Tom Hudson - Vice President, Investor Relations
John Donahoe - President, Chief Executive Officer, Director
Bob Swan - Chief Financial Officer, Senior Vice President of Finance
Ron Josey - JMP Securities
Colin Sebastian - RW Baird
Gil Luria - Wedbush Securities
Doug Anmuth - JPMorgan
Sanjay Sakhrani - KBW
Heath Terry - Goldman Sachs
Scott Devitt - Morgan Stanley
Glenn Fodor - Autonomous Research
Brian Pitz - Jefferies
eBay Inc (EBAY) Q3 2013 Earnings Conference Call October 16, 2013 5:00 PM ET
Good day, ladies and gentlemen, and welcome to eBay's third quarter 2013 earnings conference call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded.
I would now like to hand the conference over to Mr. Tom Hudson, Vice President, Investor Relations. Sir, you may begin.
Good afternoon. Thank you for joining us, and welcome to eBay's earnings release conference call for the third quarter of 2013. Joining me today on the call are John Donahoe, our President and Chief Executive Officer and Bob Swan, our Chief Financial Officer.
We are providing a slide presentation to accompany Bob's commentary during the call. All growth rates mentioned in John and Bob's prepared remarks represent year-over-year comparisons unless they clarify otherwise. This conference call is also being broadcast on the Internet and both the presentation and call are available through the Investor Relations section of eBay website at investor.ebayinc.com. You can visit our IR website for the latest company news and updates. In addition, an archive of the webcast will be accessible for 90 days through the same link.
Before we begin, I would like to remind you that during the course of this conference call, we will discuss some non-GAAP measures and talk about our company's performance. You can find the reconciliation of these measures to nearest comparable GAAP measure in the slide presentation accompanying the call.
In addition, management will make forward-looking statements relating to our future performance that are based on current expectations, forecasts and assumptions and involve risks and uncertainties. These statements include, but are not limited to, statements regarding expected financial results for the fourth quarter and full year 2013, and the future growth in the Payments, Marketplaces and eBay Enterprise businesses.
Our actual results may differ materially from those discussed in the call for a variety of reasons including, but not limited to, changes in political, business, and economic conditions including foreign exchange fluctuations, our need to successfully react to the increasingly importance of mobile payments and commerce and increasing social aspect of commerce, an increasingly competitive environment for our businesses, the complexities of managing an increasingly large enterprise with a broad range of businesses at different stages of maturity, our need to manage regulatory tax and litigation risks, including risks specific to PayPal and Bill Me Later, our need to timely upgrade and develop our systems, infrastructure and customer service capabilities at a reasonable cost for maintaining site stability and performance and adding new products and features, our ability to integrate, manage or grow businesses recently acquired or that maybe acquired in the future.
You can find more information about factors that could affect our operating results in our most recent Annual Report on our Form 10-K and subsequent quarterly reports on Form 10-Q available at investor.ebayinc.com.
You should not rely on any forward-looking statements. All information in this presentation is as of October 16, 2013, and we do not intend and nor undertake any duty to update this information.
With that, let me turn the call over to John.
Thanks, Tom. Good afternoon, everyone, and welcome to our Q3 earnings call. We had a strong third quarter enabling $52 billion of commerce volume, up 21%. Revenue was up 14% and non-GAAP EPS was up 17%. Both, PayPal and eBay marketplaces saw double-digit growth in new users and we continue to lead in mobile with 36% of new customers in the quarter acquired via mobile. Mobile continues to drive our commerce revolution. Go to London or Moscow, [Sydney or], San Francisco or New York and mobile is transforming how commerce happens. Consumer behaviors and expectations are rapidly changing around the world and the pace of commerce innovation is accelerating.
In this dynamic global environment, we have the scale and experience, the platforms and technology and capability to lead in this commerce revolution. That's our focus. Let me take a moment to reiterate our strengths and opportunities.
First, with technology accelerating change in how consumers shop, our company has a bigger addressable market, the $10 trillion commerce market. As we shared at our Analyst Day, by 2015, we expect to enable 300 billion in commerce volume, up from 175 billion in 2012, and we are well on our way with our trailing 12-month commerce volume up 20% and now reaching 200 billion. This is one way we will measure our success.
Second, our core businesses are strong. We have proven models for monetization, and we’ve built a powerful set of technology and innovation capabilities. Third, our global commerce platforms, technology assets, and innovation capabilities strongly position us to lead and compete in the four emerging commerce battlegrounds, mobile, local, global, and data.
We are a mobile commerce leader both at PayPal and eBay. We continue to expect that each will do $20 billion of mobile volume this year. We’re innovating in local with new experiences such as eBay Now, buy online pick up in store, and PayPal Check-In and Order Ahead. We are leveraging our cross-border trade advantages in new markets such as Russia and Brazil, and enabling merchants in China to grow by reaching consumers worldwide. Last, but not least, were harnessing our data to drive consumer engagement.
Our success is strongly tied to enabling others to win, whether an entrepreneur or a global brand. We don't believe that commerce is a zero-sum game. It's not winner take all. Technology is changing the rules and pushing the boundaries of commerce enabling what we call connected commerce, and we believe that creates more opportunity for us and for everyone.
Now, let's take a look at the quarter starting with PayPal. In Q3, PayPal continued to expand its footprint, increasing merchant coverage and share of checkout. Finishing the quarter with 137 million active accounts globally, PayPal added 5 million new active accounts during the period.
Merchant Services generated strong TPV growth of 30%, accelerating 1 point from Q2 and representing almost $31 billion payment volume. Penetration on eBay increased to 78% accelerating 100 basis points from the prior quarter.
PayPal rolled out significant enhancements to its mobile app in Q3. With the updated app, consumers can now check in and pay with their PayPal digital wallet at thousands of retail locations in the U.S., Canada, U.K., and Australia. Consumers can also order ahead at participating restaurants or pay for their meal via mobile without having to wait for the check in the U.S. and Australia. In the U.S. alone, PayPal mobile users can now order ahead at almost 9,000 restaurants.
We believe our pending acquisition of Braintree will help accelerate PayPal's global leadership in mobile payments. Braintree is powering the next generation of leading online and mobile first startups. Braintree will also strengthen PayPal's commitment on supporting developers who are creating innovative solutions for the next generation of commerce startups.
PayPal also expanded its geographic reach in Q3 launching domestically in Russia. In the first two weeks after launch, 2,000 Russian merchants applied for Russian PayPal merchant accounts, and PayPal already has 1 million active accounts in Russia.
PayPal continues to innovate at point-of-sale announcing Beacon in Q3. PayPal Beacon, which utilizes Bluetooth low energy technology is simple for merchants to use with existing point-of-sale systems. Beacon will enable consumers to easily pay at their favorite stores handsfree without having to open their PayPal app or take out their smartphone. It's another way PayPal is reinventing the shopping experience.
Now let's turn to Marketplaces. In Q3, eBay's core or non-vehicles GMV grew 12% over the prior year. In the U.S., core GMV was up 15%. Active user growth was also up to almost 124 million. Top-rated sellers on eBay continued to deliver a great experience and outpace e-commerce growth accounting for 46% of U.S. GMV in Q3. irThe same-store sales grew 17%. Fixed-priced listings accounted for 71% of GMV globally and more than half of all U.S. transactions shipped free in Q3. eBay continued to see strong growth in mobile with 2.4 million new users acquired through mobile in Q3.
eBay also continued to innovate in local with expanded coverage of eBay Now in the San Francisco Bay area and in New York. And in time for holiday, eBay Now plans to launch in Chicago and Dallas and will go global in 2014 with a planned launch in London.
Speaking of the U.K., eBay announced a Click & Collect partnership with Argos. The service will launch with 50 eBay merchants now able to offer consumers fast, free and local pickup at 150 Argos stores across the U.K. eBay is also offering Click & Collect functionality for all large merchants who wish to participate and offer pickup in their physical store locations. In the U.S. eBay plans to partner with select retailers in Q4 to offer in-store pickup for items purchased on eBay.
More brands and retailers are turning to eBay as a new way to reach consumers. In Q3, 34 brands and retailers signed agreements to open stores on our platform. We continue to feel very good about eBay's performance, ongoing site improvements, and new product experiences. This team is executing well and innovating.
Now let me briefly touch on eBay Enterprise. In Q3, eBay Enterprise grew same-store sales 13% for its retail customers, and eBay Enterprise continued to evolved its omnichannel capabilities and solutions. At its customer summit in September, eBay Enterprise announced a new suite of Commerce Technologies including its recently launched platform. These technologies were deployed in Q3 to another four brands and Sony went live with its online store in North America last week.
eBay Enterprise has also partnered with PayPal to pilot a free two-day shipping program with nine retailers. Launched earlier this month, initial results are strong, showing increased share of checkout and sharp uptakes in conversion. Share of checkout is significantly greater than competing offers on sites where both exist. This is a great example of how we can leverage our portfolio to deliver compelling offers and experiences to merchants and consumers.
In summary, our company had a strong third quarter. As I outlined at the beginning of my remarks, I feel very good about our strengths and opportunities. Our core businesses are strong, and over the past 12 months, we have enabled over $200 billion in commerce volume for our merchant, brand, and retail partners. That's more than a 20% increase in what's been a fairly lackluster macro environment. But in this challenging environment, we are focused on what we can control, strengthening our operating discipline and execution, this means getting our product innovations to market faster, deploying new technology more effectively, and more aggressively driving consumer and merchant engagement.
We believe we are making the right investments to drive commerce innovation and we need to step up the pace on translating these investments into accelerated growth. That's our priority.
Now, I will turn it over to Bob, who will provide more details on Q3 and our outlook.
Thanks, John. During my presentation, I will reference our earnings slide presentation that accompanies the webcast. Q3 was a strong quarter for the company another deposit on our multi-year plan.
Total enabled commerce volume in the quarter grew 21% to $52 billion. Revenue was $3.9 billion, up 14%, and non-EPS was $0.64, up 17%. Free cash flow was $1 billion in the quarter. User growth grew double digits for both, PayPal and Marketplaces, and we announced our agreement to acquire Braintree for approximately $800 million to help accelerate PayPal's leadership in mobile payments and to support developers who are creating innovative solutions for next-generation commerce startups.
Additionally, we have sold our equity stakes in ShopRunner and Rue La La and received repayment of the Kynetic note receivable for approximately $485 million. The proceeds will partially finance the Braintree acquisition. We are maintaining our full-year guidance and expect to be at the low end of our range on both, the top and bottom lines.
As John mentioned and we highlighted at Analyst Day earlier this year, our goal is to enable commerce connecting merchants and consumers from around the world to down the street, to buy and pay. We have continued to invest and improve capabilities in mobile, local, global, and data.
As such, we are expanding our addressable market, have built and are building a portfolio positioned to capitalize and lead and accelerating our mobile leadership position and the rate of innovation in our company.
As a strategic partner of choice for merchants of all sizes, we enable $52 billion of commerce volume at a take rate of 7.6% in the quarter. Our take rate declined 40 bps, driven by business mix as our fastest growing business PayPal has a lower take rate.
Now let's take a closer look at the results from the quarter. In Q3, we generated net revenues of $3.9 billion, up 14%. Organic revenue growth was also 14% in the quarter, a slight deceleration from Q2 as ecommerce grow slowed in the U.S.
Third quarter non-GAAP EPS was $0.64, up 17%. Non-GAAP operating margin was 26.8%, up 50 basis points, due primarily to solid top line growth and operating expense leverage.
Our EPS was slightly higher than expected as we began to realize planned operating leverage earlier in the quarter, which puts us in good shape for Q4. We generated free cash flow of $1 billion in the quarter. CapEx was 8% of revenue, primarily due to investments in search, data and site operations.
Now a closer look at our segment results, PayPal had a strong quarter. Revenues reached $1.6 billion, up 20% on an FX-neutral basis. A few quick operational metrics. Total active accounts growth was 17%. TPV on an FX-neutral basis grew 25%, driven primarily by continued expansion of PayPal, our merchant sites around the world and increase in share of checkout and 160 basis points increase in PayPal penetration on eBay. Merchant services FX neutral TPV accelerated 1 point to 30% in the quarter. PayPal's segment margin came in at 22.7% for the quarter up 10 basis points due primarily to OpEx leverage, partially offset by a lower take rate from larger merchant mix, smaller gains on foreign currency hedges and lower cross currency transaction growth.
Let me touch on a few quick highlights for Bill Me Later. BML had a good quarter and is becoming an increasingly important component of our overall portfolio. BML had strong standalone financials with TPV of $1 billions up 30%. BML's penetration as a funding source in the PayPal wallet was 4.3% on eBay in the U.S. and 2% our merchant services. BML gives consumers another funding choice and increased penetration helped lower PayPal transaction expense.
We continue to finance the BML loan receivable portfolio primarily using offshore cash which has enabled us to increase the return on this asset. Additionally, we launched an SMB lending pilot in the quarter to enable merchants to grow their businesses while leveraging our data and risk management capabilities. Overall, BML continues to perform well.
Now let's move to marketplaces. Marketplaces had a strong quarter with net revenues of $2 billion, up 12% on an FX neutral basis. Revenue growth was driven by 12% growth on an FX neutral basis for both transactions and marketing services and other.
A few quick highlights on Marketplaces' operational metrics. Active users grew 14%, FX neutral non-vehicle GMV grew 12% driven primarily by improvements in mobile and the customer experience. Geographically we saw the EU and Korea stabilize in the quarter but experienced deterioration in the U.S. e-commerce market. Transaction take rate excluding vehicles and StubHub was roughly flat with last year and marketplaces segment margin was 38.9% in the quarter, down 10 bps from last year primarily due to investments in trust and technology, partially offset by the OpEx leverage.
Now let's turn to eBay Enterprise. eBay Enterprise client same-store sales grew 13% in the quarter. Revenue was $238 million, up 5% driven by solid volume growth offset by a lower take rate, client mix and channel mix. Marketing and services and other revenue growth was impacted by the re-platforming and branding efforts to consolidate nine companies into one. Segment margin came in at 5%, down to 110 basis points due to take rate reductions and business mix.
Turning to operating expenses. In Q3, operating expenses were 42.5% of revenue, down 212 basis points. Operating expenses were down due to mainly to lower sales and marketing from improved marketing inefficiencies and a shift in spend to product and user experience. This was partially offset by an increase in provision for transaction loan losses resulting from investment in Marketplaces trust initiatives and TPV growing faster than total company revenue.
We ended the quarter with cash, cash equivalents and non-equity investments of $13 billion including approximately $3.9 billion in the U.S. We have improved our financial flexibility funding 67% of the BML loans receivable portfolio with offshore cash in the quarter. We repurchased 2.8 million shares of our common stock for approximately $146 million and we received approximately $485 million from the divestitures of our remaining equity interest in Rue La La and ShopRunner and the settlement of the Kynetic note.
With that, let me turn to guidance. A little context on our business outlook. First from a macro standpoint. Europe and APAC has created a bit of anxiety for us in the first half of the year has stabilized through Q3 but at the same time, the U.S. e-commerce softened considerably and we have a cautious outlook for the holiday season.
Second, currency. The U.S. dollar weaken since July, which positively impacted the top line, but there is no impact to our bottom line since we are fully hedged.
Third, investments in operating leverage. We expect $0.01 dilution from the anticipated late Q4 close of Braintree. We expect to increase spend with our eBay Enterprise and PayPal free shipping pilot to drive higher conversion for merchants and increased share of check out for PayPal, and we had strong operating leverage in the third quarter that will carry momentum into the fourth quarter. As a result, we expect to be at the low end of the full year 2013 guidance range on both, the top and bottom line.
For the fourth quarter, we expect revenues of $4.5 billion to $4.6 billion, representing growth of 13% to 15%, and we anticipate the non-GAAP EPS of $0.79 to $0.81, representing growth of 12% to 15%.
In summary, we feel good about or performance. Our core businesses had a strong quarter and we continued to test and learn in our adjacencies and seeds such as local, global and Omnichannel.
PayPal continues its strong growth with increasing focus on simplifying and improving the customer experience. Marketplaces is stable in a deteriorating U.S. environment driven by investments in buyer and seller experiences and eBay Enterprise continues to position its assets for growth, invest in technology and grow its client portfolio. We are investing in our business for the long-term and we are focused on delivering the next generation of global commerce and payments capabilities.
Now, we will be happy to answer your questions. Operator?
(Operator Instructions) Our first question comes from Ron Josey from JMP Securities
Ron Josey - JMP Securities
Great. Thanks for taking the question just a real quick, Bob, if you can go back and talk about the stabilization you saw in EU and Korea and the impact on Marketplaces, I am wondering if that's just better macro or the result of the marketing investments I think you made during the quarter. Then also domestically, any additional color as to why you think holiday might be a little bit weaker this year would be helpful. Thank you.
Thanks Ron. Yes, in terms of Europe and Korea, as you may remember back in July, we had a bit of anxiety just about the signs that we were seeing in both of those markets and how it was impacting our business.
During the course of the third quarter, in essence, we looked at stable growth for 11% Q2, 11% Q3, and things kind of stabilized in what at that time had caused us the greatest anxiety. I think, there are some things that are working well in terms of what we are doing and some things that aren't, but in the aggregate we got nice fundamental, strong businesses with good stable growth. That's kind of first.
Secondly, holiday weaker, you know the reality is the thing that’s caused us the most angst is a dramatically decelerating, what we believe is a dramatically decelerating U.S. e-commerce growth rate from the second quarter of 15.5% to 16% for comsCore to the third quarter of closer to 13%, so when we came into the third quarter, we looked at a stable U.S. market, and lo and behold in a relatively short period of time we have seen a pretty rapid deceleration in the market.
I think for us that deceleration happened throughout the course of the quarter. Then as always, we take all the information we have at our disposal, which right now is roughly 15 days in, and we haven't really seen any more positive signs in October than what we experienced through the latter part of the third quarter in the U.S., so all of that and all the anxiety we see when we pick up the newspaper every day makes us fairly cautious about how we look at the holiday season and its impact on our outlook for the fourth quarter.
I hope I am too conservative, but right now all the signs point to a bit of caution.
Thank you, and our next question comes from Colin Sebastian from RW Baird.
Colin Sebastian - RW Baird
Great, thanks. Maybe just one quick follow-up there on the deceleration in the U.S. Bob I wonder what your level of confidence is on the Q4 outlook if there is no improvement in the U.S., into the holiday period given overall stable growth rate expectations?
My other question would be on the new users coming from mobile. I think you have articulated in the past that they don't monetize quite as well as other users, and I wonder though if you are seeing a trend emerging among these cohorts as their tenure on eBay and PayPal starts to lengthen if the monetization is improving? Thank you.
I will do the first, John, and maybe handle the second. I think in terms of the decel that we are seeing in the quarter in level of confidence, we always try to -- at the risk of repeating myself, we always try to give you our best look based on everything that we are seeing. It's hard to be really confident when lots of the fundamentals that we are reading about are not all that positive. That being said, we are not expecting really any improvement for the fourth quarter from what we have experienced for the last eight to 10 weeks. So, we are expecting improvement. We are just assuming that things are going to stabilize where they are. E-commerce growth rates will not accelerate, but they will be stable, and we think we are well positioned to deal with an environment that doesn't get any worse than it kind of is right now.
And Colin, on the new user growth and the mobile user monetization over time, as we said, we had continued double-digit user growth across both businesses, and I think in the quarter was up almost 36% of our new users came via mobile. So what's clear is a lot of new users are coming to us via mobile, and I really like the demographics. They are the demographics of the future because they tend to be younger and they tend to come from -- not tend to but there is a significant portion that comes from BRIC and emerging markets, kind of markets of the future. So, it’s just a fact that the younger people have less disposable income, and the people in the BRIC and emerging markets, because they are buying cross-border don't really have domestic eBay markets to buy from, they don't buy quite as frequently.
So what we are doing is we are obviously monitoring the number of transactions for those users as they mature and the total GMV, and the good news is they are getting better so that there was a – once they use use eBay more, they tend to grow their number of transactions and grow their GMV over time, but the slopes of those cohort curves are simply lower than the slope of a more developed market or our higher disposable income demographic.
So what we are doing about it is making sure that we have the best inventory available for international BRIC and emerging market sellers. So something like the Russian site really increases the richness of selection that Russian consumers have, for instance, and how easy it is for them to get that inventory, and we are trying to grow our inventory that appeals to younger demographics.
The last thing we are doing is increasing engagement. One of the things that's a good thing about a mobile user, they tend to engage more frequently even if they don't always buy, and some of the stuff we are doing with eBay Feed and our mobile apps are driving growth -- growing engagement with those customers. So, we still don’t not have enough data to sort of what would I call highly predictive cohorts, but we like the demographic. We like the trends and we are working on making sure that we grow those users into valuable long-term customers.
Colin Sebastian - RW Baird
Thanks very much.
Thank you. And our next question comes from Gil Luria from Wedbush Securities.
Gil Luria - Wedbush Securities
Yes, thanks for taking my question. I wanted to revisit the Braintree acquisition. You talked about some of this during your release, but could you elaborate a little bit what the economics are for them? How many of their transactions were acquired versus just gateway? What that translates into the revenue they are going to contribute next year? And what are some of the opportunities for you to build on their economics, introducing PayPal as a payment option maybe becoming the acquirer for some of those transactions. What's the potential there, how would you rank the most important contributions that you are going to get from Braintree?
Yes, Gil, why don't I just quickly revisit the rationale of why we acquired Braintree and then Bob maybe you can talk about some of the specific questions Gil was asking. We have been watching Braintree for the last 12 to 18 months and really liked the progress they are making in two very important markets.
First, with developers. They built a really simple product that developers find very attractive to integrate into their new products and new businesses. As you know, we have been developing our developer product as well, but when we finally looked at it side-by-side, we decided that we were best off taking Braintree's and then merging ours into it, so the developer community we think is the real growth opportunity for eBay going forward or PayPal going forward and will use Braintree.
Second, Braintree has done a great job of becoming the payments provider for many of the new economy or sharing economy companies that are growing and growing quite rapidly, and their payment solution really works well for those, so what we really like about it is, it positions PayPal into these two high-growth markets, but then the last thing they have is they acquired a little company called Venmo which has a user experience on mobile payments that is pretty compelling.
It allows you to basically with one-click payment pay across different apps that Braintree powers across someone's mobile device, so we thought this company was a nice fit with PayPal to help us build almost a payments OS, and we will run it separately. Bill Ready will report to David, but we will do everything we can to leverage PayPal's strengths to help Braintree expand internationally and to ensure that we are developing the most competitive products for the developer community and also working with that Venmo Touch to see if we link that to PayPal's user base and PayPal accounts.
Gil, I had follow-on. In terms of the business model and the economics, its ease of integration and its relationship with developer communities has enabled it to get dramatic organic growth, so as we indicated at the time of the announcement, roughly $12 billion of TPV volume where the service provide is primarily a no risk PSP Flash gateway and the implications that are really three things for us.
One is, significant volume, but we don't record gateway-type TPV in our external metrics, so for the most product it's not going to be a dramatic change on TPV. Secondly, because of the nature of the service they provide, they get insight into all transactions that get processed, however their take rate is very low relative to ours, so the revenue impact is relatively small.
Then third the opportunities and John touched on these is, how do you leverage their relationship with developers, mobile users, sharing economy, merchants, coupled with PayPal integration, so over time Braintree gets visibility to all transactions and PayPal as a source or only way to pay can get enhanced economics as it gets share check out on Braintree merchants, so that's kind of the strategic and then the financial implications for the business for us.
Thank you. Our next question comes from Douglas Anmuth from JPMorgan.
Doug Anmuth - JPMorgan
Just two things related to payments. First, could you just talk about what you think was the most impactful in terms of driving the acceleration in merchant services. Then, secondly, if you could help us break down the impact in terms of the lower take rate that we saw. I know you mentioned three things there. If you could help us put percentages around that and how we should think about those going forward? Thanks.
First a modest acceleration in that, so 29% up to 30%, we feel good about. We don't feel great, we would love to see more acceleration in the business, primarily merchants' equity in the online world has given us kind of the modest growth when you cut through it all.
In terms of the lower take rate, it's really got some consistency in this metric that you have seen over time. First the more we grow our merchant services business relative to eBay and the more in that merchant services we have a larger merchant mix which are both extremely important to us and all good stuff, the lower the take rate. Think about that as maybe a little more than the one-third of the decline in the take rate year-on-year.
The second thing is, our FX hedges. We hedge our international exposures in PayPal through the revenue line. In the quarter the impact from our hedges were not as favorable as they were a year ago. It had less than a third impact and that's one that will not - well may or may not continue. It's more how we hedge and what the impact is.
The third one. It has to deal with cross-border trade. And I think about this as kind of not quite a third but in that magnitude. And what it is, as we grow our cross-border trade and help merchants reach consumers in new markets, how we monetize that, can change over time. So if a U.K. merchant is selling into Germany, we could help them grow their business by setting up local accounts. They get better growth. They eliminate some of the restriction locally for their consumer and all that keeps our take rate is down a little bit.
For us we think that's a great thing for merchants. We think it's a great thing for the health of the business. The negative impact is it has an impact on our take rate. That one will continue as well and that's not a new phenomena. So if you want to use roughly a-third,
a-third, a-third I think two of those are things that are fundamentally good decisions that we make over time to grow our merchant relationship. The impact is a lower take rate and likewise we believe higher volume for the business and our merchants.
Douglas Anmuth - JPMorgan
Great. Thanks, Bob.
Thank you, and our next question comes from Sanjay Sakhrani from KBW.
Sanjay Sakhrani - KBW
Thank you. Good evening or good afternoon. A couple of questions. One was, at the beginning of the year, I think you guys talked about making investments specifically around holiday season. I was wondering if you could just talk about some of those during the holiday season and what you are anticipating in terms of returns on those investments?
Then secondly, just specific to PayPal, I was just wondering if you could talk about your discussions with the retailers today. I know you guys have an offline strategy and you have talked about your penetration rates and expect penetration rates, but maybe you could just talk about how those discussions have progressed and maybe how close you are to getting some of the other merchant acquires that have been hold out to sign on? Thank you.
So maybe I will take the fist and you take the second.
So I think on holiday season, I think Sanjay, our coming in the year was more about maybe for the full year we are going to accelerate the level of investments across the company in several key vectors whether it was expand globally, where it was expand though Omnichannel locally or whether it was to expand with data and engagement. I think as a company, we have said we are going to make more investments during the course of 2013 and in the fourth quarter what we would see from those higher investments during the course of the year is more leverage on higher growth. So that's kind of generically where we were and what we have been doing in terms of investment during the year.
If you isolate the fourth quarter or maybe more marketplace, or eBay specifically, our expectation is that we will be making more investments as we always do and usually the more challenging the economic times, the more we believe that we have to lean in on behalf of our merchants to spend more on sales and marketing related activities that drive higher growth. So in that's specific area we always spend more Q3 to Q4 reflected in our guidance as we will in fact be leaning in and spending more on sales and marketing.
And then Sanjay, I think your question was around the merchant conversations and we go offline and the impact on acquirer. We are in essence, continuing to move ahead and what we said earlier this year and same for the last really 12 to 18 months, which is we want to build out as close to ubiquitous acceptance as possible over a period of multiple years, so that involves direct conversations with the very largest merchant and those continue. That involves the other end of the spectrum growing out PayPal here, clearly very, very smallest.
Then further up, the largest segment which is a middle segment, working with the existing people on the ecosystem. We are not trying to go around the payments ecosystem, we are trying to work with the merchant acquires, we are trying to work with the existing point-of-sale providers to integrate PayPal into the existing hardware and software - really infrastructure in the payments offline world.
We are continuing to make progress in doing that. It's sort of one step at a time and merchants continue. The good news is merchants continue to have very much want to get PayPal to point-of-sale, thus they want to be able to offer their consumers easy enhanced ways to pay and also have a direct relationship with those consumers when they are in the stores.
One of the things is perhaps been the biggest progress in Q3 or the newest progress is actually less than a merchant site it's more in getting our mobile app, the PayPal mobile app re-launched and for our iOS and for Android. You see now, you can easily discover what merchants around your accept PayPal, so that makes it easier for consumers and then we have been focused on couple of consumer used cases where we are trying to take a consumer pain points and in some very targeted geography really maybe even neighborhoods where we are working on order ahead which is a used case that consumer say they want. We had some early indication about the case.
The ability to pay at table, without having to wait for your check and offering merchants the opportunity to provide a closed group offer to a consumer in their stores, so all of this is trying to increase the value that PayPal would bring to a merchant and which I think in time will increase everyone in the pressure, if you will, or the incentive for every one of payment ecosystem to help support these solutions.
Thank you. Our next question comes from Heath Terry from Goldman Sachs.
Heath Terry - Goldman Sachs
Of the 34 merchants that you added to the platform that opened up shops on the eBay platform this quarter, is there a sense that you can give us any sort of commonality? Are those coming to you from a similar sized merchant group? Are they more concentrated in some verticals versus others, and to what extent are they taking all or largely all of the various offerings that you have got within the e-commerce stack. How broadly are they utilizing eBay as a platform now?
I know that you are a big eBay shopper, so I am sure you know the answer already, because you are always on the site. I think what you have is a mix in terms of both, retail brand, but I would say for brands it's a bit easier.
I think, secondly, characteristics-wise, the verticals with higher gross margins, who can spend more to drive demands through alternative distribution channels like eBay. I think the way the relationship builds is they start out trying with a relatively narrow selection, test and learn, expand the selection about what moves and then evolves into multiple different formats, a daily deal to try something where they have deep SKU inventory and/or fast and tight experiences where we use what historically we call fashion vault as a category to display their inventory in new and different ways, so it kind of is retailer's brand, verticals, higher growth margins tendencies, start with a store and then expand into other formats is kind of how the relationships have been building.
We are very upfront. We are still working to find ways to allow these brands and retailers to fully leverage eBay marketplace. So it's an ongoing, I don't know, call it learning journey, if you will, but more and more of them, I think, our trying to leverage the platform and leverage the traffic.
Also eBay Now, some of them want to tie some things in with eBay Now and they are looking really to leverage the eBay Inc. full set of assets. When we sit down with retailers, in fact we were having dinner with one last week, Bob and I were. He said, what I really want access to the eBay Inc. set of assets and all the innovation you are doing around mobile, around local. So they are open to exploring ways to take full advantage of that. And we are still learning how to most effectively deliver and leverage that.
Heath Terry - Goldman Sachs
Okay, great. Thank you.
Thank you, and our next question comes from Scott Devitt from Morgan Stanley.
Scott Devitt - Morgan Stanley
Thanks. I was wondering just for the last six months since the Analyst Day, given some of the things that you faced in 2013. Bob how you think about the ranges that you gave at the Analyst Day, the earnings growth range and then the profit margin ranges for the Marketplaces and PayPal business? I know you are not necessarily interested in updating that but I think there is a lot of debate in the investment community around your ability to get to those numbers given the way that this year's played out. So I would be interested in getting your updated thoughts there.
And then secondly just to follow-up on Braintree. I know with Bill Me Later, it may be more complicated to get deep integration to PayPal because there is a credit decision that's made but with Braintree that may not be the case. So I was wondering on the frontend to the extent that as there is opportunity to basically synchronize accounts so that PayPal customers have access to Braintree account without having to separately signup for account? And on the back end of that, does Braintree compete directly with Mobile Express Checkout or are they separate product offerings? Thanks.
Yes, Scott. First just a quick reminder of our multi-year outlook. Enable e-commerce volume of $175 billion and growing to $300 billion or roughly 19% growth rate. To that, mobile is going to be a significant contributor and our intention was to lead and while overall growth was in the 19% to 20%, mobile would be more in the 65% growth rate over that three year time frame. Then third, we set our take rate or that role that we play in all the Inc technologies that merchants consume over that three year time frame will go from roughly 8% to 7.5%. So that's tied to the macro things about strategically what it is we are trying to do and how we are going after it.
Year one, or as we characterize it, three deposits into the 12 deposit journey, e-commerce volume is up roughly 21%. Mobile volume is up roughly 80% over the first three quarter and our take rate is right around 7.6%. So at the lower end of the range. So in that context, in terms of strategically what we are trying to do and the momentum at the enterprise we feel relatively good.
At the same time obviously, in year one of our about three year journey, we are at the lower end of 2013's revenue and earnings range and we have characterized macroeconomic being a little worse than we expected, currency being a little worst than we expected but we continued to invest in the things that John highlighted so we can be accelerating growth over the three year timeframe. So that backdrop on what we said is kind of where we are 270 days through.
Then the last thing I would say is, right I am not thinking about selflessly. I am not thinking about '14 or '15 right now. We are thinking about delivering for our merchants in the fourth quarter this year and as we get through the year one of the journey, we will provide more context for how we think about '14 in January.
Let me just build, just kind of try a little bit of color. Bob talked about the numbers. Let me say where my focus is. So we have also had a year where there has been a lot of macro things going on. Headwinds in Europe, and Korea, and now the U.S. and uncertainty about the government and those are uncertainties frankly that we can't control. What I am focused on and what David and Devin and Bob and our leadership is focused on, what we can control.
While I feel good about our portfolio and I feel good that we are investing in the right areas, I do feel we need to accelerate the pace with which we are rolling out products, identifying what's working and what's not, scaling what is working, so we have developed a lot of new products this year and that's good. The product pipeline is stronger than it has been, but we need to get them to market more quickly.
Iterate, learn and then scale what's working and so rest assured that when you hear its inside our meetings with, I guess, David and Devin and Bob, we are focused on how do we accelerate our pace, how do we accelerate execution and ensure that the good products and innovations that we are investing in and that we are developing, translate into incremental growth and we are going to be very focused on that in Q4 and very focused on that in 2014, so we are far from satisfied in terms of what we think we can achieve. It is an enormous market, we are well positioned, we are making the right investments, we have had good momentum, but we want to take it to the next level and that's certainly the hunger and motivation that I feel are now we all feel.
Let's see, your other - Braintree?
Scott Devitt - Morgan Stanley
Braintree doesn't compete with Express Checkout. No, because Braintree captures a 100% of its customers payments and that's the beauty of it. It covers a 100% of their payments across all channels whether it's mobile apps or web and so as we are PayPal Express Checkout only covers the PayPal portion, so PayPal will be one of the alternatives in the full suite of Braintree solutions, but they don't really compete.
I think as merchants get larger and some of Braintree's largest merchants are looking to add PayPal's Express Checkout button on as one of the ways you would pay and then we are finding nice ways to leverage Braintree and PayPal. As you said, I think we will have the ability to have seamless account creation for consumers and so that if you are registered as a PayPal user then you will be able to use any Braintree-enabled path or customer site.
Our next question comes from (Inaudible).
Glenn Fodor - Autonomous Research
Hi. Good afternoon. Thanks for taking my question. You talked in the past about the retooling efforts of the PayPal platform and how difficult that would be to speed up earlier than I think it was like a three-year timeframe, so just wondering when you think about the acquisition of Braintree and how that can impact this effort. I mean, will it increase the scope, costs and timeframe of that project or could it potentially speed it up and actually lower overall cost and how should we think about that?
Well, thanks for the question. Let me just comment first on the re-platforming for PayPal, Glenn, which is quite important. David is sitting across me, he has more grey hair at the end of the year than he did at the beginning, because re-doing this platform is essential for us to accelerate the pace of innovation and allow us to rollout some of the new products. We are actually holding some of our new products to roll them out on the new stack to do it more efficiently, so our re-platforming efforts are on track. It is sort of I would year end to three years.
Some of the newest experiences are built on the new stack, if you will, and that will continue. Braintree does not really slow it down. What it does is, allows us to run the, what I call the unbranded payments platform parallel to the kind of core PayPal platform. What Braintree really does is, it's the unbranded payments and gateway platform and so that will consider to keep those separate, we will over time be merging the PayPal unbranded volume to the Braintree platform, so it allows us. You could say it accelerates things and it allows us to go side-by-side. It won't make the PayPal piece itself go any faster, but it just means, it's one last thing we have to re-platform on the PayPal site.
Glenn Fodor - Autonomous Research
Just have one more if you don't mind? To the extent you can answer it, it would cure some of the issues out there among investors. But a lot of decision about one-click checkout solutions. We are getting a lot of questions about checkout by Amazon. So there is probably a portion of your TPV that's protected because it come from retailers that compete Amazon and probably would never use their solution. So to help ameliorate some of the concerns, can you roughly segments for us the percent of TPV that comes from merchant set given their demographic and footprint probably wouldn't work with Amazon? Maybe it's a 50-50, 60-40 rough order of magnitude.
78.4678%. Glenn, I don't know. My reaction is they all should worry. So I don't know if we have that. I am sure we don't have that card data but here is what we are doing, which is ensuring that the PayPal checkout process and checkout experience is as good as it possibly can be. So any of you that, and I am sure many of you do, use eBay mobile apps whether it's your smartphone or a tablet. It's one click checkout. It's fast. It's simple. It's easy. Increasingly, the new checkout experience that the PayPal teams built for web, as the new stack rolls out, as the new platform rolls out, you will see it. It's a significantly enhanced and improved checkout experience.
Some of the checkout experiences that we are developing for the offline world, things like Beacon, actually are no click, if you really look at it. So our focus is ensuring that PayPal user experience makes significant progress over the coming months and years. We have got products built. They are in the pipeline. We will be rolling them out just like we have rolled them out on to the eBay web and mobile apps.
Operator, I think we have time for one last question.
Thank you, sir. And our final question comes from Brian Pitz from Jefferies.
Brian Pitz - Jefferies
Thanks. Two questions. One, you simplified your listing fees in the second quarter about the same time Amazon implemented some fee changes as well. Have you seen any impact on GMV or the net number of sellers on your platform over that time period?
Then secondly, any update on StubHub? Are you seeing any impact to growth from their very aggressive push along with Ticketmaster and with professional sports leagues such as the NFL taking tickets and putting it on their ticket exchange. We have been hearing some pretty negative things in terms of how aggressive they are being? Thanks, any color there would be great.
Yes. I would say on listing fee simplification, the primary impact that you are seeing is a dramatic expansion in selection. So I think right before we did it, we were around 450 million items into a variety of things whether its same fee simplification, expanding relationship with large merchants we are over 0.5 billion listings today. And in terms of, obviously the broader selection we have the more we serve up the right inventory that impacts the growth of the business.
StubHub, I would say, Brian, is what all of our - so StubHub continues a very strong growth and I think a strong growth is going to attract competition over time, but what we are doing with StubHub is we are investing heavily in providing these absolute best consumer experience out there. And if you look at the consumer experience, the consumer net promoter scores, the way we absolutely guarantee fans have the best
possible experience on StubHub. That's the best way to address any competition now or down the road. And that also will drive the most traffic to StubHub which drives the highest price realization.
So I would say StubHub has some of the absolute best consumer experiences on our portfolio. And it has a rabid commitment to delivering great experiences. If you ever have a problem at StubHub they make it right. That's the most powerful way to compete, which is having the absolute best consumer experience. That's reflected in our traffic which is, I think, reflected in the growth rate. So we will continue to make that kind of investment in StubHub business and we think that is the best way to continue to compete going over time.
So I guess that's it, Tom.
So thanks everyone and we will talk to you at the end of the holiday season.
Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect and have a wonderful day.
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