eBay Inc. (EBAY) Earnings Call Transcript & Summary

Thanks for coming, guys. Ross Sandler, I run the U.S. Internet team here at Barclays. We're super excited to have eBay back in the flesh this time for 2023. So, Steve, thank you for coming.

Thank you, Ross. Great to be here this morning.

Good to see you all. I thought we would start maybe with some current events. This is your first appearance since the Adevinta news broke. So maybe you could just walk through the overall structure of what's happening here. Our understanding is you get $2.2 billion in-house once the deal closes, there's another $1 billion of potential sales that could happen thereafter with private equity, and then there's tax implications. So, could you just kind of flush out what maybe net proceeds are going to look like at closing and then thereafter and what the plan is with those proceeds?

Yes. Thank you, Ross. We were pleased to announce the deal a couple of weeks ago, which we believe is a great opportunity to continue to drive good returns for our shareholders here at eBay. We will be -- based on the deal that has been inked, half our stake will be sold for cash, you're right, at $2.2 billion. That would leave a remaining 20% shareholding in Adevinta for eBay. Obviously, this is subject to regulatory approval and subject to close and approval by the remaining shareholders. We did structure in a way that existing shareholders could continue to have shares in the private company if they wanted to. Specifically on a tax basis, the cost basis was pretty low. And in terms of cash taxes associated with the transaction, assuming it gets closed around second quarter of next year, we would expect that to be at the prevailing corporate rate of tax. So that's really where we are at the moment. But really pleased to have the deal inked. And again, we think it's a great move for our shareholders here at eBay.

And post that, you've committed to, I think, through '24, 125% of free cash flow in the form of buyback and dividend, et cetera. So is that still kind of the plan, this will be a big injection? Any updated thoughts on that?

Yes. We've been very thoughtful, balanced and disciplined about our approach to capital allocation. You've seen us do that. We've monetized significant stakes in eBay over the last few years and returned a significant amount of capital back to shareholders. We were ahead at this point in time from the commitments that we sort of made as we sort of went through the 125% through to the shareholder base and that we committed to, the 125% between '22 and 2024. We remain on track and really pleased with the levels of balance we've had between investing in the business and those healthy returns that we give to shareholders really is a function of the strength of the balance sheet and the strength the model that we have, the financial model that we have at eBay.

The other big thing in recent events, I think noticeable shift, at least that we saw, most of the investor community saw was the change in tone on the last quarter around future margin trajectory. So can you just like level set we've invested now for a couple of years, outlook we'll get to in terms of macro outlook, but you have much more confidence that you've turned the corner and you're going to have operating margin increase going forward. So can you walk us through like where we are in the investment cycle and what gives you that confidence going forward?

Yes. We pivoted the strategy eBay about 3 years ago to really focus on non-new in season where we saw the opportunities. We also saw a great opportunity to continue to invest in focused categories. The business is going from strength to strength. We're really pleased with the momentum that we continue to see with focused categories. We're really pleased with the continued momentum that we see in the underlying business based on the horizontal investments that we've made. But we had to lean in in terms of product development because we had seen a significant underinvestment for a number of years. And it's really about getting the balance between driving top line growth and driving margins at eBay. The investments that we've made, not only in 2023, but the last couple of years and getting rid of a lot of the tech debt that we had in the business, investing in experiences that customers are looking for when they come to eBay, gives us the ability to scale and leverage those investments that we've made over recent years as we get into 2024 and beyond. I do want to emphasize we will continue to drive operational efficiencies to continue to drive capacity for investment. It's important that we continue to invest in the business. But as you look at us and we think about our ability to drive short-term operating efficiencies really embrace AI and look at the opportunities that provides for us to drive operational efficiency. We are confident that as we get into 2024, we will see expenses grow at a slower rate than revenue next year.

Another one on strategy. A couple of quarters ago, you guys laid out kind of 3 core pillars that you're investing against to reinvent and deepen the shopper experience. So how is that tracking relative to kind of your internal goals? And when do we see that being fully implemented?

Yes. I would describe the strategy as an evolution from where we are. There's no significant pivot. It's really building on the foundations that we've built over the last few years. I think of it as you said, Ross, in terms of 3 elements. The first one is around relevance. As you think about eBay, over $70 billion of GMV, over 190 countries serving 132 million customers. The size and scale of what we have, it's enabled us to really think about what is relevant to those enthusiast customers in particular that come to eBay, whether that's in luxury items where we're providing things like authentication, whether it's about the mix and balance of the items that we have on the platform, if there's a car enthusiast that's coming to make sure that the part fits their vehicle. And so, it's really making sure that those experiences are relevant when the customer comes for. The second thing is about the scalability of the platform. We have lent in and invested in payments, which has offered a number of financial services to buyers and so to think about Buyer FX, which really helps us facilitate trade across borders. Think about eBay International Shipping. We now have over 400 million listings from U.S. sellers that can be now seen over 190 countries across the globe. And really having that scale, again, continues to drive the overall health of the platform. And I've mentioned about some of the areas that we've lent into like authentication, which gives those scalable solutions, not only for watches and handbags, but for trading cards and fine jewelry that we've launched relatively recently and sort of gives us that. And then the third pillar is really around sort of magical experiences for our customers. We've talked a lot about the magical listing flow. How do we take friction out of that listing experience for customers? And we've gone -- we've used generative AI to populate descriptions for customers. And in [ beta now ] with a number of large sellers, we are now using image-based -- using generative AI around the images that we have that will enable us to pre-populate the attributes of those products and make it -- take it from minutes to seconds for customers to list their products. And we're really excited about what we're seeing. And so, the strategy is, again, is really building on the foundational elements that we've put in place over the last 3 years and really ensure that it sets eBay up well for the future and sort of benefits from the investments that we've made over the last few years.

And you mentioned your scale. You guys have huge scale. You have lots of visibility across categories. And here we are sitting in early December. So -- and I think a lot of folks in the audience are curious to what you're seeing around macro. And you talked about on the conference call a couple of weeks ago, the quarter started off slow. We've now subsequently seen pretty good GMV trends from the broader industry, I would say, looking at data points after the Turkey 5, as we call it. So how would you level set, I guess, the slow start to where we are today? And I think this happened last year where we kind of got off to a slow start and then the fourth quarter ended up doing quite a bit better than you thought. So yes, how do we reconcile those data points?

Yes. As I stand back, the first thing I would say and remind the investor community is roughly half of our business is outside of the U.S. And so, I think we're sitting here in the United States. We think a lot about what's happening in commerce in the U.S. That's about half of eBay's business. And so, the general macro environment that we've talked about is not just a U.S. phenomenon, but obviously, parts of Europe, the economic contraction has a bit of a drag on the overall business. The second thing I would say is that, for us at eBay, we have less of a peaky overall holiday period. It's more spread over the quarter. And so, we are still in that cycle. So it will be a little bit premature for me to talk about the overall holiday cycle in terms of where that will end up as we go through the quarter. The third thing is, I'd say is like when we think about eBay, we're not in the space of sort of highly discounted new in-season type products. We pivoted away from some of that heavy, heavy discounting as a retailer and having a sort of really high peak during the holiday season. We're now more focused on this non-new in-season categories that we go forward. So, again, less of an absolute peak for us in the U.S. around Cyber 5, but obviously, it's an important part of the architecture. So we'll see how the quarter continues to develop as we go through that, both in the U.S. and on an international level.

The other thing that's been a big kind of evolution in the e-commerce space this year, you mentioned discounting. Is the kind of surge that we've seen from some of these new Chinese outbound e-commerce players, Temu and Shein, in particular? You guys actually have a business that participates in that channel to some degree. But how would you view the impact from them, both on potential market share, marketing cost inflation for you guys? Just what's your thoughts on the big picture impact?

Yes. As far as eBay is concerned, we haven't seen a material impact on our business. I mentioned earlier, we're a non-new in-season player. We generally lean into sort of refurb. We've walked away from a lot of the low ASP items over recent years. So we haven't sort of seen a discernible impact on our overall business. The other thing I would say on a traffic standpoint, the vast, vast majority of our traffic is organic. The power and the strength of the eBay brand with over 1.9 billion listings, 132 million customers. The vast, vast majority of that traffic is organic. And whether it's through that organic traffic or through paid search, et cetera, we haven't seen any discernible impacts. The other thing I would say is the breadth and scale of inventory and the categories that we have at eBay gives us a sort of a very wide and significant footprint. And so, we're pretty comfortable with where we are. And we're used to competition coming and going over our 28-year history, and this will be no different. But we haven't seen any discernible impact of those competitors at this point.

And if we shift to the focus category part of your story, if we look at a category like parts and accessories, I mean, you guys have a strangle hold. It's a great category. It's growing faster than the company average. We all understand how that's been a great area for you guys. If you look at the other ones, though, do you feel like your position in those respective industries is as strong as P&A? What's your view on that?

I've been really pleased with the execution of the teams on focus categories. As I look at all of the focus categories that we're lending so far, we talked at the last earnings call us about, in aggregate, focus categories year-to-date growing about 4% year-over-year. And that's in the sort of TAM growing in low-single digits. So it's very clear to me that the strategy is working in the categories that we've lent into. It's not just about P&A. If I think about refurb, eBay is a pioneer of e-commerce and customers across our markets love to look for pre-loved goods. We have incredible partnerships. We have over 300 partnerships with brands looking at sort of seller refurbished, certified refurbished products. And that has been growing at a healthy double-digit growth for the last few quarters. And the benefits of having 2-year warranties hassle-free returns for customers, meaning that we've seen great momentum in the refurb space, and that continues to go from strength to strength. If I think about luxury, think about watches and handbags and fine jewelry, that is another focus category we've lent into. The last 3 quarters have seen positive GMV growth despite the prevailing macro environment. And that's really a function of the relevance that we've got for our customers. and the trust that we've built on the platform. Just yesterday, we launched authentication out of Japan. Think about luxury handbags and the prevalence of those luxury items out of the Far East, the likes of U.S. consumers are looking for. We've done a partnership out in Tokyo. This enables us to get those handbags authenticated in Japan before they obviously go through cross-border trade in the U.S. and Europe. So that's a fantastic example where we've lent in, we've got relevance. We've got the scalability of eBay that's driven forward. Another item I would talk about is collectibles. We are the platform for enthusiasts for trading cards. We've launched my collection. We've launched the vault. We've launched authentication in the trading card space. We've recently done a commercial deal with COMC, which has over 100 million cards in the trading card space on a consignment basis, which again, enables us to drive that relevance on eBay for consumers. So whether it's parts and accessories, whether it's watches or handbags or sneakers or collectibles, there's a number of proof points where we've built relevant experience for our customers when they come to eBay, and we've seen prevailing GMV growth as a result of that. And that's what gives us confidence that the strategy is clearly working, and we're making the investments in the right place.

And if we look at the flip side of focus categories. So going back to your early '22 Analyst Day presentation, there was kind of a stair casing of GMV, flat, up low-single digits, up mid-single digits. And it was contingent on the focused category performance that you're talking about, but also the non-focus kind of stabilizing. So can you speak to that? How is that performing? And is that framework still in hold -- still in place just maybe a year beyond?

We remain committed and confident in the medium-term architecture that we laid out. It's really a function of macro. None of us had anticipated as we went through the second quarter of 2022 and that's prevailed over the last 18 months or so that we'd be in the macro situation that we're in. And really, it's a case of fueling those experiences that I've talked about earlier and then having normalized e-commerce growth. A couple of data points we talked about 2 of our 3 biggest markets are in economic contraction. The U.K. and Germany, if you look at the e-commerce data, it's been a negative territory for a number of quarters. And naturally, when that's happening, it puts more overall pressure on the overall growth algorithm for the platform. The one thing I would say about the beauty of eBay and what gives us continued confidence is cross-category shopping. You build those relevant experience, you drive the GMV in those focus categories like P&A and then the customers come and then they cross-category shop. So your average parts and accessories shopper will spend $500 in parts and accessories and then they'll spend $700 on the rest of the platform. And I think that's what's magical about the eBay experience. You build trust and relevance to the customers. And it doesn't just have a benefit on the focus categories, but it has the multiplier effect across the rest of the platform. And that's why we remain confident in the medium-term architecture that we've laid out. And again, that will really be a function about when we get to a more normalized macro environment and normalized e-commerce growth.

And you mentioned the breadth of supply, another aspect that's unique about you guys is your cross-border business on the back of that supply. So if we look at -- could you just kind of level set us where we're at on the different big corridors of cross-border and how the International Shipping program that you guys are about almost a year into that build-out, how that's impacting your cross-border?

Yes. What I really like about how the teams are coming together at eBay to think about long-term cross-border, there's a number of items that have really helped fuel the momentum in cross-border. One has been sort of the paradigm shift from going back a year or so ago when supply chain challenges were very clear. They've opened up somewhat, and we've seen good momentum in cross-border trade. And you can see that from the last Q that we put out following the Q3 earnings associated with the revenue aggregation by market. And so, cross-border continues to be sure as a result of that. The second point is having those relevant experiences, think about payments and the scalability of payments and now having Buyer and Seller FX, means that customers irrespective of their home country can transact in the currency of their choice. And not only does that give optionality for the customers, but it also brings financial benefits for eBay and fuels it. The third element, which has been a big unlock for us is eBay International Shipping. If you're a seller in Seattle and you traditionally want to sell to a customer, let's say, in Frankfurt in Germany, you are sitting there thinking, well, how is the product going to get there? Is it going to potentially be an issue with the buyer? What do we have to do from a duty standpoint, what taxes might be prevailing on that? What about documentation? Through eBay International Shipping, we've now taken all the friction out for the sellers. So if I'm that seller in Seattle, it's as easy to ship to Frankfurt as it is to San Francisco. And what happens is the seller ships to Chicago domestically, and we take care of the rest. The economics are good because we have flexibility in terms of the shipping charges we gave to buyers, but it takes the friction out of experience. And so far, we have opened up 400 million listings for U.S. sellers with their ability to open up the aperture to those 132 million buyers on a global scale across 190 countries. And so, through supply chain challenges abating through the investments we've made in payments and facilitating transactions and the great work we've done on eBay in International Shipping is really helping us fuel our cross-border trade at eBay.

And if we look down the P&L at take rate and the impact that advertising is having on take rate, you guys are a few years into the kind of rebuild of the first-party ad business. You're around 2% ad penetration as a percent of GMV. What are you most excited about in that sponsored listings business? And where are we kind of on ad load? Where is the opportunity?

I'm excited that we have met the goal that we laid out in 2022 for a 2% penetration of ads as a percentage of GMV. And we are basically a year early. And that's really a testament to the work the team have done. We mentioned at Investor Day, we see a path to 3%. We haven't given specific timing on that, but it continues to go from strength to strength. We continue to see take rate expansion and on an organic FX-neutral basis as a result of the work that we're doing in ads. And that's really being fueled by Promoted Listings, our first-party ad product, which we've really seen the benefits of the investments we've made and things like generative AI has really helped the products. The workhorse behind Promoted Listings, Promoted Listings Standard has been a traditional Promoted Listings product that we've rolled out and gone from strength to strength. The biggest growth vector that we've been seeing more recently is Promoted Listings Advanced, which is our CPC product. And again, we're making the relevant investments to see the relevance of that going forward. And things like smart targeting that we talked about last quarter is enabling sellers to really exploit our Promoted Listings products, as I say, using the benefits of AI to drive that forward. And so, we see this as not only a great thing for our sellers on eBay, but we have room to further drive momentum, and this is going to continue to be an important part of our financial architecture at eBay. And if you look at the numbers, they speak for themselves. Last quarter, we grew our first-party ad business like 36%, that was 36% higher than overall GMV. And so, again, really pleased with the results that we're seeing and the trajectory ahead of us as we go through '24 and beyond.

I want to make sure we open it up for any questions. I've got a few more, but if anybody has one, just raise your hand and either I can repeat it or we can run a mic. Gentlemen. Over here.

I think if I heard you right, your investment in capital return is not changing for next year, but given the cash infusion that you've seen from the sales statement, I guess, why wouldn't you want to put more money into some of focused categories and increase that investment going forward? There was no webcast. So I think...

We're on the webcast. So I'll just repeat the question. The question was really about capital return for 2024 with the backdrop of the additional funds from Adevinta and how do we think about whether to lean in and invest in the overall platform and how we think about that architecture? Is that a fair reflection?

Why wouldn't you increase given...

Yes. The question is would you increase in '24? We remain committed to the targets that we laid out to the investors last year in terms of 125% of capital returns over the period. We're well on track. I'm pleased with where we are. And if you look in the rearview mirror, we have continued to be great allocators of capital, I would suggest. We've got the balance right between first and foremost, investing in the business because that's where we see the best ultimate long-term return for our shareholders. And then once we've done that, any surplus cash that we have, we've been good at continue to increase the dividend and being opportunistic about driving back capital returns for shareholders. So you should expect us to continue to be great allocators of capital. I'm pleased with where we are. We haven't got into any further guidance or perspectives about 2024. But I would reiterate the architecture that we laid out from 2022 to 2024 on a cumulative basis remains intact, and I'm pleased where we are on that trajectory.

Going back to the advertising and payments, like you've kind of built out 2 of the major pillars of these value-added services that you could add to your marketplace. If we look broadly, worldwide, some of your peers might have seller financing is a big part of their business. They might have fulfillment. Third-party is a big part of their business. So as you guys look beyond the current scope, are there any areas that you're thinking about you're exploring?

Yes. I think it's a good point, Ross. And you've seen us, particularly, as you say, payments and ads have been great opportunities for us to fuel the financial, the healthy -- already healthy financial architecture for eBay. But there's a number of vectors that we continue to go forward. You're right. I think building the foundations in payments has enabled us to continue to monetize that, whether it's through Buyer and Seller FX whether it's like thinking about alternative forms of payments that support higher ASP transactions. And so, you've got a relevant proposition for customers, but it also fuels income for eBay. So, I would say we're continuing to look at continued opportunities in the payment space. Similarly, from an ad standpoint, again, driving relevance for our sellers on eBay making it simple for them to use the advertising products that we have and fueling more revenue for eBay. A couple of other areas. We've talked about eBay International Shipping. The size and scope of eBay really enables us to look at that and to monetize that, again, not only because we've got the opportunities to make it more relevant, put the 1.9 billion listings across all of the customers across the globe in a much more prevailed way, but also to sort of drive income. You think about authentication, there are and continue to be opportunities for us to think about monetizing that. In watches, for example, we do have a buyer fee on uncertain watches that enables us to sort of drive, again, a relevant experience, a trusted experience for the buyers, but also drive incremental revenue for eBay. And I think as we look at eBay going forward, we've built the foundations. We've built those scalable solutions, and it enables us, a, to drive the trust for the customers, but also help us fuel the economics of the overall company.

A question here?

So you mentioned that expenses will --. So you mentioned that expense will grow slower than revenue growth next year. I wonder -- so if I looked at the gross margin, it has been gradually grinding down and R&D has been moving up. So I wonder how should I think about these 2 ratios. Are you mentioned -- are you -- your expense definition is mainly operating expenses or include the cost within the cost of goods sold?

Yes. So let me just add a little bit of commentary on gross margins. And so, we called this out a number of times in 2023 because of the evolution of eBay International Shipping, we went from being the agent in that relationship to the principal. And therefore, there was an accounting change. And so, historically, we'd net the costs off from the revenue. And now as we've evolved through 2023 and brought that in place, we recognized the revenue and the cost, and that has had a dilutive effect on the overall gross margin, essentially gone through 2023. As we've said, eBay International Shipping on an operating income basis and in terms of operating income dollars, we expect the operating margin to be at corporate levels of margin in the fourth quarter. And going forward, we expect it to be operating income dollar accretive. And so, there's a dynamic with regard to gross margins. In terms of overall costs, I mentioned earlier, we continue to lean into the business and leverage some of the investments that we've been taking place over the last few years to build these relevant and scalable experiences of our customers. We've done some of that by fueling investment opportunities to the structural cost program. We remain optimistic and committed to the fact that we're going to generate $100 million of structural cost benefits in 2023. This is something we will continue to lean into as we go forward to get the balance right between driving operational efficiencies in the short term with the influx as I mentioned, with generative AI and other opportunities while continuing to invest in the business. And that's what gives us confidence that we would grow our expenses at a lower rate of revenue as we go through 2024 as an opportunity associated with the leverage that we've got from the investments we've made over recent years.

It's excellent. Steve, on behalf of Barclays and myself, thanks for coming.

Thank you, Ross, and thank you all for your time this morning.