The Transcripts, Transcripts
eBay Inc. (EBAY) 51st Annual J.P. Morgan Global Technology, Media and Communications Conference Transcript
eBay Inc. (NASDAQ:EBAY) 51st Annual J.P. Morgan Global Technology, Media and Communications Conference Call May 22, 2023 11:15 AM ET
Company Participants
Stephen Priest – Chief Financial Officer
Conference Call Participants
Douglas Anmuth – J.P. Morgan
Douglas Anmuth
All right. We’re going to go ahead and get started. I’m Doug Anmuth, J.P. Morgan’s Internet Analyst. We’re pleased to have with us today Steve Priest, CFO of eBay. So eBay, everybody knows, one of the world’s largest and most vibrant marketplaces for discovering great value and unique selection. The company empowers millions of buyers and sellers in more than 190 markets around the world and enabled nearly $74 billion of gross merchandise volume last year.
So Steve has been CFO of eBay for nearly 2 years. Prior to that, he was CFO of JetBlue and before that, spent nearly 20 years at British Airways across a wide number of senior leadership roles. So welcome, Steve.
Stephen Priest
Thanks, Doug. It’s great to see you this morning and good morning, everyone.
Douglas Anmuth
All right. So just to start off, maybe a little bit bigger picture eBay has gone through a lot of changes over the last few years. New management team driving the tech-led reimagination of the business. What stands out to you most through these changes kind of across both front end and back end?
Stephen Priest
Yes. Thanks, Doug. I think when I stand back, I think at a very high level, it’s the say/do ratio and seen the levels of execution that the leadership team are driving throughout the organization. If you think about the pivot towards focus categories and the way that has been rolled out on a category by category, country by country basis and the levels of trust that we’re building on the platform, I’m really, really encouraged by it. In addition, I suppose the execution of the payments transition that we saw as we migrated to managed payments, I think there was a lot of skepticism about whether eBay could pull that off. And we’ve executed and delivered over $2 billion of revenue, $0.5 billion of ROI and we’re on track with the Investor Day commitments that we made with an additional $300 million of payments revenue.
And then advertising, I mean, that’s gone from strength to strength. We said that we were going to drive momentum in advertising. For the third straight quarter, we’ve seen advertising revenue grow over 30% over the volume on the platform and that’s really gone from strength to strength. And then more recently, we’ve talked about eBay International Shipping and what implications that would have. So at a high level, Doug, I’d just say, we’ve talked about the core platform. We’ve talked about trust. We’ve talked about the things that are going to continue to facilitate that growth and drive investment dollars for eBay and we’re bang on track and the team is really executing.
Douglas Anmuth
Okay, great. We’re going to hit on all those things. Maybe let’s get macro out of the way. So at this conference a year ago, you called out some of the early challenges in the market. What are you seeing today across both U.S. and international markets? And are there any key points of difference that we should be thinking about?
Stephen Priest
Yes. The macro environment, as everybody knows in the room, is very uncertain. We’re dealing with such a challenging environment as we navigate through 2023. And we’ve been very thoughtful about planning our business accordingly and we’ve given a lot of color from a sort of guidance standpoint about our expectations and how we plan the business. If I split the world in two, I’ll talk about our international business. We came into the year really not knowing what Europe in particular was going to look like. And I suppose as you think about the U.K., you think about core Europe, some of the concerns about energy costs and how that would go forward, even more rampant inflation than [indiscernible] thought would happen. It hasn’t turned out to be quite as bad as potentially we thought it could have been when we came into the year.
And then from also the other side of the international paradigm is really China opening up and more international trade coming through supply chain challenges have abated somewhat coming off the sort of COVID pandemic. And then when I think about the U.S., the best way I could describe it is very choppy. There’s a lot of items and issues progressing through the U.S. market. So we’ve been very, very thoughtful about how we’re thinking about driving the short-term operational efficiencies in our business, preparing for the worst but, at the same time, exploiting the opportunities ahead of us and continue to invest in our business. So very uncertain but I think we’re well positioned to navigate the storm that we see ahead of us.
Douglas Anmuth
Okay, great. I think people often look at eBay as potentially being more resilient because of pre-owned and have you — and to a degree, refurbished as well. Have you seen kind of the share of GMV increase there, just given some of the macro pressures and perhaps shifts in how people are spending money?
Stephen Priest
I mean, undoubtedly, from a non-new-in-season standpoint, that’s about 90% of what transacts on eBay. So that’s really our focus. And I think despite our size, as you said, Doug, $74 billion of GMV, the tide rises and falls from the economic standpoint in eBay mirrors that to some degree. But the focus on non-new-in-season, about 1/3 of our GMV is used or refurbed so that gives a natural sort of hedge, I suppose. And when the discernible shoppers are have less disposable income, they will look to eBay for value.
And the fact that we’re leaning into that is helping us. We talked extensively about as we went in through Cyber 5, we saw the highest ever refurbished volume going through eBay. And last quarter, we saw healthy double-digit growth in refurbed. So it’s what eBay is about; it’s part of our DNA and we’re really happy to sort of see the momentum in this space and we’ll continue to lean into it.
Douglas Anmuth
Okay, great. Let’s talk about focus categories. So focus category GMV, I think, grew in the positive low single digits in 1Q and outpaced other categories by more than 8 percentage points. You’ve also talked about rolling out focus categories to 50% of GMV by 2024. And they would basically be kind of doubling or so from last year. How are you tracking toward that goal? And how do you think about getting there across kind of deeper in existing categories versus expanding into new ones?
Stephen Priest
We’re making great strides. We’re seeing great momentum in our focus category playbook and it’s all about driving trust for customers on the platform. If you think about sneakers and watches and handbags, for example and trading cards, it’s about authentication and we’ve hard with regard to that. If you think about parts and accessories which is probably our biggest focus category to date is one of those over $10 billion categories on eBay. We’ve seen significant increase in trust. We drove Guaranteed Fit which basically means currently for U.S. customers, if you see the Guaranteed Fit badge on eBay, we backstop the fact this part will fit your vehicle. So it’s all been about fitment. And then third, if you think about refurb, you think about buying a refurbished, sell a refurbed or the manufacturers refurb program, 2-year warranty, 30-day eBay moneyback guarantee, giving the customer the guarantee and commitment that the product is going to be as they see fit or they’re going to get their money back.
Leaning into trust has been an essential part of that. We’ve seen great traction in the focus categories as you roll this out, category by category, country by country. As at the end of the fourth quarter, we’ve covered 25% of the overall platform, 28% in the key markets. We’ve seen modest improvement since the end of the year. So we’re right on track. It’s working very effectively. I think, Doug, as I think about the levels that we get to in terms of penetration like some of the other items, that will be a function of the macro environment, the duration and severity of what we’re seeing and how long that goes forward. But we’re committed to those medium-term goals that we laid out and I’m really, really pleased with the traction what we’re seeing and particularly, as you said, the 8 points delta between the focus categories and the rest of the platform last quarter, really going from strength to strength.
Douglas Anmuth
Okay, great. Maybe we can dig in a little bit more on parts and accessories. You mentioned one of the big $10 billion-plus types of categories. It accelerated a few points sequentially in 1Q. I guess, what’s been the reception from the enthusiast community out there around your product? And how are they kind of viewing all your efforts there?
Stephen Priest
Yes. I mean, they’re loving it. I mean, we talked about the concept of fit your vehicles. So now you go into eBay. You’ve got your specific cars in My Garage on the platform. The Guaranteed Fit backstop which basically means I have absolute confidence when I shop at eBay. The beauty, as I talked earlier about, the trade channels opening up and the discernible buyers who are retaining some of their vehicles a little longer because of the macro environment leading into some of that cross-border trade. We have an incredible level of inventory on the platform, over 0.5 billion parts and accessory items.
And so needless to say, we’re seeing our CSAT, our customer satisfaction, go from strength to strength. We’re seeing the penetration of parts and accessories on eBay go from strength to strength. And we called out on the last earnings call about our perspective that we are now at market levels of growth because of what we’ve been doing. And that’s really a function of building what the customers want and driving the right products and telling them about them and driving very robust full funnel marketing campaigns, including sort of in penetrating social channels and whether it’s through paid, whether it’s owned or whether it’s earned media is having a huge impact on the category. And it just goes to show that the playbook is clearly working. The strategy is in good shape and we’re looking forward to seeing the same levels of success in the other categories that we’re leaning into.
Douglas Anmuth
So when you — I know that in terms of where you’re going and launches, obviously, you keep that pretty tight. But it feels like some categories, it might be harder to kind of drive the level of trust or perhaps the products aren’t as straightforward. It may not be as easy to do authentication or Guaranteed Fit, for example. How do you think about that as you look to just continue the tech-led reimagination?
Stephen Priest
Yes. I think we’ve been very thoughtful as we’ve gone through. We got to do a huge amount of customer research. Again, it’s very, very important that we deliver the products that customers need. And we’ve — it’s not just — we’re not just focused on 1 sort of category, as you mentioned, Doug. If you think about those items that we authentication, we’ve launched them in certain markets. Think about trading cards. We launched that in the U.S. relatively like recently over the last couple of years. We’ve just launched it in Canada and we built authentication in Canada. We’re rolling out other categories on a market-to-market basis. And so I’m pleased with the traction that we’re seeing. We recently launched fine jewelry.
Again, an authentication side of things has worked through that. And so you should expect us to go category by category, country by country. We will be a little thoughtful about what we put out there publicly because of, as you said, Doug, the competitive dynamic. But we’re right on track and I’m pleased with the traction that we’re getting.
Douglas Anmuth
Okay, great. So enthusiast buyers, clearly a big differentiator for eBay, driving about 70% of GMV and I think spending around $3,000 annually. Maybe you can talk about the trends that this group has displayed kind of since your last Investor Day. And how are they holding up through tougher macro?
Stephen Priest
They’re holding up well. We have 16 million enthusiast buyers, they’re a very, very important cohort. To Doug’s point, the categorization of enthusiast buyers is to shop on at least 6 individual days during the year and actually buy something and spend over $800. Actually, the average enthusiast buyer shops over 30 times a year and, to your point, Doug spends over $3,000, so incredibly customers. And what I love about the enthusiast buyers. They will not only shop in the category that they’re passionate about but the beauty of eBay with the size and scale that we have, it really facilitates cross-category shopping and it’s aligned very much with the focus categories. We saw about 16 million this quarter, 16 million last quarter. It’s clear that we’re getting good traction with that group. And then from a broader buyer standpoint, for the last 3 quarters, we’ve seen new and reactivated buyers driving positive territory.
And last quarter, we saw new buyers increase on a year-over-year basis. So it’s clear by the focus category playbook, the trust we’re driving on the platform, we’re certainly seeing good levels of buyer acquisition and we’re pleased with the traction that we’re seeing.
Douglas Anmuth
And just to clarify, the 30 days of shopping that you mentioned; that’s actually transacting on [indiscernible].
Stephen Priest
Correct, transacting on the platform on average.
Douglas Anmuth
Not just browsing, for example?
Stephen Priest
Correct, correct.
Douglas Anmuth
Okay, okay. So I guess maybe putting kind of all these components together, a lot of the product things that you’re doing, how do you feel about your ability to grow GMV in the back half of the year?
Stephen Priest
We haven’t guided the back half of the year. What I would say, we laid out some architecture about a year ago at our investor event. We wanted to share with the investor community about the aspirations to eBay, what our targets were for the medium term and we’re executing bang on track. And so when I look at the underlying signals of the business, like the levels of CSAT, the level of focus category penetration, the growth in the focus category is everything that we’re seeing, we’re exactly where we want to be. The function of the timing of that is really a function of the macro environment that we’re operating in. We purposely haven’t guided beyond the second quarter because at the levels of uncertainty that we’re seeing, Doug but we’re really happy with where we’re standing at the moment. And again, the non-new-in-season focus, the growth we see in the focus categories, I think, puts eBay in a very healthy competitive position compared to the competitive set.
Douglas Anmuth
Okay. Advertising is expected to generate, I think at the Investor Day, you talked about around $2 billion by 2025 which would materially outpace GMV growth. Maybe you can just talk about how you’re tracking toward that goal and where you think that can go as a percentage of GMV.
Stephen Priest
Yes. As we mentioned in the earlier comments, for the last 3 quarters, we’ve seen advertising revenue outpace GMV by over 30 points which is really, really incredible. There’s a core product which is Promoted Listing standard. The team are doing an amazing job in terms of increasing penetration across our seller base in terms of driving that forward and exploiting the likes of AI and changing the algorithms to really make sure that we monetize it effectively.
At the same time, we’ve developed 3 more nascent products: Promoted Listings Advanced which is about our CPC product which again is going from strength to strength; our Auctions product which is Promoted Listings Express; and then also our Fee by Ads, where we’re in partnership with our sellers to see the further opportunities and drive monetization forward. So really pleased with the work that Alex, that runs advertising and the team, are doing at eBay, going from strength to strength. And as you can see from the latest 3 quarters of results, well on track, seeing the traction that we want and really pleased that we’re executing towards a strategy that we laid out.
Douglas Anmuth
Okay, great. Maybe just shifting gears a little bit, thinking about profitability. You’ve historically had strong non-GAAP operating margins in 29%, 30% range. We’re likely to see margins compress a bit this year. Maybe you can just talk about some of the drivers, some of the factors there in terms of the deleverage near term.
Stephen Priest
Yes. I think there’s 3 things I would call on. Number 1 is operating deleverage. So as you think about the macro environment which is driving some of the deceleration in GMV, the business works very, very well when the top line grows, as you can well imagine, based on our financial architecture. And so the macro pressures that we’re seeing is having an implication on that. And that’s why for the medium term, we’re completely focused on committed on growing GMV.
The second thing I would say is that we are leaning into investment. And while others are pulling back, we are leaning in. eBay has a tremendous financial architecture. We are being very focused on the short term, driving operational efficiencies through the structural cost program which is bang on track. We delivered $100 million of savings last year. We’re on track to deliver the same this year. And that is increasing the capacity for us to invest. And we will continue to do that because we’re seeing traction in the strategy whether that’s in product development, whether it’s in for marketing, we will continue to do that.
And then thirdly, we are, as we called out on a couple of earnings calls, seeing some margin pressure in 2023 associated with M&A. We have been a little bit more acquisitive recently and also the eBay International Shipping program which gives us a further unlock in terms of ancillary services going forward which are putting a little bit of pressure on margins in 2023. But the medium-term architecture that we laid out a year ago remains intact. And that again, that will be a function of the macro environment and how we drive things going forward.
Douglas Anmuth
Okay. So your number 2 in there was leaning into investments but also you kind of talked about some of the cost savings that you’re getting. I guess, maybe you can just talk a little bit more about the rationale there. We’ve seen lots of peer companies in the Bay Area, really everywhere, that have cut costs in a bigger way and boosted margins more materially. So I guess, how much was there that discussion for you internally? And maybe just talk more about the rationale for where you’re kind of ending up.
Stephen Priest
Yes. It’s obviously, as you can imagine, running a public company, it’s an ongoing discussion. It’s very, very important for the investor community and for the business as a whole that we continue to think about operational efficiency. We did it in earnest in 2022. You saw the earnings power of the business. You saw the margins that we produced. You saw us leaning hard in terms of driving the operational savings. But at the same time, we have continued to invest. And so that’s why the structural cost program is incredibly important.
Earlier this year, we made the difficult decision to go through a reduction in force of about 4% of the workforce. Those things are never easy. And we sort of went through that exercise again to create the capacity for us to continue to invest in the areas that we needed to invest in going forward. So I think, Doug, what I would say, eBay continues to be very balanced about making sure that we focus on the bottom line while continuing to invest. You’ve talked about some of the competition not having the capacity to do that. But when you’ve got a business like ours that prints about $2 billion of free cash flow a year and we’re seeing the traction in things like parts and accessories, where we’re growing at market rates of growth, we are getting the returns on the investment that we are looking for to drive that medium-term architecture that we laid out just a year ago.
Douglas Anmuth
Okay, great. So I know you don’t have long-term margin guidance but I mean, the business has changed over time through some divestitures, migrating payments, ramping the advertising business now certainly. I guess when you think about the other side of macro, how do you think about margins relative to historic levels?
Stephen Priest
Yes. I mean, again, I refer to the Investor Day materials. We were very thoughtful about how we laid that out. We were thoughtful about the capacity and the returns that would come from the ads business for the incremental financial services in payments and then ads [indiscernible] overall and other things. And with that mid-single-digit GMV growth, we talked about margin accretion associated with that. So for us, on a medium-term basis, that architecture remains intact and really be a function of when we cycle through the macro environment and we come to the other side of that. Again, the timing of that will be a function of the duration and severity of what we’re in but we’re committed to those longer-term targets that we laid out a year ago.
Douglas Anmuth
Okay. Maybe let’s just talk about marketing spending a little bit and you mentioned it for parts and accessories. You’re doing a lot of marketing, especially for that category right now as you have for other focus categories previously. I guess, how do you think about whether you continue to push on that spending, perhaps as you get to or even above maybe market rates of growth?
Stephen Priest
Yes. So if you think about eBay, 80% of our traffic comes direct to eBay, 10% is paid search and 10% is free search. So we have a rather unique model which we benefit from. One of focus — I mean, our work is never done within a specific focus category. We build the tech, we tell customers about it and we continue the traction. So we will continue to invest in the focus categories that we deployed, whether it’s trading cards and handbags and sneakers and P&A, for example and then we move on to the next category. And we do that in the U.S. and we do it internationally.
And so I think the big pivot for eBay is we’ve moved away from sort of the low-calorie couponing one-and-done buyers that came to the platform and investing in really good sort of full funnel marketing, as I mentioned earlier, whether it’s sort of earned or paid as we go forward. And so we will continue to invest. We’ll continue to invest in product. We’ll continue to invest in full funnel marketing as we believe that it’s going to give us that advantage over the medium term. And it’s an important component of our investment sort of criteria.
Douglas Anmuth
Okay. I want to hit on the International Shipping program. So we did talk about how it weighs on margins currently. There’s also some accounting changes in here as well. But at the same time, you’re forecasting positive operating income contribution this year and basically getting to corporate level margins, right, by 4Q. Can you just talk about the benefits of the program, what it opens up for you going forward?
Stephen Priest
Yes, we’re excited about the unlock from eBay International Shipping. Think about the opening comments that I referred to which is you can think about the core GMV and then you think about the opportunities to scale that and drive ancillary opportunities for eBay. We’ve done it in payments. We’ve done it for ads. We’ve just launched eBay International Shipping. If you stand back and think about a customer sitting in New York, for example, wanting to sell to San Francisco versus the customer that’s trying to sell from New York to say, Frankfurt in Germany, there’s naturally more friction associated with that. And customers think about, well, what about the shipping process? What about customs duty? What about forms, et cetera, et cetera? So eBay is taking the friction out of that. So that customer sitting in New York ships to Chicago and forgets about it and becomes ambivalent about whether they’re shipping it domestically or internationally. The beauty of it is that currently, less than half of our inventory on eBay in our key big 3 markets has the accessibility for International Shipping. That eventually does not get international eyeballs on it.
And by opening up the lens for the buyers internationally by taking this friction out, not only does it give us the ability to drive incremental GMV because there’s more inventory available to international customers but at the same time, if you think about FX through the payments lens, someone sitting in the U.K. and wants to pay in sterling for a U.S.-denominated sale, eBay benefits from an incremental payments revenue side on that. So it’s going to help us unlock GMV, it’s going to help us unlock ancillary opportunities. It’s in its early days. That’s why we’ve seen some investments in the first quarter. You’re right, by the end of the year, we’d expect it to be at corporate margins and we’re excited about the overall operating income this can potentially unlock for the business as we go forward.
Douglas Anmuth
Okay, great. I have some more questions. I think we may have some mics around the room as well. If anybody has questions, you can raise your hand, we’ll get a mic to you. You can think about those. Let me ask you about capital allocation, a strong balance sheet, generating healthy, sustainable free cash flow. I think you’ve talked about returning 125% of free cash through ’24. But you did more than that last year. I think it was around 170%. I guess, how do you think about the considerations around whether you can be even more opportunistic going forward?
Stephen Priest
As a reminder for the investor community, at the investor event last year, we talked about returning 125% of our free cash flow on aggregate between ’22 and ’24 and that’s through both dividends and buybacks. We’ve been great stewards of capital. We went through a significant amount of divestitures over the last couple of years. We turned a lot of capital to shareholders. But our first and primary objective is to reinvest in the business through the build, buy, partner framework that we’ve talked about. That is where we see the highest accretive use of capital for our shareholders over the medium term.
The beauty of eBay’s financial architecture is we can do both. As you’ve mentioned, Doug, the strength of our balance sheet. So to date, in the 15 months since we sort of talked about this, we’ve returned $4 billion of capital to shareholders which is around 140% of free cash flow. So we’re bang on track. For this year, we’ve talked about offsetting dilution. And beyond that, we’ll continue to be opportunistic. But again, I think I’d say we’ve been really good stewards of capital, very disciplined and we’ll continue to do the right thing in terms of investing in the business and then returning surplus cash to shareholders.
Douglas Anmuth
Okay, great. Let’s stick with that same topic, M&A transactions. So you’ve — we’ve seen some to bolster the offerings in focus categories. How should we think about kind of the strategy there going forward?
Stephen Priest
We have been a little bit more acquisitive recently. If you think about we simplified the portfolio, we focused on the core and we’ve lent into a number of acquisitions to strengthen the core and accelerate the playbook. So think about TCGplayer in the trading cards side of the business, you think about myFitment for P&A. You think about 3PM Shield which is really about driving a higher and continued level of safety on the platform. And then just last week, we announced the acquisition of Certilogo which will have an impact on refurbished fashion in terms of pre-loved fashion items.
And so it’s really about investing to accelerate the core. But what I would say, Doug, is despite the fact we’ve been a little bit more acquisitive recently, we go through the same process, very diligent in terms of making sure we get the right return on investment from the investments that we make. And we’ll continue to look for those opportunities as we go forward.
Douglas Anmuth
Okay, great. Can’t get through a discussion here without the 2 letters, A and I. So what do you think?
Stephen Priest
We’re excited. I think this provides a significant unlock for eBay. We’ve already been embracing it. Think about the ads penetration. We’ve been working very closely with Alex and team to drive benefits there. Secondly, in terms of search, we’ve really been leaning on AI to sort of make sure that customers get offered more relevant opportunities in their search and the search algorithms that go through eBay. We’ve been thinking about it from a risk standpoint, making sure that we continue to protect good GMV versus bad GMV and the teams that work in the risk of exploiting AI to drive the modeling. But I think the big unlock for us is in terms of the listing flow. If you think about eBay, we’ve got 1.8 billion listings globally on the platform times X number of photographs and images that are on the platform times 28 years of history. Think about the huge level of unlock for our customers whether they’re using their smartphones, whether you’re a seller and you’ve got an easy listing flow where you can take a picture of an image, or whether you’re a buyer and you’re searching for something that’s unique that you need to find to your home.
And so we really believe that this AI unlock will be very significant for us. Jamie talked about some of this in his prepared comments on the last earnings call. We are integrating ChatGPT into the listing flow as we go forward. So again, we see this as a huge, huge opportunity for us at eBay and we’re excited about the prospects as continuing to lean in with the opportunities that AI provides for us.
Douglas Anmuth
Okay, great. We’re going to wrap up with a quick word association. All right. First thing that comes to mind. Parts and accessories.
Stephen Priest
Fitment.
Douglas Anmuth
Macro.
Stephen Priest
Choppy.
Douglas Anmuth
AI.
Stephen Priest
Exciting.
Douglas Anmuth
Focus categories.
Stephen Priest
Execution.
Douglas Anmuth
International Shipping.
Stephen Priest
Unlocked.
Douglas Anmuth
Payments.
Stephen Priest
Revenue.
Douglas Anmuth
Margins.
Stephen Priest
Solid.
Douglas Anmuth
Advertising.
Stephen Priest
Momentum.
Douglas Anmuth
Tech-led reimagination.
Stephen Priest
Fantastic strategy.
Douglas Anmuth
And capital returns.
Stephen Priest
Balanced.
Douglas Anmuth
All right. Good. Thank you, Steve.
Stephen Priest
Awesome. Thanks, Doug.
Question-and-Answer Session
End of Q&A