eBay Inc. (EBAY) Earnings Call Transcript & Summary

Good morning, everyone. Thanks for joining us. My name is Lauren Schenk. I'm Morgan Stanley's small and mid-cap interim analyst, and I'm excited to be joined this morning by Jamie Iannone, eBay's CEO; and Steve Priest, eBay's CFO. Thank you both so much for joining us.

Thanks for having us.

One quick housekeeping item on my end. Please note that all important disclosures, including personal holding disclosures and Morgan Stanley's disclosures appear on the Morgan Stanley public website at morganstanley.com/researchdisclosures or at the registration desk. All right. So with that out of the way, Jamie, it's been about 3 years since you joined eBay, and it's been a very tumultuous 3 years, I guess, we could say. Can you just maybe take a step back and talk about eBay and where you see it sitting in the global and U.S. e-commerce landscape and how that's evolving?

Yes. Thanks, Lauren. So if you look at the investments that we've made and our focus on non-new and season against our vertical competitors, our strategy is really working. So let me start with focused categories. On the focused category side, we're growing 7 points faster in focused categories than nonfocused categories. That's a 2-point increase sequentially quarter-on-quarter. The investments that we're making in a game-changing level of trust, whether that be authentication or fitment or 2-year warranties are really paying off from that perspective. And we're changing customer satisfaction, which is really significant. And so performing there great on a focus standpoint. The same thing is true when you look at the investments on a horizontal standpoint, our site-wide investments. Let me start with payments. Payments continues to innovate quarter after quarter. So in Q3, we rolled out faster payments. In Q4, we rolled out split payments to help us with high ASP. And if you look at our payments business, we've now kind of completely migrated all of the transaction volume over, but we're on track to do another $300 million in payments volume through payments and making payments a whole lot easier. If you look at advertising, advertising grew 33% faster than transaction volume through innovations and products, through new product launches, et cetera. So that's working. And I could talk about a number of other horizontal investments that we're making across the board. So across the vertical landscape, across horizontal, the investments that we're making are paying off. The strategy is working, and we're seeing that improvement over the last couple of years.

Okay. Great. Maybe let's touch a little bit on the macro backdrop. What are you seeing in the health of the consumer, maybe in the fourth quarter and into the first quarter and how it's changed and maybe any geographical differences as well?

Yes. Thank you, Lauren, and good morning, everyone. Great to be here. Thanks for having us. Obviously, our business, like everybody else is really impacted by these macro headwinds that we're driving in terms of higher inflation, higher interest rates. Obviously, the discretionary spend for the consumer is getting impacted. I was really pleased with our levels of execution in the fourth quarter. We ended up above the high end of our guide due to some of the areas that Jamie talked about in terms of focused category execution, particularly in parts and accessories, particularly in refurb, where we saw our highest ever week during Cyber Week, which really reflects. But obviously, even in a pretty resilient business like our own, we are disproportionately impacted by the macro environment. And those headwinds are continuing through the first quarter. We laid out a comprehensive guide on our earnings call a couple of weeks ago. And we do expect those headwinds to continue as we navigate our way through 2023, but really pleased with the levels of execution that the teams are driving in our business for driving longer-term sustainable growth.

Okay. At your Analyst Day last March, you laid out the path of how to drive sustainable GMV growth and margin expansion. Obviously, it's been a tough macro backdrop. But what do we need to see to get both of those things going in the right direction?

I mean from my perspective, the strategy is clearly working. As Jamie mentioned, we're seeing focused category growth, 7 points higher than the underlying platform. Payments and ads are really producing the fuel to take our marketplace forward. Those long-term targets, those comprehensive targets we laid out at our investor event remain intact. The timing of when we execute those specifically will be a function of the duration or severity of the macro environment that we continue to navigate. But the underlying business is going from strength to strength whether on a category by category, market-by-market basis. So really pleased with the direction that the business is going in.

Okay. Jamie, as you mentioned focus categories have been a key pillar of the growth strategy, and I think they're roughly 25% of GMV with a goal of 50% over time. Can you just refresh investors maybe a little bit more on the strategy there and where there's incremental opportunity on new focus categories that you haven't yet touched?

Yes. So for folks that are new to eBay, essentially eBay for a long time have been a one-size-fits-all platform. And starting with the tech-led reimagination 3 years ago, we started investing category by category to really build what's the experience we need for that category, how do we drive customer leading CSAT and how do we drive marketing to really bring enthusiast buyers into that category. And that strategy has been working phenomenally well. We've been increasing CSAT by double digits in the focus categories that we launched, changing our GMV trajectory pretty significantly and having the intended impact that we want to see. So when you look at our penetration, we're at about 25% across the business, 28% if you look at our big 3 markets, which is where our focus is. And the pace with which we continue to drive coverage will be dependent on the macro, but we feel good we'll get to 50%. And that's our aspiration that we talked about. Because when you look at EBIT, we have 5 categories that are over $10 billion, so big opportunity. And what we've seen is that as we rolled out a category in one market and expanded it to internationally, we've seen the same type of impact with CSAT and GMV. So we feel great that we have a winning strategy. We're executing it, and we're seeing the results that we want to see.

Great. You've made vertical-specific investments to help reaccelerate growth in some of those focus categories like authentication, and buyer protection. How do you think about balancing vertical-specific investments, marketing and take rate and sort of tangent to accelerate growth?

Yes. So when you look at the vertical specific investments, great ROI for investors and for the company from those. So as we go category by category, we see that change in trajectory. From a marketing perspective, we've changed our marketing strategy to be much more full funnel. One of the great benefits of eBay is that 90% of our traffic is either organic or free. So we only pay for 10% of our traffic. When we think about our competitive positioning versus, say, a pure-play vertical-specific vendor, we can monetize that so much better and have a much better CAC because let's take the sneakers category. If I acquire -- if we acquire a sneakers enthusiast, they'll spend $450 in sneakers, but they'll spend $1,900 in other categories on the site. If we acquire a handbag enthusiast, they'll spend $2,500 in handbags, but $5,000 elsewhere. So that's what I would say from a marketing perspective. To your question on take rate, we constantly look at take rate as a way to say, what's an opportunity to go lean in or to grab more take rate. So last year, we were able to remonetize our sneakers category and continue the great growth that we've seen. We were able to do the same type of thing with our watches and increase the take rate. You may have seen just a week or 2 ago, we announced that we're actually going to lower our fees in our C2C business in Germany. And that's because we saw an opportunity in that specific market to grow our C2C business to be on par with, say, our U.K. business, which has a stronger C2C. Our Germany is less than 20%. And so through take rate changes there, we're able to actually lean into a category in a specific market because we've been leaning into Germany with things like putting Klarna, a specific payment method, launching tire installation first in Germany. And Steve, maybe you want to talk about more broadly how we think about take rate and those changes.

Yes. I mean that's the beauty Jamie said about us, the massive size and the scale and the global footprint that eBay has. So if I look back to the fourth quarter, our overall take rate was 13.8%. So pretty significant take rate. These investments that we're making in Germany is around 10 basis points. So it gives you a real sense of our ability to look at monetization through ads and payments, and other opportunities as we look at it on a global scale. And even with these investments we're making in Germany, we will continue to see and expect take rate expansion as we navigate our way through 2023.

Great. When you look at some of your earliest focused categories like sneakers, for example, how durable has growth been in those categories?

Yes, very durable. So if I take sneakers, which is part of our luxury investment, in our luxury categories, we've been growing at double digit per year over the last couple of years since Q4 of '19. So really sustainable growth. If I look at trading cards, we had a massive impact from the stimulus, but that business is still twice as big as it was pre pandemic. If I look at our refurbished business, refurbish actually had its largest week during Cyber Week in Q4. If I look at P&A, it continues to be the largest contributor to that outperformance that Steve talked about of focused categories to nonfocused and the largest category that we've taken on kind of returning to market levels of growth. So the investments that we're making are seeing great ROI. We're solving problems differently in every category. So the way we get game-changing level of trust in luxury was through authentication. But in refurbished, we do that through 30-day hassle-free returns, eBay money back guarantee, a 2-year warranty. And we just launched this quarter in parts and accessories guaranteed fitment. So we've been making investments over the last couple of quarters and making sure that what's key in that category is solving fitment. And we've done a lot of the technological work so much so that we can put this game-changing level of assurance there for the customer of guaranteed fit.

Great. Maybe let's pivot to active buyers. How do you think about managing the active buyer or do you? And is that -- and when would you expect buyers, particularly enthusiast buyers to return to growth?

Yes. So we're right where I expect us to be. Based on the macro, we declined 1 million this quarter, which was kind of right where we thought we would be. We're through a lot of the lapping of COVID on the active buyer count. But what we're really focused on is the enthusiast buyer. So enthusiast buyers on eBay shop more than 6 times a year, spend over $800 and they drive 70% of the GMV on the platform. So when you look at that number, even despite in this macro environment, that only declined 0.5 million from last quarter, which was the lowest decline. And when it comes down, it actually moves into mid-value, less than 1% churn. So most of those move into our mid-value just based on the macro environment, which is actually a very heavy level of spend. If you think about our enthusiast buyers, these are people that spend over $3,000 a year. They shop 30 times on the year, 90% of them shop in a focused category. So it's absolutely where we should be focused from a buyer perspective. And what we've done is, we've changed our marketing approach to really go after those enthusiast buyers. So if you see us, for example, in parts and accessories, in U.K., we're doing a partnership with Pimp My Ride. In the U.S., we're doing the New York Parts Auto show. We're doing the actual personalities from the Car Talk Show because we're working to bring those enthusiasts directly in. And one of the unique benefits of eBay are some of the stats that I mentioned before, which is when we bring them in, we're able to get them shopping across categories. And so that makes our marketing doubly effective. So when we're marketing to that P&A enthusiast, the majority of them go on and buy a whole lot of other stuff on the site that I talked about. In fact, they buy more outside of parts than they buy inside of parts. So even though we've changed our marketing approach to be vertical specific, which is having a great ROI, it's having a halo effect across the whole business.

Great. You guided to roughly 2% non-GAAP expense growth for the full year. Can you just provide a little bit of color on what's driving that expense growth and what you're doing on the efficiency side to protect margins?

Yes, absolutely. And the way I would think about this, Lauren, is we lean very heavily into the short term to drive continued operational efficiencies while we continue to invest for the future and drive towards those long-term trajectories that we laid out. We provided quite a bit of color, obviously, for the first quarter in terms of our guide, but obviously, because of the uncertain macro environment, we got some directional color for the full year. In terms of the 2 points, that's really a reflection of continued investment in our business to drive that longer-term growth. But there's a nuance also. We've lent into some M&A activity over the last year or so. And in addition, we've got a change in our international shipping program. So eBay traditionally was the agent and now we're the principal with these shippers, which means historically, we'd recognize revenue net but now we recognize it growth from a growth standpoint and then the additional incremental expense associated with it. So of the 2% increase in cost, about 120 basis points of that is really associated with the M&A and the EAS program. And obviously, the structural cost program that we launched and talked about at our investor event, which is broadly $300 million over a 3-year window, continue to be on track with the engagement with our colleagues across the business to really drive those cost efficiencies as we go forward.

Great. Maybe just one other one on guidance. You gave some context about how to think about '23 seasonality. And based on our investor conversations in the past couple of weeks, there's been a lot of different interpretations and conclusions given -- or gotten to from that context, maybe what did you mean by the seasonality commentary?

We want to make sure that we plan for our business effectively. And it shouldn't be a surprise that us, along with others, are expecting this macro headwinds to continue as we navigate through 2023. We gave very comprehensive guidance for the first quarter but wanted to give the investor community some alignment and some color about how we're planning our business as we go through 2023. So as a starting point in terms of our spot GMV for the first quarter, we wanted to sort of share how we thought the seasonality would play out as we go through the year in this uncertain environment. So that's really a reflection, Lauren, of our planning assumptions where we continue to be conservative and thoughtful about how we go forward with that. So that was really why we gave the seasonality guide out, so the investors could like to think about that from a modeling perspective and give us a sense about how we're thinking about our business as we navigate the headwinds. What I do want to emphasize is that this is not a reflection of our long-term aspiration or the long-term health of our business. It's really a function again of the expectations around the duration and the severity of the macro environment that we continue to navigate.

Okay. Capital returns have been a key shareholder focus of the story. Your target is to return 125% of free cash flow to shareholders from '22 to '24, given last year, you were well above that 170% or so. How should we think about the cadence of returns this year and next year?

Yes, we've been really good stewards of capital. We have an incredibly robust financial model, best-in-class margins, a fortress balance sheet, which is a real asset for us as we navigate this environment and continues to enable us to invest. As Jamie and I always talk about, our first priority is to invest in the business because that's where we see the best returns for shareholders, be it through our build by partner framework. But at the same time, we've been incredibly not only good stewards, but we've driven significant capital returns. As Lauren, as you said, during 2022, we returned $3.6 billion to shareholders through buybacks and dividends, which is around 170% of free cash flow. We remain committed to the Investor Day goal that we laid out, between '22 and '24, 125%. The commentary that we used on the call was to say that our first priority will be to really offset dilution, to give that from a sort of quarter-to-quarter basis. And then beyond that, we'll continue to look at being opportunistic as we go forward. So a very disciplined approach as we've gone through the last couple of years. And that will continue as we commit to the 125% goal through the end of 2024.

EBay has done a variety of acquisitions and partnerships in the past 12 months. How are you thinking about M&A in this market backdrop, particularly as we've seen some valuation adjustments?

Yes. As Steve said, we have the privilege, I think, of being -- have a very rich balance sheet and a great financial model. So we've used this build by partner framework to say what's the best speed, ability to really be successful with our vision and what's the best return for the company and for shareholders. And nothing's really changed. We continue to use that framework. So if you look at the acquisitions that we did in '22, they were really to further the strategic mission that we're on. So take myFitment. I just talked about having a game-changing level of fitment, meaning a guarantee in parts and accessories, myFitment is one of the best AI technologies out there to really help drive fitment in this category. And you think about the scale of our P&A business is 500 million listings at any given time. So it's massive. So that makes a lot of sense. If you look at the acquisition of TCGplayer in the collectible card game, we've talked about what's happening in collectibles. Collectibles is one of our over $10 billion businesses. TCGplayer has great access to thousands of hobby shops, and we've already started integrating their platform and our platform, making easier right from a hobby shop point-of-sale system to list both on TCGplayer and on eBay. So you can expect us to continue to be disciplined but looking against this build by partner framework to look at M&A opportunities, just like we had done in 2022 to help accelerate our strategy.

Okay. Great. Steve, you mentioned it briefly in your earlier comments about -- I just wanted to make sure that investors sort of understand the P&L impact of the international shipping programs. You talked about the cost impact. But maybe just remind us how it should impact revenue take rate and gross margin as well?

So just to sort of take a step back, international shipping program at eBay gives us an opportunity to take our 1.7 billion listings and make them more applicable to cross-border trade. About 20% of our overall GMV comes through cross-border, but the access to that inventory has been somewhat limited because of like sellers looking at the opportunities to continue to drive trust. So we've lent into that at eBay. I'm really excited about how EIS, eBay International Shipping is going to open the door to more sellers to sort of drive their sales across the planet, which is right really, really important. So as I mentioned in the previous question, historically, we used to be an agent, i.e., the revenue will be offset by the costs associated with running that. With us being the principal, we both recognize the revenue and we recognize the cost. And so this is a great opportunity for us to drive additional net income, which is obviously great for our business and great for our shareholders. But in the short term, because of the dynamic of revenue and cost, it will put some pressure on margins, which I talked about earlier. So expect some sort of sequential as this continues to grow, 30 basis points of margin challenge in the first quarter, moving to about 120 points as we go forward through the year. So that directionally gives investors a bit of a sense how to think about the margin trajectory associated with it. But a great opportunity for me, but a great opportunity for our sellers and ultimately, a great opportunity for our investors as we grow net income through this program.

And just to be clear, even though we do 20% of our business in cross-border, 1 in 5 transactions, less than half of our inventory is currently available to be exportable. So the whole point of eBay International Shipping is to unlock the other 800 million listings to cross-border trade.

Okay. Maybe I'll pause and see if there's any questions in the audience. All right. I'll keep going. Now that managed payments have been fully rolled out for over a year, what are the key steps to reach the Investor Day target of $300 million in incremental revenue?

Yes, we're right on track to hit that target. So if you look at it, we've been rolling out new financial services products quarter after quarter. So if I talk about the one we launched in Q3, which is faster payouts, great for our sellers, they get their money faster, but we charge a fee associated with that. Earlier in the year, we launched Buyer FX, Buyer Foreign Exchange. And so that's a double win for the platform. So on the platform, that means that 20% of cross-border trade that Steve talked about, I now have multiple currency payout options, whether in my local currency or the currency of the seller and obviously, eBay profits from products like that. So we're right on track with what we outlined at Investor Day from that perspective. I think the bigger point here is that it's driving the financial return and great for investors but it's also great for the customer because these are unlocking new opportunities for the customer and really taking friction out of the commerce meets payment elements of eBay, and that's what excites us, both is the win-win-win that we get from that.

Okay. Great. Maybe shifting to eBay Live, which is your new live streaming service, how are you thinking about the market opportunity for that? And maybe where is that in the launch process?

Yes. So if you look across eBay, there are so many interesting elements where live shopping can be compelling. You think about our collectibles category with things like card games, et cetera. You think about some of the fashion categories. We just hosted one in sneakers 2 weeks ago. And when you dial into these live shopping, live shopping, I'd say, is not where it is in Asia, in some of our other markets, but it's starting to get traction. And so we're kind of leaning into that traction with some of the pilots that we're doing. What we see is great engagement when we have those events. I log into the average one, and there's tens of thousands of people engaged in a live shopping, about 1/4 of them actually engage with the product in some way. In our early pilots, we saw people stay on for like 15 minutes. So think about that as just eBay continuing to innovate as commerce changes in our major markets, continuing to follow where the customer goes, especially the Gen Z customer.

Okay. Maybe I'll end on one that I feel like we're going to hear a lot about over the next 4 days. And it's a bit of a longer-term question, but how do you think recent advancements in AI and large language models could impact eBay and what's your willingness to invest behind some of these new technologies?

Yes. Some of my favorite days are the days I meet with our AI teams because they are just working on some amazing stuff. So AI isn't new for eBay. When you think about the scale of eBay, we use AI in almost everything and machine learning in almost everything that we do on the platform. So take, for example, our advertising products. So when you look at advertising on eBay, we have over 2 million sellers and over 700 million listings. Well, to drive that amount of complexity, especially against a listings-based platform, you need very advanced AI to figure out the relevancy, how to move people across categories, how to get them to the right next product. So that's a huge emphasis for us for AI. When you think about the search challenges we have, last quarter, I talked about $0.5 billion in GMV through using AI in a different way in search and structured data to really help us present better results to customers. So we use it a lot there. When you think about our payments technology, right, we're processing over $75 billion of payments in a year. So every single day, we're looking at when do we pay out that seller, when do we accept that payment. We use very advanced AI capabilities there. Last quarter, we just used AI to figure out shipping times with more accuracy and we were able to take 1.5 days off of shipping times on the platform and about 2 days off for an authenticated item. So when you think about what that can do to conversion on the platform, when you can use it in these capabilities, -- the reason I say that those are most exciting meetings is that nobody has the level of data that we have against that AI capability. So just take images. So every day, we have 1.7 billion images on the -- or sorry, listings on the platform. So we were able to train our image technology on over 10 billion images on the site and use that to be able to do things like image search. So we just rolled out a brand-new image search on the platform where I could hold up anything here and find it on eBay or if I want to see how much I could get for selling something around the house, just hold my phone up and figure it out. And that's an example of the massive wealth of data on the platform that we have and how we can use AI in different places. So I'm excited to see what we'll continue to do with it. But I would tell you that the AI team really works across the whole company, advertising, search, selling, et cetera, to really unlock these new capabilities for us. And it's pretty exciting with the volume of information that they get to canvas.

Yes. Maybe Steve, obviously, it sounds like there's a base level investment already. But I guess is there a willingness to invest more here if needed?

Absolutely. As I said earlier, the strength of our balance sheet, the resilience of our financial model enables us to continue to invest. And to Jamie's point, the scale of opportunity because of the amount of listings that we have on the platform, we will continue to invest in the business because the ROI is really, really powerful for us at eBay. And so we'll continue to get the balance right, as I mentioned earlier, between driving those operational efficiencies in the short term. but making sure we put the right investments in place to drive long-term sustainable growth for our business.

Great. I think we will leave it there. Thank you all so much for your time and thank you for coming.

Thank you.

Thank you, everyone.