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eBay Inc. (NASDAQ:EBAY)

Q1 2010 Earnings Call

April 21, 2010 5:00 pm ET

Executives

Mark Rowen - Vice President, Investor Relations

John J. Donahoe - President, Chief Executive Officer, Director

Robert H. Swan - Chief Financial Officer, Senior Vice President - Finance

Analysts

Spencer Wang – Credit Suisse

Doug Anmuth - Barclays

Gene Munster – Piper Jaffray

Collin Sebastian – Lazard Capital Markets

Imran Khan - J.P. Morgan

Justin Post – Bank of America/Merrill Lynch

James Mitchell - Goldman Sachs

Stephen Ju - RBC Capital Markets

Mark Mahaney - Citi

Operator

Welcome to eBay Incorporated's Q1 2010 earnings call. (Operator Instructions) I would now like to turn the program over to our speaker, Mark Rowen, Vice President of Investor Relations. Please go ahead.

Mark Rowen

Thank you, operator. Good afternoon. Thank you for joining us and welcome to eBay's earnings release conference call for the first quarter 2010. Joining me today on the call are John Donahoe, our President and Chief Executive Officer, and Bob Swan, our Chief Financial Officer.

We are providing a slide presentation to accompany Bob’s commentary during the call. This conference call is also being broadcast on the Internet and both the presentation and call are available through the investor relations section of the eBay website at investor.ebayinc.com.

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

In addition, management may make forward-looking statements relating to our future performance that are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. These statements include, but are not limited to, statements regarding expected financial results for the second quarter and full year of 2010; the focus of the payments and Marketplaces business units going forward; and future growth in the Marketplaces and payments businesses.

Our actual results may differ materially from those discussed in this call for a variety of reasons including, but not limited to; the continuation or worsening of the global economic downturn; changes in political, business and economic conditions; foreign exchange rate fluctuations; the impact and integration of recent and future acquisitions; our increasing need to grow revenues from existing users in established markets; an increasingly competitive environment for our businesses; the complexity of managing an increasingly large enterprise with a broad range of businesses; our need to manage regulatory tax, IP and litigation risks, including risks specific to PayPal, Bill Me Later, and the financial industry; and our need to upgrade our technology and customer service infrastructure at reasonable costs while adding new features and maintaining site stability.

You can find more information about factors that could affect our operating results in our most recent annual report on our Form 10-K and our subsequent quarterly reports on Form 10-Q, available at investor.ebayinc.com. You should not unduly rely on any forward-looking statements and we assume no obligation to update them. All information in the presentation is as of April 21, 2010 and we do not intend and undertake no duty to update this presentation.

With that said, let me turn the call over to John.

John Donahoe

Thank you, Mark and good afternoon everyone. Welcome to our Q1 earnings call. Today I will talk about our results and our continued progress towards achieving our three-year growth objectives. Bob will then provide more details on the quarter and our guidance before we take questions.

I will start by providing context. Last year we set out clear three-year growth and profitability goals for 2009 to 2011. Goals to strengthen our position in our two core businesses, eBay and PayPal and to achieve strong financial performance. We are achieving these goals by focusing our company on three themes. First, we are becoming a more customer focused company. We are driving improvements to our user experience and we are measuring our success with three customer oriented metrics; net promoter score, velocity and market share. I have tied a portion of our leadership compensation to customer satisfaction.

Second, we are becoming a more technology driven company and we are increasing our commitment to innovation. This is evident with the opening of the PayPal platform which is driving payments innovation and it is demonstrated in mobile which is experiencing widespread adoption and driving significant e-commerce payment volume. We have made good strides with our technology innovation and we are just getting started.

Third, we are committed to operating more efficiently by taking $2 billion out of our cost structure over the three-year period and reinvesting it in our highest growth priorities. Our first quarter results reflect another strong step towards our goals. Revenue was up 18% and non-GAAP EPS was up 15% on an apples-to-apples basis taking Skype out. We are off to a good start in 2010.

Now let’s take a brief look at what we accomplished in each business unit. With PayPal we are well on our way to turning PayPal into the leader in online global payments. Approximately 8 million merchants worldwide accept PayPal benefiting from the higher conversion rates that PayPal delivers with more than 84 million active registered accounts using 24 currencies across 190 countries. PayPal had another exceptional quarter posting record Q1 results and strengthening our global competitive position.

PayPal’s deepened penetration on eBay, gained global market share, signed a significant deal with China UnionPay and drove mobile payments innovation. Thousands of developers are using PayPal’s open platform which has already generated $30 million in TPV. PayPal is now a convenient and easy to use payments choice for Facebook users and advertisers.

Across e-commerce PayPal is gaining share. Merchant services payment volume grew 49% in Q1 and total payment volume exceeded $21 billion. Nearly 60% of PayPal’s total TPV now comes from merchant services. PayPal signed a number of deals in Q1 that expand its global footprint and help merchants reach more customers. For example, 1.3 billion Chinese consumers will soon be able to use PayPal to shop worldwide funding payments from their China UnionPay cards.

As part of our strategy to more closely partner with banks around the world, PayPal also announced agreements with Singapore’s largest bank, DBS and with First National Bank in South Africa. Both agreements give consumers in those markets a fast and easy way to use PayPal online.

PayPal is also leading in mobile payments, generating in Q1 almost the same payment volume that was created through our mobile application in all of 2009. PayPal’s newest mobile app for iPhone launched in March was downloaded more than one million times in less than three weeks. With PayPal mobile iPhone users can quickly bump payments to each other, easily split checks at restaurants and send and receive money from their friends and family while on the go.

In addition, our business continues to benefit from the combination of Bill Me Later and PayPal. We have been testing a new approval process that uses PayPal’s extensive data in addition to credit bureau data. This new process allows us to extend BML to a wider set of customers, giving consumers increased purchasing power and driving incremental sales to our merchants. We are already seeing promising results from the integration of BML in the PayPal Wallet and we plan to integrate BML more seamlessly into the eBay marketplace in the coming months.

Now turning to eBay we are in the midst of a multi-year turnaround, positioning eBay to win in the secondary market. We believe we are uniquely positioned to capture growth opportunities for sellers in the secondary market and provide tremendous value and selection for buyers on new, used and vintage goods. The launch of our new fashion category as well as eBay buyer protection and our innovative eBay mobile apps for the iPhone and iPad reflect our efforts in Q1 and demonstrate eBay’s potential as the e-commerce landscape continues to evolve.

Our Q1 results show the steady progress we are making against our turnaround priorities. Marketplace revenue grew 13% and the key underlying metrics continue to improve with our focus on trust, value and selection. Net promoter scores were up for key segments such as top and active buyers and top and hobby sellers. Sold items in the U.S. and U.K. and core GMV in the U.S. accelerated for the fourth consecutive quarter. Our Korean also performed well as we successfully integrate G-Market and IAC.

Our most trusted sellers continue to win on eBay. Top rated sellers generated about 31% of core GMV in the U.S. and same store sales for top rated sellers accelerated three points to 13% in the U.S., outpacing e-commerce. We also announced a number of changes in Q1 to make eBay pricing more competitive for sellers and improve the eBay experience for buyers. It is too early to assess the impact of these changes since most just went live in the last couple of weeks but we continue to align our success with that of eBay sellers by dramatically lowering and even eliminating the up-front costs of selling on eBay and we believe these changes in the U.S. will have the same positive impact we have seen in Europe.

For buyers we have implemented eBay Buyer Protection in the U.S. and the U.K., a big step in making sure buyers can shop eBay with confidence. eBay Buyer Protection adds a new level of customer support and trust to the world’s largest online marketplace. Through eBay Buyer Protection buyers have access to customer support specialists 7 days a week and will cover the buyer’s purchase price and original shipping for most purchases should a problem arise and a seller be unable to resolve the issue. eBay Buyer Protection along with our vehicle and business equipment protection programs covers almost every item purchased on eBay.

eBay’s newly launched fashion category illustrates how we are delivering better experiences for buyers in servicing and more compelling ways the deep inventory that eBay sellers offer. The fashion tab and category on eBay delivers a dramatically different eBay shopping experience, offering the convenience of visual search and features that will help buyers more easily find the items they want.

We introduced Fashion Outlet in the U.K. and Germany and launched Fashion Vault in the U.S. which was successfully piloted in the fourth quarter. We are pleased with the progress we are making in positioning eBay as a fashion destination offering great value and selection from top brands, retailers, designers and other sellers.

So we are starting from a strong position as the number one clothing site based on sales and traffic and we begin to expect traction from these initiatives in Q2 and beyond. In fact, we expect to generate more than $5 billion in GMV from clothing, shoes and accessories.

Mobile continues to be a focus of innovation for eBay and our mobile apps are driving strong demand. Our main eBay shopping app has been downloaded more than 8.5 million times and we expect our mobile apps to generate $1.5 billion in gross merchandise volume in 2010. That is 2.5 times our volume last year. In the first quarter we offered and introduced more apps offering more ways to buy and sell on eBay. Our new eBay selling app lets sellers conveniently list an item from their iPhone in less than 60 seconds and we launched a new eBay app for the iPad that delivers a more visual and easy to shop mobile experience in what the New York Times called “the best shopping experience on the web.”

Turning to our adjacent e-commerce formats, our classifieds business was up 14% in Q1 with strong growth in Canada, the U.K. and Denmark. At the end of Q1 we also announced eBay classifieds in the U.S., relaunching our strategic platform with major enhancements that create industry leading standards in trust, safety, consumer service and user experience. We also introduced the eBay classifieds mobile app for the iPhone making it easy to photograph and list items in less than a minute and search for items in your local community.

StubHub also had a solid quarter as ticket demand for professional and college sporting events such as the Super Bowl and March Madness was strong. StubHub continues to gain momentum as the tickets marketplace that offers the most choice and availability.

So in summary, 2010 is off to a strong start as we continue to strengthen our core e-commerce business and aggressively grow payments. We accomplished a great deal in the first quarter building on our 2009 momentum. And we are performing well against our three-year goals. I am pleased with how we are strengthening the fundamentals of our business, enhancing our competitive advantages and focusing on our customers and driving innovation.

Now I will turn it over to Bob for more details on the quarter and our financial outlook.

Robert Swan

Thanks John. During my discussion I will reference our earnings slide presentation that accompanies the webcast. All growth rates mentioned in my prepared remarks represent year-over-year comparisons unless I clarify otherwise.

Overall, we delivered strong first quarter results. We came in at the high end of expectations on the top line and above expectations on the bottom line while we increased the financial strength of the company. We continued to execute against our strategic priorities during the quarter. PayPal gained market share off of eBay and increased penetration on eBay as total TPV growth accelerated for the fourth consecutive quarter. The marketplace’s turnaround remains on track as growth in velocity or the number of sold items accelerated for the fourth quarter in a row.

We are pleased with the results we achieved this past quarter which gives us a good head start on our full-year objectives. We are maintaining full-year guidance as the strong trends at PayPal and the improvement from the turnaround at eBay Marketplaces will be offset by headwinds from a stronger U.S. dollar.

Our combined businesses generated net revenues of $2.2 billion in the first quarter, a 9% increase or 18% excluding Skype from Q1 2009. FX increased growth by three points and our acquisition of G-Market increased growth by four points resulting in organic revenue growth of 11%.

First quarter non-GAAP EPS was $0.42, an 8% increase or 15% excluding Skype. The year-over-year increase was primarily due to productivity gains which we reinvested in a lower take rate and this in turn helped achieve higher sales volume. We also recognized a one-time benefit of approximately $0.01 during the quarter related to the early repayment of Skype notes to us. Also worth noting, relative to guidance the strength of the U.S. dollar cost us $0.01 of EPS in the quarter.

Non-GAAP operating margin was 30.6% roughly flat with the year-ago period. We generated $266 million of free cash flow in the quarter. Cash flow was reduced by a one-time tax payment of approximately $200 million related to a fourth quarter 2009 business restructuring which allowed us to move $1.1 billion in cash to the U.S. from overseas. It was also reduced by a higher employee bonus payment versus the historical norm of approximately $50 million related to a change in the timing of bonus payments.

CapEx as a percentage of revenues was 7% for the quarter. Return on invested capital was 22.5% on a trailing 12-month basis, the second consecutive quarter of improvement. Earnings growth coupled with lower invested capital is a result of the sale of 70% of Skype drove the improvement.

Now let’s take a closer look at our segment results. Starting with our payments business PayPal posted another great quarter. Total revenue increased 26% to $809 million. Total payment volume increased 35% to $21.3 billion. Geographically, TPV growth was 25% in the U.S. and 52% internationally. Today, as John indicated, we operate in 190 countries and 24 currencies as we continue to expand PayPal’s global footprint.

In the first quarter we generated 40% of our TPV outside of the U.S. compared to 35% in the first quarter of 2009. PayPal’s merchant services business had another stellar quarter driven by an increase in the number of merchants who accept PayPal, the number of active accounts and an increase in our share of [checkout]. Merchant services TPV grew 49% in the quarter and now accounts for 3/5 of PayPal’s total TPV.

On the eBay platform, PayPal’s TPV growth accelerated to 18%, the fourth consecutive quarter of improvement driven by strong GMV growth and 68% penetration of addressable GMV, a 420 basis point increase. PayPal transaction margin was also strong, increasing to 63.5% in the quarter. Although global take rate was down modestly we were able to offset this decline with lower transaction expense and a significant improvement in transaction losses which was primarily a function of better fraud detection and prevention.

PayPal segment margins came in at 22.6% in Q1, up 480 basis points from Q4 and 520 basis points year-over-year. The increase from last year was primarily the result of higher transaction margins helped by some one-time benefits, operating leverage on volume, transferring much of the cost of the eBay Buyer Protection program to Marketplaces and improvement at Bill Me Later.

Let me touch on a few key operating metrics for Bill Me Later. Bill Me Later’s gross receivable balance at quarter end was $641 million. The quality of BML receivables has continued to improve which has resulted in reduced growth but we believe this is the right tradeoff for the current economic environment. We began using eBay Inc. data to help reduce the customer decline rate without taking on additional risk. BML’s net charge off rate decreased to 9.5% in the quarter from 11.1 in Q4 resulting in a risk adjusted margin of 11.5%, 120 basis point sequential improvement.

Now let’s move to our Marketplaces business. Overall Marketplaces achieved net revenues of $1.4 billion, a 13% increase. Marketplaces generated 60% of its revenue internationally this quarter up from 54% in Q1 2009. We continue to be pleased with the strong double digit growth we are seeing in our fixed price format with fixed price now accounting for more than 60% of GMV excluding vehicles. On an FX neutral basis, GMV in our fixed price format grew at 33% while the auction format declined 3% and vehicles was down 7%.

Beyond transaction revenue we connect buyers and sellers through alternative formats which are becoming increasingly important to the marketplaces. Marketing services now represents 15% of marketplaces revenue and grew 12% in the quarter. Our class five business continued its strong trajectory with 14% growth due to strength in Canada, U.K. and Denmark. Total global advertising revenue increased by 12% driven by strong growth in ad commerce, our internally developed CPC based advertising solution for sellers as well as higher revenue per click on our search advertising.

A few quick highlights on Marketplaces operational metrics. Active users accelerated in our three largest markets. However, globally this was offset by weakness in some of our smaller European markets. Sold items excluding G-Market accelerated for the fourth straight quarter to 13%, geographically driven by strength in the U.K., cross border trade out of China and the U.S. Marketplaces segment margin was 42% in the quarter, down 310 bips from a year ago but in line with our full-year guidance. The main drivers of the year-over-year change include savings from operational initiatives which we then reinvested into a lower take rate and new Buyer Protection programs as well as the inclusion of G-Market which we acquired in June of last year.

Global take rate was 7.6% in the quarter, down 41 bips from last year or down 49 bips excluding vehicles, StubHub and G-Market. The decline is primarily due to a reduction in feature fees, an increase in buyer incentives and discounts given to our highest rated sellers.

Turning to operating expenses in Q1 sales and marketing was 19% of revenue up 70 bips from last year primarily due to the acquisition of G-Market and the divestiture of Skype. Product development was 8.3%, down 20 bips as productivity gains and acquisitions more than offset the negative impact of the Skype divestiture.

G&A cost was 10.7%, a decrease of 70 bips predominately due to operating leverage. Our provision for transaction and loan losses was 4.8%, up 80 bips primarily due to our new eBay Buyer Protection program and PayPal’s newly enhanced off-eBay protection program.

From a cash perspective we generated free cash flow of $266 million during the quarter. As I mentioned earlier, cash flow was reduced by a one-time tax payment of approximately $200 million and changes in bonus payments compared to last year. Cash, cash equivalents and non-equity investments totaled $5.4 billion at quarter end. Of this we held approximately $1.1 billion in the U.S.

Now let me turn to guidance. For Q2 we anticipate revenue of $2.15-2.2 billion. This represents growth of 11-14% excluding Skype. We anticipate non-GAAP EPS of $0.37 to $0.39 which represents growth of 9-15% excluding Skype. As I mentioned earlier we are maintaining full-year guidance. Despite strength from PayPal and improvements from the Marketplaces turnaround these positives will essentially be offset by a stronger U.S. dollar compared to where we were three months ago.

For the full-year 2010 we continue to project revenues of $8.8-9.1 billion representing growth of 9-12% excluding Skype and we continue to anticipate non-GAAP EPS of $1.63 to $1.68 representing growth of 11-14% also excluding Skype.

In summary, as John mentioned we committed our three year growth and profitability goals in early 2009. Since that time, first we have a stronger and more focused portfolio. We divested the majority of Skype and we acquired G-Market. We completed the integration of Bill Me Later and the PayPal Wallet and we had a stronger balance sheet.

Secondly, we exceeded our expectations in 2009 and growth accelerated in the second half of the year. Last, we are off to a good start with 2010. Despite headwinds from a stronger U.S. dollar we are well positioned to deliver on our full-year guidance.

Now we would be happy to answer your questions. Operator?

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Spencer Wang – Credit Suisse.

Spencer Wang – Credit Suisse

On PayPal the decline in the take rate at PayPal I know there are a bunch of things that go into that but should we expect a similar kind of year-over-year decline for the balance of the year? Secondly, the transaction expenses you mentioned a couple of one-time benefits. Could you give a bit more color on what that was and the rough size?

Robert Swan

Just in terms of take rate, we saw a 22 bip decline year-over-year and a modest uptick from the fourth quarter. I think we do expect take rate to come down more during the course of the year. To put it into context, the way we try to think about the business is more looking at transaction margins which are a function of obviously take rate. Secondly, transaction expenses and third, fraud losses. The reason we do it that way is simply in some geographies take rates may be lower but transaction expenses may be lower as well. Particularly as we grow outside the U.S. we do have lower take rates outside of the U.S.

As you know from our results the growth rates internationally have been very strong. We do expect global take rate to come down but we also expect transaction margins to stay above 60%. In terms of one-timers in the quarter in PayPal’s variable costs, there was probably about 1.5-2 points of margin benefit from PayPal due to some one-timers flowing through transaction expense and fraud losses. So while margins accelerated 500 bips year-over-year probably [3] bips is more sustainable improvement on a year-over-year and quarter-over-quarter basis.

Operator

The next question comes from the line of Doug Anmuth – Barclays.

Doug Anmuth - Barclays

On the marketplaces, curious how you will know when it is really the right time to sort of push more on the buyer side perhaps in terms of marketing and advertising? What your plans are there. Then, secondly in terms of the international GMV deceleration on an organic basis from the last quarter you mentioned some weakness in smaller European markets. Do you think that is more macro oriented or just a little bit more color there.

John Donahoe

You know what is fun about Q1 was we had some product advancements that buyers can really see now. eBay Buyer Protection which we really put the foundation in last year, we now in the U.S. and U.K. can communicate “buy on eBay and you are completely covered.” We think that is going to have real cut through to buyers where they can now reach a customer service rep anytime they have a problem. Usually those issues are resolved with sellers but if not we give them their money back plus shipping and we have gotten very good feedback on that.

Similarly, you see the clothing shoes and accessories launch a couple of weeks ago and that is really the first tailored vertical shopping experience that is built on our platform and I think you see it is a way that really brings eBay’s inventory to life in a very different way for buyers and allows them to access eBay’s inventory in easier and more engaging ways.

These are just the first two of what I think will be a series of buyer related improvements you will see over this coming year. As I have said all along I want to make sure our experience gets to the point where buyers can constantly know and see they are experiencing something differently and we will at that stage really amp up our marketing. To be clear we are spending the same amount on marketing this year thus far as we did last year and we will continue to do that. I want to keep making the steady progress we are. Our buyer metrics are improving. Our customer retention is improving. One quarter at a time towards this 3-year goal.

Robert Swan

Relative to the international growth globally our non-vehicle GMV was up 8% which is roughly in line with the fourth quarter. Underneath the [inaudible] U.S. GMV accelerated by two points Q4 to Q1 and international GMV was down by roughly 2 points. I think there are a series of things going on. First, as to what is execution and what is macro environment, first I would say in the U.K. strong performance, great execution.

If I characterize then Australia and Korea, strong performance and good macroeconomic environment. Germany I think was okay performance and a tough economic environment. The rest of Europe I would say is a combination of both. Average performance and economic environment not so good. By that I mean particularly Western Europe both active users and GMV declines in those markets. So it is a little bit of good performance, some good macro and some not so good. GMV growth flat with Q4. U.S. accelerating and international down a bit.

Operator

The next question comes from the line of Gene Munster – Piper Jaffray.

Gene Munster – Piper Jaffray

If you could please go through what the impact in the change on listing fees is having on the number of listings or what that has been over the past few weeks? Maybe give some sort of feel in terms of how that is impacting the overall search results as well?

John Donahoe

I can’t comment on the actual impact of the changes because it is only two weeks old. What I can say is this. What we have done in the U.S. is very similar to what we did in Europe a year ago or a little over a year ago where we are in essence incenting consumer sellers to list in the auctions format by making that virtually free when they list in the auctions format and they only pay if it sells and they pay a flat rate which is really what our research had told us consumers would prefer; something simple and easy.

Then for the smaller business seller or people that sell a lot of volume on eBay we are incenting them to sell in the fixed price format, making that in essence free or quite low price to list in a fixed price format. Again, they only pay if it sells. As you know, auctions are sorted by time ending soonest. Fixed price is sorted or searched by in essence relevance or best match. What we found in Europe was that allowed both groups of sellers to list in their most natural format and allowed the richness of inventory to become more clear and pop better for buyers. We saw improvement in sold items and improvement in GMV. We anticipate the same reaction in the United States as it plays out over the remainder of the year.

The other thing that happens as part of that is we no longer have the store inventory format and so the fixed price items are now all in sort of core search and what we have proven in Europe is our search engine can take that. These are things that were proven out in Europe and will take time to sort of work their way into initially our listings and into demand but we feel good about the impact it will have on the U.S. business over the remainder of the year.

Gene Munster – Piper Jaffray

When we will see given those dynamics, should we start to see more of an improvement in marketplace in the June quarter or as you are saying will it take several quarters to kind of take hold?

John Donahoe

The timeframe, if I were to take what happened in Europe I would say it took 2-3 quarters to really fully work their way through. They first change their listing practices and then buyers get used to them and we will start really assessing the impact in the summer to fall timeframe.

Operator

The next question comes from the line of Collin Sebastian – Lazard Capital Markets.

Collin Sebastian – Lazard Capital Markets

Following this latest round of changes I think you talked about before perhaps 2-3 rounds of changes for the year. If you could clarify if that is still the plan and directionally what the timing is for those changes and directionally what they might impact. Then secondly on PayPal I think Scott had talked about some expansion in Asia there. I am also curious about the timing of that and if there are any added expenses associated with those moves baked into your guidance now for the year?

John Donahoe

On the marketplace changes what we have done is we have bunched those into two releases which makes it easier for sellers. Sellers like the advanced warning and like to know they can really make two sets of changes in the year. We have tended to make those in March and in September and announce them 60-90 days ahead of time. So we will have a second wave of changes this year. Again this is a year where you are going to see a lot of the foundational work we did in 2008 and 2009 begin to flow through to things that buyers can touch and feel. Things like the vertical shopping experience and clothing, shoes and accessories; things like [inaudible] in auto parts which is in essence a significantly simplified selling in that category for eBay and things like eBay Buyer Protection. So more things like that you will see in the next release.

With respect to Asia, Bob and I were in Asia last week in fact visiting with the PayPal team and there is just really, really impressive growth frankly in both eBay and PayPal businesses in Asia as cross-border continues to be quite strong in that market. What PayPal has done that I mentioned earlier in my remarks is signed some deals with financial services entities that give us access to local Asian customers that may not be on eBay. So the China UnionPay deal allows us access to 1.3 billion Chinese consumers. China UnionPay by the way is a total of 2.1 billion overall cardholders.

So now it is easier for them to open a PayPal account and fund it with that. We signed deals in Singapore and in South Africa which again allow local consumers in those markets to access PayPal more readily and we are doing some interesting things on the mobile front.

In Japan we have signed deals with several of the largest payments gateways which give us access to both Japanese merchants and then we are talking with a couple of Japanese financial services [concerns] about doing the same thing to access Japanese consumers. So I think a lot of growth opportunity. Your question on guidance I am going to give Bob a chance to comment on guidance which I know some people were curious about.

Robert Swan

I think we have been spending quite a bit of time on expanding our global footprint in PayPal in Asia. As John indicated we have a fantastic cross-border business there and a great domestic business in Australia but the moves we have been making since really early last year has been about building domestic presence over there. So we have a reasonable sized business today. It has been growing extensively and it will continue to grow this year and all of the costs that go along with it are reflected in the guidance we have given.

Relative to the more macro question on guidance that maybe you didn’t ask but I will comment anyways. I gave some words in the script and maybe I want to put some numbers to it to make sure you have the context for how we are thinking about the full-year. I will give you maybe the simple version. We came into the year with earnings projected to be $1.63 to $1.68 and I gave some words about how we are thinking about the rest of the year and how we get back to our full-year guidance. Maybe I can put some numbers to them.

First the negatives, as you know we are a global business with more than half of our revenues from off-shore. A couple of billion dollars in revenue exposed to the Euro and $1 billion of revenue exposed to the Pound. The implications of how currencies have changed in particular the strengthening of the dollar in the last 90 days will cost us approximately $125 million in revenue and $0.05 in EPS relative to where we were 90 days ago.

Secondly, our tax rate is going to be a little bit higher this year than what we thought and the reason is our U.S. business is going to be stronger. That higher tax rate will likely cost us a couple of cents relative to where we were 90 days ago. So that is $0.07 down. We maintained our guidance for the full-year and that is because of two things. One, PayPal will grow faster than we expected a few months ago and its margins will be higher. And we are increasingly confident 90 days later about the changes we are making in the marketplaces business.

So as we think about our full-year guidance for eBay Inc. not [only] the costs in the Asian business and PayPal, we will be down $0.07 because of currency and tax rate and we will be up $0.07 because of good operational performance in the PayPal business and continued progress in core eBay business as well.

Operator

The next question comes from the line of Imran Khan - J.P. Morgan.

Imran Khan - J.P. Morgan

Can you talk a little bit about how the [inaudible] acquisition impacts the payment space? I think they talked about they might reduce exposure in the merchant service business. Is this an opportunity for merchant service to add clients for PayPal as they shift to [merchant] businesses? Secondly, not to nitpick, I think on slide 13 it seems like your global activity has declined sequentially despite the market acceleration. Can you give us some color on the sequential decline? That would be very helpful.

John Donahoe

I will take the first one while Bob looks for page 13. On the payments, first of all let me make a prediction which is you are going to see lots of announcements around online payments and mobile payments in the coming months. That is simply because payments is a large and competitive space and lots of people participate in one form or another. Rather than comment on any specific announcement or competitor let me just say this, we continuously closely monitor the competitive landscape and feel confident about our position and our competitive advantages and feel more confident about those as the days go on.

We get this combination of scale and speed. We primarily look at what customers want. Actually we look at it much more from a customer perspective than a competitive landscape and what you see from the PayPal numbers is our customers like what we are doing. The specific things I think we have that are unique is we have direct relationships with both consumers and merchants. We don’t have to work through issuing banks or acquiring banks. We have 80 million active consumers and 8 million merchants. So as you said, I think there are additional opportunities to add merchants following this acquisition and we will certainly get very aggressive to be adding those.

It is that kind of direct relationship that gives the data that allows us to do the risk detection and fraud prevention we do and that combined with our technology platform allows us to innovate more rapidly what we have done with our platform, opening up our platform, which no other payments platform in the world has done, what we are doing in mobile where there are a lot of people talking about it. We have already launched two apps and really did more volume in Q1 than we did all last year in mobile payments. In digital goods we are pushing forward. I think you are going to see lots of different movements in the broader e-commerce competitive space. We are staying very focused on our consumers and feel very good about the combination of scale and speed we bring to being the leader in online global payments.

Robert Swan

In regard to the active users for the marketplaces business the comments I gave on accelerated growth in the biggest markets was a year-over-year comment. What you are referring to is a sequential decline from Q4 to Q1. That has a bit to do with two things; one is a strong holiday season which ramps up fourth quarter active users and then a deceleration both year-over-year and quarter-over-quarter in our Western Europe markets.

Operator

The next question comes from the line of Justin Post – Bank of America/Merrill Lynch.

Justin Post – Bank of America/Merrill Lynch

Can you talk about your new Buyer Protection on marketplace? I think you mentioned PayPal how that could possibly affect results? Secondly, any thoughts or update on opportunity or drivers to essentially spin out PayPal? Is that something that even makes sense for you at all well down the road?

John Donahoe

Let me take the latter first and I will simply just repeat what I have said before which is we continue to believe the best way to drive long-term value for our customers and investors is by keeping these two businesses together. There continues to be strong synergies between eBay and PayPal. You saw that in the increased penetration PayPal has had on eBay. It is up I think almost 300-400 basis points year-over-year. eBay continues to provide a significant number of new users for PayPal in essence for free and eBay Inc.’s balance sheet allows us to invest in PayPal’s business and make investments like Bill Me Later that further its position.

As long as those synergies are there we are going to try to fully capitalize on them and believe it is the best thing to do for our customers and investors. Then on eBay Buyer Protection this is a nice capstone of stuff we have been working on for the last 12-18 months where we have materially reduced bad buyer experiences. We have increased trust on the site. We have put in place from a standing start; we had no phone coverage for buyers 12 months ago. We now have in essence full phone coverage for buyers in both the U.S. and the U.K.

What this allows us to do with confidence is to say buy on eBay and you are covered. Almost no questions asked. What our research says is even though buyers are seeing better experiences this kind of guarantee is going to give them that real sense of confidence they can buy with confidence. The early feedback we are getting from consumers in the U.S. and U.K. mention that. It does result in a shifting of a little bit of cost from payout of losses from PayPal to eBay but overall net/net we don’t see that as a major reason. It raises one margin slightly lower than another. We are confident enough we don’t see it having a material impact on the company overall. Financially that is, but we do hope it will have a material impact on our consumers.

Operator

The next question comes from the line of James Mitchell - Goldman Sachs.

James Mitchell - Goldman Sachs

To follow-up to Justin’s question on Buyer Protection can you approximately size the dollar impact of the costs that were previously incurred by the PayPal business unit and are now incurred by the marketplace business unit?

Robert Swan

It is approximately $8 million in Q1 that historically would have been in PayPal’s losses which is now in Marketplace’s losses.

John Donahoe

Here was a fascinating thing we found out last year. This is where the testing and learning and how we approach many of these changes makes sense. So we started off a year ago by saying we were certain people just wanted their money back instantly. So when we first highlighted this Buyer Protection we did it just with the top buyers in the U.S. and they called and we gave them their money back instantly. What we found is that is not what they wanted. They said you know what, I just want the item. So we started intermediating with the sellers more aggressively and helping connect the buyer with the seller in the after-transaction and we found that in 70-80% of the cases they got it resolved within 24-48 hours and the buyer was happy.

They preferred that to getting their money back. What that has enabled us to do is to scale this in a way that is far more aggressive because what it is in essence doing is connecting the buyer and seller in post-transaction to make sure they resolve the transaction in a satisfactory manner and then if at any time if the buyer would just rather get their money back we provide it. It was fascinating learning to find that in most cases they just want to get their item and they want to get their item and they want to get their item in a timely and accurate basis and in 80% of the claim filings that is what is happening. That is why Bob’s number of $8 million which sounds so small it is because for every 10 calls that come 8 of them are getting resolved between buyer and seller.

Operator

The next question comes from the line of Stephen Ju - RBC Capital Markets.

Stephen Ju - RBC Capital Markets

You mentioned small businesses are receiving the fee adjustment incentive right now in the second quarter. Did most of your larger volume sellers already receive these incentives in the first quarter? Sticking with the Asia related PayPal questions here, from what I was given to understand PayPal is not the dominant payment methodology on the auction platform G-Market in Korea. What is different about the Korean market? Why is PayPal not used as prevalently in that market?

John Donahoe

The pricing change was just one pricing change and in essence it says anyone that sells more than 50-100 items a month on eBay to use the fixed price format because you buy a store and a subscription and that gives you access to lower insertion fees. So where you draw the line between small or larger businesses, anyone that sells more than 50-100 items per month on eBay is in essence probably better economically to sell them in a fixed price format.

Secondly, payments in Korea is escrow. In that way it is different than most any other market except for the domestic Chinese market. We have an escrow system built into Internet Auction Company and in essence escrow systems built into G-Market. So that is why that market is different.

Operator

The next question comes from the line of Mark Mahaney – Citi.

Mark Mahaney - Citi

On the payment segment margins for the balance of the year would you give any comments on marketplaces segment margins for the balance of the year? One question on Germany and the U.K. the GMV trends the last couple of quarters did give this tentative evidence that some of those Marketplace changes you implemented had a real impact on those markets. It is unclear from the March quarter results whether that is the case but is it clear to you from your internal data that GMV acceleration in the German and U.K. market in the second half of last year continued into the March quarter?

Robert Swan

I think the first was related to margins in the marketplace business. Back in January we indicated our expectation for full-year 2010 is marketplace margins to be roughly 42%. That is off of 40% in Q4. Q1 was 42% so we kind of expect that to continue throughout the course of the year.

John Donahoe

On the U.K. and Germany to be honest what I am really looking at is our competitive position in each of these markets and I would say that we continue to gain share in the U.K. Sold items and GMV growth are both very strong. The U.K. e-commerce market is surprisingly strong. The market is growing more quickly as offline comes online and we are growing more quickly than the market. The German market, as Bob said the e-commerce market is now growing as fast.

The economy and e-commerce market is lagging behind and I would say our competitive position is holding steady there. It improved in 2009 and it held its position in the first quarter of this year. So again I feel good about the changes we made there in 2009 and we will bring those to the U.S. in 2010 and I feel good about what we added in both markets in the first quarter of this year.

I will wrap up by saying what I say every time and it is absolutely how we are approaching things. I feel good about the progress but we have a lot of work to do and it is just one quarter at a time. There is no doubt we are seeing growing traction as these changes begin to build on top of each other. More to come 90 days from now. Thanks everyone for listening.

Operator

Ladies and gentlemen this does conclude today’s program. Thank you for your participation and have a wonderful day. Attendees you may now disconnect.

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Source: eBay Inc. Q1 2010 Earnings Call Transcript
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