Good day, ladies and gentlemen, and welcome to eBay's Second Quarter 2011 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to Ms. Jennifer Cerran, Vice President of Investor Relations. Ma'am, you may begin.
Thank you. Good afternoon, everyone, and thank you for joining us, and welcome to eBay's earnings release conference call for the second quarter of 2011. 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'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. 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 when 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 will make forward-looking statements relating to our future performance that are based on our expectations, forecasts and assumptions and involve risks and uncertainties. These statements include, but are not limited to, statements regarding expected financial results for the third quarter and full year 2011 and the future growth in the Payments, Marketplaces and GSI businesses. Our actual results may differ materially from those discussed in this call for a variety of reasons, including, but not limited to: global economic events, including sovereign debt uncertainties; changes in political, business and economic conditions; foreign exchange rate fluctuations; our ability to integrate, manage and grow businesses recently acquired or that may be acquired in the future, including GSI; our increasing need to grow revenues from existing users, particularly in more established markets; an increasingly competitive environment for our businesses; 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, IP and litigation risks, including risks specific to PayPal, Bill Me Later and the financial industry; and our need to timely upgrade our technology and customer service infrastructure at reasonable cost, while adding products and features and maintaining site stability and performance. You can find more information about factors that could affect our operating results in our most recent will report on our Form 10-K and our subsequent quarterly report on Form 10-Q at investor.ebayinc.com. You should not rely on any forward-looking statements. All information on this presentation is as of July 20, 2011, and we do not intend and undertake no duty to update this information. With that, let me turn the call over to John.
Thanks, Jenny, and good afternoon, everyone, and welcome to our Q2 earnings call. Q2 was a strong quarter for eBay. We generated strong financial results and strengthened our portfolio. I want to start out today by taking a moment to recap our growth strategy. We intend to compete and lead in the new retail, global environment that we see emerging. Technology-driven innovation is changing how consumers shop and pay. And these changes are blending online and offline into a new global commerce landscape.
In this new retail world, consumers expect a seamless experience across multiple channels, whether it's a physical store, a mobile phone, a laptop or any Internet-connected device. In this new world, physical stores will become just another point of access and location alone is no longer a sufficient competitive advantage.
The advantage is the ability to connect with consumers anytime, anywhere. And in this new environment, retailers of all sizes are seeking new competencies and capabilities. They are looking for partners who will provide flexible global platforms and technology-driven innovation that deliver consumer access, insight and engagement.
We aim to be such a partner, enabling the future of commerce. We're a different eBay today, a global commerce company. We enable consumers to get what they want, when they want, how they want it. And we enable merchants of all sizes to compete in this new commerce environment, and we won't compete with them.
We're delivering on our commitment to taking bold steps. Simply put, we're playing offense. And I feel good about our performance, our momentum and our opportunities.
Now let's talk about our results. We had a strong quarter. Our revenue and non-GAAP earnings per share exceeded the top end of our guidance with revenue growing 25% in Q2 and non-GAAP earnings up 20%. PayPal continued to deliver strong momentum, hitting 2 milestones: achieving its first $1 billion quarter in revenue; and surpassing 100 million active registered users. And Marketplace has had a strong quarter as well with 19% revenue growth and a significant acceleration of growth in the U.S. market. We also announced a number of acquisitions in Q2, adding technology capabilities in important areas such as platform services, local commerce and mobile payments. And GSI is now our third of business unit, which significant expands our capabilities and relationships with large merchants and brands.
Now let's take a look at the results for each business unit. PayPal has over 100 million active users and serves 9 million merchants worldwide. This provides a powerful foundation for attractive, sustainable growth. PayPal's Merchant Services business continued its strong growth momentum in all regions of the world. This business, which now accounts for over 2/3 of PayPal's total payment volume, grew 37% in Q2 and we see significant runway for continued strong growth.
PayPal's PPP growth on eBay accelerated 4 points in Q2 and penetration topped 71%. And Bill Me Later had another strong quarter. In fact, Bob will cover more about Bill Me Later's business in more detail in his remarks, but this business has strong traction both on and off eBay.
PayPal Mobile also continues to accelerate. While others talk about the promise of mobile payments, PayPal is delivering. An estimated 8 million people are now using PayPal Mobile and we expect mobile payment volume to exceed $3 billion this year. That's more than 4x the volume we did in 2010. This growth is being driven by the fact that PayPal Mobile is driving strong sale and new customer acquisition for merchants.
For example, Crutchfield, the North American online consumer electronics retailer, recently saw conversion jump almost 34% during a 2-week period in April for its customers who were using PayPal Mobile. And since Crutchfield added PayPal last December, 65% of customers using PayPal Mobile are new to the company.
In Q2, the U.K. restaurant chain, PizzaExpress, also embraced PayPal Mobile as an in-store payment option across its 370 outlets. Customers can now pay their checks right from the table using their iPhones. This is the kind of innovation PayPal is delivering merchants and consumers today: Real applications, real sales, real customers.
Now several of our recent acquisitions strengthened PayPal's mobile and digital goods portfolio by combining Where's capabilities with PayPal Mobile, we'll help make local commerce a reality. Consumers will have a fast, safe way to pay on the spot with coupons and discounts integrated directly into their PayPal account. And we believe that Zong, which has direct carrier billing relationships with more than 250 mobile network operators around the world, will help us strengthen our leadership position in mobile payments and digital goods.
With our strong position and growth momentum in online payments, we plan to extend PayPal's capability to point of sale locations. We intend to help retailers grow their businesses offline in the same way we help merchants grow online around the world. By the end of this year, we expect PayPal to be testing point-of-sale innovation with a major U.S. retailer. And during 2012, we expect to be rolling out new point-of-sale experiences with up to 20 national retailers. So stay tuned.
Turning to Marketplaces, we're making great progress. Our U.S. business demonstrated significant momentum in Q2 as core GMV accelerated 4 points to a 40% growth rate. We now believe that our U.S. business is growing in line with market growth rates.
In Europe, eBay's business remains strong and stable overall. Growth in the U.K. continues to outpace that market. And in Asia-Pacific, we saw the business stabilize in Q2 driven by increased traffic to our Korean business and strong growth in cross-border trade. eBay is delivering a better shopping experience and buyers are happier and our most trusted sellers are winning.
Search improvements such as the removal of duplicate listings are making it easier for buyers to find what they want on eBay. And trusted sellers now account for 38% of GMV in our 3 largest markets and same-store sales for these sellers grew 22% year-over-year, continuing to outpace e-commerce.
And we're continuing to innovate. For example, in the eBay Garden, we're currently testing a new search preview experience that eliminates the need to jump back and forth between search and item listings pages, making shopping easier.
Mobile commerce also continues to drive strong growth. Our eBay mobile apps have been downloaded more than 45 million times. In Q2, the eBay Motors app launched as one of the top 10 free lifestyle apps in the iTunes' App Store. And now, more than 2,000 cars and 70,000 auto parts are sold on eBay's mobile platforms each week.
Overall, we're on track to more than double eBay's Mobile GMV to over $4 billion in 2011. We're also continuing to innovate mobile commerce. In Q2, we unveiled Milo's new product called Fetch, which allows small- and medium-sized retailers to upload their local inventory and automatically share it realtime on eBay. And we're also testing a local shopping tab on eBay search results, showing buyers the availability of items at stores in their local area in addition to eBay listings.
Turning briefly to our adjacent formats. Classifieds is up 18% in Q2 on an FX neutral basis, and StubHub had another strong quarter with revenue and ticket sales up double digits year-over-year, driven primarily by Major League Baseball and concerts.
Before closing, let me add how excited we are about GSI and the opportunities this acquisition creates. I've had the pleasure of meeting with many of GSI's top customers over the last several weeks, and I can tell you they are excited about their growth potential online with GSI and the additional value that eBay brings to the table. All of my conversations reinforced what we already believed: Retailers need partners who will help them compete, innovate and grow in a multichannel commerce environment. And we're well positioned to help.
In summary, we had a strong Q2 and first half of the year. Our core businesses are strong and getting stronger, and we're adding to our portfolio. Our opportunities have expanded and we feel well positioned, if not uniquely positioned, to capitalize on this potential. That said, we know that this success is all about execution.
Earlier this year, we laid out our 3-year plan to become a $15 billion company in 2013. Six months into that plan, we've delivered 2 strong quarters and our outlook for 2011 says we're well on our way. We feel more confident than ever about our opportunities and our competitive position.
With that, I'll turn it over to Bob, who will provide more details on Q2 and our outlook before we take questions.
Thanks, John. During my discussion, I'll 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.
As John said, earlier this year we shared with you our 3-year plans including a framework for growth, a framework for execution and a framework for capital allocation. We said these plans would enable us to generate approximately $15 billion in revenue, approximately 14% EPS CAGR and cumulative free cash flows of $8.5 billion through 2013.
Our first half results reflect a strong start to our 3-year journey, and we are increasingly confident in hitting our long-term goals. In summary, we exceeded our Q2 guidance on the top and bottom line. From a growth perspective, we grew the top line 25% with contributions from our core businesses, our adjacent formats and our seeds.
Our core businesses generated solid growth with non-vehicles GMV of 17% and PayPal TPV of 34%. Our adjacent formats grew 45% with strong organic growth from classifieds and advertising, and inorganic growth from the acquisition of brands4friends, which closed in Q1 and where.com, which closed in Q2.
Our seeds, such as credit, mobile and PayPal digital, had high double digit and triple digit volume growth rates. These investments will help drive our future growth.
From an execution perspective, operational excellence has increasingly become the way we work, and we are reinvesting in operating leverage and accelerating innovation and driving top line growth. From a capital allocation perspective, we continue to strengthen our portfolio, closing 6 acquisitions during the quarter, including GSI Commerce and announcing our agreements to acquire Magento and Zong. We repurchased approximately 13.6 million shares and expect to receive $2.3 billion for our minority stake in Skype upon closing. We're very pleased with our progress for the first half of the year and we're raising our full year guidance to reflect this strong momentum.
In the second quarter, our combined businesses generated net revenues of $2.8 billion, up 25%. Organic revenue growth was up 18%, foreign currency movements increased growth by roughly 4 points and the inclusion of recently closed acquisition increased growth by roughly 3 points.
Second quarter non-GAAP EPS is $0.48, a 20% increase year-on-year. The increase in the outperformance versus guidance were primarily due to solid top line growth and productivity. Non-GAAP operating margin was 27.6%, down 150 basis points from Q2 2010 due primarily to the inclusion of recently completed acquisitions.
We generated strong free cash flow of $543 million in the quarter despite the negative impact of a onetime tax payment related to a prior period tax settlement. Return on invested capital was 25.3%, a slight decline due to the acquisition of GSI.
Now let's take a closer look at our segment results. PayPal posted another great quarter, achieving the strongest revenue growth in the past 3 years. Total payments revenue was $1.1 billion, representing growth of 31% and total payment volume increased to $28.7 billion, up 34%. We continue to expand our global footprint as international TPV increased 31% year-on-year and made up 45% of PayPal's TPV in the quarter.
A few quick highlights on PayPal operational metrics. Merchant Services TPV grew 37% on an FX neutral basis in the quarter as we continue to expand our global footprint, merchant coverage and share of checkout. Merchant services TPV accounted for 66% of PayPal's TPV.
On eBay, PayPal TPV showed continued strength, increasing 17% year-on-year on an FX neutral basis. Penetration of addressable GMV increased 60 basis points sequentially to 71.4% with penetration increases in Germany, the U.S. and Australia.
In terms of the transaction margin components, we've made a few changes to better reflect the growing importance of credit and other revenues to the PayPal wallet. Primarily take rate is based on total revenue, while transaction expense and losses include the full impact of Bill Me Later. Based on these changes, the new transaction margin was 63.6% in the quarter, up 60 basis points year-on-year, essentially the same as it would have been with the old definition of transaction margin.
PayPal segment margin was 21.9%, up 200 basis points from last year, trending towards the 24% to 26% target we set for PayPal margins in 2013. Margin performance was driven by stable transaction margins, solid operating leverage and continued improvement in Bill Me Later performance.
Let me touch on a few key operating metrics for Bill Me Later. We provide Bill Me Later TPV to include volume on eBay and inside the PayPal wallet off eBay in addition to the previously broken out volume outside the wallet off eBay to give you a full picture of the credit business.
Bill Me Later's TPV was up 67% as consumers turn to Bill Me Later for both convenience and choice, driven by continued strong penetration both on and off eBay. Bill Me Later penetration in the U.S. has quadrupled in the past year to nearly 1% in the second quarter. While small compared to other funding methods, this penetration reduces our funding cost as consumers shift away from credit cards to Bill Me Later.
Risk-adjusted margin increased 370 basis points over prior year to 16.5% as improved credit quality drove net charge-offs down substantially on a year-on-year basis. It's been over 2 years since the acquisition of Bill Me Later, and we feel great about the business and even better about the outlook. It has not only increasing consumer choice and an additional source of monetization but it also reduces PayPal's overall processing costs.
Before moving on to Marketplaces, I wanted to take this opportunity to discuss the implications of the Durbin amendment. First, we believe that the rules announced by the Fed in June do not treat PayPal as a payment card network. Second, we expect the overall net impact of the Durbin amendment on our margins to be slightly positive in the short to medium term. And finally, we're pleased to report that our U.S. ACH contract was extended during the second quarter through another 5 years, preserving our cost structure with this funding method.
Now let's move to our Marketplaces business. Overall, Marketplaces achieved net revenues of $1.7 billion, a 19% increase. Marketplaces FX neutral revenue was up 12%, driven by solid non-vehicle GMV growth of 10%, accelerated growth from adjacent formats like classifieds and advertising and the addition of the brands4friends acquisition. Marketplaces generated 59% of its revenues internationally this quarter. We had a great quarter from our Marketplaces adjacent formats with marketing services and other revenue up 34% on an FX neutral basis. The growth rate was primarily driven by strength in ad base revenue, continued strong performance across our global Classifieds business and the addition of brands4friends. Today, these adjacent formats represent 19% of Marketplaces' revenue and are increasing contributor to the overall company growth rate.
A few quick highlights on Marketplaces' operational metrics. Active users increased to 97 million, accelerating growth to 6% year-on-year. Sold items grew 8% year-on-year, a 1 point acceleration from Q1, driven by growth across all our 3 key regions. Non-vehicles GMV was up 10% in the quarter. U.S. GMV accelerated 4 points to 14% and International GMV accelerated 2 points to 10%. Our global take rate, excluding vehicles and StubHub, was 8.3%, 20 bps lower than last year as we lack the initial impact of the plays and changes implemented in the U.S. business in March of 2010. Marketplaces' segment margin was 38.8% in the quarter, down 150 basis points from a year ago, mainly driven by recently completed acquisitions.
Turning to our newest addition. We're very excited to welcome to GSI team led by Chris Saridakis to the eBay family this quarter. We closed the transaction on June 17, financing it with cash and $700 million in commercial paper. The integration is well underway, and we're very excited about the opportunities that the combined capabilities of GSI, eBay and PayPal will open for large retailers and brands in this new retail environment.
A few highlights from the quarter as we're now up to reporting GSI as the third segment in our results. Revenue for the 2 weeks we owned GSI totaled $24 million and the impact on non-GAAP EPS was negligible. The GSI team is making good progress on their V11 technology platform and we plan to increase spending so that we can accelerate the deployment schedule and create capacities for new clients.
Cross business unit integration has already started. We are on track to realize that roughly $60 million in total revenue synergies and cost savings by 2013 that we laid out when we announced the transaction. And we have 5 GSI clients live on eBay today and 66 clients now use PayPal.
On this next slide, we provide few key metrics to give you a better sense for GSI's business performance. Please note that the historical information has been adjusted for the divested businesses to be more comparable to the business acquired.
Global eCommerce merchandise sales, or GMS, grew at 20% on a comp store basis driven by continued retail shift from offline to online. Total revenue was up 16% year-on-year as solid organic growth was offset by the shift away from the owned inventory model and the Global eCommerce business. The Marketing Services business increased 33% year-on-year in Q2, driven by continued adoption across GSI clients.
Turning to operating expenses. They were 45% of revenue, slightly higher on a year-over-year and sequential basis driven primarily by sales and marketing, investment in product and acquisition-related expenses. From a capital allocation perspective, we generated strong free cash flow of $543 million during the quarter after adjusting for a tax payment of $75 million. We've improved our financial flexibility by funding over 1/3 of the U.S. Bill Me Later loan receivables portfolio with our offshore cash. We've invested $2.7 billion to strengthen our portfolio with the acquisitions of GSI, Where and GittiGidiyor and we continue to use a portion of our cash on our share repurchase program.
We ended the quarter with cash, cash equivalents and non-equity investments of $6 billion, including approximately $1.2 billion in cash in the U.S. From an M&A perspective, we've taken several steps in the quarter to strengthen our portfolio, accelerating our mobile payments, expanding our platform, extending our geographic reach and strengthening local commerce efforts will help us with our vision of becoming e-commerce partner of choice on and offline.
Now let me turn to guidance. For the third quarter of 2011, we anticipate revenue of $2.85 billion to $2.95 billion. This represents growth of 27% to 31%. We anticipate non-GAAP EPS of $0.46 to $0.47, which represents growth of 15% to 18%. Our EPS guidance reflect slightly higher sales and marketing cost and costs associated with the integration of GSI and acceleration of the V11 platform.
Turning to full year guidance. We are raising our guidance on the top line by approximately $700 million and on the bottom line by approximately $0.04. A couple of things driving the improved outlook. First, we expect continued momentum in the Marketplaces and PayPal businesses specifically driven by stronger GMV in the U.S. Second, the acquisition of GSI and several smaller acquisitions will add significantly to the top line and be accretive on a non-GAAP EPS basis by approximately $0.01 as we invest in integrating the businesses.
For full year 2011, we now anticipate revenue of $11.3 billion to $11.6 billion, representing growth of 23% to 27%. And we anticipate non-GAAP EPS of $1.97 to $2, representing growth of 14% to 15%. And we expect free cash flow to exceed $2.2 billion for the year despite approximately $350 million in onetime tax payments and higher CapEx due to increased capacity requirements and investment related to data analytics.
In summary, we had a strong first half with double digit top and bottom line growth. The Marketplaces business is gaining momentum, PayPal continues to increase their market share online and our adjacent formats continue to perform well. We're very excited about our future with the addition of GSI to serve large brands and retailers. We continue to invest in growth and we're focused on accelerating innovation and making strategic acquisitions while maintaining a dilution neutral buyback strategy. And we are well positioned to deliver on our 3-year plans.
And now, we'd be happy to answer your questions. Operator?
[Operator Instructions] Our first question comes from Ken Sena from Evercore Partners.
Kenneth Sena - Evercore Partners Inc.
So I was wondering if you can maybe talk about the point-of-sale experience a little bit. I know you mentioned that you're going to be rolling out a comprehensive product through next year. But can just can you just say how much of that will actually have Milo and Where and offers some of the other services as a part of that product?
You know what's interesting is I would say 12 to 18 months ago, if you would've asked that where growth really led, we would have said, we're an e-commerce company. And that e-commerce is an enormous market that is growing quickly and was going to gain share from offline retail, and we still believe that to be the case. And so e-commerce will stay -- will continue to gain share from offline retail, and both of our core businesses are very well positioned in that. But the mobile device is absolutely lowering the boundary or blurring the boundary between online and offline. And with that said, this has created incremental opportunity for both of our businesses, really, all 3 of our businesses, far greater than what we would've expected. So on the eBay business, we see it already with the eBay Mobile application, which our analysis says is actually used in stores not infrequently. So the almost $4 billion of volume on eBay Mobile, many times has people using their mobile device while in a store or at least having -- being in a store at some point of the shopping cycle. And our acquisition of Milo is a way to bring that local inventory from stores into the shopping experience whether it's on the eBay site or on our eBay or RedLaser mobile applications. And so that will be one of the ways we're bringing local products and local inventory into the eBay shopping experience, both online and mobile. And then with PayPal, we've had merchants reach out to us quite aggressively and say they want us to bring PayPal into the point of sale. And we see this as an incremental opportunity and a fairly significant incremental opportunity that will play out over the next 3 to 5 years. We think we bring 3 things to that picture. There's going to be a lot of announcements and a lot of speculation about point of sale. I'll remind you that's the slower growth part of the market, but we feel very well positioned because we start with 100 million active digital wallets, each that have 2 financial instruments in them. And we start with 9 million active merchant accounts. And so we bring that to the offline or point-of-sale world. Second, we bring risk and fraud detection that we have today. We have $100 billion of [indiscernible] inventories to our platform with less than 0.2% of loss, and so we are equipped to bring that loss performance to PayPal Mobile, where we're successfully underwriting $3 billion of items and to point of sale. And the merchants recognize that, they trust that. And then lastly, what we're bringing to point of sale is an approach that merchants like in that it will accept all tender types, be they card or hands-free or mobile. And any mobile solution -- our solution will work with any mobile device or mobile software platform or operating system. And so it's payment-type agnostic, and merchants like that because it's going to enable them to help scale the PayPal solution across not just one store or one shop but across nationally all their stores and all their checkout lanes. And so we're designing our product and our point of sale much like we did the Merchant Services business 5 years ago. We're designing it to build the business that can grow significantly over a long period of time. So as I said, we'll have a pilot up and running by the end of this year. We'll have active operations and multiple merchants next year. And I think it will lead to material growth in the next -- the 3- to 5-year period after that.
Ken, the only other thing I'd add is as John mentioned in his prepared remarks, our Milo, Where, RedLaser, Critical Path Software teams are not waiting for a PayPal point-of-sale product. They are out gaining traction with large merchants and retailers today. So they're not waiting for PayPal's point of sale. They're out there getting traction as we speak.
Kenneth Sena - Evercore Partners Inc.
And would eBay consider partnering to potentially expand beyond just retailers, but potentially with like a navigation platform in terms of offers, whether it's like Groupon or some other partner? Would you be open to that idea?
Sure. I mean, we feel like we have 9 million partners today called customers and merchants. And we partner with -- when we buy Zong, we're partnering with mobile carriers, we partner with the card associations today. And we certainly would consider partnering with any of the deals providers or others that would be merchants on our platform.
Our next question comes from Doug Anmuth, and it's from JPMorgan.
Douglas Anmuth - JP Morgan Chase & Co
Wanted to ask 2 things, first, just on the outlook for the rest of the year, just to clarify on the pro forma EPS, just trying to understand how much is sort of core eBay specific and how much is related to acquisitions? I know you laid out in the deck, obviously, but just want to dig into that operating performance number in particular, the $0.03 number that you have there. And then secondly, can you just clarify how you're going to be handling the reduced transaction expenses related to the debit cards going forward?
On the second question, first, the transaction that lowered transaction cost related to debit will flow through the transaction expense line that we give you on a quarterly basis. So the 111 bps for Q2 all else equal when Durbin gets implemented in the fourth quarter, you should expect that to come down. In terms of our guidance for the rest of the year, we said there's -- let's just isolate the GSI because that's the primary driver on both revenue and profitability. When we announced the deal back earlier this year and we said our expectations would be essentially EPS neutral on a non-GAAP basis for 2011. Today, what we're saying is that we expect revenues to be roughly $550 million, generating about $0.01 of EPS. So a little bit better than we expected back when we announced the deal despite the fact that we will be making higher investments to rollout the V11 platform. So a little bit better than we said at the time, relatively modest impact on non-GAAP EPS guidance for the full year.
Our next question comes from Shawn Milne from Janney Capital Markets.
Shawn Milne - Janney Montgomery Scott LLC
John, you talked a little bit about some of the changes you've made in the U.S. Marketplace. We've seen a pretty significant acceleration in the past couple of quarters. As you look out into the second half or closer to the holiday, you said previously no silver bullets. What are some of the things that you are working on? You talked a little bit about the shopping cart and some of your vertical strategies. Is there any more color you can provide there to get a sense of if we can continue to see good acceleration in that business?
Sure, Shawn. We feel good about the progress in the U.S. And in many ways, it's playing out much as we've been saying it would as we've applied the search changes, the pricing changes we made last year and those have worked their way in, the vertical experiences, eBay Buyer Protection. And the business is responding much like it did in the U.K. Looking out in the second half of the year, I think what you see is a bit of an acceleration of innovation. And so whether it's mobile, commerce and increasingly getting into different mobile environments, whether it's changes in our vertical experiences. I don't know if you've been to our Consumer Electronics segment, but the product base experience has now been rolled out from what was 3 subcategories, which were MP3 players, DVDs and GPS devices now to 30% to 40% and rising of the consumer electronics and consumers like that. And then our auto parts experience it growing. So the technology, Mark Carges has done a great job in our technology in a place where we can enter rate faster. And cart [ph] is available. We've got it completely developed and it's now roughly in by 10% of the U.K., 2% to 5% of the U.S. and we are rolling it out carefully because it turns out that while consumers like cart, some consumers like the cart, where we can cross merchandise, other consumers like buying directly from the product page. The main thing that'll be different, however, in the second half is we're going to increase our marketing investment. I said for now a couple of years that we're holding off increasing marketing and focusing on our current customers until we get a user experience to the place where we feel it's ready, and we feel like we've passed that point now. And so we'll be increasing our marketing expenditure second half of the year both to reraise the visibility of our brand and engage our buyers. You'll see us on TV in late Q3 and Q4 in the U.S. And we think that will have benefits for the business. And that's both in the U.S. as well as in Europe.
Shawn Milne - Janney Montgomery Scott LLC
Just one quick follow-up for, Bob, you talked about investing a little bit more in GSI and accelerating the rollout on V11 and some of the capacity. When do you think we'll get a first look at the new front end platform with some of the large clients?
We're expecting the first launch late in the third quarter. John has had the opportunity to go around with Chris and see a lot of the GSI clients and demo-ed the V11 platform. And I'd say the tech team at GSI has done a really nice job in building out that platform, working out the kinks and we're excited to get the first one launched here at the end of Q3.
Our next question comes from Colin Sebastian from RW Baird.
Just one quick follow-up on the mobile question, if you can talk about, John, maybe how much of the acceleration in Marketplace growth we should credit to the rise in mobile transactions. And then turning to the largest category, vehicles, I wonder if you can address, where you see this business heading directionally over the next couple of quarters. Is there any initiatives in place now to help reaccelerate that business? Or is it really just tied to the broader headwinds in that market?
Colin, what's interesting is we've stopped trying to worry about how much the mobile is incremental versus not for the simple reason that what we see as consumers are using mobile as just another device that when you look at -- what consumer behavior is doing is often they'll use a laptop and an iPad and a mobile device in a purchasing transaction. And so what the mobile device is really doing and the real value is it allows eBay to be present and available to consumers 7 days a week, 24 hours a day, whether they're standing in an offline store or whether they're sitting on their couch at home watching TV or whether they're sitting with their laptop. So we know that people that use our mobile devices, there are 45 million of them now, are 4 times as active as those that don't. And so we know it increases customer engagement. And so we feel like its expanding both the pie that we have to play in as well as deepening our engagement. And we don't think about it as a mobile or online. We think of it almost as a multiplier. Interestingly would be that we're seeing a little bit of a similar thing in motors. I mentioned that this motors app, I'm just stunned by how much early traction it got because motors buyers, at least motors enthusiasts, love browsing our motors inventory. And I'd break motors into 2 parts. Our Auto Parts businesses is absolutely doing fabulously. We've added an enormous amount of inventory in the Parts business and it's got real traction. It's a much better user experience. If you haven't seen it, it allows you to store your cars that you want to filter the parts for. And then the Vehicles business is as a business, to some extent, a business that has uneven performance or uneven demand around the world. We're seeing a little stronger performance in Europe, where we have Mobile, and a strong motor classifieds footprint. We're seeing decent motors transaction performance in the U.K. And in the U.S, it's kind of fair, I would say. And the thing I'll remind you about our Motors businesses is it's a mix of transaction and lead generation. And so we're trying to get to a point where we are basically indifferent between whether it's a transaction or a lead generation. So GMV I think will continue to be modest, GMV growth. We're focusing, though, to just getting in the flow of the vehicles transactions.
John, one last point on the Mobile side, you talked about the buyer adoption and usage of mobile. Is it fair to say as well that given some of the seller tools on the mobile apps that these applications are also increasing the velocity of listings as well?
Yes, and there's 2 parts to that, Colin. One is consumers listings are going up because you can do a listing with your mobile device in a minute. And so we're seeing more long-tail consumer listings. And then the second thing that we're just beginning to see is, and I think the GSI folks are telling us could be a real opportunity, is you could see people in retail stores beginning to lift their liquidation inventory on eBay. And so again that mobile device gives them a tool to lift and shift from a store and allow local store managers even in big chains to be making decisions about having another distribution channel. And so the mobile device is clearly another avenue or channel, if you will, for retailers, big and small.
Our next question comes from Ross Sandler from RBC Capital Markets.
Ross Sandler - RBC Capital Markets, LLC
One quick housekeeping question for Bob and then a follow-up on mobile payments for John. So Bob, was there anything besides the acquisition that you called out that contributed to the margin compression in Marketplaces in the second quarter? Is this a new run rate to expect or was there anything onetime in there? And then on the mobile side, John, as you mentioned and we've seen a lot of interesting technology being developed in the NFC area. My question is who really has control over the mobile wallet in NFC? Is there any risk that operating system developers for smartphones or OEMs can prevent PayPal from becoming the de facto wallet? And is PayPal's strategy here to be a funding source for these wallets or do you need to be the wallet of choice?
If I can add a little more color on Marketplaces margins, as I indicated, they were down to about 150 basis points. The dynamics I mentioned, a slightly lower take rate, and that was offset by productivity. Secondly, a slight mix degradation because the high growth Classifieds and StubHub businesses are lower margin than the core eBay business. But those essentially kind of offset each other, and then the primary change was simply the acquisitions that we did that weighed down on margins.
And Ross, on the mobile payments question and NFC, our perspective is that the people that are really going to drive this at the end of the day are going to be the merchants. And in particular, the merchants, the large-scale merchants who drive 80% of the point-of-sale spend. That's grocery, that's drugs, that's clothing. And while I think there'll be experimentation with NFC, I don't think you're going to see widespread adoption of NFC in the large merchants for quite a while until there are standards. In fact, I was with a large merchant last week who described NFC as not for commerce. Simply because when you're a large merchant and you have 500 stores and 14 checkout lanes per store, you want 0 friction at checkout and point of sale. And they're not going to allow anything that has friction, no proprietary systems. So we're building solutions that work for their internet-enabled devices, their internet-enabled card readers and can handle card or mobile of all types of technologies. And I think it's a long way away before any major merchant accepts anything proprietary. In terms of the wallet, again, our starting point is we have 100 million active wallets in the cloud with each 2 financial instruments. And I don't know if you call that the de facto wallet or not, but I think it is an enormous advantage and starting point as we enter in to what is going to be an emerging point-of-sale environment.
Our next question comes from Spencer Wang from Credit Suisse.
Spencer Wang - Crédit Suisse AG
My first question's for John. Just on the online/offline commerce convergence strategy that you articulated, John, I was wondering if you could just walk us through the business model or the revenue model there. Is this something more of a lead gen type of business that shows up in the commerce line? Or do you monetize it through PayPal or some other mechanism? And then secondly, just for Bob, real quick, could you just talk a little bit about Marketplaces' margin trajectory in the second half just with the incremental marketing?
Spencer, on your first question, the online/offline in monetization, here's how we think about it. We feel very fortunate in that in the highest growth segment of this, which is online, a part that's gaining share and when you add online and mobile, we have proven monetization business or models with proven -- business models with monetization approaches that are gaining traction and share. And that's sort of the foundation of our forecast and that's frankly the only thing we've included in any of the forecasts and outlook we gave in our Investor Day earlier this year. We said we'd become a $15 billion company and that was without any offline business in those forecasts. So we view offline as new incremental opportunity that's still in its early days. Exactly how it will monetize? That, we don't know. Milo, our focus on Milo is getting traction, getting it into the eBay mobile app, getting it into RedLaser, getting it onto eBay and generating consumer engagement with it. Consumers like it. And once we get consumer engagement with it, we can look at how we monetize; be it lead generation or otherwise. PayPal is a little more straightforward that to the extent PayPal and when PayPal gets pulled into the offline world, it will monetize much the same way it does today so it doesn't really need a new monetization model.
Spencer, on the Marketplaces' segment margins in the second half, it will, as John said, slightly higher sales and marketing expense. And it will be higher, but it will be slight. And therefore, the dynamics of Marketplaces' segment margins will go the traditional pattern of first quarter and fourth quarter being highest, Q2 and Q3 being lowest. So I would expect Q3 to likely be marginally lower than Q2 and then it will accelerate in the fourth quarter.
Our next question comes from Mark Mahaney from Citi.
Mark Mahaney - Citigroup Inc
Two questions. The active user growth of 6% year-over-year and I know in the deck you talked about the U.S., U.K. and Australia as contributing to that. Is there any particular, other things you would point to outside of geographies to that growth? Is there new marketing plans that you think were already contributing to that in the June quarter? And then secondly, just in terms of the guidance. You're raising the revenue by $700 million. It doesn't seem like there was anything that you've raised in terms of your back half numbers. The outperformance really seems to have all come from the June quarter. I assume there wasn't anything new in the September quarter that made you more cautious on the business, but I just want to check that.
Mark, on the user growth, it is, frankly, I think just a function of better, improved experience and word-of-mouth that's coming from improved experience. And so there's no particular thing we've done in any of the past previous quarters to try to grow user growth. And as I said, we all begin stepping up ourselves on marketing expense and investment in that, both to around our brand and around come back and try eBay again to win active users. One area I do also think there's going to be an interesting source of new user growth over the next, I don't know if it's the next 1 to 2 quarters, but certainly over the next 12 to 18 months, is the impact mobile can have, both in our existing markets and in new markets. We, as you know, in many emerging markets around the world, more and more consumers are coming online, be it for the first time with a computer or with a smartphone. And with a global platform like eBay has and a strong cross-border capability, we believe there's a great opportunity to have a transaction on eBay, eBay's global platform be the first e-commerce transaction that many people in some of these emerging markets have. So I think that's going to offer -- we're stepping up our focus on those and that will offer a source of new users over the next, again, more on the 12- to 18-month timeframe rather than 1 to 2 quarters.
Mark, on the guidance question, I'll characterize it as follows: first half revenue growth, up of 20%; second half revenue growth, up 30%; raised overall revenue guidance by $700 million, $550 million acquisition, $150 million operations. On the operation side, I would think about roughly $100 million having come from the second quarter if you strip out FX and acquisitions, and roughly $50 million more of operational revenue, stronger Marketplace, stronger PayPal performance coming in the second half of the year. So all in all, just to recap, strong first half growth going up to 30% top line growth in the second half, good operational momentum through the first 6 months and stepping up our guidance in the second half to reflect both that momentum in Q2 outperformance and the acquisitions we did as things striking the portfolio.
Our final question comes from Scott Devitt for Morgan Stanley.
Scott Devitt - Morgan Stanley
A question for Bob. I was wondering if you can share same-store TPV for Merchant Services. And if it's not in the deck, I don't know your willingness to share that metric. And then separately can just update us on the Top 100 retailer penetration, U.S. and Europe for PayPal?
On the first one, it's not in the deck. I think my recollection is that you ask this every quarter, maybe every other one, Scott. I think I give you the same answer. Yes, I would say overall that globally, we looked at e-commerce rates of growth roughly 10% to 12% in the markets that we serve around the world, and Merchant Services TPV up 37%. So if the clients that use PayPal are growing faster than overall rates of growth, we'd like to think PayPal has something to do with that. And we continue to add new clients, small, medium and large into the backlog. In terms of the Top 100 merchants, I think in the U.S, we got 62 out of the top 100; Europe, 35; and in Asia, it's between 15 and 17. I don't remember what. But that's the penetration and we made progress kind of every step of the way, including the progress that we're making on GSI's clients that increasingly are adopting PayPal as the way to pay in the checkout close.
All right. We'll see everyone next quarter.
Ladies and gentlemen, thank you for participating in today's conference. Is concludes our program for today. You may all disconnect and have a wonderful day.
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