eBay Inc. (EBAY) Earnings Call Transcript & Summary

Good morning. We're going to go ahead and get started here. My name is Heath Terry. I co-lead technology, media and telecom research for Goldman Sachs. On behalf of everyone that put together this conference this year, all of the analysts, associates, conference staff, I want to welcome you to the Goldman Sachs Technology and Internet Conference for 2020. Thank you all for being here. Just want to start with a few remarks before we kick it off to our first keynote of the conference. First, I want to encourage you all to download the app, both for the conference as well as the new GS Now app that's available on the App Store. Many of the conference sessions that will be recorded here over the course of the conference will be available on the app as well as a lot of the research that will be published about the conference as well as ahead of the conference. It's available on the App Store, so make sure you take advantage of the opportunity to download that. Please make sure as well to take advantage of the conference staff who are here. If you need anything at all, please check with them. They're happy to help with any of the needs that you have. This is going to be an exciting couple of days for us. We're incredibly happy to have some of the speakers that we have. We have 2 of the CEOs from 2 of the most important cloud vendors out there. We're incredibly happy to have them here. We've got a rock block of regulatory sessions at lunch today with Christine Varney, the Head of Antitrust at Cravath, as well as Alec Phillips, our own Head of Policy in D.C. We've got keynotes from some of the leading technology companies over the course of the next 2 and 3 days that we hope you'll all be able to join us for. Closing out on Thursday with the CEO of Cisco here talking about an incredibly important update on the environment that we've got for enterprise spending. So lots to take in today, and really excited to be able -- over the next 3 days, I'm really excited to be able to start all of that with Scott Schenkel, the CEO of eBay. Scott, happy to have you join us. So Scott, obviously, it has been a couple of really exciting weeks for you, especially last week, and the team at eBay. So one, really appreciate the fact that you could take the time to be here with us. I guess maybe just first, can you kind of update us on your thoughts coming out of last week.

Look, let's maybe take a couple of things straight on. First, there was the rumored offer from ICE. Look, I think it's relatively straightforward. We take our -- the Board and the management, take our responsibility to create long-term shareholder value extremely seriously. I think, actually, it's a core competence of what we've done over the last 5 years. And so from many points of view, it's just as simple as that. We take any offer. We engage with those offers. We look at what makes sense and what doesn't, and then make the best decision for the company. So that's as straightforward as it can be. And then there's the Starboard butter, which also came out at the same time -- roughly the same time that morning. And look, I think that the reality is we engage with all shareholders to talk about their perspectives on everything. And so we've done that with Starboard over the course of the last year. I don't really think there's that much daylight between what we're trying to do. They would like us to go faster. We'd like to go faster. And so we're actively working every second we can to try and implement a lot of the things that we've jointly talked to many of you in the audience about as well as with them.

Great. So to take a bit of a step back and just talk about eBay for a second. Where is eBay -- what is eBay as a company today? Where are you trying to take the company from the seat that you're in now? And for investors who are maybe most familiar with eBay, either as customers, what's the right way to think about what you're trying to build?

Well, look, I mean, with the context that I sit in interim seat, I think what we're all have been trying to do, if you started 2019, just look at the last year as a frame of reference. Last year, we grew revenue 3% for the year. Certainly, right in line with our guidance, actually, but not exactly what we wanted, particularly in the second half of the year, and we'll talk a little bit about that, I'm sure. We raised margins 1 point, took additional cost out of the business to be able to fund a significant set of growth initiatives for the company for 2020, '21 -- second half of '20, particularly, '21 and '22, in the form of payments as well as ads. And so we've actually been able to invest in the company while expanding margins. We've generated north of 20% EPS expansion, north of -- high 20s in the form of free cash flow return increase year-over-year. We've used that to buy back an enormous amount of our shares. Last year, it was about $5 billion worth. So we're returning capital to shareholders. And meanwhile, issued out our first dividend. So I think a reasonably balanced year, and those -- we set those expectations at the beginning of the year. I'd say 2 dynamics that really impacted our business last year: One, at the beginning of the year, we did not expect 30-plus states to roll out Internet sales tax. And we didn't really, even for the early states that had gone, have a good diagnosis of what might happen. And so as we went through the year, what started to build was a very rapid move from state governments to have us collect the tax for our sellers and remit. And keep in mind, this is on small sellers with no nexus, including consumer sellers across the country. And so we didn't anticipate that. It is what it is, but we didn't anticipate that at the beginning of the year, and that's impacted our growth, particularly in GMV in the U.S., over the course of 2019, and it will impact us in 2020. And the second, which we did anticipate and we actually architected the plan that way, was to reduce some of our marketing spend. We had talked about in '17 and '18 that we are pushing the efficient frontier as we turned it then to expand our marketing and try and bring in customer -- new customers that we would then grow. And so as we kind of reach the end of that frontier, we've pivoted back to then trying to spend on those customers and get them to activate more GMV per buyer. And so that's what we're focusing on this year, which obviously then, it's going to negatively impact a bit of the active buyer growth and it's going to impact GMV a little bit. So as we faced into 2020 and we look at what we're trying to do, it's really centered around, simply said, the seller and the buyer experience and a bit of our underlying platform.

Yes. You've been at eBay 13 years now. When you look at who that eBay customer is and how that's evolved over those 13 years, who are they? How have they changed?

Yes. In many respects, it's changed; in others, it hasn't. I think that the ethos of the company is still the enthusiast buyer, right? I mean, if you talk to people and you listen to surveys and you go around and even monitor your own experiences on eBay, it tends to be for the enthusiast and value -- the enthusiast buyer and the value seeker. And they tend to index towards things like collectibles but vintage. Like last year's model that may be new, but not in box, et cetera. It's the spectrum of value that we've talked about. They're not the efficiency buyers, and so that's fine, and I think that's what we have to lean into. And I think those parts of the market, as we really look deep at the market growth and what inventory is growing online, what you do see is it's not just FMCG goods, which tend to be difficult to make money at and not necessarily what eBay is known for, or quite frankly, is good at. So I think we should lean into the vertical categories and the buyers and the inventory that is particularly what people think of us for. And I think there's a market there. I think, historically, there's been a view that, that market isn't large enough or it doesn't grow fast enough. And sure, it might grow less in e-commerce, but it probably goes in line or better than retail. And for our business, with the gross margin dynamics and the flywheel, and it's a great business.

Yes. And what's that look like on the seller side of things? How is that shaping up?

Yes. We've got a massive diversity of sellers out there. And I think that the sweet spot for us is the -- we have all sellers, like we have -- let's just start there. We have brands. We have retailers. We have large sellers. We have consumer sellers and we have SMBs. Real -- a real diversity and a real strength in our SMB base. And I think that's one of the core strengths of the business. And I think one of the things that we've been really working on -- I think we made good progress in '19. We're going to make more progress in '20, is the seller tools that we offer these guys. And it's really about how do we make these sellers, of all sizes, but in particular, that middle group of SMB sellers, how do we make them successful? How can we give them online tools on our platform that are more robust than we've offered historically, to make it easier to manage inventory, easier to grow their business, better tools for conversion. We rolled out an offering -- it's essentially sell your item. You can reach out to the buyers that have either watched or looked at your item and automatically give them an offer. And we've -- in just a few months, we've literally gone from nothing in that to over 1 million transactions that are using these types of tools. And it's how do you bring that to those -- that seller base so they're more successful on eBay? And keep in mind, we're not trying -- and we don't compete with them. We're just trying to make sure we connect them to the buyer base on a global basis, which we do. Don't forget, regardless of the predicted demise of everything, the reality is we're still the #2 marketplace around the world other than China.

Right. And so that gets into a good question. When you look at sort of where you are around the world and that global ecosystem of off-line retail, online retail, where does eBay fit? Strategically, where do you see yourself maintaining that #2 position?

Look, I think we really have to start to talk about the business in terms of what's on the platform, because so much of what we talk about is -- even the tools I was just talking about, our tools that are on our platform for the major countries to include the U.S. and the U.K. and Germany and Australia and France, Italy, Spain and our global buying hub and those things that are very important to us, and that's what we term kind of on-platform. And I think increasingly, we got to talk about what we're doing on-platform so that's clear, because that's the how do you maintain and be competitive. Recognizing that we may not, and probably in all -- in some countries, won't lean into FMCG goods. We won't try and catch e-commerce rates of growth to compete in FMCG goods. It's not where people think about us. There's other places around the world that we will. And so I think we just have to balance that. And on the other side, there's off-platform businesses that we have like Korea, Japan, Turkey, that are wonderful businesses in their own right, but they run very independent and very different. The Turkey -- sorry, our Korean business is a wonderful business. It's a top 3 size. It's a very retail-like experience. It sells an enormous amount of first-party inventory, so it comes much more like Amazon in that regard. It's a lot more efficiency buyer. It's got a wonderful loyalty program we call Smile. And has a combination of Smile delivery, Smile pay and Smile services. And it's very different. But I think we often talk about the tools that we're building for sellers, the things that we're doing for buyers and the underlying structured data and kind of platform of the company. And when we talk about that, that's our on-platform businesses in the major markets I just discussed.

Yes. You've touched on the data side of things, eBay has made a lot of investments in technology over the last few years, particularly around search and data and trying to improve conversion. When you look at where the technology platform is and benchmark it versus where you need it to be, where is that gap now? And where does your priority list look?

Yes. I think we have to look at it, again, going back to how are we doing for the sellers, how are we doing for the buyers and how is the platform? To your question on platform, we've made enormous progress on speed, stability, security, things like that, and I think that, that team has done a wonderful job at that. The use of data and the collection of data, we've pushed on and had stops and starts along the way. I think we've found the balance now with our new product officer, that's working on what can we get from sellers in a way that's effective for our sellers with the seller tools and the new listing flows and that type of thing, to be able to get that information and utilize that in the buyer experience. And so there's the balance there. And so we talked a lot about catalog a couple of years ago. And I think we have a lot of that information. But really, we had to get to a point that we are talking about things that we could use within that catalog with our sellers and do it in a way where it's more seller-friendly. And I think we've learned a lot in going through that process. I think what you'll see in '20 and beyond is the utilization of that data at a foundational level from that platform to improve both seller experience and the buyer experience. I mean if you just look at the seller experience itself, we started listing -- we started offering, again, on-platform, Promoted Listings. And at this point now, roughly 1/3 of our listings are promoted. Now that would not be effective or as effective as it is without a base level of cataloged information or structured data information. And so as that continues to improve our capability to ensure that what the sellers are offering in a Promoted Listing is actually what they say it is, in that when we show it to a buyer we've got a pretty good certainty of what type of conversion it's going to get. And so you created that flywheel. And so it's about building that foundation, leveraging it in seller flows and then utilizing it in the buyer experience as well.

So one of the major investments that you're making from a technology standpoint's into payments. Where are you in that process now? And maybe for people who are a little bit less familiar with the specifics of your decision, what was behind the decision-making that went into you deciding to launch your own payments?

Yes. I mean, it's actually -- it goes back a few years. So I don't know how much time we have. But...

25 minutes.

No. But look, I think that the bottom line is we want to be able to control our user experience, right? I mean, every other major marketplace in the world has control of their own payments process, right? You don't have to -- you didn't have to click out for the vast majority of your transactions, if you're a buyer, to another company and/or another experience, even when it was part of eBay. And so it was a relatively straightforward win-win for -- we think, for sellers and for buyers, and ultimately, for our shareholders. And so in the greater scheme of things, it was a relatively straightforward decision of why you would do it. Because for sellers, ultimately, you can offer a lower price. For sellers, you can offer the capability to flow your transaction all the way through and see where your payment status is. For buyers, it's a more clean user experience. You have more options to pay. And so it's -- it will be a better buyer experience. And where are we in that journey now? Flash forward, 1.5 years, 2 years, 2.5 years from that decision, we have a governor on our progress. And if we didn't have a governor on that progress, we'd be further along than we are today. So we've launched in 2 countries. In the U.S., we're maxed out for -- until July. And we've launched in our scaling in Germany. And again, this isn't -- if you really step back, it's not that complicated. You're just going to be able to pay on eBay when you come and buy or sell something. It's not that hard, right? But that dynamic means that then, we'll offer sellers within our take rate the utilization of payments on our platform. There'll be no other way to do it. And for buyers, with Adyen as our partner right now, there's going to be over 200 different payment methods that are going to be available to buyers all over the world. And that's -- we think that's a benefit as well. So that'll scale radically. We'll start launching additional countries and additional -- letting more sellers onto the platform, both in the U.S. and Germany, scaling to more countries as we head into the second half of this year. And then we kind of expect to be fully scaled kind of second half of '22, '23 as we get into that. But I think when we hit 2022, we talked about a number of about $2 billion of incremental revenue and $0.5 billion of incremental operating profit, and we're still on track to that.

And so you've anchored people around those financial targets. How do you think about the secondary impact of payments, whether it's higher conversion rates, whether it's customer satisfaction, sort of the ancillary benefits. They're probably the primary reason you actually went down this payments path in the first place.

Yes, that's super hard to quantify, right? I mean, just the return on the program itself, it's cost us 1 point of margin last year, 1 point of margin this year. It's expensive investment to be able to scale a payments platform on your own business and unwind the existing PayPal agreements and kind of integration over time. So we didn't kind of lay out a multiyear plan of what that could be. But I think, certainly, as we scale in the U.S. and Germany, we'll keep a close eye on that. And look, along the way, we'll be introducing each year and each kind of quarter along the way, incremental services within that. And there will be things like fee netting and other things that we think will improve the seller experience and the buyer experience, and I would hope along the way, that would influence better buying behavior and more engaged sellers.

Yes. When you look at the tools that you're building around customer conversion and helping to sort of drive for sellers. Obviously, you talked about Promoted Listings. That's been a big one. What else is on your priority list in terms of things that can actually help drive more GMV across the platform?

Yes. I mean, our plans this year for sellers, in particular, are to continue to make it easier for them to list. And it's -- and integrate it with their tools and integrate it with our tools and making sure that they can see demand signals and have those demand signals be right and so that they can go in, in their category or other categories as a seller and look at what's selling. What are buyers looking for? What are search terms? Can they automatically start to go source that inventory and list that on our site? Can we give them price guidance and make the price guidance that we do give better? Can we have the listing flow as it relates to populating facts of data and aspects related to that product, have that more accurate? And then we could -- can we give them more tools in the selling fold? Like I was saying with sell your item or other constructs around pricing. Today, you can go in even as a consumer seller and automatically reduce your price over time. Can we give them better capabilities for shipping and offer multiple places to list your -- where your inventory is, so that way, the estimated delivery date is better? So there's a lot of things that we're working on over the next 12 to 18 months to really make that selling flow much better. And that's for consumer sellers, all the way to large brands.

So a lot of the U.S.-focused investors are probably less familiar with your international classifieds assets. It's just not a model we have as much of here. So putting the transactional piece of it aside, can you maybe walk people through sort of what those assets represent and sort of where you found value in those for eBay, having built those up over the years?