eBay Inc (EBAY) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for your patience.

You've joined the eBay Q2 2017 Earnings Call.

(Operator Instructions) As a reminder, this conference may be recorded.

I would now like to turn the call over to your host, Vice President of Investor Relations, Mr. Selim Freiha.

Sir, you may begin.

Thank you.

Good afternoon.

Thank you for joining us, and welcome to eBay's earnings release conference call for the second quarter of 2017.

Joining me today on the call are Devin Wenig, our President and Chief Executive Officer; and Scott Schenkel, our Chief Financial Officer.

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

All revenue and GMV growth rates mentioned in Devin and Scott's remarks represent FX-neutral year-over-year comparisons unless they clarify otherwise.

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

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

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

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

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

In addition, management will make forward-looking statements 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 the future performance of eBay Inc.

and its consolidated subsidiaries, including expected financial results for the third quarter and full year 2017 and the future growth of our business.

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

You can find more information about risks, uncertainties and other factors that could affect our operating results in our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q, copies of which may be obtained by visiting the company's Investor Relations website at investors.ebayinc.com or the SEC's website at sec.gov.

You should not rely on any forward-looking statements.

All information in this presentation is as of July 20, 2017, and we do not intend and undertake no duty to update this information.

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

Thanks, Selim, and good afternoon, everyone.

Q2 was a good quarter for us.

We delivered strong top and bottom line financial results, led by acceleration in our core eBay platform.

At a time when retailers are struggling more every day, we were able to accelerate growth by improving our customer experience and beginning to reinvigorate our brand.

Overall, total GMV was up 5% for the quarter while revenue was up 7%.

Active buyer growth was stable at 4% as we added nearly 2 million buyers to our platforms in Q2.

Excluding buyers in India, which we'll no longer report after our Flipkart transaction closes, growth in buyer acquisition was 5%, accelerating a point.

GMV in our Marketplace platform grew 6%, a 1 point acceleration, driven by strength in the U.S. Our Classified platform grew revenue at 11%.

And StubHub volume was down 5%, driven by tough comps and a weaker event landscape than we expected.

Finally, we returned $0.5 billion to our shareholders in the form of stock repurchases.

Now let me take a moment to put our Q2 performance in the context of our strategy.

Two years ago, we began repositioning our business for long-term success by driving the best choice, the most relevant and the most powerful selling platform while sharpening the eBay brand.

At the time we said we were confident in our ability to deliver improved user experiences and to accelerate growth on our core eBay platform, and we're doing just that.

We've made significant progress to modernize and simplify eBay while bringing forward its unique strengths.

We've created a product catalog that covers well over half of our inventory.

We've built and launched hundreds of millions of new product and browse pages, and we've rolled out a significant number of customer improvements at an accelerating pace.

And we've begun to reposition the eBay brand to be more differentiated while also correcting long-standing misperceptions about eBay.

Over the past 2 years, we've added 14 million active buyers while improving the GMV growth of our core platform and accelerating revenue growth.

We've delivered well over $4 billion of non-GAAP net income while returning $5 billion of cash to shareholders through share repurchases.

We've also created renewed vibrancy and energy across our company and our culture as we work together to execute our business strategy and to accelerate growth.

As an example, over the past 2 years, our employee satisfaction has increased while our turnover has decreased.

Another important element of our culture is our ongoing commitment to make eBay more diverse and inclusive, which is a competitive advantage in recruiting world-class talent, and ensuring that our workforce reflects the diversity of our Marketplace.

In summary, we're on track with our plans.

We're making progress in our business and our organization and we're right where we expected we would be.

We continue to drive best choice by providing our consumers with great selection and value.

We're focused on attracting and retaining sellers and brands that bring differentiated inventory to eBay, and this continues to yield good results.

For example, in Q2, we collaborated with Disney to offer exclusive Pirates of the Caribbean merchandise, and we launched Nest and DJI as new brands on our platform.

Growth in the global number of eBay's business sellers accelerated in Q2, the second straight quarter of acceleration.

And just last week, we announced a partnership with Shopify to enable their merchants to list and sell their products on eBay directly from their Shopify account, which will expand merchants and inventory over time.

Finally, we launched a Price Match Guarantee on our eBay deals platform, ensuring our consumers always have access to the best inventory at the best prices.

Traffic to our new structured data-enabled user experiences was at 9% exiting the quarter with continued strong conversion in our SCO channel, while conversion in our organic and pay traffic channels continues to be stable.

Within SCO, where our experiences have been in place the longest, conversions further improved and we saw strong acceleration in traffic growth this quarter.

The rollout of our new homepage has expanded to all users across 8 key geographies.

We've leveraged our structured data and AI to deliver an experienced tailored to each eBay user's interests and passions.

Early evidence shows users are responding well to the new homepage with lower bounce rates and better engagement.

This tells us we're matching users with content that's more relevant to them and we stepped up our brand marketing in Q2.

In April, we rolled out a national fashion campaign, and in June, we launched the first activation of our new brand platform, Fill Your Cart with Color, using multiple channels including television, digital and social.

And while it's still very early to determine the overall efficacy of our brand advertising, we're seeing promising early results, with better fashion -- better purchase consideration in our fashion category and an increase in traffic from new to eBay visitors.

We recently began building on our brand marketing with the launch of a significant out-of-home campaign in the U.S. and the next phase of our television and social advertising.

We plan to continue to invest in our brands in the second half of this year, including the international rollout of the new campaign.

Finally, we continue to execute our plan to deliver the most powerful selling platform.

In Q2, we engaged our developer community by hosting a developer conference at our San Jose campus, and we announced significant enhancements to our suite of APIs.

Over time, this will enable better innovation on our platform, which will benefit our sellers of all sizes.

We also continue to expand adoption of our Seller Hub product while adding capabilities to enable sellers to more effectively manage their eBay businesses.

Our Classified platform had another strong quarter of revenue growth, driven across our broad portfolio of assets.

We're focused on increasing traffic and engagement through better mobile experiences and improving our verticals, and our inventory integration between Marketplace and Classifieds continues to perform well.

Finally, StubHub had a challenging quarter, driven by continued lapping of strong growth comps coupled with a U.S. events landscape that was significantly weaker than we had anticipated.

Last year, we benefited from record-setting events such as Hamilton and Copa America, along with strong NBA and NHL postseasons and good performance of top-selling MLB teams, none of which repeated in Q2 of this year.

While U.S. growth lagged, we continue to expand our global event marketplace with significant double-digit international GMV growth this quarter.

And we continue to improve the product experience this quarter with innovations in our native app, social commerce and a globally integrated event catalog.

While we expect to face tough growth comps again in Q3, StubHub is well positioned to grow over the long term due to our leading consumer brand, expanding industry partnerships and continued innovation.

In summary, Q2 was a good quarter for our business, with accelerating volume and revenue growth in our core Marketplace platform.

In the 2 years since implementing our strategy, we've made the product and technology investments necessary to enable us to deliver growth acceleration.

Our focus continues to be on improving the customer experience, and we won't hesitate to trade off short-term results when necessary.

Looking forward to the second half of this year, we expect good execution and an increasing pace of product innovation.

And with that, I'll turn it over to Scott to give you more detail on the Q2 results.

Thanks, Devin.

Let's begin with Q2 performance, starting on Slide 4 of the earnings presentation.

In Q2, we generated $2.3 billion of total revenue, $0.45 of non-GAAP EPS and $517 million of free cash flow.

We repurchased $507 million of our stock.

And this week, our Board of Directors approved an additional $3 billion share repurchase authorization.

Moving to active buyers.

In the quarter, we increased our total active buyer base to 171 million, while trailing 12-month growth was stable at 4%.

Underlying the overall trends, we saw stable retention and continued positive momentum in new user acquisition, with particular strength coming from the U.S. and Korea.

On Slide 6. In Q2, we enabled $21.5 billion of total GMV, up 5%.

By geography, the U.S. generated $8.8 billion of GMV, up 3%, while international delivered $12.7 billion, up -- of GMV, up 7% year-over-year.

Moving to revenue.

We generated total net revenues of $2.3 billion, up 7% on an FX-neutral basis, and up 6% organically, both stable versus the prior quarter.

We delivered $1.8 billion of transaction revenue, up 6%, and $511 million of Marketing Services & Other revenue, up 9%.

Turning to Slide 8. Our Marketplace platform grew GMV by 6% in Q2, a 1 point acceleration versus the prior quarter.

U.S. GMV accelerated 1 point quarter-over-quarter to 5% and international GMV grew at 6%, stable versus the prior quarter.

Underlying those trends, our B2C growth rate was 6% year-over-year and C2C growth was 3%, both slightly improving versus the prior quarter.

Total Marketplace revenue was $1.9 billion, up 7% year-over-year, a 2 point acceleration versus the prior quarter.

Transaction revenue also grew 7% and accelerated 2 points versus Q1, 1 point faster than GMV, as the pricing changes we announced in Q1, which are enabling increased investments to drive velocity for our sellers, went into effect.

Marketing Services & Other revenue grew 4%, a deceleration of 2 points versus the prior quarter.

The deceleration was driven by the elimination of certain third-party ads on our site, in addition to lapping significant Q1 growth from our cobranded credit card revenue, which is recognized annually in the first quarter.

As we continue to shift our advertising strategy away from third-party and towards first-party advertising, this will favor transaction revenue, putting ongoing pressure on MS&O revenue growth.

Moving to Slide 9. StubHub GMV declined 5% year-over-year, decelerating 11 points from Q1, while revenue grew 5%, a deceleration of 14 points versus the prior quarter.

This quarter, we lapped the strongest growth rates from all of last year in addition to facing into a weaker events landscape, as Devin discussed earlier.

While we will continue to face tough comps through most of Q3, we believe Q2 will be the low point of growth for this year.

Moving to Slide 10.

In Q2, Classifieds grew revenue 11%, a 1 point acceleration versus Q1.

We are seeing strong growth across our key markets, driven by improved user traffic and engagement, partially offset by ongoing monetization headwinds as traffic shifts to our mobile app platforms.

Turning to Slide 11 and major cost drivers.

In Q2, we delivered non-GAAP operating margin of 27.3%, which is down 180 basis points versus last year.

80 basis points of which was driven by a stronger U.S. dollar, impacting all spend categories.

I will focus my remaining comments on the operational dynamics of our expenses.

Cost of revenue increased year-over-year, driven by our Ticketbis acquisition, our first-party inventory program in Korea and incremental investments in eBay customer support.

Q2 sales and marketing expenses decreased as a percentage of revenue as productivity and marketing channels and reallocations across platforms more than offset increased Marketplace brand advertising.

In June, we launched a new multichannel brand campaign in the U.S., which will roll out across our key international markets throughout the remainder of the year.

Product development costs were relatively flat as a percentage of revenue as we are now lapping increased product investments from the second quarter of last year.

We continue to drive operating leverage to fund ongoing investments in key areas, such as the expansion of structured data and the product experience enhancements across our platforms.

G&A expense was up year-over-year, driven by the addition of Ticketbis operating expenses and investments in data, security and employee benefits and services.

Turning to EPS on Slide 12.

In Q2, we delivered $0.45 of non-GAAP EPS, up 5% versus prior year, with FX negatively impacting EPS growth by 5 points.

EPS growth was driven by revenue growth and the net benefit of share repurchases, partially offset by the cross dynamics described earlier.

GAAP EPS for the quarter was $0.02, down $0.36 versus last year.

Our GAAP results were negatively impacted this quarter by a noncash income tax charge of $311 million, caused by the foreign exchange remeasurement of a deferred tax asset related to the ongoing realignment of our legal structure.

As always, you can find the detailed reconciliation of GAAP to non-GAAP financial measures in our press release and earnings presentation.

On Slide 13.

In Q2, we generated $517 million of free cash flow, which was down 16% on a year-over-year basis, primarily driven by timing differences of cash tax payments.

CapEx was 8% of revenue in Q2, and we continue to expect to be in a range of 7% to 9% of revenue for the year.

Turning to Slide 14.

We ended the quarter with cash, cash equivalents and nonequity investments of $13.6 billion, of which $4.9 billion is in the U.S. Our capital allocation strategy is designed to manage the capital structure in a way that optimizes our financial flexibility, access to debt and our cost of capital to enable capital return and drive long-term shareholder value.

In Q2, we raised $2.5 billion of debt, which we plan to use for general corporate purposes, repayment of our near-term debt obligations, share repurchases and M&A activity.

Additionally, we repurchased 15 million shares at an average price of $33.79 per share, amounting to $507 million in total.

We ended the quarter with $479 million of share repurchase authorization remaining.

And as I previously mentioned, our Board of Directors approved an additional $3 billion authorization this week.

We remain committed to capital return at a minimum of 50% of free cash flow for the full year, and we will continue to be in the market opportunistically at levels above that.

Before discussing our Q3 guidance, I'd like to remind you that we will start to utilize hedge accounting to better protect revenue from currency movements in the second half of 2017.

As I mentioned on our January earnings call, we implemented a new hedging program that is intended to reduce volatility of our top line from foreign exchange.

Going forward, our hedging results will be recorded in our net revenue line and not our interest and other line.

With that, let's turn to our Q3 guidance on Slide 15.

We are projecting revenue between $2.35 billion and $2.39 billion, representing organic FX-neutral growth of 6% to 8% year-over-year.

Our guidance assumes continued improvement in Marketplace volume and revenue growth.

We expect non-GAAP EPS of $0.46 to $0.48 per share, representing year-over-year growth of 3% to 7% on an as-reported basis.

EPS growth will be driven by revenue growth and the net benefit of our share repurchase program, offset by continued investments to drive improved user experience and to market our brand.

Additionally, we expect FX to impact us by approximately 5 points of growth on a year-over-year basis.

For Q3, we expect GAAP EPS in the range of $0.30 to $0.32.

For the full year, we continue to expect revenue in a range of $9.3 billion to $9.5 billion, organic FX and revenue growth of 6% to 8%, non-GAAP operating margin in the range of 29% to 31%, non-GAAP EPS in a range of $1.98 to $2.03 per share and free cash flow of $2.2 billion to $2.4 billion.

Assuming foreign exchange rates remain where they are today, we would expect revenue dollars to be slightly above the high end of our guidance range.

We are updating our full year GAAP EPS guidance to $1.65 to $1.75 per share, reflecting the impact of the previously mentioned noncash income tax charge recorded in Q2.

As our legal structure realignment process continues throughout this year, it may result in further noncash adjustments that are not currently factored into our GAAP guidance.

In summary, we are seeing positive momentum, and we expect to launch an increasing number of product enhancements throughout the remainder of this year, in addition to increasing our brand advertising to drive improved consideration and traffic.

As we significantly change the eBay user experience, the improvement in our results may not always be linear.

However, we believe we are investing in the right initiatives to meet our commitment to accelerate growth.

We're on the right track and execution will be key for the second half of this year as we continue to set the business up for longer-term success.

Now we'd be happy to answer your questions.

Operator?

(Operator Instructions) Our first question comes from the line of Eric Sheridan of UBS.

Maybe taking a step back.

As we look into the back part of the year, I want to know if you could frame some of those key investments that you think are necessary to continue the momentum in the business that you're seeing, Q2 over Q1.

And what we should be watching for as those investments play out in terms of the key metrics on either the top line -- users, sellers, GMV?

How should we be measuring that?

I'll talk about the investments and then Scott can just frame it.

It's not a lot different than what we're doing.

We think we're on the right track.

And we will continue to build out our catalog and continue to build out our structured data foundation.

You'll see an accelerating pace of user innovation on top of that, meaning the eBay site will continue to evolve.

There's some significant product deliverables in the second half built on that foundation which we've already announced, which, in the coming weeks and months, we'll update on when the delivery is.

But there's significant move on things like guaranteed delivery and things like authentication.

And all of that is built on the same foundation, and we've already discussed that, and we think those are on the right path.

You'll also see us continue to expand the brand advertising campaign.

As an example, we've launched it in the U.S. We have not launched it yet internationally, and that will happen in the second half.

So on the back of those things, what we're seeing is traffic improve, buyers improve and conversion improve.

We like that.

So we're going to keep expanding the surface area of that, and it's on that basis that we've given the guidance in the second half that we've given, which implies continuing improvement.

I don't know if you have anything to add, Scott.

No, you covered it.

Our next question comes from Ross Sandler of Barclays Capital.

Guys, I've got a couple of questions.

First is the spring seller update, can you just talk about the overall impact to back half revenue?

Is this going to be revenue neutral or accretive?

And if StubHub continues to underperform -- and I think Scott's comment about exceeding the high end of the revenue range that he just made, what would that imply for Marketplace's GMV, ex-FX, relative to that 8% at the high end?

And then the second question is any -- I think you mentioned the U.S. active buyers are picking up in the second quarter.

Any early feedback or metrics around the ad campaign that launched in the quarter?

Is that what's driving it?

Or is it something else?

Any color there would be helpful.

Yes, let me work backwards real quick.

First off on active buyers.

As Devin called out, excluding India, we grew active buyers by 5%, which accelerated nearly a point quarter-over-quarter, with particular strength in the U.S. And we've called out also augmented by Korea.

Three dynamics under there, some of which we've talked about, some of which I'll just expand upon.

First is retention.

We continue to see that stable as we expose more users to our new experiences.

New buyers: We see new buyers coming particularly from our new SCO landing pages based on the structured data pages that underlie that.

And we're starting to activate the brand much more at scale than we have.

And we expect that to supplement new buyer growth with increased consideration.

This is in the early phases but we're happy with the early start.

If I go back to your first couple of questions, on the -- first, maybe start with guidance.

As I called out, the Q3 organic revenue as well as the total year organic revenue of between 6% and 8% is really going to be based on the acceleration that we expect to see in Marketplace's GMV and revenue.

The pricing change that we made will continue to favor transaction revenue and much of that, as I called out in my remarks, will be reinvested to try and accelerate the pace that we see in our growth.

What was the other one?

Active buyers?

I think that was it.

That was it?

Anything to add?

I mean, how the brand campaign is doing.

I'll just say, look, we're pleased with it.

I think the response has been really good.

To some extent we started feathering brand marketing in earlier in the year, but we really kicked it in at the back half of Q2.

And you'll see that continue throughout the year and expand internationally.

We've seen traffic respond nicely.

It's a little early to be calling buyers, but we've seen traffic respond nicely, and we've seen that traffic come from new to eBay users, which is really the intention of a brand campaign is to expand those -- expand our consideration.

And 1 month, 1.5 months in, we think that's happening.

But with all brand campaigns, you're going to keep it on and that's what we're going to do.

So we've -- again, it's -- these are all themes that we think we're on the right track and we're going to keep doing it but at an accelerating pace.

Yes.

Let me double click real quick on Marketplace's GMV.

If you back up here, we've accelerated Marketplace's GMV from 4-ish to 5% to 6% over the course of the last year, and this has been driven by the U.S., which has accelerated roughly 1 point per quarter over that same time period, while international has been relatively stable.

So we've made the most improvement, as Devin called out, to our foundation and as well as changes to the Marketplace's ecosystem in the U.S. and we're in the -- and we're further along in the brand activation, as Devin called out, in the U.S. And those improvements, the changes in the ecosystem, the brand are in the process of rolling out across our platform and our properties internationally.

And so in a global ecosystem, it's highly dependent on many factors.

But as I said, things won't always be linear but we believe we're making the right investments and we're making balanced trade-offs to drive that growth, and our outlook and guidance assumes that.

Our next question comes from Douglas Anmuth of JPMorgan.

Devin, just wanted to ask you about structured data.

You talked about SCO being strong and conversion improving.

I hope you could also just talk about what you're seeing in terms of organic and SEM as well.

Yes, those are stable.

Those are kind of in line with where they've been because we haven't yet fully penetrated that.

If you look at where we've taken structured data in the last quarter, in Q2, we've really expanded its presence in SCO.

We're up to 22% of total SCO shares now on these new experiences.

And it's interesting that those experiences have been in place for longest in SCO and we see the most surface area.

And I think 2 quarters ago, we started seeing, we're seeing really nice double-digit conversion gains.

Those actually moved up again this quarter.

And we're really seeing very nice traffic acceleration in SCO now.

So we like that.

In the core, where we're just starting to intersect with things like search and the homepage, we're pretty stable.

And I guess, that's to be expected.

We think that will move up over time.

But we also said, you're not going to get the gains at the edge that you've got near the middle, near the core.

We think we will get gains, but it will be a bit of a different profile.

But still, this is playing out kind of the way we had hoped it would, which is we're seeing conversion gains, we're improving SCO, we're moving from the edge into the core.

And I'll just reiterate what I said, I believe, last quarter, which is this is not -- the pace isn't linear.

It's actually going to speed up in the second half.

And you'll be able to see the new experiences in eBay from space by this holiday and we still believe that, that will be the case.

Our next question comes from Colin Sebastian of Robert W. Baird.

I have a couple of questions.

First, with the active buyer activity picking up, I wonder if you're seeing a corresponding increase in seller activity, not only in terms of number of sellers but more granular metrics such as number of listings per seller or something like that.

And then secondly, as a follow-up on the advertising strategy, Devin, are you closer to the point now where some of the investment in the brand initiatives at the top of the spending funnel can graduate towards more of a transactional or a direct response effort?

And if that's the case, how quickly should we expect to see the benefits of that shift in volume?

Yes, 2 good questions.

So let's start with active buyers.

We are -- on the seller side, we're seeing a really nice acceleration of the number of sellers on eBay.

It's the second quarter -- it's the second straight quarter of acceleration.

So we're seeing a lot of small and medium-sized businesses start selling on eBay for the first time.

We're really happy about that.

I also talked about brands.

While we're acquiring a lot of SMBs and small sellers, we're also starting to acquire brands at an increasing pace, which is excellent.

I'm really pleased about that.

So listings.

I think what's interesting is over time, listings -- as structured data penetrates our site and our experiences, listings will become a less important metric than products will.

We're not quite there yet, but I'll just give you one example.

So listings are growing, but we're working with sellers to take duplicates down.

And we've been pretty aggressive about that right now because it clutters the site and it depresses conversion.

So listings might not linearly or exponentially keep going up.

There may be periods when it comes down, but we're actually adding to number of products.

So the most important thing are sellers and inventory, and both are increasing at an accelerated pace.

Vis-à-vis marketing, Colin, we're doing both at the same time.

So we're doing the brand and there's a significant amount of consideration work that's implicit in the brand.

But we're also doing a lot of the normal advertising that we do, which is buy this.

And you saw some very active over the last several weeks selling our deals, selling deals that are in our Price Match program.

So it's all of the above, and that's implicit in our expectation of further acceleration in the second half.

Our next question comes from Richard Kramer of Arete Research.

Two quick questions.

First of all, looks as if your principal competitor is very aggressively ramping sponsored listings in 1P ads.

Can you give us a bit of an update of where you are in this transition from the 3P ads that are sort of rolling off of MS&O to the 1P ads that should be boosting Marketplace growth?

And is that a significant factor in the second half of the year?

And then just another question just in the U.K., we've seen a number of instances where new management was reaching out and visiting sellers, especially -- maybe in response to some things like mandating the standard images rather than the watermarked ones.

And can you comment on sort of your balance of sellers?

And do you see, if you will, a larger number of sellers sort of graduating to being more professional sellers on eBay?

Or are you still in the funnel where you're trying to bring new sellers on at a very early stage, if that makes some sense?

It does to us.

So our first-party advertising business is a big priority.

We think it's a really good opportunity, and it is growing rapidly.

It is also small, and it is not a major factor in our second half guidance.

So implicit in our guidance is standard GMV, the way we've historically defined it, will continue to improve.

But with that said, we haven't backed down on the 1P opportunity at all.

This quarter, we continue to expand the SKUs that are available, the number of sellers it's available to.

And an example is in our latest seller release, some of our core anchor stores got credits for promoted listing.

And that's about to activate and they're about to start using those credits to further enhance the penetration of 1P ads.

So we're kind of in a year-over-year.

(technical difficulty)

Really acceleration here.

(technical difficulty)

Keep in mind, our commitment to the ecosystem was while this ramps, we're also going to take down third-party ads that bring people off of eBay.

And then as an example, you heard in Scott's remarks, this quarter, we took down our off eBay PLAs entirely in the U.S. So in the MS&O line, you're seeing a little bit of a mix shift between transaction, revenue and MS&O.

And if you net the 2, you're not yet seeing the type of growth that we're seeing on the left side of the ledger, if you will, because on the right side of the ledger, we're taking down ads that suppress GMV and make the ecosystem less healthy.

And we'll keep doing that until we get to the place where those bleed off and then we're just in the growth phase of the 1P ad strategy.

On the U.K. thing, I wouldn't -- look, we are still bringing in a lot of small businesses.

And in many ways, that's the heart and soul of our company, and we'll continue to focus on them.

I don't -- I've never viewed it as one or the other.

I've never viewed it as a large professional seller can't sell right alongside a very small mom-and-pop seller, even a consumer.

To me, that's what is unique about eBay.

What's unique about eBay is the seller base and the inventory, and we're actually leaning into that to make sure that we don't end up as a me-too to any other competitor.

But we occupy a very distinct place in the e-commerce world.

And it's for that reason that we're being more aggressive than ever at reaching out to small sellers.

And a great example of this is the Shopify deal, where Shopify's got lots of small merchants who we'll bring onto our platform.

And you'll see other activities in the second half of us getting more aggressive in small seller acquisition.

Thanks for the question.

Our next question comes from Paul Bieber of Crédit Suisse.

First off, I was wondering how we should think about this trajectory of gross margins through the rest of the year, given the investment in 1P in Korea.

And then secondly, on the Classified business, why is that such an important part of the eBay portfolio?

And I was hoping you could walk us through the synergies between Classifieds and the Marketplace business.

Yes, on gross margin, I think it's more of the same.

I think you'll continue -- we'll continue to see the dynamics with our Ticketbis business along with first party from Korea.

And so those dynamics, I don't expect a massive shift between first half to second, but it will continue to be a factor in our overall gross margin.

On Classifieds, we're the world's leader in consumer selling, and it just happens to be that Classified is a format for consumer selling.

We sell globally, we allow consumers to access global consumers and we allow them to access local consumers.

But both of those are important.

It happens to be we've organized it as a business unit, but it is part and parcel and core to our business.

To directly answer your question around synergies, the synergies are getting more and more every quarter because we've co-mingled the inventory now, so our buyers can see the best inventory whether or not it ends up being listed on a Classified format or on core eBay format.

So we talked about that integration 2 quarters ago, and we've seen GMV each quarter improve since we've rolled it out 2 quarters ago.

So to me this is an absolutely core part of eBay.

We're good at it, we've grown it over a decade, and it wouldn't have grown the way it has grown if not for being part of our business.

And then look, we talked about Classifieds and eBay as 2 different platforms because they're 2 different sites.

But the fact of the matter is we go after the same segment, consumer segment, as Devin talked about.

And so increasingly, what you're seeing in each of the -- in some of the major markets is a blending of that inventory to try and make sure that we're addressing customer needs across the 2 different sites and platforms.

And I think it's been very successful and it's always been a go-to-market strategy together in their respective markets.

Our next question comes from Justin Post, Bank of America.

I guess my questions are all around margins.

Can you first say if there's any unusual items in your margins this year that are depressing them ex -- excluding FX?

And then on FX, if the exchange rates start to level off or even improve, would that help your margins next year?

And then finally, can you quantify how big that Korea first-party business is for revenue?

Just thinking about the impact on Marketplace revenues and also what the impact is on gross margins.

Yes, I mean, the first party -- we're not going to breakout Korea first party.

It's not, in the greater scheme of things, a massive contributor on dollars.

On a year-over-year basis, it's been growing nicely and does impact gross margins and that's why we've called it out.

With respect to margins, a couple of things.

As I called out, foreign exchange was 180 basis points of the -- was 80 basis points of the 180 versus prior year decline in margins.

The rest of the decline was really driven by investments in and the integration of Ticketbis.

And so at a broad level, if you want to call that unusual, that's a year-over-year change that's driving most of it.

But similar to the last couple of years, we've offset many of the investments that we've been making to accelerate growth via leverage/productivity.

And so I feel like, as we look at the first half of the year, there's always unusuals.

We've called out Ticketbis in this case.

But the fact of the matter is, I think, we've done a reasonably good job of operationally trading off the investments with productivity, recognizing that we do have that Ticketbis acquisition and foreign exchange.

Maybe a bit more dynamic -- and get to your other question about foreign exchange, if you look at the last 2 years, those dynamics aren't that dissimilar with the ad that I would put in here, which is we had a standup cost in the first year of separation.

And so again, a little bit of an unusual as we stood the company up as a standalone entity.

As we look at year-to-year, we're able to offset much of the foreign exchange impact, the gains that were recorded historically below line and now that will be in revenue, as I called out in my remarks.

But over time, a stronger U.S. dollar will pressure our margin rate and over time a weaker will help.

But it's going to be muted on both sides, if not eliminated, with our hedging programs.

The next question comes from Brian Nowak of Morgan Stanley.

I have two.

The first one on the U.S., the GMV continues to accelerate nicely in the Marketplace.

I was wondering if you can just talk to any specific categories in particular that are driving that strength in the U.S. growth?

And then the second one on the seller side.

Devin, as you think about the seller services, are there any specific examples of new services that you've rolled out this year that had a positive impact on the seller growth or seller selection or anything, just so we can think about what you've learned in kind of new seller services year-to-date?

On acceleration in Marketplaces, we've seen nice progress in fashion, we've seen nice progress in electronics, we've seen nice progress in home and garden.

To some extent, the investments we're making are horizontal.

They have lifted the water line for all of our categories.

But I'd say we're particularly excited in the second half about fashion, electronics and home and garden as we approach the holiday season in the second half.

On seller services, the way that I look at what we're doing for our bigger sellers who need -- who generally take more services is we're beginning to package the suite of services like Seller Hub with an increasingly rich data profile.

And that's becoming part of our store subscription.

So you can almost think of it as the store subscription is almost a seller loyalty plan where they're paying us a fee.

For that, they're getting both price benefits to listing, plus a set of services like data and inventory management in the new products that we launched within the last year.

So we're not yet offering other services to those sellers.

But I think we'll see, as that expands over time, if there are other products and services that they want that we can begin to add more and more value to our stores.

That's the way we kind of look at the commercial model vis-à-vis our larger sellers.

And if you go back to some of the conversations we've had in the last few quarters, we've invested a lot in structured data and we've invested a lot in new experiences.

And I think you're seeing that pay off in our parts and accessories experience, which is also where we're seeing nice growth and very differentiated based on the experiences that we've developed.

Our next question comes from Mark May of Citi.

Your Q3 guidance obviously implies further revenue acceleration despite a -- I think it's 100 basis point tougher comp and despite, as you mentioned, the continued headwinds from StubHub.

Did the company exit Q2 and/or are you entering Q3 seeing this acceleration?

And that's what's giving you the confidence to provide that outlook?

Or are there some things that you plan to do or see throughout the quarter that's driving that expectation for improved growth going forward?

And then just quickly on the comment regarding Q3 revenue potentially being above your guidance if FX rates hold, can you just clarify that comment?

Is that because you're using maybe a different FX assumption in your guidance?

I won't get into the kind of where we are at this week but I would say that we're seeing improved -- we're generally seeing improvement in all the metrics that we want to see.

We're seeing, as time goes on and as we penetrate more and more with our strategy, our new product, our better customer experiences, we're seeing buyers' traffic and conversion improve.

And it's that, that gives us the confidence to give the guidance that we gave.

So I won't get into it this week versus last week.

But I'd say this business has gotten healthier consistently over time.

It's not always perfectly linear.

But we think we know.

And we expect to see the continuation of that.

And we also expect to see acceleration in the second half.

We're going to go faster.

With a lot of the foundation now in place and now seeing the results we're hoping for, we're going to go accelerate and go faster.

So it's -- that's implicit in it.

And I'd just say, vis-à-vis the revenue growth, Scott will talk about the FX, the GMV acceleration is the primary driver of the revenue acceleration.

They tend to go in lockstep.

As I mentioned in my prepared remarks, if FX remained -- FX rates remain where they are today, then all I was calling out was that the revenue dollars that we report at the end of the year would be at or above -- really above the high end of the range.

That said, the organic FX-neutral growth rate of 6% to 8% remains, and that's driven by the dynamics we just talked about.

Our final question comes from Ron Josey of JMP Securities.

I wanted to go back a little bit to the new homepage and the product.

And Devin, you talked about lower bounce rate and better engagement rates from the new homepage.

Are you seeing the same on mobile, with the mobile product pages launched?

And if you could comment around mobile conversion rates as well, that would be helpful.

It's -- we haven't -- it's a little bit different because the homepage is obviously a different experience on mobile than it is on the desktop.

But what I would say is that historically for everyone's e-commerce business, mobile conversion is less than desktop conversion.

But we're seeing improvements in mobile conversion alongside the improvements of the desktop -- from a lower base but we're seeing the improvements -- as we begin to roll the structured data experiences out to mobile as well.

So SCO on mobile is driven just the same by structured data experiences.

Our product pages are now in our native app and in our mobile web experience.

So it's moving right along at the same.

Yes, mobile's less than desktop, it is for everyone, and we're seeing it move up lockstep with the desktop, so we're pretty pleased by that.

No real difference depending on the format.

Thank you.

And ladies and gentlemen, that does conclude the Q&A session and our call for today.

Thank you for your participation.

You may disconnect your lines at this time.

Have a wonderful day.