eBay Inc (EBAY) Piper Sandler Growth Frontiers Conference (Transcript)

eBay Inc (NASDAQ:EBAY) Piper Sandler Growth Frontiers Conference September 12, 2023 10:00 AM ET

Company Participants

Steve Priest - SVP & CFO

Conference Call Participants

Tom Champion - Piper Sandler

Tom Champion

And good morning everyone, I am Tom Champion, Piper Sandler analyst. I am joined today by Steve Priest, CFO of eBay. We've got about 25 minutes for the discussion. So I'll ask a few here. And then at some point, we'll open it up to the group for any questions.

Steve thanks for traveling to Nashville to be here with us.

Steve Priest

Thank you, Tom. Good morning, everyone. Good to see you.

Question-and-Answer Session

Q - Tom Champion

Steve, maybe to begin, why don't you set the table for us a little bit? I know it's been a re-imagination journey that eBay has been on the last couple of years under Jamie's leadership and sort of alluded to maybe entering in a new phase here at 2Q and a little bit of a change in direction. Maybe you could kind of give us the overview of the strategy and what stage, what inning we're in of the re-imagination?

Steve Priest

Yes. So again, good morning, everyone. Great to be here. Tom, thanks for having us. I think the way I would frame this is that we've been at sort of this strategic pivot for that three years, in terms of just changing the foundation of eBay, leaning into nonlinear season, and really thinking about this area of driving focused categories and building trust on the platform, while at the same time, really driving some of the tech debt as I would describe out of the business and focusing on innovation.

The strategy that was laid out at the last earnings call is just really an evolution in terms of how we take that forward. We've put the foundational pillars in place. As you're probably all aware, we've made significant progress in the focused category playbook. We've really enhanced a lot of the horizontal initiatives on the marketplace. We've integrated payments. We've seen great momentum in ads. We've launched scalable solutions like eBay International Shipping.

And so for us, the pivot really is around making sure we embed relevant experiences to customers, whether they're shopping for sneakers, whether they're shopping for past accessories, whether they're shopping for trading cards. We have five mega categories across the platforms that were over $10 billion each. So, we have tremendous scale. And so it's about having that relevance for the customers that come in, whether they're looking for pre-love items or looking for new items coming out.

The second item is really about -- just looking at the scalable solutions. So I mentioned about payments and ads, eBay International Shipping. We're looking at solutions for the customers irrespective of what they're buying. Another good example of this is like additional services tire installation services where consumers will get great value by tires on eBay, have them ship to a third-party shop and then they'll get installed accordingly. And then the real unlock for us is around sort of magical listing.

And we're very, very excited about the opportunities we can provide with regards to customers coming on to the platform, but speed of listing is being transformed. We're going from ideation to execution in a matter of weeks. And I'm really excited about some of the tech that we can add there and show that markup of our magical listing flow, which is on our IR website. We shared that last week publicly. And again, it's a matter of weeks before that will be out there. So really pleased with the levels of innovation that we're seeing at eBay.

Tom Champion

Excellent. Okay. So I think any discussion of eBay, we have to talk at the top with GMV, with kind of the dynamic in terms of growth, certainly a ton of progress over the last couple of quarters, but just walk us through the trajectory, the possibility, the potential of a return to growth in the marketplace. You talked about it at the Analyst Day in March '22. But where are we -- what should we be watching in terms of getting back to that growth?

Steve Priest

Yes, you're right. We laid out a medium-term architecture at the Analyst Day in March of last year, which we still align to. We're making tremendous progress under the hood. I think about at the end of 2022, we talked about having 25% of the platform such by focus categories, really lending to those trust initiatives and innovation.

The advertising and the payments businesses are helping fuel that level of innovation, the amount of investment that's sort of driving forward. And again, we're really pleased with the trajectory. What's clear is that we've obviously been impacted by the macro headwinds. No one would have anticipated what happened in Ukraine, the subsequent economic paradigm that's gone since there.

And so that's really having an impact. And then I suppose the severity and the duration of the macro headwinds that we face will be a front of the timing. However, what I'm like really pleased to see under the hood, things like parts and accessories. That's growing, we believe, at market levels of growth in the sort of low-, mid-single digits. We've seen things like refer to a healthy double digit.

Over the last couple of quarters, we're seeing buyer can't stabilize. We talked about having 132 million buyers across the platform. And for the last two quarters, we've seen new buyout increases on the platform. We've seen new and reactivated buyers who hadn't been on eBay for a while in positive territory for the last four quarters.

And overall, we've seen CSAT, which is a really key measure for us about how customers perceive eBay as growing sort of double digits on each of the categories that we've lent into. And so under the hood, we're seeing some really good momentum. And I suppose where I would point you to is the implied guide that we put out for the fourth quarter.

At the high end of that guide, which contemplates less of a macro headwind, contemplates that we get to flattish GMV as we exit the year. But obviously, as I said, we are dealing with a lot of macroeconomic uncertainty, and that will be a function in terms of what top line growth ultimately looks like this year.

Tom Champion

Okay. Well, let's talk a little bit about macro because eBay is a wildly international business. You're in a lot of different geographies and different places with their own dynamics. About some of your comments last night were very interesting. Can you just kind of give us a map of the world and kind of contextualize for us what you're seeing by within your major geos?

Steve Priest

Yes. So to take you back to 30,000 feet, we were about -- we do over $70 billion of global commerce. So, we've got significant scale, and as you would imagine, our platform like ebbs and flows with regards to the overall macro environment in aggregate. We generally lean into non-linear in season, pre-loved items on the platform, customers looking for value. And so, we do far better in certain circumstances, certain categories based on the economic impact.

As we step back and think about the global footprint, where we report GMV is a function of where the seller is domiciled. And about half of our business is U.S.-based and then half of it is international. So some of the tailwinds, headwinds that we start to see is Europe undoubtedly has been impacted more heavily over the last 12 months or so with regard to macro challenges.

In fact, Germany recently went into recession. The U.K. is teetering on sort of a recession. We've seen e-commerce shrink in sort of B2C side of things for both Germany and the U.K., which are covered in more or less significant markets in the last quarter. And so as a U.S. investor as a U.S. -- a lot of the analysts and investors that we speak to, based in the U.S. having this global perspective is really interesting and seeing what's happening across the globe.

The other thing I would point to is cross-border trade. We've seen the opening up of some of the supply chain challenges that we saw in Greater China. And so you'll see on our latest Q in terms of the revenue disclosure that we put in there that shows some of that cross-border trade picking up. So we are a truly global business. We are impacted by the macro environment, but there's obviously sort of pockets of -- challenged pockets of strength. But I think we're very well placed with the investments we're making as we come out this challenged macro environment for sustainable growth as we go forward.

Tom Champion

Okay. Okay. Got it. Product initiatives, right? You kind of referenced Jamie's tap dancing into work every day, and he's excited about some of the newer offerings. We're all talking about AI. Steve, what is AI? What are -- what does that mean for eBay? What are some of the product initiatives that gets you excited?

Steve Priest

I think the first thing I would say at a macro level, is a speed of execution. It's helping us drive tremendous velocity on the platform. Things that would have historically taken months are taking weeks, we sort of scrum teams together in terms of ideation, and the speed at which these things go from the white board into the website is we're seeing significant acceleration. I suppose when I called out earlier is about the listing flow.

And the speed, if you think about eBay, we have 1.9 billion listings on the platform, and we have 28 years of history and think about all of those images with commercial data sitting behind it. And so the for seller just being able to take their phone and to take a picture of an item and because of the data that we have in embracing AI, not only will it ultimately recognize what that is, but also be able to fit in the attributes and descriptions using AI.

I recently started selling trading cards and literally last week, I was listing trading cards in a matter of seconds versus the historical experience, which we bring in minutes. And this is a massive unlock for us. If you think about the average consumer has about $4,000 of items in their closets and the easier is to list then the better it is for us sort of the health of the marketplace and the opportunity to buyers driving it forward.

In focused categories all seeing tremendous innovation. So parts and accessories one of our biggest categories, we've now evolved in used AI to sort of think about what parts are relevant to your specific car and using AI to sort of enable customers to really upgrade the experience and then we've also got something like engine lookup. So we all have cars, you get an error on the dash. You get a message associated with the car.

We've now got AI that you go through eBay, you put the engine, full cadence into the website. I'll tell you what the issue is and suggest the parts to fix it. And so the opportunities are endless to sort of really embrace AI in terms of the customer-facing side of things. And then on the efficiency side, which is tremendously important for us, which is continue to drive operational efficiencies in the short term to curate the capacity for us to continue to invest.

That runs the full gamut from the likes of co-piloting and tech, that can really drive that speed of velocity and innovation all the way through to support functions such as finance and legal and sourcing other areas across the business. And so we're really leaning in. We're really embracing AI at eBay, and we feel it's going to be a game changer for our whole organization.

Tom Champion

Got it. Okay. So just to be clear, Magic Listing is the name of the new product. There's some information on the website about it, and it's currently available in terms of the description, but also you're working on it still, and there will be further innovation to...

Steve Priest

Exactly, Tom. So in the sort of public domain, we've got the ability to use AI to fill in a description and listing for customers. And we've got an employee beta that's been running for about a month or so, which is exactly what I just talked about where you can take a picture of the image and it will recognize it and go through all that. Over the forthcoming months, then we'll be in a position to launch that out to the public, so really excited about the level of innovation that's going on eBay at the moment.

Tom Champion

Got it. Got it. Okay. I'd be -- other, I think, evolution or product change that I think is very interesting is EIS, eBay International Shipping. Steve, maybe you could kind of walk us through that and where that is in the rollout today?

Steve Priest

When I think about the over $70 billion of commerce that we do across the globe, about 20% of that goes across national borders, and that can be product getting greater China to the U.S., so it could be items going from the U.K. to Germany. In our big three markets as it currently stands, only about 50% of the inventory that is listed by the sellers is available on a global scale. And so -- and a lot of that is really to do with friction.

If you were a seller sitting in San Francisco and you want to sell a pair of sneakers to a customer in Oslo, you got to think about, well, how are you going to get there? What if we hit a glitch in terms of like, the product the customer wants, what if there's going to be a return, what do I do about some of taxes, what to do about customs forms, et cetera. And so we recognize that taking friction out is incredibly important to the seller and by taking the friction out for the seller, it means they're more open to looking internationally and then it opens aperture up the buyers.

And with the more inventory that is available on a global scale, it means that we'll continue to drive health on the platform. And so, we've now partnered with a number of third parties to sort of really drive this concept of eBay International Shipping. So that seller that's sitting in San Francisco ships the product to Chicago, and we take care of the rest. And it means that it -- so it takes all of that friction away from the seller. It means that they can sort of open things up.

The other thing I would say, it really drives bottom line potential income for eBay. We are partnering with others. As I said, this is not about eBay building our own distribution centers. We're doing this with third parties. It's a variable cost structure. We have the size and scale of our platform. That means we can really leverage contracts. And in terms of the flexibility around shipping fees, then we can be flexible in terms of what we charge to the buyer for those fees.

And so, we anticipate that the margin structure around eBay International Shipping will be at corporate rates at margin by year-end. And we're just starting to roll it out. It's out in the U.S. market at the moment. Some of our European markets will be fast followers over the next couple of quarters. But we're really excited about the scalability of this solution and the offering that it will have for eBay and our sellers on the platform.

Tom Champion

I don't know if this question makes sense, but who are the primary beneficiary on the marketplace, Steve, from EIS? Is it sellers just accessing more markets, is it a small market buyer getting access to more inventory? Or is it kind of all of the above? Like how do you see it?

Steve Priest

Well, it's both. I mean, if you, if you are a C2C seller or if you're a small enterprise that's sitting in national state, it's much better for you as a seller because you're getting your inventory out on a more global scale. It's good for the buyers because they get a better breadth of products. I mean, if you're sitting internationally and you want to -- you're a collector or you want to buy some sneakers, do you want to -- you want to sort of get a car park, for example. The aperture is completely opened up for you as a buyer in terms of the amount of availability for products. And also, it's obviously great for the investor community because of the value that this will continue to drive the bottom line.

Tom Champion

Okay. So maybe working down the P&L, there's been a very favorable dynamic with revenue able to grow above the rate of GMV due to the attach of payments and advertising. Steve, where are we with kind of the -- those two product lines, revenue lines and in that dynamic of revenues outgrowing GMV continue?

Steve Priest

I've been maybe taken by the level and speed of execution at eBay. We have some incredible talent and the say do ratio has been incredibly high. I mean going back a few years, when we said we were going to intermediate payments over $70 billion, I think there was a number of new sellers that say, eBay will never manage to do that. We did it early, ahead of schedule, generated over $2 billion of revenue, over $0.5 billion of OI and it's been a tremendous success.

And just by integrating that with sort of the end of the beginning, and then at the investor event last year, we talked about an incremental $300 million of revenue associated with payments, just continue to evolve those services like buyer effects for example, if a buyer in the U.K., seller in the U.S. seller wants to transact in U.S. dollars, buyer in the U.K. wants to pound sterling, then eBay benefits from the arbitrage.

So, payment has been a tremendous program for eBay and a great margin and revenue generating and creative capacity. That's becoming more mature. And so, we get through this heavy lift of payments. And so, that's getting to a greater level of maturity. I think what's overtaken that, and again, we've been very pleased with the executions as in ads. Again, at the investor event, we talked about reaching 2% penetration of ads as a percentage of GMV by the end of '24. We crossed that threshold last quarter.

We've got plenty of run way ahead us. If I think about the number of listings, we have 1.9 billion listings on the platform and promoted listings, which is the sort of advertising, but one pay business. We have about 700 million listings that are touched by advertising. We've got about 2.1 million sellers that are embracing advertising over the last disclosure we gave on sellers, it was in the mid-teens million. And so we do expect overall take rate expansion on an FX-neutral basis as we continue to go through the rest of 2023. I'm really pleased with the levels of execution from the team and the ads business continues to go from strength to strength.

Tom Champion

Okay. Okay. Great. Maybe working further down the P&L, like just thinking about your margin guide for the year. There's some puts and takes there. There was some cost savings, but also some investment. How did you land at the 27% range? And we're -- walk us through the puts and takes there and especially where you're investing?

Steve Priest

So, the guide -- the expected guide that we put out there for the full year '23 is 27% to 27.4% and there's a number of factors that play. Number one is operating leverage. We have an incredible financial model at eBay, our fortress balance sheet, very, very strong free cash flow generation, about $2 billion a year. So the financial model is really robust. And as you can imagine, when the top line grows, it really sort of flows through the P&L. So we've seen some operating deleverage pressure sort of on the top line associated with macro.

The second thing I would say is that about a point of margin dilution associated with the combination of EIS, eBay International Shipping that we talked about with the investments that we're making, but also M&A. We've been driving into acquisitions and tuck-in M&A that's really helping the health of the platform, driving that acceleration. And if you think about those two in tandem, it's about a point of margin pressure.

We've also got about 50 basis points of FX pressure. We are lapping a significant FX tailwind that we had in the fourth quarter of last year when there was a bit of a dislocation between various currencies and the U.S. dollar. This created a hedging gain, but that's about 50 basis points. And then the balance is really about investment. We have the strength, as I mentioned, in terms of the balance sheet.

We are confident in terms of the return on investments that we're making. There's a lot of competitors that are struggling in this macro environment. The cost of investment, the cost of money that was free is now not quite so cheap. And so, we have the capacity and ability to invest in eBay and we're very, very focused on sort of long-term sustainable growth that will drive. And so really, that's the case of like -- the margin commentary that we've put out on the second quarter.

And again, I'm really pleased with the teams have continued to lean in. And I feel like we've got the balance right in terms of about how we're thinking about driving short-term capacity through efficiencies in the business, particularly through the structural cost program, and at the same time, investing for long-term sustainable growth.

Tom Champion

Why don't I pause here for a second to see if there are any questions for Steve? All right. I'll keep going then. I think within the eBay story, capital returns has been kind of a hallmark of the investment case. Steve, where are we today? I mean how would you characterize '23 and maybe longer-term guidance in directive that you put out there?

Steve Priest

I think we've been great allocates of capital. As you all know, we've generated significant capital returns over the last few years. We created over $20 billion of value through the divestitures that we've gone through the last few years, really focusing on the core platform and return a significant amount of that capital to shareholders.

As I always say, our first priority will be to invest in the business with a build by partner framework. And then beyond that, any surplus cash that we have will go through capital returns. And we're in the privileged position again because of the financial architecture that we enjoy, we can do both.

We've clearly laid out the direction of having 125% of our free cash flow returned to shareholders over the '22 to '24 period. Over the last 18 months, we've returned 4.4 billion through a combination of buybacks and dividends, which is at 130%. So, we're back on track. I'm pleased with the balance that we continue to have, and we continue to drive healthy returns for our shareholders.

Tom Champion

So, it is built by and there have been a couple of decent number of tuck-in M&A transactions. Just one or two or three of those recent transactions that you think are impactful for the business. I'd be kind of curious your perspective there and kind of that fit between the need and the tools that you were able to acquire.

Steve Priest

As you can imagine, we've been very diligent about where we do go and acquire companies. And some of them will start with a partner and then we'll ultimately go through the acquisitions. So -- and they generally a, to drive a greater level of speed to drive that trust that I've talked about for our customers. Obviously, in terms of got to drive a good return on the investment and then just sort of really enhancing the platform.

So some relatively recent examples, I think about Sneaker Con, which was about authentication in the sneaker space with partners and then we acquired them. We've got myFitment in parts accessories, which has really enhanced the AI opportunities there and really open the aperture up in terms of the parts that fit vehicles and has helped us give the guarantees to customers that if they shop in eBay and they find a part then it's going to fit their vehicle.

3PM Shield, which is an acquisition we've made to really enhance trust on the platform and make sure that we minimize and eliminate the prohibitive sort of counterfeit restricted items on the platform. And then most recently, Certilogo, which I'm very, very excited about. Certilogo is a company based in Milan, that has QR codes that they partner with brands where they embed the clock codes in the manufacturing process for the likes of fashion.

And so, there's obviously a massive drive on an ESG standpoint for manufacturers to take accountability and responsibility for keeping those garments out of landfill. And so through the partnership and now the acquisition of Certilogo, we were able to help track what happens to those merchandise and then obviously, eBay is a natural place for it to be resold the pre-loved items which, A, helps the environment, B, sort of continues to help the platform but C, also obviously drives better economics for eBay and ultimately for our customers.

Tom Champion

ESG an important part of the mission for you folks. I think we're about at time. Steve, thanks so much for being with us today.

Steve Priest

Thank you, Tom. Great to see you, and thank you all for your time.