eBay Inc. (EBAY) Q2 2013 Earnings Conference Call July 17, 2013 5:00 PM ET
John Donahoe - President and Chief Executive Officer.
Robert Swan - Chief Financial Officer and Senior Vice President
Tom Hudson - Vice President of Investor Relations
Colin Sebastian - Robert W. Baird
Douglas Anmuth - JPMorgan
Heath Terry - Goldman Sachs
Youssef Squali - Cantor Fitzgerald
Sanjay Sakhrani - KBW
Ron Josey - JMP Securities
Benjamin Schachter - Macquarie Research
Gil Luria - Wedbush Securities
Mark Mahaney - RBC Capital Markets
Ross Sandler - Deutsche Bank
Stephen Ju - Credit Suisse
Good day, ladies and gentlemen, and welcome to the eBay second quarter 2013 earnings conference call. At this time all participants are in a listen-only mode. Later we’ll conduct a question-and-answer-session and instructions will be given at that time. (Operator Instructions). As a reminder, today’s conference may be recorded.
It’s now my pleasure to turn the floor over to Tom Hudson, Vice President of Investor Relations. Please go ahead.
Good afternoon. Thank you for joining us and welcome to eBay's earnings release conference call for the second quarter of 2013. Joining me today on the call are John Donahoe, our President and Chief Executive Officer; and Bob Swan, our Chief Financial Officer. We're providing a slide presentation to accompany Bob's commentary during the call. All growth rates mentioned in John and Bob's prepared remarks represent year-over-year comparisons unless they clarify otherwise.
This conference call is also being broadcast on the Internet, and both the presentation and call are available through the IR section of eBay’s website at http://investor.ebayinc.com. 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 in talking about our company's performance. You can find a reconciliation of those measures to the nearest comparable GAAP measures in the slide presentation accompanying the call.
In addition, management will make forward-looking statements relating to our future performance that are based on our current expectations, forecasts, and assumptions and involve risks and uncertainties. These statements include, but are not limited to, statements regarding expected financial results for the third quarter and full year 2013 and the future growth in the Payments, Marketplaces, and eBay Enterprise businesses.
Our actual results may differ materially from those discussed in this call for a variety of reasons, including, but not limited to, changes in political, business, and economic conditions; foreign exchange rate fluctuations; our need to successfully react to the increasingly importance of mobile payments and commerce and increasing social aspects of commerce and increasingly competitive environment for our businesses, the complexities of managing an increasingly large enterprise with a broad range of businesses at different stages of maturity, our need to manage regulatory tax and litigation risks, including risks specific to PayPal and Bill Me Later and our need to timely upgrade and develop our systems, infrastructure and customer service capabilities at a reasonable cost while maintaining sites stability and performance and adding new products and features.
You can find more information about the factors that could affect our operating results in our most recent annual report on our Form 10-K and our subsequent quarterly reports on Form 10-Q available at http://investor.ebayinc.com. You should not rely on any forward-looking statements. All information in this presentation is as of July 17, 2013 and we do not intend and undertake no duty to update it.
With that, let me turn the call over to John.
Thanks, Tom. Good afternoon everyone, and welcome to our Q2 earnings call. We had a strong second quarter enabling $51 billion of commerce volume, up 21%. Revenue was up 14% and non-GAAP EPS was up 12%. And double-digit active user growth continued to accelerate for both eBay and PayPal. Our second quarter and first half performance underscores our company's strengths and opportunities. Led by mobile, our commerce revolution is underway and we're well-positioned to capitalize on the accelerated changes happening globally.
We're a mobile commerce leader, adding more than 3 million new customers in Q2 through mobile. eBay and PayPal each expect to do $20 billion of mobile commerce and payments volume this year. And our global commerce platforms are a competitive advantage enabling commerce to happen anytime, anywhere.
In Q2, we generated $11 billion of cross border trade through our platforms, 22% of total enabled commerce volume for the quarter. With our technology outsets and capabilities, we are enabling new retail interfaces. For example, our partnership in Q2 with Kate Spade Saturday re-imagines the storefront window as a 7x24 shoppable screen. We are also creating diverse new consumer experiences. From more ordering online and picking up in store to ordering via mobile and having the product delivered to you wherever you are. To ordering lunch ahead and skipping a long line, innovation is everywhere and the seamless, web-enabled, omni-channel, multi-screen commerce environment is rapidly emerging. We intend to be a leader in this new commerce world.
Before getting into our second quarter results, let me briefly recap three things we shared with you at our investor day earlier this year. First, with technology accelerating change in how consumers shop, our company has a bigger addressable market, the $10 trillion commerce market. By 2015 we expect to enable $300 billion in commerce volume up from a $175 billion in 2012. This is one of the ways we will measure our success.
Second, our core businesses are strong. We've proven monetization models and we've built a powerful set of technology and innovation capabilities. And third, we see four emerging battlegrounds of omni-channel commerce, mobile, local, global and data. And our global commerce platforms, technology assets and innovation capabilities leave us well positioned to lead and compete. We have clear strengths, opportunities and capabilities in each area. In this environment, both retailers and brands need a partner and that's who we are, a partner, not a competitor. Our success is strongly tied to enabling others to win, whether an entrepreneur or a global brand. Commerce is never a zero sum game and in this period of disruption and innovation we believe technology should enable more opportunity for everyone.
Now let's take a look at the quarter, starting with PayPal. In Q2, PayPal continued to expand its footprint, increasing merchant coverage and share of checkout. Finishing the quarter with a 132 million active accounts globally, PayPal added almost 5 million new accounts during the period, the fifth consecutive quarter of accelerated growth. Merchant services generated strong growth of 29% for the quarter, accelerating three points from Q1 and representing $30 billion of payment volume. PayPal continues to be a global leader in mobile payments, generating strong growth and driving incremental sales for merchants.
Mobile is enabling seamless shopping experiences for consumers and PayPal is focused on delivering great product experiences for merchants and consumers anytime, anywhere. For example, RadioShack went live in Q2 with PayPal's point of sale options in the majority of their U.S. locations. PayPal is all also driving innovation for small merchants. The cash for registers program was announced in Q2 and went live earlier this month in the U.S. PayPal is waiving transaction fees for up to $20,000 of transactions per month through January 2014 for the first 10,000 merchants who qualify.
With a 132 million digital wallets in the cloud, availability in 193 countries and unmatched global risk management capabilities, PayPal has powerful competitive advantages. PayPal's core business is strong and growing. And as merchants and consumers meet better, more convenient and smarter payment options across every commerce channel, PayPal is committed to leading disruptive innovation.
Now let's turn to marketplaces. In Q2, eBay's core or non-vehicles GMV grew 13% over the prior year. And in the U.S. core GMV growth was up 16%. Active user growth was also up making this the fourth consecutive quarter of accelerating double-digit growth. Performance was driven by continued site improvements and by eBay's focus on delivering consumers abundant selection at great value with personalized trusted shopping experiences. Top rated sellers continue to deliver a great experience and outpace e-commerce growth, accounting for 45% of U.S. GMV in Q2. Their same-store sales grew 22%. Fixed price listings accounted for 69% of GMV globally and half of all U.S. transactions included free shipping in Q2.
eBay continued to see strong growth in mobile. eBay mobile attracted 2 million new users in Q2 and drove an average of 5.6 million listings per week through eBay sellers. The pace of innovation continues to accelerate at eBay. For example, Cassini, eBay's new search engine was fully rolled out to North America in Q2.
And shipping is another way where eBay is continuing to innovate. eBay's global shipping program added eight countries in Q2, bringing the total to 36. This program makes international shipping for sellers easier and it creates a more trusted experience for buyers with shipments now fully trackable. These are examples of the range of product enhancements and initiatives being implemented by eBay to improve the buyer experience, create more consistent retail-like standards and drive increased selection. eBay is driving growth by pulling multiple levers which collectively deliver a great customer experience.
Now let me briefly touch on eBay Enterprise. In Q2, we rebranded GSI Commerce to its new name, eBay Enterprise. The new name best captures this business today, a commerce partner of choice for retailers and brands and it captures its role in our company. eBay Enterprise continued its success in Q2 by enabling its retail clients to grow faster than e-commerce. Same-store sales grew 19%. We feel very good about eBay enterprise's ability to deliver omni-channel solutions that leverage eBay Inc. capabilities.
So in summary, our company had a strong second quarter and first half. And as we look at ahead to the second half of the year, we expect continued macroeconomic headwinds in Europe and Korea. Despite that, we still expect to deliver within the range of our guidance for the full year. We have a strong core business and we feel very good about our strengths and competitive advantages and global opportunities in the evolving $10 trillion commerce market. We remain confident in our ability to deliver the goal we have set for ourselves.
Now I'll turn it over to Bob who'll provide more details on Q2 and our outlook.
Thanks John. During my discussion, I’ll reference our earnings slide presentation that accompanies the webcast.
The first half was a strong start to the year and Q2 was another deposit on our multi-year plan. Total enabled commerce volume in the quarter grew 21% to $51 billion. Revenue was $3.9 billion, up 14% and non-GAAP EPS was $0.63, up 12%. User growth accelerated 1 point for both PayPal and Marketplaces. We are maintaining our full year guidance, yet expect to be at the lower end of our range on both the top and bottom line. I’ll provide more context on this later.
As we discussed at Analyst Day in March, we're expanding our addressable market, had a portfolio positioned to capitalize and lead and are accelerating our mobile leadership position and the rate of innovation in our company. As the strategic partner of choice for merchants of all sizes, we enabled $51 billion of commerce volume at a take rate of 7.7%. Our take rate has declined slightly as our faster growing business PayPal has a lower take rate. We enabled a $100 billion of commerce volume in the first half of the year with a growth rate in line with our three year plan.
Now let's take a closer look through results from the quarter. In Q2 we generated net revenues of $3.9 billion, up 14%. Organic revenue growth was 15% with the divestiture of rent.com in the second quarter last year decreasing growth by approximately half a point. Second quarter non-GAAP EPS was $0.63, up 12%. Non-GAAP operating margin was 26.3%, down 100 basis points due primarily to a benefit from an indirect tax settlement in the second quarter last year as well as business mix. We generated free cash flow of $658 million in the quarter. CapEx was 9% of revenue primarily due to investments in search, data and site operations.
Now let's take a closer look to our segment results. PayPal had a strong quarter. Revenue reached $1.6 billion, up 21% on an FX neutral basis. A few quick highlights on PayPal operational metrics. Total active accounts growth accelerated one point to 17%. TPV on an FX neutral basis accelerated three points and grew 25%, driven primarily by continued expansion at PayPal and merchant sites around the world and increase in share of checkout and 160 basis points increase in PayPal penetration on eBay. Merchant services FX neutral TPV grew 29% in the quarter. Transaction margin was 64.4% in Q2, down 190 basis points due primarily to large merchant mix and smaller gains on our foreign currency hedges. PayPal segment margins came in at 23% for the quarter, down 280 basis points due primarily to lower transaction margin and investments in consumer awareness, product initiatives and merchant ubiquity.
Let me touch on a few quick highlights for Bill Me Later. BML had a good quarter and is becoming an increasingly important component of our overall portfolio. BML had strong standalone financials with TPV of $934 million, up 34%. BML's penetration as a funding source in the PayPal wallet was 4.1% share on eBay in the U.S. and 1.8% on merchant services. This penetration improved PayPal's funding mix and helped to reduce overall funding costs. We continue to finance the BML loan receivable portfolio using offshore cash which has enabled us to increase the return on this asset. Overall, BML continues to perform well.
Now let's turn to Marketplaces. Marketplaces had a strong quarter with net revenues of $2 billion, up 10% on an FX neutral basis. Revenue growth was negatively impacted by two points from lapping a onetime gain from an indirect tax settlement. Growth was driven by FX neutral transaction revenue growth of 10% and marketing services revenue growth of 12% from our adjacent formats.
A few quick highlights on our Marketplaces operational metrics. Active user growth accelerated to 14% driven by mobile, site enhancements and emerging markets. FX neutral non-vehicle GMV grew 13%, driven primarily by improvements in the customer experience, mobile and strong performance in the auto parts and accessories and home & garden categories. Sold items increased 11%. The growth was pressured primarily by tougher comps in Korea from low ASP categories added last year and stricter seller standards in China.
Take rate, excluding vehicles, Stub Hub and the onetime benefit from indirect taxes was down slightly from last year due to higher promotional activity in our international markets. Marketplaces segment margin was 39.7% in Q2, up 10 basis points primarily due to productivity partially offset by investments in the user experience and trust.
Now let's turn to eBay Enterprise. eBay Enterprise continues to deliver on its goal to enable its clients to grow faster than ecommerce market with 19% same-store sales growth. Revenue for Q2 was $246 million, up 11% driven by strong volume growth offset by a lower take rate and channel mix. Segment margins came in at 4.4%, down 30 basis points due to take rate reductions partially offset by productivity.
Turning to operating expenses. In the second quarter, our operating expenses were 43.5% of revenue, down 110 basis points. Operating expense was down due mainly to lower sales in marketing from improved marketing efficiencies and a shift in spend to product and user experience, partially offset by provisions for transaction loan losses resulting from higher loss experienced in the quarter and investments in marketplaces trust initiatives.
We ended the quarter with cash, cash equivalents and non-equity investments of $11.7 billion, including approximately $3 billion in the U.S. We've improved our financial flexibility, funding 65% of the BML loan receivables portfolio with offshore cash in the quarter. And we repurchased 8.5 million shares of our common stock for approximately $466 million.
With that let me turn to guidance. First, a little context on our business outlook. First, the macro environment in Korea is weak and Europe is slower than we expected, impacting both PayPal and Marketplaces. Second, currency has continued to deteriorate through the first six months of the year and we have greater headwinds as the U.S. dollar strengthen versus the Euro, Pound, Australian Dollar and Korean Won. And third, we expect tax rate to be approximately 19.5% at the high end of our previous guidance due to less contribution from our international businesses.
Notwithstanding these, we expect to be within our previous full year guidance. But anticipate being at the lower end of revenue and non-GAAP EPS of $16 billion to $16.5 billion and $2.70 to $2.75 per share. We expect modest revenue acceleration from the first half of the year to the second half. For the third quarter, we expect revenue of $3.85 billion to $3.95 billion, representing growth of 13% to 16%. And we anticipate non-GAAP EPS of $0.61 to $0.63, representing growth of 12% to 15%.
In summary, we feel good about our performance. Our core businesses had a strong quarter and we continue to test and learn in our adjacencies and see such as local, global and omni-channel. PayPal continues its strong growth with increasing focus on simplifying and improving the customer experience. Marketplaces is strong, particularly in the U.S. driven by investments in buyer and seller experiences. And eBay Enterprise is performing in line with our expectations as we continue to invest in technology and growing the client portfolio. We are investing in our business for the long-term and we are focused on delivering the next generation of global commerce and payments capabilities.
And now we'd be happy to answer your questions. Operator?
Earnings Call Part 2: