Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Mark Rowen – Vice President, Investor Relations

John Donahoe – President and Chief Executive Officer

Bob Swan – Chief Financial Officer

Analysts

Scott Devitt – Morgan Stanley

Christa Quarles - Thomas Weisel

Mark Mahaney - Citigroup

Doug Anmuth - Barclays Capital

Jeffrey Lindsay - Sanford Bernstein

James Mitchell – Goldman Sachs

Justin Post – BAS-ML

Heath Terry – FBR Capital Markets

Analyst for Youssef Squali - Jefferies & Company

eBay Inc. (EBAY) Q1 2009 Earnings Call April 22, 2009 5:00 PM ET

Operator

Good day, everyone. Welcome to eBay's first quarter 2009 earnings results conference call. This call is being recorded. With us today from the company is the President and Chief Executive Officer, Mr. John Donahoe, and the Chief Financial Officer, Mr. Bob Swan. At this time I would like to turn the conference over to Mark Rowen, VP of Investor Relations.

Mark Rowen

Good afternoon. Thank you for joining us and welcome to eBay's earnings release conference call for the first quarter of 2009. 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. This conference call is also being broadcast on the Internet and both the presentation and call are available through the Investor Relations section of the eBay website at investor.eBay.com.

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 the reconciliation of those measure to the nearest comparable GAAP measures in the slide presentation accompanying the conference call.

In addition, management may make forward-looking statements relating to our future performance that are based on our current expectations, forecasts, and assumptions, and involve risks and uncertainties, including those relating to the company's ability to grow its businesses, user base and user activity. Our actual results may differ materially from those discussed in this call for a variety of reasons including, but not limited to, the impact of recent global economic events and the global economic downturn, foreign exchange rate fluctuations, changes in political, business, and economic conditions, the impact and integration of recent and future acquisitions, our increasing need to grow revenues from existing users in established markets, an increasingly competitive environment for our businesses, the complexity of managing a growing company with a broad range of businesses, our need to manage regulatory tax, IP, and litigation risks, including risks specific to PayPal and the financial industry and risks specific to Skype's technology and to the VoIP industry, and our need to upgrade our technology and customer service infrastructure at reasonable costs, while adding new features and maintaining site stability.

You can find more information about factors that could affect our operating results in our most recent annual reports on our Form 10-K and our subsequent quarterly reports on Form 10-Q available at investor.eBay.com. You should not unduly rely on any forward-looking statements and we assume no obligation to update them. All information in the presentation is as of April 22, 2009, and we do not intend and undertake no duty to update this presentation.

And with that, I'll turn it over to John.

John Donahoe

Good afternoon everyone and welcome to our Q1 earnings call. We delivered solid Q1 results, exceeding expectations in a tough economy. Revenue was just over $2.0 billion and our non-GAAP EPS was $0.39. We managed our expenses well during the quarter and generated free cash flow of close to $600.0 million. All in all, we are a strong company operating in a challenging global environment.

I think it’s fair to say that we have had an active start to 2009. In addition to executing against our priorities, we held an analyst day at which we detailed our three-year growth plans. And last week we made some important announcements that reinforced those plans and move us forward strategically.

Before discussing our Q1 results in greater detail, let me recap the strategies and priorities we outlined at our analyst meeting last month.

Our company connects buyers and sellers and we are focusing our portfolio on two core growth engines that accomplish this: payments and e-commerce. PayPal is the leading online global payments network and we intend to approximately double this business over the next three years. PayPal has unmatched advantages and will be the leader in online global payments.

eBay is competitively positioning itself where we can win in the $500.0 billion secondary market. We are fixing the foundation of our core eBay marketplace by improving trust, value, and selection and we are transforming the user experience.

We are also growing other formats, such as classifieds and Stuff hub that connect buyers and sellers. Overall, we expect our total eBay marketplaces business to grow slower than the market this year but with the market in 2010 and faster than the market in 2011. Skype is a great stand-alone business and we’re moving to maximize its potential and value. And we are elevating the role of technology across our company to deliver more innovative user experiences, and last but not least, we are managing our company with operating discipline and accountability.

Since announcing our three-year growth plans a month ago, we have taken action where it is consistent with our strategy. We are focusing our portfolio by divesting assets that are not closely aligned with our two core growth businesses, such as Skype and Stumble Upon. And we are strengthening our core eBay business by signing an agreement to acquire Gmarket, Korea’s largest marketplace.

So now let’s take a look at our first quarter results for each business unit. PayPal had a strong quarter, growing significantly faster than e-commerce. Both revenue and total payment volume were up double digits. Active accounts also continued to grow at a strong double-digit rate and PayPal penetration on eBay continued to increase.

Our Merchant Services total payment volume grew 26% year-over-year with organic growth of over 30%. PayPal’s share gain in the U.S. is outpacing e-commerce’s growth two-to-one. We are seeing the impact of combining the large merchant sales team for PayPal and Bill Me Later.

For instance, in the first quarter alone, we signed 26 large merchants representing $8.4 billion in addressable online sales. This includes the eighth largest online retailer, Sears.com, and now 22 of the top 100 online retailers accept both PayPal and Bill Me Later and the pipeline is incredibly strong.

These large retail brands achieve incremental sales through PayPal and Bill Me Later. We drive customers, new customers, to these online retailers via customized promotions targeting our user base and PayPal is one of the largest customer data bases of active online shoppers in the world, and we apply increasingly sophisticated targeting and profiling tools.

PayPal also drives proven higher check-out conversion for merchants compared to other payment products. Among the largest U.S. online merchants, PayPal Express Check Out delivers conversion rates of 80%. This is 23% higher than average credit card conversion rates of 65%.

Bill Me Later continues to perform well and we are pleased with the progress we are making in integrating this business. Bill Me Later’s loss performance is holding up well in a very challenging credit environment and bob will provide more details on this in a minute.

In our eBay marketplaces revenue was about $1.2 billion for the quarter, down 18% year-over-year with foreign exchange accounting for 10 points of that decline. Underneath this overall number we see a number of factors at play.

Core GMV in our eBay transaction business was down 5% on an FX-neutral basis and beneath this we continue to see a format migration as consumers increasingly choose the fixed-price format. Fixed-price business on eBay grew 12% during the quarter, significantly faster than e-commerce and now accounts for approximately half of our total GMV. However, the auction format declined 20%.

Our classified business continues to be an effective format in these tough economic times, growing 23% and Stuff Hub delivered double-digit revenue growth for the quarter.

Our advertising business was softer than expected due to the macroeconomic conditions impacting that entire industry and our vehicles business was down significantly as the auto industry is experiencing a significant contraction.

So the bottom line is that we are seeing a marketplace business in transition with shifting formats and preferences on how buyers and sellers connect. The strategies we outlined in analyst day are addressing these challenges. We are focused on delivering buyers the value and selection they want, in the format they choose, from sellers they trust.

Based on the actions we are taking to improve the eBay experience, we have continued to see strong performance by our highest rated sellers. While e-commerce growth was flat in the U.S. during the first quarter, our highest rated sellers, those with 48 and above detailed seller ratings, or DSRs, saw their sales increase 11% during the quarter. And the percent of core GMV generated by these high-quality sellers topped 30% in the U.S. during Q1.

Buyers continued to benefit from greater value and selection on eBay. Average daily listings hit 160.0 million during the quarter and our Daily Deals continued to move high merchandise volumes quickly at great prices. Free shipping is also becoming a more frequent offer, with almost 30% of U.S. listings providing this service and active users were up modestly in Q1 to more than 88.0 million.

Buyers will continue to see improvements in trust, value, and selection as we enter the holiday season later this year. We are also strengthening our marketplaces business globally. At our analyst day we said that Asia is becoming an increasingly important region for us, representing 9% of eBay marketplace’s revenue in 2008.

Last week’s announcement of our tender offer for Gmarket significantly strengthens our position in Korea. Gmarket is an innovative, competitive platform and the combination of IAC, our current Korean marketplace business, and Gmarket, gives us a powerful foothold for long-term growth, both in Korea and in the Asia region more broadly.

Skype had another strong quarter, with revenue up 21% and registered users topping 440.0 million. Both Skype-to-Skype out minutes continue to show strong growth momentum.

Skype had a number of major products and partnership announcements during the quarter, including Skype for Android, Skype preloaded on Nokia’s N-Series phone, Skype for iPhone, and Skype for Blackberry, which launches in May. Josh Silverman and his team continue to do a great job driving Skype’s innovation and momentum.

The release of Skype for the iPhone application has generated a great response. More than one million people downloaded Skype for iPhone in the first 36 hours after it became available and Skype immediately became the number one downloaded free application in more than 40 markets, including the U.S., U.K., and Japan. In just over a week downloads passed the 2.0 million mark, putting Skype on more than 6% of all iPhones and iPod touch and adding almost half a million new Skype users.

As you know, last week we announced our intent to separate Skype, beginning with an initial public offering in the first half of 2010. I have said repeatedly over the past year that we will make the right decision to maximize Skype’s potential and long-term shareholder value and we believe the IPO is the best path.

As an independent publicly traded company, Skype will have the focus and resources it needs to compete and win in the huge communications market. And eBay will be able to focus entirely on our two core growth engines and deliver long-term value to our shareholders.

In summary, we are focused on the new strategic direction we have outlined for the company and we are executing against our priorities. 2009 will continue to be a challenging year. As we said in March, our core eBay business is expected to contract this year as we improve the user experience and more competitively position eBay in the face of a very tough economy.

While we saw some signs of stabilization in the first quarter, we still have a lot of work to do. We will continue to take the right actions and make smart short-term tradeoffs to competitively position eBay for the longer term. And at the same time we will continue to invest in and grow our other e-commerce formats, driving a variety of ways to profitably connect buyers and sellers.

PayPal will continue to aggressively drive growth as the leading online payments network and Skype’s got great momentum.

We are a strong company with a valuable portfolio of assets creating an increasingly diversified revenue mix and competitive global footprint. As we invest in the long-term success of our company, our focus is on strong operating discipline and solid execution of our growth strategies with a management accountability to deliver on our commitments.

And now before taking questions, let me turn it over to Bob, who will take you through more specifics.

Bob Swan

Before I delve into the financial results for the quarter, let me give you the financial perspective on the key strategic priorities that John discussed earlier.

First, we are focusing the portfolio on our two core growth engines, payments and e-commerce and we are allocating capital to ensure the full potential of our two core businesses while capturing inherent synergies across them and where synergies don’t exist we will divest our non-core assets.

Secondly, we are managing the company with operating discipline and accountability. We are operating smarter to drive efficiencies of approximately $2.0 billion over the next three years in order to free up financial capacity to invest for growth. Technology will be a priority.

And third, our business generates strong cash flows and high margins that gives us the flexibility to reinvest to grow and/or return capital to our shareholders. We will be disciplined in how we make these tradeoffs.

Our first quarter results and actions are consistent with what we laid out for you at analyst day. Now let’s get into the specifics. During my discussion I will reference our earnings slide presentation that accompanies the webcast. All growth rates mentioned in my prepared remarks represent year-over-year comparisons unless I clarify otherwise.

Overall, we executed well against our strategic priorities in the quarter. revenue came in at the high end of guidance and we exceeded on the bottom line due to solid cost control in a difficult economic environment. PayPal Merchant Services continued its strong growth, marketplaces diversification continued as buyer preference drove format shift and Skype grew rapidly and significantly improved its segment margins.

Our combined businesses generated net revenues of $2.0 billion in the quarter, an 8% decrease. Organic revenue was down 1%. A stronger U.S. dollar cost us 9 points of revenue growth and acquisitions added 2 points.

Despite operating in a tough economic environment PayPal Merchant Services, classifieds, and Skype all delivered double-digit growth.

Non-GAAP EPS was $0.39 in the quarter, a 7% decrease. We outperformed the midpoint of our guidance, primarily due to tight cost controls and better than expected TPV and GMV volume. Excluding the impact of a stronger dollar, our non-GAAP EPS increased 5% as the actions we took last October to simplify our organization and prophecies reduced our cost structure and positions us well to deal with slower growth in 2009.

Our non-GAAP operating margins for the quarter was 30.7%, down 129 basis points from last year. The operating margin decline was primarily a function of business mix, which pressured gross margins by 400 basis points, along with increased R&D and product-related spend. These were mostly offset by improved efficiencies in sales and marketing and lower G&A costs.

We generated free cash flow of $578.0 million, or 29% of revenue. Capex as a percentage of revenues came in at a better than expected 5% due to the timing of certain expenditures.

Return on invested capital decreased to 25.5% on a trailing 12-month basis. The decline from prior quarters is primarily attributable to our recent acquisitions of Bill Me Later and DBA bilbasen. While these acquisitions create near-term pressure on returns on capital, we believe they will generate attractive long-term returns for our shareholders.

Now let’s take a closer look at our segment results, starting with our payments business. PayPal posted a strong quarter and now represents 32% of company-wide revenues, up 27% from last year. Total revenue came in at $643.0 million, an 11% increase. Total payment volume was $15.9 billion, an increase of 10%. TPV increased by 9% in the U.S. while growing by 11% internationally.

In key operating metrics global active PayPal accounts grew to 73.1 million, an increase of 22%. PayPal continued its strong penetration gains on eBay, up 9 points from a year ago, to almost 64% globally, helped by increased buyer protection.

Beyond eBay, PayPal’s Merchant Services business posted another strong quarter despite a difficult economic environment. Merchant Services recorded $8.4 billion of global TPV in the quarter, representing 26% growth and accounting for 53% of total TPV.

PayPal’s global take rate held relatively steady at 3.81% in the quarter while transaction margins were stable. PayPal’s direct segment margin came in at 17.4% in the quarter.

Let me touch on a few key operating metrics for Bill Me Later. Bill Me Later’s gross receivable balance at quarter end was $556.0 million, down $49.0 million from last quarter. We continue to adapt our flexible credit positioning model in order to manage the quality of the receivables and we believe this is the right tradeoff in the current environment.

Our desire and ability to manage risks on our loan portfolio has caused us to grow the Bill Me Later business more slowly than in past quarters. Net charge offs as a percent of receivable have increased moderately but the increase is in line with our expectations and risk adjusted margin remains strong and higher than industry average.

The integration of Bill Me Later and PayPal is progressing on schedule. The risk management and sales functions have begun to be integrated and cross-promotional efforts between Bill Me Later and PayPal users are progressing as expected. Overall, the acquisition is off to a good start.

Let’s now move to our marketplaces business. Overall, the business achieved net revenues of $1.2 billion, an 18% decrease. Transaction revenue decreased 18% and marketing services and other revenues declined by 12%. With 54% of marketplaces business coming from outside the U.S., the stronger dollar significantly impacted top line performance. On an FX-neutral basis, marketplaces revenues were down 8%. Segment margins for the marketplaces business remained strong at 45%.

The transaction revenue decline was through the result of a 20% decrease in GMV. As we said at analyst day we expect the fixed-price format to outperform the auction format over the next few years as we continue to make it easier for buyers to find great deals and wide selections from the most trustworthy sellers in the format of their choice.

Fixed price continues to grow significantly faster than the e-commerce market as a whole at 12% on an FX-neutral basis, while auctions declined 20% in the quarter.

Our vehicles GMV declined 27% FX-neutral during the quarter as this big-ticket category continues to be dramatically impacted by the recessionary environment.

Let us turn to marketing services and other, which we view as alternative formats for bringing buyers and sellers together. Our classified business exhibited continue strength in the first quarter with 23% revenue growth, or 41%, on an FX-neutral basis.

Our text and graphical advertising revenue were flat this quarter, impacted by a weak advertising environment as page use and CPCs declined.

Consistent with the last few quarters, Shopping.com declined and will continue to be negatively impacted for the next couple of quarters until we lap the rules changes made by search engines last year.

A couple of quick highlights on operational metrics. Active user growth came in at 2% on a trailing 12-month basis. Sold items declined by approximately 2% as the economic slowdown continues to impact consumers’ propensity to buy.

ASPs declined 8%, continuing the trends from recent quarters as our search serves up the most relevant inventory of great values and consumers trade down in the current economic climate.

On a geographic basis GMV, ex-vehicles in the U.S., was down 11% and down 1% internationally on an FX-neutral basis.

Cross-border trade accounted for 17% of GMV, up 1 point from Q4, driven primarily by the U.K. Asia showed particular strength in cross-border trade unit volumes as our enhanced global supply chain capitalizes on bringing better values to our buyers.

Now let’s turn to our communications business. Skype posted total revenue of $153.0 million in the first quarter, an increase of 21%. On an FX-neutral basis, growth was 38%. Total registered users grew to 443.0 million, representing an increase of 43% over last year. Skype-to-Skype minutes increased to approximately 24.0 billion during the quarter, representing 67% growth and Skype out-minutes increased by 65% to 2.9 billion.

The team at Skype continues to invest in, and grow, the business while delivering attractive segment margins. For the quarter, direct segment margin was 23.7%.

Now let me touch briefly on ink level operating expense and cash position before I discuss guidance. At analyst day we talked about operating smarter and more efficiently in order to free up capacity to invest in technology, user experience, and expansion of buyer protection programs for our customers.

In the first quarter, sales and marketing as a percent of revenue decreased by over 400 basis points, largely due to lower and more efficient online and offline spend. Product development came in 150 basis points higher than last year, driven by increased investment in our top technology priorities. G&A costs were down 8% from last year. employee costs were down, partially offset by acquisition-related costs. Our provision for transaction loan losses came in 10 basis points higher than last year.

We generated strong free cash flow during the quarter and paid down $600.0 million on our line of credit. At quarter end we had $400.0 million drawn on our credit facility with the remaining capacity at $1.4 billion. Cash and cash equivalents was $3.1 billion at quarter end, of which $2.7 billion was held internationally.

Now let me turn to our second quarter non-GAAP guidance. Our guidance reflects weak consumer spending, tight cost controls, and the negative impacts from foreign exchange.

In Q2 we expect to generate revenue of $1.85 billion to $2.05 billion and non-GAAP EPS of $0.34 to $0.36. Compared to the first quarter, the midpoint of our guidance is down approximately $70.0 million on the top line, and $0.04 on the bottom line, primarily driven by seasonality.

Consistent with recent trends, we assume that the declines in GMV and TPV will remain relatively stable with Q1 levels and we expect that take rate will decline as more of our sellers achieve discounts for high service levels.

In addition, we anticipate that volume in CPCs and the online advertising markets will continue to come under pressure.

Based on these factors, the implications for the second half will be as follows:

First, we assume the economy and our volume will remain relatively stable; we anticipate our take rate will continue to fall as more of our GMV is sold by high-quality sellers; and third, as per recent trends we expect advertising to be softer throughout the year.

Combined, these factors are likely to negatively impact our second half EPS by approximately $0.04 to $0.06 when compared to the first half.

In summary, we continue to operate in a challenging economic environment and our task at hand is to focus on what we can control. We will manage costs diligently and at the same time continue to invest in our portfolio. We are on track to execute against our 2009 priorities and beyond, to strengthen our portfolio, and to extend our leadership in e-commerce and online payments.

We believe our agreement to acquire Gmarket will strengthen our position in Asia and our intent to conduct an IPO with Skype will focus the portfolio on our two core businesses.

And finally, we believe the financial architecture of our plan will allow us to make the necessary investments in and changes to our businesses while still delivering strong top line, bottom line, and free cash flow to our shareholders.

And now we would be happy to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Scott Devitt – Morgan Stanley.

Scott Devitt – Morgan Stanley

Two please. The first one related to the $500.0 billion liquidation opportunity. EBay has always been a pretty healthy marketplace for excess and liquidation goods so I was just wondering if you flush that out a little bit. Are there incremental opportunities, are focusing on things like Smart Bargains and Buy.com or could you just walk us through that opportunity in a little more detail.

And then secondly, the $2.0 billion of efficiencies that you’ve highlighted over the next three years, it seems like PayPal processing costs are a pretty significant component of that. And in as well shifting payment processing away from credit cards can be helped by Bill Me Later, so I was wondering your early progress in that area of shifting payment processing costs away from credit cards towards ACH transfers, or even with Bill Me Later replacing credit card processing.

John Donahoe

Congratulations on your new home. Let me just talk for a minute about secondary market. What secondary market was is a label that attempts to capture what we view as our sweet spot. And let me try to definitize it a little more clearly.

On eBay we’re going to have the new in-season merchandise much like every other retailer in the world. You can get the latest HP laptop one of 30 places online, including on eBay. And so our small sellers or advertisers will bring that, but that’s not our primary focus. Our focus is to have that but then to offer inventory that no one else can.

And that inventory really comes in, I would say, two or three categories. One is the historical eBay sweet spot, which is the used [inaudible] inventory. But second there is this, as you described, liquidation opportunity that we have frankly always had a piece of.

But there is a third piece that we see as one of the fastest growing offline segments as product life cycles compress, particularly in fashion and in consumer electronics, which are brand new items that are one season out of date. And this is whole explosion in outlet malls across the world where retailers want to get rid of this stuff, they don’t want it in their retail store and yet they don’t to deal with getting rid of it.

And it turns out that whole segment is very underpenetrated online because it’s a very inefficient supply chain. And so a marketplace, and the eBay marketplace is the perfect place to offer that because we have a wide variety of sellers so that whether it’s an entrepreneurial middle man that got a piece of that inventory or whether it’s a retailer that wants to put it directly on the marketplace or whether it’s an element model that wants to do it, we can offer that.

And then we give buyers the only place online where you can compare the brand new item with the item that’s one season out of cycle with a refurbished item with the used item. And so we think this both captures what is our historical sweet spot, as well as a growing market opportunity where we are very well positioned to win.

And you mentioned private sales. Let me just give you an example of the kinds of things that we can now do on eBay that frankly, eight short months ago we couldn’t, because of the way we operated.

In this Daily Deals, what this is really doing is giving us the chance to drive high-volume inventory, quickly. So take a buy.com, which is—buy.com put X-box live subscription cards on our Daily Deals one day last month and they put it on for about half what it is available otherwise and they sold 8,000 of them in 6 hours. And you think about 12 months ago, you couldn’t have sold 6,000 of anything quickly on eBay. TigerDirect.com sold 3,500 surge protectors in less than 5 hours.

So what it’s allowing is people to bring high volumes of fixed-price inventory on the site and move it quickly. And we think that’s an opportunity where our marketplace is uniquely suited to win.

Bob Swan

Let me take the second question of your one allowed question. You know, we laid out at analyst day our plans over the next 3 years to operate smarter, which we believe will enable us to generate $2.0 billion in cost savings that we would re-deploy to invest and grow.

And we really broke it down into three key areas. One was improving the end-to-end customer experience across all three businesses and in doing so increase the efficiency of our sales and marketing spend and reduce contacts into our customer support centers.

Secondly, we said we would simplify the organization and as a result lower our overall G&A costs over the three-year time frame.

And third, and directly to your point, was transaction expense in our PayPal business is a large component of that expense space and that we believe by offering choice for consumers we could also lower processing costs. And we’ve been making some pretty good progress on this over time.

I think the evidence of it is reflected in our transaction expense. It’s been coming down modestly over the last six to eight quarter. We expect it continue to trend in that direction over time and as we integrate Bill Me Later into the PayPal wallet and on eBay we believe that will continue to drive down transaction expense while giving our consumers more and more choice.

Operator

Your next question comes from Christa Quarles - Thomas Weisel.

Christa Quarles - Thomas Weisel

I was wondering if you just highlight the sequential decline in Bill Me Later given that the Q4 number you are reporting is only for about a month and a half. It seems like a fairly steep decline and I was just curious if they have any mix issues that make it more seasonal, I guess, than your merchant service business.

And then I was just wondering, also, John, if you could just highlight more on the stabilization that you keep talking about and is embedded in your guidance.

Bob Swan

On the first one on Bill Me Later, the primary decline is in the loan portfolio balance at the end of the period so that the full 90 days is not really a driver. But the decline in the loan portfolio or the balance at the end of the period is primarily driven by two things.

One is just seasonality. Fourth quarter is a higher quarter for Bill Me Later and then those consumers pay off their balances in a relatively timely manner so Q4 to Q1 seasonality with Bill Me Later is all else equal, going to be coming down.

And secondly and probably more importantly is our credit decision you mentioned in that our collective desire and the team’s ability with their decision you mentioned to in tough economic times and tough credit environments with high unemployment, they have the ability in their model to be tighter in their decisioning and we did that during the course of the quarter and as a result we took on lower balances consciously as we tried to manage the dynamics between both growth and risk management.

John Donahoe

On the crystallization, or the stabilization, here’s what we’re seeing. There is no doubt it is a tough economic environment and that’s global. We see that in the U.S., the U.K., going down Continental Europe and across Asia. And if we were to piece apart the quarter, it was getting worse in the first four to six weeks of the quarter and over the last, really four weeks, we say growth rates stabilizing.

Now they aren’t stabilizing at rates we like. We like the fact that they are stabilizing at 30% organically with PayPal merchant services but we would like that to be 40% or 50%. We don’t like the fact that they are stabilizing at minus 5% in our core GMV business. We would like that to be plus 5%.

But nonetheless we see the decline has flowed and they seem to be kind of flat-lining a little bit. So we can’t, we don’t have any crystal ball better than anyone else about what is going to happen in the global economy in the second quarter and second half of the year, but we are focusing on what we can control, which is trying to provide great value for both our buyers and sellers, consumers and merchants.

Operator

Your next question comes from Mark Mahaney – Citigroup.

Mark Mahaney - Citigroup

Just a quick question on the Skype segment margin. I think that 23%+ is nicely above your long-term margin outlook. Is there something new? And it also seems like you had some new product and events roll out this quarter so that makes that 23% even more impressive. Is there something that brings that down over the balance of the year and through the next two years and the reason why we shouldn’t think about that as the steady state going forward?

Bob Swan

When we talked to you at analyst day we highlighted both the progress the Skype business is making and our belief that we can more than double the business over the next three years and gave a margin structure in the 18% to 20% range.

Quarter-over-quarter margins have continued to expand but we are going to make sure that we continue to reinvest to fully capitalize on the long-term growth potential of Skype. We believe that at this stage that over the next three years 18% to 20% is probably the right range to be thinking about, making the appropriate investments to invest and grow and enhance its competitiveness.

Operator

Your next question comes from Doug Anmuth - Barclays Capital.

Doug Anmuth - Barclays Capital

Bob, can you give us a little bit more color on the comments you made on the back half of the year, and in particular the comments on GMV and TPV stabilizing, but you’ll be on easier comps there in the back half. And does that include Gmarket being slightly accretive as well, for the year.

Bob Swan

If you don’t mind, I’ll try to be a little more holistic about what we know but also what we don’t know and in terms of how we have tried to be as transparent as we can in articulating both the second quarter and the second half of the year.

The second quarter’s guidance essentially reflects John’s comments before about stabilization and growth rates in our core business Q1 to Q2 on a year-over-year basis. And revenues we expect will come down, not because of a lack of stabilization but more a function of seasonality of Q1 to Q2. And then secondly, take rates coming down Q1 to Q2 as more of our sellers provide better service and as a result the power seller discounts continue to go down. So that we feel relatively comfortable with, the first half.

In the second half, we are not going to give full year guidance, just like last quarter. What we are trying to do is trying to tell what we know is going to happen that’s within our control. When we look at the second half a couple of points worth mentioning.

One is clearly the comps will be easier for a couple of reasons. One is, as you will remember, last year in the August time frame, and for the rest of the year, things got pretty hairy in the global economic environment and that dramatically impacted our second half results.

And two, currency comps get much easier in the second half. So those two things, strictly from a comp basis, will work in our favor.

At the same time, we are going to continue to take the steps necessary to improve our competitive position and we believe our sellers are going to continue to adopt their models to provide better service for our consumers. And the implication to that is we believe our take rate will come down from the first half to the second half as we make those decision to enhance our competitiveness and they make those decisions to enhance their service levels.

That is within our control and our community of users control and we feel like that is a reality of the second half, and as a result, all else equal, we expect revenues to come down.

The second thing is advertising has been relatively soft throughout the quarter and we are expecting the dynamics that we’ve been seeing on traffic and page use and CPCs, that that will continue to be soft during the second half.

The last thing I would say is that does not really capture the impact of the Gmarket acquisition that we expect to conclude at the end of this quarter. And as we indicated last week, we will add $125.0 million to $130.0 million in top line growth in the second half and be modestly accretive as well.

So I hope that helps provide some context about what we do have pretty good insight into and the things that we don’t good insight into and that is just how the global economic environment is going to be in the second half of this year.

Operator

Your next question comes from Jeffrey Lindsay - Sanford Bernstein.

Jeffrey Lindsay - Sanford Bernstein

I notice that net charge offs are still going up [inaudible]. Could you give us an indication, is this deterioration in the original book of business and more days or is this being driven by new business that you are booking since the acquisition? And then, second, the fixed-price format seems to be stronger, have stronger adoption overseas. The results suggest that fixed price seems stronger overseas. Is this the case or are we seeing currency effects here?

Bob Swan

Let me answer your first question and then I’ll ask you to maybe clarify the second part because I’m not sure I got it.

In terms of Bill Me Later’s charge offs, the first point I would make is it’s relatively as we expected so provisioning levels and how we set provisions haven’t really changed from pre-acquisition to time of close in really over the last four or so months and it’s been in the portfolio. So it has kind of trended as we have expected.

What has trended a little bit worse, or better than we expected, depending on how you think about it, is the growth of the portfolio, it is not growing as much as we thought. And that has been a conscious decision. And as a result the loan portfolio is not growing as much, the denominator is smaller, charge offs have been relatively in line with what we thought, and as a result the net charge off percent has been growing a little bit more.

So it’s more a function of the business and the credit decisioning that we’re making as opposed to higher charge off dollars than we anticipated at the time of the acquisition.

Could I ask you if you could just restate the second question a little bit so I understand a bit better.

Jeffrey Lindsay - Sanford Bernstein

Yes. Is fixed price growing faster overseas or is it growing faster in the U.S.

Bob Swan

You know, when we gave you the fixed-price dynamics and the geographic dynamics and implied in that is, yes, internationally the business is growing faster than it is here domestically and that goes for fixed price as well.

John Donahoe

But we aren’t seeing fundamentally different consumer behavior across formats, certainly across the U.S. and Europe. Asia has always been North Asia, Korea, China, have always been primarily fixed-price markets so IAC has been a truthfully fixed-price market. Gmarket in essence if fixed-price. But the underlying consumer behavior and format choice it seems, fixed price, classified, auctions, advertising, we see some real similarities across the major European countries, Australia, and the U.S.

Operator

Your next question comes from James Mitchell – Goldman Sachs.

James Mitchell – Goldman Sachs

I am going to waste the one question on a clarification since American is my second language. But when you refer to declines in GMV and TPV stabilizing, do you mean that the GMV and TPV stabilize at the first quarter dollar levels, which I guess would be good for the marketplace and not so good for PayPal, or do you mean that the percentage rates have changed, persist through the year at similar levels so the percentage rates have changed in the first quarter?

Bob Swan

I’m sure it’s not our language, I’m sure it’s my communication. Stabilizing at the growth rates in Q1 going into Q2. So the year-over-year growth rates stabilizing roughly the same in Q2 and they were in Q1, for both merchant services, TPV, and non-eBay growth.

Operator

Your next question comes from Justin Post – BAS-ML.

Justin Post – BAS-ML

When you look at the GMV declines, and your classified are definitely growing, how much pressure do you think is being put on GMV by some growth of your other formats or other things that are out there in the e-commerce market?

And then maybe just a follow-on, you kind of indicated you think you can grow with the market in 2010 and then grow faster in 2011. What things are you seeing in the marketplace that maybe are masked by the economic environment that give you confidence that you can start taking share as you look out a couple of years.

John Donahoe

On your first question on the classifieds, as I said our strategy is to give buyers and sellers choice and to give them choice of format so they can buy what they want, when they want it, in the format they want it. And what we are finding, interestingly, is people do buy different things in different formats. That the same buyer will buy a used Coach on a classified site, buy a gift for their grandmother in the auction format, and buy a new watch on a fixed-rate format.

And so, yes, we think there is some substitution for classifieds for what used to be in auctions because auctions used to be, or auctions is primarily focused on items that are either hard to find, which often used items are, or if items are of a certain value, which used items are, and classifieds is a nice format for used items if you want to sell locally.

So the good news is we recognized that three or four years ago and have been building what is a growing classified business. And so our whole strategy in e-commerce is to have these complimentary formats and if classifieds grows more quickly than another format, that’s okay, as long as we’re helping that buyer and seller connect successfully. Same thing on the seller side. We see sellers that sell both in classified and in the marketplace.

And then in terms of growing ads more faster than the market, again, every format we have except auctions is growing faster than e-commerce. So fixed price is growing faster than e-commerce and has been now for many quarters. Classifieds is, Stuff Hub is, advertising is, even though it really softened this quarter. And auctions is the only format that’s not. You know. Good, bad, or indifferent, auctions, two years ago accounted for three-quarters of what we did. Today it accounts for half of our GMV. Two or three years from now it will account probably for, I don’t know, 30% or 40%.

And so we think that dynamic, combined with the changes we are making, we believe are going to improve the health of our underlying eBay marketplace over the next six to twelve to eighteen months. And so we think the combination of those two factors make us comfortable saying that we will grow with the market next year.

Operator

Your next question comes from Heath Terry – FBR Capital Markets.

Heath Terry – FBR Capital Markets

I was wondering if you could give us a sense of the impact that you’re seeing from the proliferation and free shipping on repeat customers. Is there anything more that you can do with what your free shipping among sellers to the extent that maybe at some point you start to require it in certain categories?

John Donahoe

Clearly free shipping is becoming more prevalent in shopping online. Our best sense is that roughly 40% of e-commerce in the United States is free shipping. And we’re now up to 30% on eBay. And our strategy, consistent with our philosophy, has been not to dictate it but to provide the right incentives and words for sellers to make the right tradeoffs.

And what we see is, it’s a very different picture, category by category, where there are certain categories now where it’s almost a given it’s going to be free shipping. Books, music, and video, a lot of the smaller consumer electronics categories. And any seller that doesn’t offer it won’t succeed. So we have provided incentives to do it, we have provided advantages in search to sort of get it kick-started.

But you’ve seen other categories, items that are of heavier value or often in an auction situation, people charge for shipping. They charge their costs. And we try to drive out excessive shipping but what they have found, and again, our sellers are very shrewd, they are optimizing to what’s working for them and what’s helping them in their conversion, and those categories they are continuing to charge for shipping.

So we are going to continue to sort of provide the carrots and incentives and rewards for those that provide free shipping and the best value and we think our marketplace will find its natural landing point. My guess is there’s probably 10 points more. I would guess we will be 30% to 40% by the end of the year. And that is what overall e-commerce is. I mean, it’s important to remember that 60% of e-commerce still charges for shipping. And I think once we get to the right equilibrium we will continue to moderate and self-correct.

Operator

Your final question comes from Analyst for Youssef Squali - Jefferies & Company.

Analyst for Youssef Squali - Jefferies & Company

John, as you evaluate your portfolio of assets, would it be fair to assume that essentially all the options are on the table, including the possible sale of your interest in Craig’s List where you have a 20% equity interest and as well as the assets such as shopping.com that you have, which has been underperforming?

John Donahoe

As I said in our panel today, our focus is on connecting buyers and sellers and we have two core growth engines, or businesses that do that: e-commerce and payments. And in the e-commerce world we have our eBay business and we have some other formats that we think have synergies with the core eBay business, like shopping.com provides capability synergies in terms of classification, catalogue, and search.

Classifieds provides synergies in the ways I was talking about early, and our craigslist ownership, we have no active plans one way or another. Stuff Hub is another example of a different e-commerce format that we think has strong synergies with our core business.

Stumble Upon, while we initially thought it might have some synergies with, and capability synergies around search, discovery based search, didn’t. And once we came to that determination, we divested it.

Same thing in payments, our other core business. Bill Me Later is an example of an adjacency that has got synergies.

And Skype was our example of a business that didn’t have synergies, and as I said, I’ve been very consistent from the day I took over CEO, we assess it and we will evaluate it.

So here’s what I think you can expect. Is everything on the table? Yes, in the following sense. We view as job as to drive maximum value for our shareholders. We believe the best way we can do that is to have strong core businesses that have synergies we’re extracting and we grow those businesses and strengthen them over time and that will deliver the best value to shareholders.

Where we see there’s not synergy or where that synergy is not what we imagined or gets spent out, then we’ll act in the best interest of both that business and shareholders. And I hope you are beginning to see a track record of doing that with Stumble Upon in a small way and Skype in a bigger way. And we will continue to apply that methodology, we will be very disciplined with our capital. Bob does a great job of ensuring we’re doing that and I think you will see our acquisition track record in recent years will bear fruit. And so we will continue to run the company that and we think that’s the best way to deliver value for our customers and deliver value for you and our shareholders.

Operator

This concludes today’s conference call.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: eBay Inc. Q1 2009 Earnings Call Transcript
This Transcript
All Transcripts