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Executives

Tom Hudson - VP, IR

John Donahoe - President and CEO

Robert Swan - CFO

Analysts

Colin Sebastian - Robert Baird

Gil Luria - Wedbush Securities

Heath Terry - Goldman Sachs

Stephen Ju - Credit Suisse

Sanjay Sakhrani - KBW

Mark May - Citi

Mark Mahaney - RBC Capital Markets

Justin Post - Bank of America Merrill Lynch

eBay (EBAY) Q4 2013 Results Earnings Call January 22, 2014 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to eBay's fourth quarter 2013 earnings conference call. [Operator Instructions] It’s now my pleasure to turn the floor over to Tom Hudson, vice president of investor relations. Sir, the floor is yours.

Tom Hudson

Good afternoon. Thank you for joining us, and welcome to eBay's earnings release conference call for the fourth quarter and full year 2013. Joining me today on the call are John Donahoe, our president and chief executive officer; and Bob Swan, our chief financial officer. We're providing a slide presentation to accompany Bob and John’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 our Investor Relations section of the eBay website at http://investor.ebayinc.com. You can visit our investor relations website for the latest company news and updates. In addition, an archive of the webcast will be accessible for 90 days through the same link.

Before we begin, I'd like to remind you that during the course of this conference call, we will discuss some non-GAAP measures in talking about our company's performance. You can find a reconciliation of those measures to the nearest comparable GAAP measures in the slide presentation accompanying the conference call.

In addition, management will make forward-looking statements related to our future performance that are based on our current expectations, forecasts, and assumptions and involve risks and uncertainties. These statements include, but are not limited to, statements regarding expected financial results for the first quarter and full year 2014, the company’s financial outlook for 2015, the future growth in the Payments, Marketplaces, and eBay Enterprise businesses, the company’s plans regarding share repurchase programs and the company’s plans for its payments business.

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, or economic conditions; foreign exchange rate fluctuations; our need to successfully react to the increasing importance of mobile payments and commerce and the increasingly social aspect of commerce; an increasingly competitive environment for our businesses with the complexity 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 while maintaining site stability and performance, in addition to adding new products and features; our ability to integrate, manage, and grow businesses recently acquired or that may be acquired itself; the effect of the announcement of the shareholder proposal [unintelligible] has on the company’s relationships with the shareholders; and the associated disruption of management and employees attention from the company’s ongoing business operations.

You can find more information about factors that could affect our operating results in our most recent annual report or on our Form 10-K and our subsequent quarterly filings on Form 10-Q available at http://investor.ebayinc.com. You should not rely on any forward-looking statements. All information in this presentation is as of January 22, 2014, and we do not intend and undertake no duty to update this information. With that, let me turn the call over to John.

John Donahoe

Thanks, Tom. Good afternoon everyone, and welcome to our Q4 earnings call. The fourth quarter was a tough, competitive holiday season in retail. It was also a holiday season that tipped toward the future of commerce. Online, mobile, and other omnichannel commerce capabilities are clearly taking hold. Consumers are changing how they shop and pay, and retailers and brands are having to adapt.

In this dynamic environment, we feel good about our performance for the quarter. We focused on what we control, leveraging our global commerce platforms in mobile leadership and strengthening our operating discipline and execution. And it paid off with a strong finish to a challenging year.

Revenue was up 13% for the quarter, and non-GAAP EPS was up 16%, and eBay and Paypal both generated double digit user growth. We enabled $61 billion of commerce volume in Q4, up 22%, well ahead of ecommerce and retail overall. Our eBay Marketplace, Paypal, and eBay Enterprise platforms are clearly driving volume growth on behalf of our retailer, brand, and merchant partners.

Mobile exceeded our expectations, continuing to lead new consumer shopping behaviors. For the full year, our total mobile-enabled commerce volume grew 88%, with eBay reaching $22 billion and Paypal hitting $27 billion of mobile payments volume. And we added more than 14 million new customers through mobile in 2013, 40% of our total new users.

These results demonstrate why we believe strongly in the power of our portfolio to compete and lead in the new commerce environment, both in our core businesses and in the four competitive battlegrounds of mobile, local, global, and data.

Now I’d like to step back for a minute and comment on the year. We drove 14% revenue growth and 15% earnings growth in 2013, and we feel good about that strong performance in a challenging environment. However, we anticipated accelerating second half growth, which did not materialize, so we ended the year at the lower end of our guidance.

As we look forward to 2014 and beyond, the growth opportunities we spoke about last year are still very much there. As mobile continues to change commerce and blur the lines between online and offline, we have tremendous opportunities in the $10 trillion commerce market, a bigger addressable market for us.

We will continue to compete aggressively across all of our businesses, and in 2014 we’re stepping up our investments, particularly in Paypal. We’ll take a very disciplined approach about how we make these investments, but we intend to capitalize on our strengths and seize the opportunities before us.

Now I’m going to turn it over to Bob, who will provide more details on our fourth quarter and full year results and 2014 guidance. Then we’ll take a slightly different approach today. After Bob finishes, I’ll come back with some additional comments before we take questions. Bob?

Robert Swan

Thanks, John. During my discussion, I’ll reference our earnings slide presentation that accompanies the webcast. As the strategic partner of choice for merchants of all sizes, we enabled $61 billion of commerce volume at a take rate of 7.4% in the quarter. Our take rate declined 55 basis points, driven by business mix, as our fastest-growing business, Paypal, has a lower take rate.

In Q4, we generated net revenues of $4.5 billion, up 13%. Organic revenue growth was also 13% in the quarter. Transaction revenue grew 14% and marketing services revenue grew 12%. Fourth quarter non-GAAP EPS was $0.81, up 16%. Non-GAAP operating margin was 29.2%, up 70 basis points, due primarily to solid top line growth and strong operating expense leverage. We generated free cash flow of $1.4 billion in the quarter. Capex was 6% of revenue, primarily due to investments in search, data, and site operations.

Now let’s take a closer look at our segment results. Paypal had a strong quarter. Revenue reached $1.8 billion, up 20% on an FX-neutral basis. Revenue was driven by accelerating merchant services growth and solid growth on eBay.

A few quick highlights on Paypal operational metrics. Total active accounts growth was 16%, with more than 30% of active accounts coming from eBay. TPV on an FX-neutral basis grew 25%. Paypal increased penetration on eBay by 175 basis points. Merchant services, FX-neutral TPV accelerated 1 point to 31% in the quarter, with particularly strong performance coming from large merchants. As of year-end, 70% of the U.S. internet retailer 100 and 63% of the E.U. internet retailer 100 had integrated Paypal.

We launched a series of innovations on eBay Inc. properties leverage the synergies of the portfolio and improve the checkout process. Paypal mobile payment volume in the quarter was $8.8 billion, with 51% of mobile payments coming from eBay. Paypal segment margin came in at 25.7% for the quarter, up 270 basis points, due primarily to opex leverage, partially offset by a lower take rate from large merchant mix, losses on foreign currency hedges, and lower cross-currency transaction growth.

Let me touch on a quick highlights for Bill Me Later. Bill Me Later had a good quarter, and is becoming an increasingly important component of our overall portfolio. We’re using the same playbook with Bill Me Later on eBay as we did with Paypal on eBay. BML’s penetration as a funding source in the Paypal wallet was 4.8% share on eBay in the U.S. and 2.5% on us merchant services.

As we drive greater adoption on eBay, we are able to accelerate usage off of eBay, and BML gives consumers another funding choice and increased penetration helps lower Paypal’s transaction expense. We continue to finance the BML loan receivable portfolio primarily using offshore cash, and BML risk-adjusted margin continued to be at the high end of the 14% to 16% targeted range, while chargeoffs increased to 6.3%. The 90-day delinquency rate improved 30 basis points from last quarter. Overall, BML continues to perform well.

Now let’s move to Marketplaces. Marketplaces had a good quarter, with net revenues of $2.3 billion, up 11% on an FX-neutral basis. A few quick highlights: active users grew 14%; FX-neutral non-vehicles GMV grew 12%, driven primarily by improvements in mobile and the customer experience; U.S. non-vehicles GMV grew 14% against tougher comps, and international non-vehicles GMV grew 10%.

In the quarter, we completed the rollout of Cassini around the world; launched Collections, an inspirational experience for buyers; and rolled out in-store pickup in the U.K. and the U.S. Marketplaces segment margin was 41.1% in the quarter, at the upper end of our 38-42% guidance range we shared in March of last year. Segment margin was down 40 basis points from last year, primarily due to investments in trust and technology, partially offset by opex leverage.

Now let’s turn to eBay Enterprise. eBay Enterprise generated $1.8 billion in merchandise sales for its clients and same-store sales grew 13% in the quarter. Revenue was $392 million, down 2%, driven by client mix, channel mix, and a lower take rate. Marketing services revenue growth was impacted by replatforming and branding efforts to consolidate nine companies into one.

We continue to scale our new technology platform and now have nine clients that are live. We’ve continued to drive Paypal adoption on eBay Enterprise client sites, with 97% coverage and 17% share of checkout. Segment margins came in at 15.8%, down 450 basis points.

Turning to operating expenses, in Q4, operating expenses were 40% of revenue, down 165 basis points. Operating expenses were down due mainly to lower sales and marketing from improved marketing efficiencies and a shift in spend to product and user experience. This were partially offset by an increase in provision for transaction loan losses resulting from investment in Marketplace’s trust initiatives and TPV growing faster than total company revenue.

We ended the quarter with cash, cash equivalents, and nonequity investments of $12.8 billion, including approximately $3.2 billion in the U.S. We improved our financial flexibility, funding 68% of the BML loan receivables portfolio with offshore cash.

In the quarter, we repurchased 4.9 million shares of our common stock for approximately $254 million. As a company, we generated $1.4 billion in free cash flow, and reinvested $1.1 billion of that to drive Paypal growth with the expansion of Bill Me Later and the acquisition of Braintree.

So we’re now one year into the three-year journey we shared with you last March. We enabled $212 billion of commerce volume for merchants and consumers globally, up 21%. Mobile commerce volume was $35 billion, up 88%, well ahead of our three-year plan.

Revenue grew 14%, non-GAAP EPS grew 15%, and we generated $3.7 billion in free cash flow. Not bad results. But as John indicated, not in line with our expectations as we delivered at the low end of our full year guidance, and we didn’t generate the monetization we had planned exiting 2013, giving us less momentum entering the new year, and making our 2015 aspirations more difficult to achieve.

With that, a little context on our business outlook. We believe the opportunity in front of the company is huge, and we have the right portfolio of assets, and we will invest to win. Competition is increasing, and consumer expectations are rising, and we’re making the investments to expand or serve the market, both globally and locally.

We are investing more across the business units in three key areas. First, the core. We’re increasing investments in sales and marketing, product experience, and trust. Secondly, omnichannel. We’re increasing investments in eBay Now, in-store pickup, ship from store, and Paypal ubiquity. And third, globally. We’re increasing investments in emerging markets and to drive cross-border trade. Paypal will have a disproportionate share of these investments in 2014.

For the full year 2014, we expect revenue of $18 billion to $18.5 billion, representing growth of 12% to 15%. We anticipate non-GAAP EPS of $2.95 to $3.00, including approximately $0.03 from the Braintree acquisition, representing growth of 9% to 11%.

We expect free cash flow to be $3.7 billion to $4 billion, and non-GAAP effective tax rate to be 18.5% to 19.5%, and capex to be 7% to 9% of revenue. We expect Marketplaces margins will be within the three-year range we shared in March of ’13, but that Paypal margins will be lower, as we continue to invest heavily to protect and extend our leadership position.

For the first quarter 2014, we expect revenue of $4.15 billion to $4.25 billion, and non-GAAP EPS of $0.65 to $0.67. For the full year of 2015, we expect ECV to be greater than $300 billion, with mobile ECV growth of 65% plus over the three-year period, per year, but we expect monetization for our take rate to be lower and investments to be higher in Paypal.

From a business unit perspective, versus the outlook we provided last March at analyst day, we expect Marketplaces to be below the range on revenue and in line with margin guidance. We expect Paypal to be in line with revenue guidance, but below the margin guidance as we boost investments, and we expect eBay Enterprise to be below revenue and margin guidance, as we continue to transition our clients to our new platform.

For the full year 2015, we expect revenues of $20.5 billion to $21.5 billion, representing growth of 14% to 16%, and we expect non-GAAP EPS year over year growth of greater than 10%, and that free cash flow will be more than $11 billion from 2013 to 2015.

We feel confident about our future outlook, and have received authorization for an additional $5 billion stock repurchase plan. Total repurchase authorization is now $5.6 billion, and we plan to make opportunistic repurchases of our common stock to reduce the outstanding share count.

In summary, we saw the dramatic shifts in commerce, the blurrings of the line offline and online, the need for tighter linkage between commerce and payments, and strength of mobile. Our portfolio has been constructed to position us for these trends, to compete and win, and we’re going to lean into the opportunity.

We believe our unique set of capabilities work best together to enable our partners’ success, and therefore our own. Our global footprint is expanding, our enabled commerce volume has accelerated, demonstrating that our commerce and payment platforms are growing in relevance to retailers of all sizes. We are investing for the long term, strengthening our core ecosystem, and are focused on key battlegrounds with mobile, local, global, and data.

And now I’ll turn the call back over to John.

John Donahoe

Thanks, Bob. Before we move to questions, I want to take a few minutes to speak about the proposals we received from Carl Icahn. Mr. Icahn has proposed nominating two of its employees to our board of directors. He is also submitting a nonbinding proposal to spin off and separate Paypal.

Our board and management team welcome the perspectives of all shareholders, and I spoke with Mr. Icahn briefly last week to hear his views. We are committed to enhancing value for all shareholders and will continue to pursue strategies we believe will enable us to achieve this objective.

Our board’s nominating and governance committee will consider Mr. Icahn’s nomination of his employees in the ordinary course of business. Let me remind you that we have an exceptionally strong board, with a diverse group of highly qualified directors. In fact, we have a world-class board. Our directors have deep experience in the technology and financial services sectors and a track record of value creation. This is the standard by which all future candidates will be assessed.

Our board and management team also evaluate the company’s strategic direction on a regular basis, so you won’t be surprised to hear that this is not a new idea. Rest assured that when we see a path that unlocks value, we pursue it. For example, in 2009 we divested Skype because synergies did not exist. This demonstrated our commitment to making rational decisions that are in the best long term interests of the company and our shareholders.

Based on what we see today, we continue to believe that the company, our customers, and our shareholders are best served by keeping Paypal and eBay together. In short, we believe this is the best way to maximize shareholder value. Our board is unified in its view on this.

Let me give you a little context as to why we believe this. For more than 18 years, our company has focused on enabling global commerce, connecting buyers and sellers, anytime, anywhere. It’s how we drive growth and create value. Payments is an essential part of commerce. Everyone loves to shop, no one loves to pay.

So we focus on taking the friction out of paying. We strive to make it easy, safe, and secure. And we’re innovating to make payments a way to drive engagement and create more value for consumers and merchants.

This is what we do, and we have been successful exactly because Paypal and eBay are together. It’s why we believe we are so well-positioned to lead in the blended worlds of online and offline commerce. No other payments competitor has achieved Paypal’s success, because no other competitor has a commerce platform like eBay.

In fact, today we’re seeing more and more commerce and payments competitors trying to replicate the eBay and Paypal model. We’re seeing a convergence of commerce and payments businesses, not a separation.

Paypal and eBay make sense together for many reasons. Let me highlight three that we believe are among the most important. First, eBay accelerates Paypal’s success. Second, eBay data makes Paypal smarter. And third, eBay funds Paypal’s growth. Let me provide a little more perspective on each.

EBay accelerates Paypal’s success. From the beginning, Paypal has benefitted from signing up eBay customers with virtually zero acquisition costs. Over the past decade, tens of millions of customers Paypal acquired on eBay have helped fuel its growth off of eBay. Simply put, eBay and Paypal together create mutually reinforcing network effects.

Mobile is the most recent example of this reinforcing network effect. Mobile is the single most important platform shift in the past decade, and Paypal’s success in mobile payments started on eBay. EBay’s customers were an important source of Paypal’s early mobile payments volume, helping Paypal gain traction quickly and become a mobile payments leader.

Let me put some numbers to illustrate this. In 2010, Paypal generated approximately $600 million of mobile payments volume, 80% of which came from eBay mobile apps. In 2013, three short years later, Paypal’s mobile payment volume grew to $27 billion, both on and off eBay. That’s massive growth, a 45x increase in a three-year period and a leadership position in mobile payments. Success on eBay enables Paypal’s success off eBay.

Second, eBay data makes Paypal smarter. Risk is Paypal’s secret sauce. Paypal’s risk management capabilities are a source of competitive advantage, and anyone who understands risk knows that more data makes you smarter. By providing closed loop global transaction data, eBay enhances Paypal’s world-class risk capabilities and its ability to [underwrite] both sides of a transaction. This is evidenced by Paypal’s loss rate of only 31 basis points on $180 billion of total payment volume. Why, in an era of big data, would we dramatically reduce the amount of data available to Paypal?

And last but not least, eBay funds Paypal’s growth. EBay is a major contributor to Paypal’s profitability and expansion. For example, eBay represents approximately one-third of Paypal’s revenue and well over half of its profits. EBay continues to generate over 30% of Paypal’s new users at zero acquisition cost. And in 2013, eBay was the significant contributor to Paypal’s profit growth.

EBay is also a significant source of low-cost capital for Paypal, fueling areas such as credit and acquisitions such as Braintree. The economic foundation provided by eBay gives Paypal the latitude to be more aggressive as it pursues opportunities off of eBay.

Now, before I close, I want to comment about the risk of distraction. Separation may seem like a compelling concept at first blush, but when you separate two highly intertwined and highly performing businesses, it creates significant distraction and dissynergies. And at a time when competition is increasing and innovation is accelerating, we can’t afford distraction, so we believe that an unwavering focus on executing our strategies is the best way we will drive growth and create shareholder value.

So to sum up, strong synergies have always existed between eBay and Paypal, and new synergies are driving new growth in areas such as mobile. If and when these and future synergies run their course, we’re committed to doing what’s best for the company and for shareholders over the long term. You can count on us.

Today, we strongly believe that Paypal is more competitive, more agile, and ultimately more successful when combined with eBay. Paypal and eBay are best together. That’s what we and our board believe, and it’s why we believe our current approach is the best way to maximize shareholder value.

Thanks, and now we’ll take your questions. Operator?

Question-and-Answer Session

Operator

[Operator instructions.] And it looks like our first question will come from the line of Colin Sebastian with Robert Baird.

Colin Sebastian - Robert Baird

First off, regarding the higher investment spending, I wonder if you could add a little bit of color around some of those initiatives. For example, how much is related to lower take rates balanced against things like headcount and brand marketing investments? And then as a follow up, I wonder how you’d characterize the offline ramp to date, both in terms of local inventory integration with the marketplace as well as point of sale at Paypal.

Robert Swan

First, higher investments in our core, what we consider our core, I’d characterize as really two fundamental things. One, higher sales and marketing. We’ve made a lot of improvements to both the Paypal user experience and the omni-based shopping experience. So bringing more traffic and converting more traffic will be a source of higher investments.

And the second thing, which is not new, but we expect to continue within Paypal specifically is the take rates will come down. And that’s simply a function of higher growth off of eBay and higher growth on larger merchants.

So those two dynamics have been the trends that are bringing Paypal’s take rate down, and we expect that to continue. But at the same time, our transaction margins are the fundamental health of the Paypal business. We still expect to be above 62%. So those are the two chunks of investments in the core.

The other things that John highlighted are kind of the themes of extending our global footprint, having a stronger presence in emerging markets. We’ve started some of those investments in 2013. We expect those to continue.

Secondly, expanding our served market locally. Those are investments that we’re making across all three businesses to expand our served market from $1 trillion of ecommerce to $10 trillion of commerce. And then third, we’ll continue to make investments in data, leveraging data more effectively, to drive deeper engagement, so increasing investments to protect and extend our core and continuing to invest to expand our served markets.

John Donahoe

And on offline, clearly consumer behavior is moving toward online, mobile, and omnichannel, and we saw that happening in the fourth quarter. In the Marketplace business, you saw large retailers, including retailers like Best Buy, using omni eBay Marketplace, when you could buy online, pick up in store. So we integrated large retailers, and beginning to allow online pickup in store right off the core eBay marketplace. So we’ll continue to add large retailers and others to the eBay Marketplace, both here and around the world.

And with Paypal, we continue to build out the city markets, where we’re trying to take neighborhoods, where Paypal is accepted frequently or with abundance in the neighborhood, and then experiment with consumer behavior. And we saw good progress in our select neighborhoods in the fourth quarter.

In general, I’d say that offline is taking longer to become digitized than we initially thought, and I think frankly it’s happening with us and with everyone else in the digital world. But we’re staying with the investment and the adjustments we’re making I would characterize as focusing more in some smaller areas to prove out the model and get viral effects, and then we’ll expand.

So whether that’s eBay Now in a couple of cities, and the moving to a couple more cities, and then so on and so forth. The same thing with Paypal. We’re going to focus on some neighborhoods, prove things out, and then expand out from there.

So more to come, but we’re continuing a very steady investment in offline, and we think over time it’s going to represent a significant opportunity.

Operator

Our next phone question will come from Gil Luria with Wedbush Securities.

Gil Luria - Wedbush Securities

On your last conference call, you predicted the holiday season would be a slow one for ecommerce, and indeed I think the industry numbers are that ecommerce growth slowed from 13% to 10%. And you had the benefit of a couple of weeks in October to do that. Now that we’re three weeks into January, and coming off what was a short holiday season, which was probably part of the problem, how does that look in terms of the U.S. and the European consumer and the other big markets that you have in terms of the trends that they’re showing right now?

John Donahoe

First, I would say we try to provide guidance with the context of all the latest and greatest information we have, so in the first quarter we have 11% to 13% growth. And I would say the trends in the quarter so far support us to be in that 11% to 13% range.

Geographically, I would say our anxiety back in October was primarily centered around the trends we were seeing in North America at the time. In Europe, Europe primarily remained relatively stagnant. I’d say right now on the margins, Europe might be a tad better, North America might be a tad worse. And that’s the context for which we look at the Q1 growth rates.

Robert Swan

But by and large, we’re getting out of the predicting quarterly growth rates business.

Operator

And it looks like our next question will come from Heath Terry from Goldman Sachs.

Heath Terry - Goldman Sachs

John, what kind of early learnings are you getting out of the eBay Now and other alternative channels you’ve been experimenting with? How important is success in those kind of channels going to be in terms of meeting the goal of growing with ecommerce?

John Donahoe

The principle behind eBay now, and behind what we’re trying to do, and frankly across our portfolio, is we believe that in the future consumers are going to want to have choice. They’re going to want to have the choice of, in some situations, buy online, have it shipped at home. In other situations, buy online or from a mobile device and pick it up in the store. And there are going to be some shopping occasions where consumers want to buy it online or on a mobile device and have it delivered to them that day, or even the next.

So we’re trying to build out offerings that give that consumer choice, and eBay Now is just simply a way where we can use our industry scale, putting multiple retailers on, to deliver same-day delivery at economic costs. And we’ve taken it, as I said earlier, I would say, a very targeted approach in that.

We picked two cities and we tried to prove the model out, get it to work for consumers. Then we modeled out the economics and believe that Shuttle, we acquired Shuttle, and Shuttle, by using excess capacity, if you will, or sharing economy, vetted drivers that in essence bid on the ability to deliver, can provide both great consumer experiences and more economic deliveries. So we’ve got that going in Chicago and in Dallas.

And then as we build scale and learn on those, we will most likely expand that out to other cities across the U.S. and into the U.K. So I’d say we’re taking a very measured approach on it, and we think it’s one piece of giving consumers choice.

With respect to our short term growth, we’re not counting on this to have any material impact on our short term growth, or even material growth over the next two years, but it’s signaling our willingness and commitment and desire to give the consumers choice and to partner with retailers to help them compete in this omnichannel world.

Heath Terry - Goldman Sachs

And then just one quick question for Bob. Bob, with the $5 billion buyback, presumably that’s all coming out of your U.S. cash holdings. How do you think about kind of the right level of cash on the balance sheet, particularly given the balance between international and U.S. holdings?

Robert Swan

Philosophically, our bias hasn’t really changed at all, and that is to ensure we have the financial flexibility to make investments along the way, whether they be organic, whether they be acquisitively, or whether they be through a return to shareholders, through a buyback, having the financial flexibility to be able to do all three of those things, essentially at all times.

In terms of our current cash position, as I indicated, we have a little over $3 billion in the U.S. and we have significant cash flow offshore, and we have access to commercial paper lines. And we’ll look at all three of those as funding sources and vehicles to execute the opportunistic buyback program that we announced today.

Operator

And it looks like our next question will come from Stephen Ju from Credit Suisse.

Stephen Ju - Credit Suisse

John, are there any details you could share around your plans around Cassini from a more granular perspective? It’s globally deployed now, and I recall what you’ve articulated previously was that it should be viewed as a platform that is the basis to enable you to more rapidly roll out iterations. So is it go time now to start pushing new products through? Or are we still a few quarters away from seeing discernable changes?

And Bob, if I’m doing my math correctly, your greater than $11 billion in free cash flow objective for ’13 through ’15 seems to suggest a decline in ’15, in terms of total dollars you expect to generate versus what you’re guiding toward for ’14. So will you give us some additional color into [unintelligible] here?

John Donahoe

On Cassini, Cassini is one of many buyer experience initiatives that help drive consumer acquisition and conversion over time. And I’ve said this before, I’ll say it again, there are no silver bullets in our Marketplace business. If anything, this improvement over the last five or six years is no single platform initiative or product thing in and of itself created viral improvements.

Now, Cassini is live in all countries except Korea, and it’s now live across all devices. In essence, as you highlighted, what it enables us to do is, as a new platform, it just enables us to test and learn and implement search changes more quickly than our previous one. And so our search team and our product experience team will be continuing to iterate, just like they have in the last couple of years, or last several years, to find ways to improve the eBay user experience.

I’m also thrilled to say that we’ve got, as you probably saw in the fourth quarter, RJ Pittman joined us to head up product and design at eBay. RJ came from Apple. We think he’s a world-class product leader, and he inherits the eBay business as it is today, the eBay user experience, and he’ll be driving a lot of the new user experience and product changes, both mobile and online, going forward. So we’re thrilled to have RJ onboard, and look forward to really good leadership from him over the coming months and years.

Robert Swan

In terms of free cash flow, we said greater than $11 billion back in March of last year. And the update to that is, while revenue and earnings are lower, we still expect to generate greater than $11 billion over the three-year timeframe. So 3.7 last year, 3.7 to 4 this year, and then at least that kind of level going forward. Because we don’t really expect the capital intensity of the business to change dramatically. So we’re in good shape to exceed the $11 billion cumulative free cash flow through next year.

Operator

Next question in queue will come from Sanjay Sakhrani from KBW.

Sanjay Sakhrani - KBW

On Paypal, as it relates to the Icahn proposal, I guess when thinking about some of the constraining factors to Paypal from being a part of the entire enterprise, it would seem to be that the investments that are being made in offline and omnichannel might be areas that might not be made if it wasn’t a part of the total enterprise. So is that a fair statement? And perhaps maybe you could just talk about what the payback period is for those investments that are being made at Paypal.

And then just secondly, Bob, within your guidance, how much of the share authorization do you expect to exhaust?

John Donahoe

I completely agree with your characterization, which is as we approach offline, the fact that we have the portfolio of assets we do, eBay Marketplace, Paypal, and eBay Enterprise, is a strength. And what drove this to start with was customers. When we sit down with merchants, they’re looking for how they can have a partner to help them compete in this omnichannel, online/offline world.

And the fact that we have the kind of mobile experiences we do across our portfolio and the mobile capabilities we do, the fact that we have an eBay Marketplace that has 130 million active consumers, and by the way 50 to 60 million active consumer outside the U.S., where many retailers want to expand without putting assets on the ground, the fact that we’ve got Paypal’s capabilities, the fact that we’ve got, through eBay Enterprise, ship from store and buy online/pick up in store capabilities, is a strength.

We did an interesting experiment in the fourth quarter, a free shipping initiative, where we offered free shipping to a small set of Paypal users on eBay Enterprise merchants. And it helped drive up conversion and Paypal share of checkout while helping drive incremental volume for those merchants. So we’re always looking for ways to leverage our full portfolio to help partner with merchants offline.

Now, the time horizon, I’ll just repeat what I said earlier, I would say in general offline is taking longer to materialize for the whole industry, the whole digital industry at least, those of us that are coming from the online world and mobile world, and so we are responding by still investing behind it, but trying to target and focus our investments to prove out successes in smaller pockets, and then expand from there. And so we’ll continue to operate that way.

Robert Swan

And in terms of our guidance on the share buyback, in essence, for ’14 and ’15, the guidance assumes that we will offset dilution from our [comp based] programs. That’s a given. How much more aggressive we are with the buyback, the timing of when we do it, and the price at which we’re more opportunistic, will obviously influence earnings. But right now our guidance primarily is offsetting dilution from [comp base].

Operator

Our next phone question will come from Mark May with Citi.

Mark May - Citi

One is I guess a follow up to some earlier questions. Just trying to dig into a little bit of what changed since the analyst day early last year, specifically on Paypal take rates. You’ve mentioned the mix of larger merchants. Is there anything specifically that changed from when you set expectations earlier in the year until the end of the year that maybe actually had an influence on creating a greater mix of larger merchants than you had expected at the beginning of the year?

And then secondly, on the proposal by Carl Icahn, is there any common ground that’s possible that the board had reviewed in terms of still being able to take advantage of the inherent benefits of these two businesses working together, but still enabling investors to kind of invest separately in these two businesses?

Robert Swan

First off, on the decline in Paypal take rate during the course of this year, is really driven by three factors. One, the mix of the business, which I mentioned before, and you highlighted. Secondly, our currency hedges that flow through the top line. And third, our fees on cross-border transactions were lower. Those three things have been happening throughout the year. And we flagged the large merchant growth and cross-border transactions, the things that we expected to happen that would weigh on the take rate going forward.

So those two, there’s no dramatic change from the beginning of the year. Obviously, hedges, we layer in hedges during the course of the year, and how currencies move, is going to have an impact, but that was not really anticipated at the time, but protected the earnings of the company, but contributed to the take rate decline.

The second thing I would just highlight from earlier in the year, we indicated that we did expect the take rate to come down, for a variety of factors, but the largest being success and traction with large merchants. But at the same time, we highlighted the other two components of transaction margins, with the wallet and the funding sources and how effectively we would manage risk, and that our belief was those three dynamics of take rate movements, consumer choice on low-cost funding, and effective risk management techniques, would enable us to deliver 62% plus transaction margins in the online world during the three-year timeframe. And I would say those dynamics played out during the course of 2013.

John Donahoe

And on your second question, about common ground with Carl, I’d say our common ground, that board, management, and Carl have is, we all want to drive long term shareholder value. That’s why we exist. We have a management team and a board that’s very focused on that, and I know that’s what Carl is focused on, driving long term shareholder value.

Where we disagree is how to best get there. As I mentioned earlier, we and our board believe the best way to drive long term shareholder value is to keep eBay and Paypal together to capitalize on the opportunities, and the distraction and dissynergies of separation would be happening at exactly the wrong time. We’re in this window of opportunity of commerce. So we believe that’s the best way to drive shareholder value.

Now, where we probably also agree is that we’re undervalued, and our board, by approving a $5 billion share repurchase authorization, gives us the flexibility that if, over time, we opportunistically think we’re undervalued, we’ll act accordingly. So I don’t see there’s a reason to be fundamental disagreements here, but we’re all driving to build the most successful company and drive long term shareholder value.

Operator

And it looks like our next question comes from Mark Mahaney from RBC Capital.

Mark Mahaney - RBC Capital Markets

International GNV growth, ex vehicles, at 10% year over year, is the lowest I think it’s maybe ever been in any substantial period of time. Can you just talk about some steps you’ve got that could cause that to kind of recover a little bit, and maybe you’ve already done it with the full rollout of Cassini in the fourth quarter, but anything else?

And then John, I wanted to ask the simple question of why the $5 billion share buyback now? You’ve always done share buybacks, but it’s always been to offset dilution. You’re obviously doing something more. So any other commentary on why now for that $5 billion authorization announcement?

John Donahoe

Mark, in international GNV, yes, this was below what we were hoping. We were hoping to get second half acceleration and we didn’t. You know, part of that, we’re fairly Europe exposed, and so the European economy has been uncertain, and it’s really hard to ascertain what’s market and what’s not. So I’m not going to sort of hide behind that.

Germany is an area where we continue to work on proving our growth rate. It’s our second largest market. It’s a market where we’re growing slower than the market. We have enormous market share. We have between 25% market share, roughly. But we’re growing more slowly than the market, and ironically, the biggest driver of that is a trust gap in the eyes of consumers, and the biggest driver of that is that Paypal penetration is lower in Germany.

It’s the case, again, with Paypal and eBay together. Because Germans tend to pay in different ways, so over the last couple of years, we’ve been focusing on driving Paypal penetration up in Germany, and this year we’re going to significantly increase that emphasis, so that German buyers can buy with trust. The reason it’s related is, our ability to offer the buyer protection, the money back guarantee, is directly tied to Paypal. And so the higher up we drive Paypal penetration in a market like Germany, the more we can offer the money back guarantee to consumers, which gives them confidence.

And then throughout the rest of the international footprint, we have, country by country, little issues, and so we’re continuing to address them, and whether it’s Korea, a fairly volatile ecommerce market. Some of the exchange rates moved, cross-border flows, in some funky ways in the second half. So there’s no single thing, but you can rest assured that we’re focused on our international growth, both in the marketplace and across Paypal.

Robert Swan

On your second question, as you know, historically, over the last few years we’ve simply been offsetting dilution from comp based programs. Historically, we have been opportunistic when we can maintain our financial flexibility to invest and grow, but also take advantage of opportunistic repurchases of shares. So it’s not a dramatic change from philosophically where we’ve been before.

I think there are a couple of changes. One is our balance sheet is much stronger. Our cash balances are much bigger. We’re funding an increasing portion of our BML growth with offshore cash. And we feel great about our future. So I think there’s some things that are very consistent philosophically to where we’ve been in the past. At the same time, we’ve got a stronger balance sheet and more financial flexibility, and again, feel good about how we see the next couple of years.

Operator

Our final question for today’s call will come from Justin Post with Bank of America Merrill Lynch.

Justin Post - Bank of America Merrill Lynch

Maybe you could help us think about Paypal’s revenue growth. You see about a 20% growth rate. And maybe you could break that down for us, between growth of your existing clients, new client wins, both offline and online, and how you see that revenue growth kind of breaking down going forward.

Robert Swan

During the course of the year, there’s three components of growth. We expect to continue to grow on eBay and get a significant source of users from eBay, and continue to make improvements in the on-eBay experience to drive higher penetration. So the on-eBay growth, we expect to be above the marketplace rates of growth.

Secondly, merchant services will company to be the biggest source of growth, and that’s going to come from same-store sales growth for existing merchants, getting coverage on more and more merchants, and third, giving consumers more and more reasons to use us, i.e. share of checkout in both existing and new clients.

And then the third is Bill Me Later has been a 30% grower for a while. We’re high 20s as we exit the year, and we continue to expect that to be not only a source of growth for revenue, but also a vehicle to reduce our transaction costs over time.

So I would say in the offline world, as John said, that will be a source of future growth, but not really a contributor in any meaningful way in the next 24 months.

John Donahoe

And one of the things, Bob mentioned the focus on share of checkout, one of the things that David and the Paypal team have done is they’re updating many of our key products. You saw that with the mobile product this year. You’ll see that with some products, most of you probably don’t see onboarding flows, merchant dashboards, and also even our core checkout products. The Web Checkout product will be updated over the course of 2014. And we think that will help drive healthy core growth. So, more to come on that.

All right, thanks everyone. We’ll talk to you in 90 days. Thank you.

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