account. TPV on an FX-neutral basis grew 27%, with Merchant Services FX-neutral TPV increasing 36%. Transaction margins remained well above the 60% level, while we continue to expand off of eBay, grow large merchant ubiquity, and accelerate Braintree growth with merchants and consumers. PayPal's segment margin declined 370 basis points to 22%, due to increased investment in Braintree, product, brand, as well as costs from one-time regulatory matters.

Now let's turn to the Marketplaces business. Marketplaces delivered $2.3 billion in revenue, up 5% on an FX-neutral basis -- a challenging close to a tough year. FX-neutral transaction revenue grew 3%, while Marketing Services revenue grew 12%, helped by strong growth of our Global Classifieds business. StubHub continue to detract from revenue, due to a lower take rate from the pricing changes earlier in the year.

eBay is a good business, but we have real challenges that we are working our way through. And as John mentioned, it's going to get worse before it gets better. A little more on what's going on.

Since the fourth quarter of last year, our GMV has decelerated by 7 points globally and 11 points in the US, our largest and most competitive market. Our ecosystem has simply been disrupted. While volume through the first five months of the year was roughly stable, a series of factors have contributed to the second half decline. And we are wrestling with three fundamental challenges.

First, traffic. Traffic growth has decelerated by 7 points in the year. The drivers include both the decline in new buyers at the top of the funnel, due to the SEO changes, and occasional buyers not returning to our site or buying less frequently.

Secondly, FX-neutral selling prices on the site have declined 4 points over last year. This is a bit of a Catch-22 for us. As we've made it easier for sellers from around the world to surface their inventory to global buyers, selection has increased from lower-priced regions. In addition, mobile has become a greater percentage of our mix, which skews more towards emerging markets and a younger demographic, who tend to buy lower-priced items.

And third, as John mentioned, cross-border trade. We have a large cross-border trade business, and our US business is a net exporter. And the stronger the US dollar -- and the stronger US dollar has slowed our cross-border flows.

The implication of these challenges has resulted in a deceleration in the three-month active buyer growth to 5%, well below our 12-month active buyer growth of 11%. This is why things will get worse in the first half of 2015 before they get better in the second half of the year. That said, we are not standing still.

We are taking decisive actions to focus the business in an effort to simplify and speed up decision-making, while creating incremental capacity to invest to improve both traffic and technology. We are investing in marketing, improving product design, and strengthening the SEO workflow to a more sustainable format. And we are prioritizing our resources towards our core shoppers and doubling down on areas of strength, like our $2 billion eBay Deals business.

So let me put the Marketplace performance into perspective. In what I would characterize as a very difficult year, eBay remains the 28th most valuable brand in the world. It has a great business model with low capital intensity, which generated $3 billion in free cash flow in 2014. We have our hand on the issues and we're working through them as we enter 2015.

Now let's turn to eBay Enterprise. eBay Enterprise generated $1.9 billion in gross merchandise sales for its clients. GMS grew 9%, driven by the addition of new logos and same-store sales growth of 12%. Revenue was $443 million, up 9%. Segment margins for eBay Enterprise came in at 15.5%, relatively flat from last year.

So, before we turn to 2015, let me step back and give a brief summary of our full-year 2014 performance. We enabled $255 billion of commerce volume for merchants and consumers globally, which accelerated 2 points to 24%. PayPal enabled $228 billion of TPV, up 27%. eBay enabled $83 billion of GMV, up 8%; and eBay Enterprise enabled $4.7 billion of GMS, up 13%. Mobile commerce volume was $54 billion, up 66%. Revenue grew 12%, and non-GAAP EPS grew 9%.

And through this tough year, we managed to generate $4.4 billion in free cash flow, and we bought back $4.7 billion of stock, and reduced our shares outstanding by roughly 5%. Not the worst performance, but a year we are glad to have behind us.

So, with that, let me turn to our priorities for 2015. They are really two-fold. First, execute on our business plans; and second, create the two world-class independent platforms. Let me talk to each.

Executing our business plans. We are taking actions to streamline and simplify this cost structure in each of the businesses. And we are eliminating approximately 2,400 positions across the Company, roughly 7% of the global workforce. And we are pursuing the sale or IPO of the eBay Enterprise, so we are focused on our two core businesses. We are focusing our growth initiatives where we believe we have true competitive advantages, and leveraging our large and growing customer bases. And, during the year, we'll produce strong cash flow and opportunistically reduce our share count.

The second major work stream for us is positioning two great standalone companies. We believe the key criteria for success are an operating agreement that provides strategic flexibility while preserving synergies and minimizing dissynergies; a capital structure that provides each business the flexibility that enables its investment priorities; and creating two world-class Boards of Directors.

Now let me turn to guidance specifically, and then I'll provide an update on where we are in the separation process. We are projecting 2015 revenues of $18.6 billion to $19.1 billion, representing FX-neutral growth of 7% to 10%. We expect FX to impact revenue by approximately $600 million or roughly 3 points of growth, as the US dollar has strengthened versus the euro, pound and the Australian dollar, by 12%, 8%, and 10%, respectively.

We are projecting non-GAAP EPS of $3.05 to $3.15, up 3% to 7% versus 2014, with our non-GAAP effective tax rate stable in the 19% to 20% range. And we expect to generate greater than $4 billion in free cash flow for the year, with CapEx of 8% to 10% of revenues.

We have a lot of moving pieces in 2015, so I wanted to provide a bit more transparency on what is driving or detracting from our non-GAAP EPS expectations for the year. There are five key drivers. As we mentioned earlier, we are reducing our global workforce by roughly 7%. This will result in a GAAP charge of approximately $100 million in the first quarter, and generate savings in 2015 of more than $300 million across the Company. But the savings will be reinvested to drive growth.

Second, we will add approximately $1 billion to the topline in 2015. This topline growth, coupled with strong margins across our businesses, will generate $0.30 per share of earnings.

Third, we've repurchased $4.7 billion in shares of common stock in 2014. And our Board of Directors has approved an increase of our outstanding authorization by $2 billion, leaving $3 billion authorization remaining. We plan to offset dilution from our comp-based programs and continue to opportunistically reduce our share count in 2015. This will add approximately $0.10 per share to EPS.

Fourth, the strong dollar will have a large negative impact from a translation perspective, and will create a headwind for cross-border trade growth. Translation, net of hedges, will negatively impact EPS by $0.10 to $0.15 per share in the year.

And fifth, the dyssynergy costs associated with separation will add approximately $200 million of ongoing costs in 2015, or approximately $0.10 to $0.15 per share.

With that as context for eBay Inc.'s guidance and the drivers of EPS from 2014 to 2015, let me provide a little more context by business unit. For PayPal, we expect 15% to 18% growth on an FX-neutral basis. We have strong momentum in the core business. We are expanding credit, both internationally and with small merchants, and we are extending our reach with Braintree. Slower on-eBay growth and lower monetization from Braintree and large merchants will partially offset the strong volume growth.

For PayPal, we are expecting segment margins of 24% to 25%, up 1 to 2 points versus 2014. We are expecting transaction margin compression due to lower take rate and higher operating expenses as we invest in growth priorities. These will be offset by strong operating leverage and the benefits from our Q1 headcount reduction and anticipated gains on PayPal's FX hedges.

For eBay, we expect FX-neutral revenue growth between 0% and 5%, with the first-half growth slower than the second-half, as we look to rebuild our active buyer base. We expect segment margins [to] 37% to 39% flat versus 2014.

We are taking actions to streamline our cost structure in the first quarter, and will reinvest in product, sales and marketing, while improving site security, stability, and site speed. While growth is lower than we'd like, we'll be disciplined in our approach, and n the business will generate strong cash flows.

For eBay Enterprise, we expect FX-neutral revenue growth of 5% to 8%, with segment margins of 5% to 10%, greater than 2014. As John mentioned, this is a good business, but has increasingly divergent opportunities with eBay; and therefore, we are pursuing a sale or IPO.

As we move to become independent companies, and fully allocate costs, we expect the business unit segment margins to be impacted by 3 to 4 points from corporate overhead, and approximately 1 point from the dyssynergies associated with the separation. From a tax rate perspective, we expect the standalone tax rate for PayPal to be lower than eBay Inc.'s tax rate, and the eBay Marketplaces and eBay Enterprise to be higher than the eBay Inc. tax rate.

Next, I'd like to switch gears and give you an update on where we are related to separation. As I mentioned earlier, there are three primary work streams we are focused on to set up these two businesses to succeed.

First, the separation itself. Our guiding principle has been to move as swiftly as possible to set up each business to be fully self-sufficient, and put in transitional service agreements where time, complexity, and/or costs become an impediment. At this stage, we expect to incur approximately $200 million of ongoing costs, which is in line with our expectations.

The dyssynergies costs are associated with separating data centers, infrastructure, and IT-related tasks, as we migrate from a shared services type environment to a path towards self sufficiently -- self-sufficiency. Additionally, there will be facilities costs associated with separating shared facilities, and G&A-related costs associated with creating two public companies.

The second major work stream has been capital structure. Our guiding principle here has been to ensure each business is well-capitalized, with financial flexibility to pursue their strategic priorities, whether it is the resources to fund growth or the flexibility to return cash to shareholders. We have a great balance sheet. And, at this stage, we feel increasingly confident that we could achieve our objectives.

Our intentions are to sufficiently capitalize eBay with net cash of approximately $2 billion with significant debt capacity, and leave PayPal with approximately $5 billion of net cash. We believe we can accomplish this in a tax-efficient manner.

The third critical work stream relates to the operating agreement between the two companies. Our guiding principle here has been to provide each business with the strategic flexibility to maximize its independent potential, while maintaining the synergies that have been captured and created over the years. At this stage, we're making good progress; but at the same time, we have lots to do.

Overall, from a separation standpoint, we are on track to file our initial Form 10 by the end of February, and we are increasingly confident in our ability to effect the separation in the second-half of this year.

I know that was a lot to cover in a relatively short time, but now we'd be happy to answer any questions you have. Operator?

Eric Sheridan, UBS.

Thanks for taking the question. So, I guess two. One, on the PayPal take rates, I wanted to know if we'd get a little bit of color on the pressure you're seeing on take rates, as TPV growth stays quite strong, and maybe even gets stronger as you get more bigger and mobile going forward, and Braintree becomes a bigger portion of the pie going forward? So maybe a little bit of commentary on the cadence there.

And then, John, on the Marketplaces business, you made a comment about shutting down or stopping initiatives that might not yield positive results longer-term for Marketplaces. I wanted to know if we could get a little more color there? Thanks.

Eric, you know, on the PayPal take rate, there's really been one dynamic that has been driving take rate for quite a bit of time now. And it primarily focuses on opportunities we see to expand our served market and enter new areas.

And they've come in three forms. One -- credit. As we expand our credit portfolio, all else equal, our monetization on credit-related transactions is higher. Secondly, as we expand with larger merchants over time, all else equal, our take rate has a tendency to be lower. And then, third, as we expand into new markets, the shared economy through Braintree, our take rate has a tendency to be lower.

So, in all three cases we've expanded our served market, the implications are a lower take rate; and yet we are still able to generate 60% transaction margins. As we project going forward, there will continue to be take rate on -- I'm sorry, pressure on PayPal's take rate. And it's going to be primarily because of our success with the growth of Braintree and the growth of PayPal ubiquity in large merchants. And we expect that trend of a compressed take rate to continue to come down going forward.

And Eric, regarding the things that Marketplace is de-prioritizing or stopping it, let me just step back. And what this is grounded in is an increasingly competitive environment that requires us to sharpen and focus the Marketplace strategy. And as I mentioned earlier, we've talked a lot over the last several years about the lines between eCommerce and mobile, and off-line blurring, taking a $1 trillion market and making it a $10 trillion market. And that's still the case.

But Marketplace, in this competitive world, is going to focus on the $4 trillion where our core consumers align with our competitive strengths. This is where we think we can win. And in particular, it's, in simplest terms, it's not the convenience consumer; it's the average -- I'm sorry, the avid shopper, the person who loves great value, loves selection, loves shopping. That's the majority of our current customer base.

And that actually is 40% of the market -- $4 trillion. And so, Devon and team are more focused on focusing on what specifically that consumer wants than ever before. So, an example -- that consumer wants great deals, so we are growing our Deals business. We are growing the $2 billion Deals business, and putting less emphasis on adding more full-priced inventory on the site.

On delivery, our core consumer wants free delivery, or they want to buy online and pick it up in-store. So they don't pay for delivery and they get to shop. And we are spending less on same-day delivery -- which is really something that's geared toward the convenience user.

Similarly on trust, our core consumer likes eBay buyer guarantee. That's what they like. And there's some other trust initiatives that have less value. So, it's a -- really, a re-prioritization on the more specific focused things that our core consumer represent. And we want to grow our $80 billion market Marketplace into the $4 trillion opportunity.

Thanks, guys.

Paul Vogel, Barclays.

Thanks for the time. Two quick questions. One -- of the 7% reduction in force, just any breakdown by division where those cuts are coming from?

And then, just the second question, on the SEO issue that keeps -- that have respected Marketplaces for a while now, just any additional color on sort of what's taking so long to fix that? And sort of how you are going about fixing that problem, so it gets better going forward?

Hi, Paul. How are you? You know, first, just on the workforce reductions. At this stage, all I would say is that 2,400 positions will be eliminated. They will be a little bit higher on the Marketplace side and a little bit lower on the PayPal side. And the reasons and the rationale differ a little bit by business, where Devon -- John highlighted where Devon is more focused, and therefore, he's aligning his cost structure to be more focused.

I think as Dan sees the opportunities in PayPal and the need to accelerate the rate of innovation, he thinks there's opportunities to simplify the structure that exists. So the reasons are a little bit different by business. In the aggregate, it's roughly 7%. And at this stage, all I would say is it's a little bit higher on the Marketplace side and a little bit lower on the PayPal side.

You know, and Paul, on the SEO, it -- the foundation of the issue is what I talked about last quarter, which is -- Google's SEO is most tuned to what retailers have, which I would call structured data and use of product catalogs. And eBay is kind of a unique beast. We have the world's largest collection of unstructured data. And our listings, by the very nature of the marketplace, turn over every 7 to 14 days.

And so it's always been a struggle for us to get that to work sustainably and effectively in Google's SEO. And we have this sort of repeated pattern where every couple of years, there's a rule change that impacts our business.

So, Devon and team have set out to fix this the right way, which involves us, in essence, creating our own product catalog, and creating it in a way so that it has more sustainable performance in SEO. And unfortunately, we can't do that overnight. We clawed our way back to where SEO traffic is more or less where it was before the event, but it's not yet driving growth, and it's not yet driving the same new buyers.

I'll remind you, SEO is a modest part of our traffic, but it is an important source of new buyers for us. And so the remaining work to be done in -- over the first three or four quarters of 2014, is building up that product catalog and getting so where SEO is generating traffic growth, and back to generating the new buyers in a sustainable way.

Right. So just (multiple speakers) -- I'm sorry, so you basically have to redo the -- sort of all the indexing and the entire taxonomy of how you index the product. So, this didn't exist going forward? Is that sort of the right way to think about it?

At the extreme. We've clawed our way back doing what we can do in the short-term, but the fundamental -- it's like rebuilding search five years ago. It's building it; building it the right way, and building it in a way that sustains. And so, that's what we are focused on.

The good news from a laughing standpoint, if you will, is the -- as this new buyer effect works its way through our ecosystem, the disruption to the new buyer funnel I talked about earlier, that will continue to work its way through up through the anniversary date. And then the lapping -- at least the lapping numbers get a little bit easier. But focused, the team is ruthlessly focused on getting it right, and building it in a sustainable and healthy way.

All right, thank you.

Ken Sena, Evercore.

I was just wondering if you could maybe explain a little bit more the contribution margin versus the transaction margin pressure you mentioned? And is the 60% transaction margin still assured? And also, is there any potential to maybe negotiate the card present status as you look forward, to maybe kind of offset some of those transaction pressures you are seeing? Thank you.

Hey, Ken. So, first, what I alluded to in the quarter is PayPal transaction margins have been relatively stable at the 63% level. As we think about 2015, we expect a continued expansion of our served market. More of our growth will come from larger merchants and Braintree volume. And as a result, we expect take rate to become -- continue to come down, and transaction margins to be coming down as well in 2015.

However, we said operating margins would improve by 1 to 2 points. And while transaction margins are coming down, and we'll be continuing to invest quite a bit, a simplified [org] structure and quite a bit of G&A leverage will help contribute to the 1 to 2 points of margin growth.

Your second question on card present rates, I'd just say within our wallet, or our funding mix, we are always looking for instruments that give consumers choice. And that, all else equal, given that choice, allows us to deliver a proposition for merchants that addresses their -- one of their key criteria, which is PayPal, how can you help me lower my costs?

So, we are always looking for opportunities to add instruments and/or use our leverage and/or technology to lower processing costs within the wallet, to offset pressures that come with a lower take rate. And we'll continue to do that in 2015 and beyond.

Great. Thank you.

Thanks, Ken.

Colin Sebastian, Robert Baird.

Maybe as a follow-up on PayPal, regarding the acceleration in growth in the number of payments, I wonder if you can share more details on that, perhaps with some of the same factors, perhaps Braintree or something else?

And then, secondly, just one of your perspectives on, given the organizational changes and some of the issues in 2014, the innovation in both eCommerce and payments that's happening really quickly. So I just wanted to clarify how you are able to keep up with that pace of change and product initiatives in the face of the separation and the disruptions? Thanks.

First, on the -- just the number of payments, I mean, broader ubiquity on merchants giving consumers the ability to use us in more instances, the slight improvement on a per user basis. And then, as you indicated, the expansion of Braintree and the incremental volume from Braintree is what's driving the growth and -- accelerating growth in number of payments.

And on innovation, there's a lot going on, on the innovation front -- I mean, on PayPal -- Venmo. Venmo is on fire. Venmo is acquiring new users. It's a leading peer-to-peer way to pay. And if you go to any college campus across America, they talk about Venmo'ing money to each other.

One Touch, which is the way that we can have -- with One Touch, consumers can pay with PayPal with One Touch on any Braintree or PayPal-enabled mobile app; v.zero, which is the Braintree next-generation platform, which started out with third-party developers and small merchants, and is now working its way -- we are building our whole next-generation PayPal core platform on it.

Installments credit. We've rolled out installments credit with Apple online in the UK and Germany; that will come to the US. That's a way to allow a merchant to give more choice to consumers, and allows the consumer to be able to make a -- buy an item, a higher-priced or lower-priced item with great convenience. And then both businesses, mobile continues to be a major source of innovation. PayPal's got its new mobile SDK.

And if I turn to the Marketplace, in the midst of what was a very challenging year, to be clear, we got that. But mobile GMV was up 42% for the year. Mobile GMV and eBay's mobile GMV was $28 billion. And you saw the iPad app that we launched right before Christmas. That is the freshest, I think most innovative mobile experience that eBay has built in years. And it's geared, importantly, to infrequent users or new users.

If you check it out, it's fresh. If you've never used eBay before, you can come in, and it's engaging and intuitive. And so, throughout all the challenges the Marketplace has right now, and all the operational execution they are focused on, we are -- Marketplace is still focused on innovations like its mobile experience, like live auctions and other things. So, there's no lack of attention for innovation across our other business.

Okay. Thanks very much.

Colin, the only thing I would add more process-wise is, we kind of highlighted two priorities -- execute on business plans and separate to create two special companies. And the best we can, we are trying to divide and conquer, where Dan and Devin and Craig are focused on their customers, and execution and innovation. And then John and I and hordes of wonderful advisors are trying to focus and carry the water for the separation process.

It's obviously not as clean is that, but these are two work streams, and we're trying to minimize distractions in their respective business units. So they can continue to focus on the innovation that's going to help them drive their growth.

Thanks, Bob.

Scott Devitt, Stifel.

I was wondering if you could just talk about how quickly Braintree is growing now, and how big it is TPV revenue-wise? And then, separately, the $0.10 related to the buyback, does that include a full execution of the $3 billion that you have remaining before the spin?

And then, third, I noticed that you are able to hedge out FX with PayPal, but not eBay, and I wasn't familiar with that. I was wondering if you can talk about that a little bit as well. Thanks.

Okay. Thanks, Scott. First on Braintree, I would just say the growth has been relatively explosive for the most part. The core business has grown tremendously during the course of the year. And Braintree added roughly 6 points of growth to the overall TPV growth for the business.

And, as you know, we added it late in the fourth quarter last year. So, on a year-over-year basis in the fourth quarter, there wasn't a whole lot of Braintree volume.

In the $0.10 buyback (multiple speakers) --

I just had one thing before you get to the second question, Bob. Just on -- one of the things, Scott, on Braintree that I referenced earlier is, increasingly, the Braintree foundational technology, the line is blurring between Braintree and PayPal. So the v.zero platform is increasingly becoming the core of the merchant platform for PayPal. You'll begin to see PayPal's peer-to-peer and Venmo peer-to-peer converge toward where we are leveraging a common backend.

And so, the mobile SDK and One Touch are increasingly converging. So it has both absolute value of getting us into the fastest-growing segment of the market, the sharing economy apps; but it's also, I think, increasing the innovation and the freshness of PayPal's core products. And that line will blur. And I think it's part of the reason you are seeing accelerated growth in the PayPal part of the equation, in addition to Braintree's.

Sorry, go ahead -- and second?

The second one, Scott, on the buyback, we -- I indicated that we've reduced our share count by roughly 5% this year. And if you take that into account in 2015, you're going to get to roughly $0.07 to $0.08 of EPS accretion as a result of the actions we took in 2014. So, our plans for 2015 are obviously to offset dilution and be opportunistic; but, given the $0.10, you should conclude that it doesn't assume a full $3 billion of execution, and our plans are to be opportunistic as we prepare for separation.

Your third question, I think, just related to hedges. I mean, in effect, to make it simple, our international -- our PayPal international business is a dollar functional currency, which allows us to put in place economic hedges for projected revenue. We don't have that luxury for the eBay. eBay business is not dollar functional. Therefore, putting in economic hedges would subject us and you to quite a bit of volatility, because we would not get the appropriate accounting treatment.

Nothing new there in terms of our historical exposures and our hedging practices. But that's kind of the dynamics and why it is the way it is. Thanks for (multiple speakers) --

I'll add that it's impressive that you are able to get a full-year guide out at this point in the year, with all the complications of the spin. So, congrats on that.

Guides are easy.

(laughter) Next question.

Heath Terry, Goldman Sachs.

John, can you give us a sense of how much of the plan for this year -- particularly if PayPal has had a chance to be influenced by the new structure, and particularly by the new CEO there, how much we are sort of at least starting to see his vision for what PayPal potentially can do?

And then, Bob, if you can, just give us a sense of what the profile of the customer behind the growth in Merchant Services is looking like now. What's the use case where you are seeing the most growth in that number?

Heath, on your first, actually Devon and Dan are sitting right here. So Dan is right here and he's, I think, 75 days into the job. And, as you recall, he brings payments expertise and experience. He's been in technology. He's been in mobile. He's got a strong consumer background. And what's very apparent is he knows the industry players, whether it's merchants or partners or tech providers, ecosystem players.

So, in the -- I think the first 75 days, what he's come away saying -- very impressed with PayPal's unique assets, its global footprint; our risk capabilities. He keeps saying our risk capabilities are phenomenal. Our brand; and the opportunity to extend and expand that brand across consumers and across merchants is significant.

So what he's bringing is a greater focus. I would say one of the challenges PayPal's always had is there's too many opportunities. And there's greater focus in the 2015 plan, which -- than I've seen in the last several years, focused on product, extending Braintree, extending One Touch, extending Venmo.

Secondly, on expanding things like our credit offering, which increase our relevance, both to merchants and to consumers. And then marketing. PayPal really did marketing for the first time in 2014. And we had pretty clear positive return on investment. It was one of the contributors to those very high growth rates. Dan brings a lot of consumer marketing experience. And the 2015 plan continues, and has even more marketing.

So, the 2015 plan, which is, in many ways, a continuation of the current, with more sharp focus, is -- he's got his footprints on it or handprints on it. And then he's simplifying the organization to accelerate innovation.

So, you'll get a chance to hear from him in the second quarter. Both Devon and Dan will be, in the second quarter, talking more about the standalone strategies and forward-looking visions for each business. But I think Dan is off to a strong start.

Heath, on the growth profile, maybe on the merchant side and on the consumer side, on the merchant side just geographically, you see more growth outside of the US than you see in the US. So PayPal's global footprint continues to expand.

From a size standpoint, large merchants -- we've gone from a roughly 0% to almost 70% penetration on large merchants in the large developed markets. So, large merchants, size of merchant becomes increasingly relevant.

And then, in the developer community and particularly where Braintree pulls us through into the shared economy, it's a different set; more -- can be more service-oriented versus merchants that are strictly product-oriented. So, on the merchant side, geographic more international size, more large and type increasing service versus just product.

On the consumer side, just from the nature of the growth in mobile, you see that the increased frequency of PayPal's user is increasingly technology-savvy, and has embraced mobile. And product, coupled with that dynamic and the customer base, has allowed the PayPal consumer to be more technology-savvy.

But I would maybe follow-up on John's point. You know, we've made tremendous progress on the merchant side. But with Dan onboard on the consumer side, and the relevancy of PayPal products to consumers sees more frequently, is where Dan is spending a lot of his time in his first 75 days or so.

Operator, I think we have time for one last question.

Thank you. Our final question comes from John Blackledge of Cowen and Company. Your line is now open.

Just a couple of questions. What are the specific plans to effectively rebuild demand in the active buyer base at the Marketplace business? And what percent of active buyers are considered core shoppers?

And the second question would be -- kind of with the benefit of time since the separation agreement, how do Devon and team think about longer-term Marketplace GMV and topline growth potential 2016 and beyond, acknowledging the recent growth challenges and restructuring? Thank you.

Yes. Thanks, John. On your first question, Devon and team are ruthlessly focused right now on rebuilding demand for the active buyer base. But as I mentioned earlier, the core eBay customer got through the password reset, and they are buying with more or less the same frequency as they've had.

And it's the infrequent shopper, the one that maybe comes two, three, four times a year, tends to come in the holiday season, they didn't come back with -- at the rate we thought, even though we ran some brand campaigns, we ran some -- so 2015, Devon and the team will continue strong marketing spend, consistent with the levels of 2014; more focused on the top of the funnel.

We'll continue to build out SEO and those two things driving traffic. In addition, the product, as I mentioned earlier, the iPad new product is a good example of gearing more toward the infrequent or new user that's not familiar with eBay. So, Devon and team are trying to make the new person that's never used eBay, when they first arrive at eBay, make it easy, intuitive to use. And so both marketing and product are very focused on that.

And then with respect to the longer-term growth rates and plans, very consciously, Bob and I have tried to provide a lot of detail today in 2015 guidance, and so that you've got a sense of what we, Devon and Dan are committed for, for 2015. There will be stability and continuity through this year, through the separation process.

And we try to provide joint guidance and also by business unit. And then we'll leave 2016 and beyond for when Devon and Dan come out and speak to you in roughly the second quarter, in advance of separation. So I'll leave the answer to that question till then.

So, with that, I think we'll wrap up. Thank you, everyone. And we'll talk to you in 90 days.

Thank you.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a wonderful day.