eBay's Management Presents at Sanford C. Bernstein Twenty-Ninth Annual Strategic Decisions Conference 2013 (Transcript)

May.30.13 | About: eBay Inc. (EBAY)

eBay Inc. (NASDAQ:EBAY)

Sanford C. Bernstein Twenty-Ninth Annual Strategic Decisions Conference 2013

May 30, 2013 10:00 am ET

Executives

John Donahoe - President & CEO

Analysts

Carlos Kirjner - Sanford C. Bernstein

Carlos Kirjner - Sanford C. Bernstein

Good morning everybody. I’m Carlos Kirjner, the Internet analyst. And I’m pleased to welcome John Donahoe, President and CEO of eBay. He has been in this position since March 31, 2008. Don’t worry I’m not going to read you his bio, I know, you know him. But, I’m just going to give you one data point, before I hand it off to John to have some opening remarks.

Since the day this stock is up 82% and I think particularly they have done a tremendous job fantastic turnaround and John is going to tell us a little bit about where the company is going on this basis. And then we are going to go for Q&A. You must have some cards and there is going to be someone picking them up forward it then for me and I will ask the questions as they come. Thank you. John?

John Donahoe

Thank you, Carlos. Every time some assists; something like that I do like this.

Let me just ask, how many of you are familiar with eBay and roughly familiar with our story? Yeah, most. I got off the plane last night and they were saying here is your presentation and I thought I’m not going to do a presentation you guys are familiar with it. Let me just hit a couple of the highlights of how we see the world and then we can dive into any piece you want.

One, external market, I have been talking about these conversations of offline and online now for three years. Mobile device is blurring the line and it’s happening faster than even I would have guessed two years ago, right. Consumers, if you think about it, consumers are accessing the web in almost every shopping experience in one form or another and often accessing the web on their mobile device or when they are in the store or are on the street. They may still buy in a store. It’s not just a retail but this convergence of online and offline, the blurring of the line is happening and it’s real.

Two, the shift is, the consumer is increasingly in-charge, not the merchant. The analogy I have used is in the media world where once the iPad has come out, I don’t know about you, but I want to get my media when I want it, where I want it, how I want it. I don’t want somebody to put constraints on what I need to do to get to the information I want via the newspaper article or a movie or whatever else it is. And by the way, I’m consuming more media than I ever have in my life. Same thing is happening in shopping and payments, where consumers are going to be able to get what they want, when they want, how they want it on their term.

Third, mobile today, you shouldn’t just straight line how we use mobile today for three years from now. It will be as different three years from now as it was three years ago versus today. In particular, we see a multi-screen world where you are going to be able to access the web on multiple screens in your life be that your work.

A mobile device, a tablet, your laptop, store front windows could be touch screen inside stores, things where you can access the web. And so we think consumers will have a multi-device world and retailers or merchants will be reaching their consumers in more places and that’s the new retail what I would call it.

And so, I think what you will see is, a blending of the best of online which is wide selection, efficiency in scale with the best of offline, which is a more social experience, some more engaging experience and you will see these things converge. So we see this, new commerce environment we have been talking about for the last couple of years happening and happening with accelerated speed.

Second, what that’s mean for our company? Larger addressable market, eCommerce is roughly a $1 billion today, the commerce market a $1 trillion, I will say the commerce is $10 trillion. And so we see it has a larger addressable market and frankly it’s the way we look at it. We have to capture a small piece of the larger addressable market and it can generate positive growth rate.

So in that context, our company, you know with eBay, PayPal, GSI, we feel well positioned and we are moving aggressively ahead in each of the business units and we are moving aggressively ahead at providing integrated commerce solutions for merchants and retailers.

So I need to stop there and then we can dig down at any given piece of any of the businesses, but the mobile I think I’ll just - one thing I’ll say about mobile scenario is that early, that hard. Mobile is continuing to accelerate, you see the curves and Mary Meeker (just incurved) yesterday at the All Things Digital I saw where people were accessing their mobile devices with enormous frequency will do $20 billion of mobile commerce volume this year on eBay and $20 billion of mobile payment volumes with PayPal and we’re blessed in that mobile monetizes the same for us as laptop or web. And so we monetize the same regardless of screen and so we’re bracing those screens aggressively, there is no concern we got a new business model involved for us and so that’s I think one of the areas, one of the reasons we’ve continued to invest in innovation around mobile and certainly consumers are responding.

Carlos Kirjner - Sanford C. Bernstein

They why - just tell us a bit about Marketplaces you have said in the past because of journey that’s a little bit depends on these all of the journey.

John Donahoe

Yeah.

Carlos Kirjner - Sanford C. Bernstein

Where are you in this journey, you look at the customer growth metrics in (ecology), it has been accelerating for the last six or eight quarters.

John Donahoe

Yeah.

Carlos Kirjner - Sanford C. Bernstein

Cost is accelerating. Where are you - work comes next, how do you think about the second half of the year, the next three years or that transformation of Marketplaces?

John Donahoe

Yeah, so I - the eBay marketplace the goal over the last five years has been to transform it to get it to be a strong sustainable marketplace, everyone was - felt there was need for marketplace, a global marketplace and now eBay is that. And we feel good about our ability to do the thousands of innovations and execution that’s necessary to grow roughly in line with the eCommerce market and so that’s, that we feel good about, now its driving toward leadership on top of that. And so we are highlighting three or four areas where we think we can drive what we hope to be incremental growth, the first of that is global; eBay is a globally known brand. There are 2 billion, 50% of eBay today is outside the U.S. 20% of eBay is cross-border, right, so the cross-border capabilities of the global platform area extraordinary and we put no effort toward that.

So looking forward there are 2 billion Internet users today all estimates are the that, that will double or more than double in the next three to five years, 80% of those new users to be Internet will be breaking emerging markets, they’re going to want to shop, pay, often they won’t have local supply. So eBay is a globally known brand so we’re being - we're going to be aggressively penetrating breaking emerging markets. So Russia is an example. It turns out we were the largest B2C eCommerce site in Russia last year with not even having a Russian site, people going to eBay.com and buy now we have a Russian site. And so that’s an example of how we’ll focus on the breaking emerging markets, that’s one of the sources of growth, for the new user growth by the way.

Second is data, leveraging data. Now in this category of things you can put merchandising, many retailers get up to 20% of the revenue from merchandising we get less than 2% of our revenue because we’ve never leveraged our data, we didn’t even have a card up until 12 months ago. So merchandising to you curation, social commerce, personalization, big data, I put all those into a bucket and Devin Wenig who runs the Marketplace put those on to a bucket of leveraging our data to provide more engaging shopping experience. And there are some really neat and cool stuff around curation and social commerce something unproven but I think offer some capacity for incremental growth.

Third area would be local and this is simply the online to offline or offline to online. And this is bringing large retailer inventory on to eBay, this is bringing the inventory in local stores on to eBay, this is eBay hoping consumers get local inventory so eBay now would be a small example of an experiment in that, that if you want to shop you can shop on an eBay application and so I can get this delivery to me from a local retailer within an hour. So the broad area of local we think is the third major growth opportunity. So we are investing behind those three major growth opportunities and we think those over the next, the next three to five years can offer incremental growth for eBay more oftenly.

Carlos Kirjner - Sanford C. Bernstein

A little bit more on the data, you have in the Investor Day presentation I think Devin put up the charges for me was the (inaudible), how much the conversion rate in Marketplaces can improve within 2010, 2012 I think, I remember it was 12%. And in the chart without numbers you broke up what were the main factors that drove that conversion and search seem to be the most important one. You also said that you are now in the process of applying new search technology Cassini, where are you in that path and what do you expect to see and tell us a little bit about the process and the timing and…

John Donahoe

Yeah.

Carlos Kirjner - Sanford C. Bernstein

How do sellers and buyers behaviors have to adjust to take a lot of debt and what do you expect to see?

John Donahoe

Yeah. What hasn’t - so search has been a really - search is a really broad term. And search has been an important part of what we have been able to do the last five years and that why I’ve have learned around this is Mark Carges who is our CTO, he first rebuilt our search platform call it Search V1.0 and he feels that it’s a platform so that we could be more flexible in testing and learning and making lots of iterations on search category-based search was something that we can now do, we couldn’t do. And so getting, getting the right platform enabled a lot of the innovations that have driven those increased conversion and what drove increased conversion in motors or auto parts is different than what drove increased conversion in clothing, shoes and accessories. So some are what we call horizontal changes, some are more vertical. Cassini is simply I would call V2.0 of the search platform. Cassini itself I don't think it’s going to cause any dramatic change in conversion but it is the next version of a robust search platform that we can innovate on top of.

And I think that would be continued opportunity to innovate around search and when I say innovative around search here is the kind of things. We talked about new users. We’re testing a new user to eBay that’s never been to eBay should when they show up we only show them fixed price, brand new items from top-rated sellers. It’s a more familiar commerce experience and then as they learn eBay they get the wider experience or should we be showing a woman buyer who buys in a clothing - with a heavy clothing, shoes and accessories buyer a different experience than we show up a 42 year old man that buy steadily in auto parts.

So, the ability to personalize leverage out data can also happen in search. So, I think you’ll see a lot of continued search innovation and I think search will continue to be a contributor to our growth, but we don't see anything out that’s going to cause - everyone is kind of hoping for we turn the search genuine on. The reality is every time we change search it has a negative impact in the short term, it’s a change. So, it’s - that’s why - this is the same for any major search engine, you don't just change those things overnight. So, you make little changes, you test and learn and as you algorithmically prove that this change is positive you roll it out in aggregate it’s been a significant contributor of growth and I think it will continue to be.

Carlos Kirjner - Sanford C. Bernstein

Another driver of marketplace performance is selection?

John Donahoe

Yes.

Carlos Kirjner - Sanford C. Bernstein

And tell us a little bit about the path there to get larger merchants to lead the inventory not just converting to GSI customers but beyond that.

John Donahoe

Yeah. So, we’re in the - more and more larger retailers are viewing the eBay marketplace as an incremental distribution channel. And for different reasons, reasons were to get rid of excess inventory or liquidation inventory through customer acquisition, number of retailers have noticed that their shoppers are starting to shop on the eBay mobile app and they say well we need to be where our shoppers are starting to shop. So, we’re working with a variety of retailers to help them sell in eBay and we’re learning, we are learning what works on eBay and what doesn’t. What we’ve learned if they just put the exact same inventory on eBay that they have on their own site and they price at the same way. It will - sorted still, but it’s not going to be any magical.

On the other hand if they have certain inventory they want to move very quickly and they want to price it competitively it can move very quickly in eBay and by and large it doesn’t cannibalize their other channels or if they have some unique inventory, Superdry in the UK is making things that go towards just eBay as a channel and so we’re still working with the retailers to find ways to help them, have success selling on eBay. The other thing we’re doing is something like eBay now is demonstrating the power of the eBay brand and the eBay platform to help, help drive sales and their local store location, right, and that’s demonstrating our commitment to try to partner with the retailers and get consumer’s choice. So, if I want to buy a - you know a new shirt I can go on eBay and try to buy it from someone selling it on a new eBay or if I want it today because I spilled on this, I’m going to need it this afternoon, I can go on eBay now and buy it at Macy’s and have it delivered to me within an hour. So, we’re trying to find ways to demonstrate our capacity to partner with the retailers to help them, grow their business either selling it directly on eBay or selling it through eBay platforms.

Carlos Kirjner - Sanford C. Bernstein

How - a large number of consumers that must be a material cohort that’s to - is not familiar with the “new eBay”, there are people who still think of eBay aside to where you predominantly buy second hand goods on an auction basis. Where are you and you have talked about that is the part of first through the quality of the experience than new market, yeah, if you look at last quarter if they look at the margins came up because you guys got leverage of marketing, right. So where are you in that journey of say okay now we’re ready to go and double down marketing, is that something they’re going to see towards the second half of the year and how do you contrast your marketing approach spend versus the past?

John Donahoe

Yeah, well as Carlos said our approach, my approach within the last five years let’s say let’s get the experience one we’re proud of, one that’s clearly competitive in today’s world and I think we’ve got that last year. Last year we also updated the eBay brand, the logo, the brand identity which needed to refresh and I think the brand logo and the brand identity and the experience is now very contemporary. And we marketed that in the fourth quarter, marketing, it doesn’t necessarily mean being doing a big TV advertising campaign, we’ll do TV advertising where we think there is some return. The - and so and what we’re seeing is more new users are coming to eBay than they were before and new user acquisition as you said it’s going up.

In terms of marketing going forward and getting the word out the marketing as we said in the first quarter earnings call the fact that it was down slightly in Q1 is not that’s more a function of how numbers landed than it was any conscious thing, we anticipate a consistent marketing spend over time it’s a percentage of revenue and so as of now we don't see any need to materially change it up or down. What’s going on inside that marketing spend we’re constantly evolving. We’re evolving to how do we - what’s the - what’s the mix of classic more Internet keyword buying versus social channels versus loyalty oriented things versus more brand, brand-oriented things. And so we’re constantly trying to optimize that marketing spend and I think there are some green shoes, there are some interesting new things, but we’ll see. But in aggregate our intense and our belief as we continue roughly within some reasonable range of a consistent level of marketing spend over time.

Carlos Kirjner - Sanford C. Bernstein

It’s probably not impossible.

John Donahoe

If we see by the way, if I ever saw an opportunity where I thought spending more in marketing and Devin and I thought spending more in marketing would pay off we do it, we do it and we tell you we’re doing it I mean so to be clear we will invest in this business anytime we feel like the return merits it.

Carlos Kirjner - Sanford C. Bernstein

It is probably one possible way to look at your business in marketplaces providing service to sellers, others, buyers but there are sellers too. And you look at some of the people who have marketplace, Amazon, Alibaba, Taobao, Tmall, they are now - they have invested heavily in providing a consumer service I mean that’s the capital to build the natural (focus) of Amazon and there is the word Alibaba has announced this is going to have big investment and fulfillment. If you take out three to five year view, do you think that is an important element of the service that you provide sellers and is an important element to support a good user experience on the delivery that tracking, how do you address the issue of your “capitalized strategy” when it comes to fulfillment?

John Donahoe

Yeah, as of now we’re focusing a lot of attention offering consumer’s choice and getting it our ecosystem to work, consumer is going to have a choice of buying it having it shipped to home, buying it, being able to pick it up in a local location, buying it having it delivered it now. Because we think ultimately consumers are going to want those choices and different consumers will choose different choices on that for different products. There is no kind of unique rule.

On the direct shipping we have been enabled through incentives and encouragement of our sellers to get them to offer free shipping, to get them to offer tracking and we are necessary to offer them more expedited shipments. I think one of the things that the whole industry recognizes is that increasingly you want to have the goods within 250 miles say roughly of the end consumer, if you want to offer expedited shipping through ground means and that’s economical way of doing it.

Carlos Kirjner - Sanford C. Bernstein

Cost of goods.

John Donahoe

…ideas. And to others looking at local pick up point, we have a lot of our retailers partnering to say while we got a lot of local distribution center cover store. And so they are going to ship from store, will have pick up from store. And then locker is of course, the other area that is unknown. So we are trying to work to have our ecosystem of sellers to be able to have the capacity to offer the shipping alternatives that consumers want. So for instance two years from now, we need to search on eBay, maybe one of the search criteria is, you are looking for an iPhone and what eBay sellers are within 250 miles so they can ship it two days free and that will be a search criteria.

Then we have enough volume and we know how much of our volume actually comes from the seller and a buyer within that geography. So as of now we don’t see the need to get into the performance business directly, we have GSI capability. We bought that with some (iPod) or maybe at some point will be putting our eBay sellers into that. I don’t think that’s the case.

I think there is other – the other ecosystems that are looking to address the fulfillment evolution in the industry whether the shipping providers, whether it’s the lockers companies, those can be a variety of other people whose business is putting capital on the ground to provide that and we will try to leverage that. So we don’t see a need to have to do it ourselves as of now.

Carlos Kirjner - Sanford C. Bernstein

And I think a few weeks ago, maybe a couple of months ago this summer plus the marketplace (inaudible), which would transform the way that sales taxes are collected. And would potentially have some impact pushed off the marketplace that’s potentially stuck on the other PayPal because it has an impact on all of eCommerce.

And it is interesting to add say that ($100) million did have to collect the taxes but the so there will be presumably impact on eBay. Can you talk a little bit about what impact, I should – just the view back ground of view is still on the house, its not clear to pass the house. But, assuming the worst scenario the same bill passes the house, how would you think about that impact on both marketplace and PayPal?

John Donahoe

To be clear for those who aren’t following it, the visibility and noise, the materiality impact is out of (NYSE:WAC). So let me just say few things up front. We are not necessarily proposed to the Internet sell-side. And frankly I think it’s going to happen. Second, I don’t know when impact that will have an Internet sales versus retail sales. I don’t think that will be material across the board just today you pay taxes in some places not the others. I don’t think consumers use that as a major shopping criteria.

For our company, I don’t believe the impact is going to be material one way or another because we run marketplaces and so people that are buying things – people are buying things on eBay are going to get what they want. They may end up over time I think the impact if the exemption stays the same is, larger sellers will gain share versus smaller sellers on eBay. That’s happening today by the way, top-rated sellers tend to be a little larger since the adverts are on eBay.

And so the reason we are fighting for what we are is not as much or the eBay marketplace per se. But it’s more to fight for the smallest seller who is struggling, who operates on lower margin. And in particular for those that aren’t familiar with the issue what this bill is going to require issued to collect sales tax from the 9600 local tax jurisdictions across the country and in essence then file a minimum, if you sell to people in 50 states, 50 states pay tax return.

And it’s not so much the burden for a small business of collecting the tax we and others can build software to do that, others will help even filing but the issue is the burden placed on the small business, the administrative burden of what would then be compliance, audit and compliance and just here is a small example. Anyone here have your personal taxes filed in more than one state, more than one state tax return, anyone here gotten that letter from a state you don’t live it says John in 2010 you paid $48 tax to our state, you really owe $62 and here is a $50 fine and you’ve got to pay this, anyone of you have that experience, right, it’s a computer generated thing.

Think if you are a small business now small business on the net is different than small business in bricks and mortar. A bricks and mortar retailer that is out here in the city of - on the streets of New York that is only help Nexus in New York; it does not have to collect sales tax if they sell outside the state of New York because the burden will be too high. Online we’re just saying the same thing should be true in a small business it’s between 1 million and 10 million, we have numerous sellers in eBay that sell $7 million, $8 million, $9 million, $10 million, so we have 25 employees, they don’t have a finance department.

And so we’ve just said take what the treasury calls a small business and exempt the people small and that so they don’t have the administrative, the compliance burden that we think will be heavy and then we’ll ultimately hurt their competitive edge. So it’s a battle as much on principal and fighting for the small guys as it is on the materiality for our business. And we’ll keep fighting for them but ultimately I think if it passes with the exemptions as low as they are the small guy it would be one more administrative burden on a small business, the small businesses are the ones creating jobs in this country. So I just think it’s a wrong thing and that’s what we’re fighting as visibly as we are.

Carlos Kirjner - Sanford C. Bernstein

Shifting focus to PayPal, tell us a little bit about where you are getting penetration in the merchant services side in verticals where you generally have been - have been penetrated, right, I mean what type of sales efforts, what type of initiatives you’re foreseeing there and how - what do you think the impact is going to be on PayPal and merchant services world?

John Donahoe

I just think it’s a continued, it’s a continued force march so early on we got the first airline and we had to really work hard to get the first airline to make sure that the PayPal integration really worked in their flows and then we’re able to contact the other airline in the first consumer electronics company. So apparel has been an area we’ve been focusing a lot over the last couple of years, how to - getting PayPal accepted it’s probably two years ago Carlos we were here, we probably weren’t on most of the major apparel brands and we’ve worked with the early people in the apparel industry clothing, shoes and accessories and now more and more apparel sites.

The travel sites we are working with, so we’re just - we've - we’ve vertically organized our sales force and we’re just working with each of the verticals. Interestingly in Australia we are working with the government, the local power company, the telcos. So new verticals in certain segments, certain sectors in countries we’re working in. And so it’s all around with the early integration allowing them to integrate it in a way that accelerates their business and then it’s just selling down to the other people in that category and then it becomes a matter of the (ITQs) for each of the companies where it’s a fit in the (ITQ), where is the integration because once we prove the value then it makes it easier to sell. So we’re just continuing that in the U.S. and Europe and Asia.

Carlos Kirjner - Sanford C. Bernstein

And one of the highest visibility initiatives you have within PayPal is your expansion to offline leveraging mobile and actually plastic too, right. So can you and so let me ask two questions, let you speak, what is the rational for that given that the transaction margins I think you said, as (Bob) said it was - it would be about 40% materially lower than the mid 60s transaction margin that you have today, right. And secondly it’s a question for some of the audience, how do you guide everyone in this room to use PayPal offline, what is - I think what’s the consumer value proposition?

John Donahoe

So the rational of why is - why we’re going offline is we’re following our customers. I talked about earlier that consumer being in charge and the consumer increasingly is not going to see a difference between being online and offline.

And second, the consumer we believe over time is going to be accessing their payments in some form or another through a mobile device. They maybe not be using the mobile device, but hey, this will become the replacement to your fiscal wall. And so, we have to follow our consumers and how and where they want to shop. We have also had offline merchant say we want to be able to view the offline merchant want PayPal offline because they want to be able to offer what they would call omnichannel shopping or seamless shopping and they want data about their customers offline, which they don’t have, they don’t know. In many cases they don’t know who the customers are in the stores and who is buying what.

So a rationale for doing it was follow the customer and it’s a big addressable market where we are now have the opportunity to be relevant factor. Its going to be and I said this from the beginning very consistent. It’s going to be a three to five year journey and our approach has been to some extent follow the same thing we did in the early days of the merchant services business at PayPal, which is first try to get merchant coverage. So, 2012 was largely a year of setting the seeds, sowing the seeds to get the merchant acceptance in the offline world. And so that had three or four pieces to it. That had directly connecting with point of sale systems of the largest retailers. That took a lot of work, we have proven we can do it. And so we are building out with maybe 50, maybe maximum of 100 direct corrections.

Our Discover partnership gives us the potential for wide access to offline merchants in the United States. They were here is the way to reach the smallest merchants some of our point of sale partnerships. So overtime we believe for PayPal to be relevant in offline its got to be accepted in a wide – its got to have enough ubiquity.

This year is the year, where we are going to try to do some learning and experimentation around consumer behavior in the offline world. Consumers aren’t just going to start paying with PayPal because we are good guys. They are highly habituated in the offline world, swiping with the card or pulling out cash or and consumers are habituated interestingly, I don’t know, pull out one card for my business purchases and I pull out another card for certain personal purchases, I pull out my debit card for – when I’m in a gas station or grocery store. I pull out cash when I do certain things, and I never think about it. So what we are doing is, we are saying what are pain points for consumers, said having been thought in years.

So simple one is, waiting in line, right, there is no one likes to wait in line and so how do we build an experience through PayPal check-in, where you don’t have to wait in line. And second is personalized service. It used to be go down main street and you go in the shop. The shopkeeper knew your name. Carlos, good to see you again, would like the usual. That’s feel good to a consumer. Today you go down to main street and its usually retail chains that have of course they don’t know who you are. While there is no technology is going to enable us and again PayPal check-in allows when you walk-in you can self identify, so by the time you get that clerk knows your name and knows who you are.

So this is a year where we are going to try some testing and learning around the consumer experiences, where we are solving pain points where we think that PayPal is going to offer something that you are going to need. We will just be testing that in some micro geographies. And my goal for this year is to get some learnings, some learnings, consumer learnings, consumer where consumer find PayPal and we can create experience as a new cases that are compelling to them in a small environment. And then we will begin to expand those until and scale those over time.

So this takes, this is an enormous space this offline world, this offline to online and it can take 3 to 5 years, have been very consistent with what we have been saying all the way along. We think PayPal is well positioned and we will do the – (inaudible) of doing it. And it will take that time, just like it did merchant services business.

Carlos Kirjner - Sanford C. Bernstein

Talk a little bit about PayPal contribution margins in April and then guided margins, contribution margins down to 24%, saying that you saw opportunities to do that. And the – quarters, things on a year-over-year basis we saw, I don’t know, other time in contribution margins we lost by because of that adjustment. Can you tell us what’s reason for the adjustment, what type of transaction, not only the rest of the agreement, how much of that discretion on your investments that you had controlled and can dial up or down according to the whole (action)?

John Donahoe

Yeah, so we set in a marketplace business as we think the intelligent level could make sense, we can see the future. We think the intelligent level of investments is to keep margins roughly the same in the marketplace. And yes, we think there is growth and in any given quarter that can go up or down like marketing did.

In the PayPal business giving the opportunity and the size and scale of the opportunity of PayPal and the need for that business we think we are going to continue to invest, and we set over three year period, I think margins will exit maybe 100 basis points higher. And the investments are sort of across the board. We are investing in doing some of the hard work at PayPal that we had to do at eBay five years ago, which is rebuilding that platform. And building that, rebuilding we call replatform, rebuilding the platform so its more flexible, more robust and more scalable.

And so we are investing in the technology. We are investing in the core product experience under David Marcus’ leadership you will see I think better product coming. We are investing in the offline omnichannel initiative. We are trying to be thoughtful about that investment and but we will invest some of the investment – some of the ubiquity investment is clear, you make this investment you get this return. Some of the consumer experimentation is going to be learning. It’s learning investments.

Marketing is something we haven’t done much at the PayPal. We will be doing some investing in marketing. Not TV marketing just basic blocking and tackling, consumer funnel management. And so the investment in PayPal and then PayPal here, I think like PayPal here in the international expansion. So we are pretty clear, where we are investing and we will continue to invest, I believe PayPal’s opportunity is significant enough and the payments opportunity there is significant enough (inaudible) to others who see investing all around it. That we will lean in on investments where we think it can help build PayPal’s long-term growth rate and build our competitive position. And I think we demonstrated over the last several years that if we don’t think there is an investment that’s worth making we don’t that sort of why those margins crept up last year.

It’s almost like we couldn’t sense that. They crept up. But we didn’t say what we are going to really nearly just spend the money even though we knew that the margins we think over time was in the range we communicated this March. And so if there ever is a period where we think we should invest more and that will pull that even down a little bit more in the short-term, we will do it. We will tell you we are doing it. We will tell you what we are investing in. But, we think the opportunity for that business is significant enough that is the right thing to invest to capture that opportunity over time.

I think there is this window of opportunity over the next five years roughly where as I said earlier that this stud change in our consumer shop and pay, it would be unwise for us not to invest to capitalize in that.

Carlos Kirjner - Sanford C. Bernstein

Of the two businesses that you have, I would say two of them definitely fantastic businesses with both scale benefit and that’s what they say – they ask for people to think of competition. Once we talk about PayPal there are two competitors, there are two classes of competitors come up. One is the traditional natural issuers and the other is Google because as people realize they are the only one who have the atmosphere considerably be competitive.

How do you think the – what is it in the PayPal, what does PayPal competitive advantage is that because we clear any one of these categories to replicate in the next few years despite the asset, despite capabilities.

John Donahoe

Well, on the former with the issuing banks and the associations and others we want to be a partner with them not a competitor. Now we are a new thing PayPal is a new thing and everyone is trying to figure out how it fits. But, you cannot use PayPal without having a bank account and/or credit card and/or – the only place where we sell fund is Bill Me Later credit, right. And Bill Me Later credit is $2 billion of receivables it might go to $5 billion, the largest bank has $400 billion of receivables. So it’s - so we are more of a metaphors more worth a digital wallet and so our goal is not to replace what a bank does or what a credit card company does but to offer consumers street capacity to have a digital wallet where they can choose what payment instrument they use just like they can choose what things they pull out of a physical wallet.

So over time we’ll continue to work with the various people in the - let’s say the financial services ecosystem and try to demonstrate we are a partner, not competitor and that over time and what we offer is consumer choice, we are not biased to one funny source or another, consumers get to choose. And there will be change in innovation and how in the financial services banking and card world but we want to be the technology wallet if you will on the consumer side. And then vis-à-vis Google, Google is going after how they want to grow their business; we’re growing after how we want to grow our business. We’re a commerce and payments company, those are - that’s our laser focus. Google has their business and business model and so if payment is a piece of that it will play out how it plays out, it’s not a new issue, it’s been the same issue for seven years. And so…

Carlos Kirjner - Sanford C. Bernstein

I ask that question every time we come here.

John Donahoe

Yeah so the honest truth is I get up every day paranoid about competition, I spend an enormous amount of attention on what are the startups doing, what are the commerce startups doing, what are the payment startups doing, what can we learn from them. We’re - an insight or something that is that we can apply a scale that we should pay attention to it so I pay a lot of attention to that. We monitor what the big companies are doing, but the mistake for us would be to get distracted from our opportunities by worrying about what someone else is doing and the best thing we can do to help PayPal’s success is to continue to grow its users, continue to grow its merchants, continue to improve the value proposition. And..

Carlos Kirjner - Sanford C. Bernstein

Speaking of opportunities.

John Donahoe

We’re not going to be the only ones trying to innovate but I don’t know they are coming after payments per se.

Carlos Kirjner - Sanford C. Bernstein

Speaking of opportunities, can you help us understand what is the journey for Bill Me Later in the next two to three years..

John Donahoe

Sure.

Carlos Kirjner - Sanford C. Bernstein

How do you think about Bill Me Later CPV versus credit quality of reserves, how do you think about international expansion because it’s only in North America.

John Donahoe

Yeah.

Carlos Kirjner - Sanford C. Bernstein

In only U.S. why not go to Western Europe, the UK.

John Donahoe

Yeah.

Carlos Kirjner - Sanford C. Bernstein

And then broadly right. How - what is the journey I mean..

John Donahoe

Yeah.

Carlos Kirjner - Sanford C. Bernstein

Without I understand if you don’t want to give us but some things, but how the journey of the opportunity because it’s a…

John Donahoe

Yeah.

Carlos Kirjner - Sanford C. Bernstein

It’s a very interesting asset.

John Donahoe

So I remind you we bought Bill Me Later because we saw consumers like it and they like the ability to get quick transactional credit. And we bought it because merchants saw it was an offering that when offered upstream got people to buy down the street and so we bought it. We are not buying it to get into the credit business and as I said earlier we have roughly $2 billion to $3 billion of receivables today could take the numbers that (Bob) said in the Analyst Day maybe that doubles. So we are not - it’s not material in the credit world, let me just say that, we are not trying or financing with our offshore cash so it’s - but it’s a - the way we think about it it’s a consumer enhancement that where if a consumer wants quick credit they can get it on a transactional basis and if a merchant wants to use credit as an incentive, installments as an incentive we have a product that helps them drive their incremental business.

What you’ll see change is today it’s still two experiences, there is a Bill Me Later checkout button and the PayPal checkout button. What you’ll see over time is there will be one checkout button PayPal and you can use PayPal paying back credit and Bill Me Later will be an funding source in your PayPal wallet or PayPal credit whether we took - brand part we haven’t figured out. So it will just be another way consumers can pay and for a subset of consumers that will be a compelling alternative on transactional credit. Again we may grow 100% or 150% in our Bill Me Later volume over that period but it’s still not material for the industry, it’s a consumer enhancement. It offers us the lowest funding source, lowest cost funding source which is great, but it’s a consumer benefit, rolling in, out internationally is something we are planning on doing the risk underwriting scheme is different in different countries. So we are going to be quite around it. And its sort of on the roadmap and when it fits on the roadmap it will come in but over time you see us offering it in the subset of our country’s not everyone on the consumer side.

And the other thing we are looking at is our merchants would like credits. We to some extent extend our merchant credits today because we pay merchants very quickly sometimes more quickly than we receive the money. And merchants are looking especially smaller merchants, how do they get merchant credits. And there are a lot of companies around that are starting up to do that others doing it. So we are looking at how do we help either facilitate or do it ourselves. But we will do it as a customer enhancement, credit is a customer enhancement for us. We don’t have a standalone desire to get in the credit business. And we will only do it where our sell through partnership where we are confident that we can handle the risk piece of it, which this is why we spend as much time on it earnings as we do. We spend more time on that materiality of it just everyone knows our goal is not to become a bank or become a credit card issuer.

Carlos Kirjner - Sanford C. Bernstein

Couple of minutes on GSI, now that you have said the business for sometime. Where are you in realigning the business to eBay side? What are the challenges and opportunities that you see with GSI and what should we expect to see in the next 12 months?

John Donahoe

I would say the two – the GSI, the benefits to-date have been probably two, three-fold, one, we have learned an enormous amount around brands and resellers. Three years ago we did not – we were not really see in brands and retailers and we saw this commerce opportunity we were talking about and talked about open up. It is such a big opportunity that we have to get smart fast. And GSI has helped us get smart fast. With the largest retailers and brands and that’s been of an enormous size.

The PayPal distribution channel, distribution channel for PayPal has been great because it allows us with one merchant – one integration with GSI software to put some of PayPal’s new features and PayPal’s sure check (inaudible) GSI merchant. So it’s a leverage distribution channel for PayPal.

And three, it provided us assets with a little bit of edge, we did know about the performance and also it allowed us a profitable operation then what we now think is, it will scale along the GSI business but we don’t think it has to scale beyond that. But we did know that.

Going forward, I kind of looked at it as a, if you take what we sort of said in our Investor Day is kind of 15 and 15 business. 15% top-line, 15% margin. And that’s our goal and that’s and we are marching toward that we think that’s a good business. Longer term the upside on that is what I don’t know is when we bought GSI, we also bought Magento. And as retailers are dealing with this rapidly changing commerce world ultimately they will have make versus buy decisions. And ultimately I think the pace of change in commerce is going to be fast enough. That they are not going to want have their proprietary software. And so, one of the sort of, I hate to say, 5 to 10 years time, right and say to 3 to 7 year time horizon, is can we built a commerce platform between Magento, eBay seller tools and GSI. That is SaaS based that we are merchants and use that as part of is not their whole commerce solutions, right.

And so we will see, we have put any of our numbers, we don’t need a separate monetization model to do it. But, the upside in the business is over time that it becomes more of a software platform that merchants want. And we will see. GSI merchants want today more and more, we are getting new customers broader, could it be beyond that we will see.

Carlos Kirjner - Sanford C. Bernstein

So, running out of time. The final question, when you (inaudible) comparing to where you were a year or two years ago more excited, less excited, more opportunities, less opportunities, how do you feel about it…

John Donahoe

More excited, more opportunity, more motivation. I mean, I want to be crystal clear, our company has gone some media lately, our stock price is up. We are as motivated we have ever been. I’m proud of what we have done. But, I’m not satisfied. We are paranoid today as we were and I said we are company all the time. The next three to five years won’t be any easier than last three to five. And that’s the mind set we bring everyday. It’s a fast changing world. It’s a competitive world. I think the opportunities are enormous. But, we are growing up our sleeves every morning getting out there and fighting. And we will take our lumps along the way there will be downs as well as ups. But, we are in it. I want the next five years to be as productive as the last five years and that’s what I’m getting up every morning to try to do as our 30,000 eBay people.

Carlos Kirjner - Sanford C. Bernstein

Thank you, John. Thank you very much.

John Donahoe

Thank you.

Question-and-Answer Session

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