eBay Inc. (EBAY) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to eBay Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to hand the conference over to Ms. Tracey Ford, Director of Investor Relations. Ma'am, you may begin.

Good afternoon. Thank you for joining us, and welcome to eBay's earnings release conference call for the second quarter of 2012. Joining me today on the call are John Donahoe, our President and Chief Executive Officer; and Bob Swan, our Chief Financial Officer. We're providing a slide presentation to accompany Bob's commentary during the call. All growth rates mentioned in John and Bob's prepared remarks represent year-over-year comparisons, unless we clarify otherwise. This conference call is also being broadcast on the Internet, and both the presentation and call are available through the Investor Relations section of the eBay website at investor.ebayinc.com. In addition, an archive of the webcast will be available for 90 days through the same link. Before we begin, I'd like to remind you that during the course of this conference call, we will discuss some non-GAAP measures in talking about our company's performance. You can find the reconciliation of those measures to the nearest comparable GAAP measures in the slide presentation accompanying this conference call. In addition, management will make forward-looking statements relating to our future performance that are based on our current expectations, forecast and assumptions and involve risks and uncertainties. These statements include, but are not limited to, statements regarding expected financial results for the third quarter and the full quarter 2012 and the future growth in the Payments, Marketplaces and GSI businesses, mobile payments and mobile commerce. Our actual results may differ materially from those discussed in this call for a variety of reasons, including, but not limited to: global economic events; changes in political, business, economic conditions, including any European or general economic downturn or crisis; foreign exchange rate fluctuation; our ability to integrate, manage and grow businesses recently acquired or that may be acquired in the future; our need to successfully react to the increasing importance of mobile payments and commerce, and the increasing social aspect of commerce; an increasingly competitive environment for our businesses; the complexity of managing an increasingly large enterprise for a broad range of businesses at different stages of maturity and in many different geographies; the effective management changes in business initiatives; our need to manage regulatory tax and litigation risks, including risks specific to PayPal and Bill Me Later; and our need to timely upgrade and develop our systems, infrastructure and customer service capabilities at reasonable cost while maintaining site stability and performance in adding new products and features. You can find more information about factors that could affect our operating results in our most recent annual report on our form 10-K and our subsequent quarterly report on form 10-Q available at investor.ebayinc.com. You should not rely on any forward-looking statement. All information in this presentation is as of July 18, 2012, and we do not intend and undertake no duty to update this information. With that, let me turn the call over to John.

Thanks, Tracey, and good afternoon, everyone, and welcome to our Q2 earnings call. We had another great quarter. Every part of our company showed strength and we feel good about our momentum as we reshape how people around the world shop and pay. In the second quarter, revenue is up 23% and non-GAAP EPS is up 16%, a strong finish to the first half of the year. As we consistently execute against our 3-year growth plans, there is no question that an inflection point is occurring in retail. Mobile is revolutionizing how people shop and pay, becoming the digital nexus of consumers' lives. They want what they want, when they want it, anywhere, any time. We now expect eBay and PayPal Mobile to each handle over $10 billion in volume transacted this year, a stunning surge in purchases and payments on devices that did not even exist just a few short years ago. Online and offline commerce is becoming seamless and global, and retailers of all sizes need a partner who will help them navigate in this new world, compete effectively and deeply engage their consumers. And this is our focus: enabling commerce, helping consumers shop any time, anywhere and helping retailers of all sizes compete and win in this new commerce environment, and we will not compete with them. With our strong portfolio, each quarter, we're demonstrating our capabilities, our focus on innovation and our commitment to delivering against the bold goals we set for ourselves. I'm pleased with where we are and excited about what's to come. Now let's take a look at the quarter, starting with PayPal. This business continues to generate enormous opportunity and drive strong performance. PayPal is delivering real innovation, not just promises, to all segments of the market on a global scale, from small businesses to large retailers, to consumers everywhere. PayPal's global reach is a competitive advantage, and for the third consecutive quarter, more than half of PayPal's revenue came from outside the U.S. We're enabling safer, easier and more convenient ways to pay for consumers and merchants around the world. PayPal's TPV on eBay was up 18% for the quarter on an FX-neutral basis. This is driven by strong Marketplaces performance and increasing penetration on eBay, which was up 420 basis points year-over-year. In Merchant Services, TPV grew 26% on an FX-neutral basis. PayPal continued to add more than 1 million new active accounts per month in Q2, ending the quarter with over 113 million active accounts. PayPal continues to innovate. In Q2, we announced 15 retailers in addition to Home Depot, who will be implementing our point-of-sale product. Two of them are already live. Abercrombie & Fitch beta tested and began rolling out PayPal point-of-sale to over 900 stores across the U.S. in just 4 weeks, in time for the critical back-to-school shopping season. And in Q2, men's retailer Joseph A. Banks begun expanding its pilot to a full national rollout of over 550 stores. In addition, Office Depot recently, not only signed up for PayPal's point-of-sale, but also signed up for PayPal Online and PayPal Mobile. This is a great example of how we can provide comprehensive, innovative, multichannel support to retailers, and how we can drive growth in our core business while expanding PayPal's presence off-line. Our small business product, PayPal Here, the only global product of its kind, is also generating strong interest. PayPal Here has been introduced in 4 markets, and in Q2, we announced the joint venture with Softbank in Japan, which will bring PayPal Here to the world's third largest economy. And as of this week, we're pleased to announce general availability of PayPal Here on iPhone and Android to any merchant in the U.S. and Hong Kong who applies, including the over 300,000 customers who have signed up for our waiting list since announcement. As I mentioned in my opening, PayPal Mobile has strong momentum. Our new estimate of $10 billion in payment volume transacted for 2012 is up 150% over last year. Through PayPal Mobile, consumers increasingly have a more convenient way to pay in a growing number of everyday situations. For example, in Q2, 4 major High Street retailers in the U.K. began accepting payments using a new PayPal in-store app. And Starbucks added PayPal to the Android version of their app in the U.S. Now, let's turn to Marketplaces. Simply put, eBay had a great Q2, the best we've seen in years. In fact, on an FX-neutral basis, this was eBay's strongest quarter of year-over-year organic core GMV growth since 2006. Our multiyear focus to transform and reposition this business for the future is paying off. eBay is revitalized. We're more relevant today than ever to buyers and sellers globally. We've improved trust, enhanced value and selection, built better product experiences and become more customer-focused, and it's working. We believe the best is yet to come as we continue to drive innovation to serve our customers in a seamless multichannel retail environment and tap the full potential of eBay. In Q2, GMV, excluding vehicles, accelerated 2 points on an FX-neutral basis to 15%. Sold items also accelerated as did growth in active users, demonstrating that our improved eBay Marketplace is attracting more new users. And our fixed price format continues to be strong, growing 20% in the quarter on an FX-neutral basis. Fixed price is now consistently well over 60% of FX-neutral GMV, underscoring what a different and more relevant marketplace eBay is today for buyers and sellers. Top-rated sellers generated more than half of U.S. GMV and their same-store sales grew 18% in the quarter. And our sellers are offering more free shipping than ever. During Q2, 48% of transactions shipped free, up 11 points over the prior year. And Mobile continues to be a game changer, and eBay Mobile continues to be a leader with transacted mobile volume expected to double in 2012. Our mobile apps have been downloaded nearly 90 million times, and we're seeing incredible velocity stats. For example, sellers are listing almost 2 million items on mobile devices each week. A woman's handbag is purchased on eBay Mobile every 30 seconds. More than 8,000 cars and 340,000 car parts are sold each week before eBay -- through eBay mobile apps. And Mobile continues to attract new customers. In Q2, 600,000 new customers made their first purchase on eBay through our mobile apps. So again, a great quarter for eBay with strong momentum. We believe this business will continue to deliver strong, steady sustainable growth. Let me briefly share some Q2 highlights from GSI. GSI had another strong quarter, driving a 21% increase in same-store sales for its clients, once again outpacing e-commerce. A year after completing this acquisition, we feel very good about the synergies of GSI in our portfolio and the momentum and potential of this business. GSI is an essential part of enabling us to partner with large retailers and brands and drive multichannel commerce. In summary, our company had a strong second quarter and strong first half to 2012. We have a strong global portfolio, we are well positioned to enable the future of commerce and lead through the dynamic changes occurring in how people shop and pay. We're focused on innovation and on serving our customers, and we will continue to operate with discipline, clarity, and we're committed to achieving our long-term objectives. Now I'll turn it over to Bob who'll provide more details on Q2 and on our outlook for Q3 and the full year.

Thanks, John. During my discussion, I'll reference our earnings slide presentation that accompanies the webcast. Q2 was a great quarter for the company. Revenue increased 23%, margins expanded for each of our 3 businesses versus last year and non-GAAP EPS grew 16%. We feel excellent about our portfolio and our capabilities. PayPal continues its strong growth while innovating on the next-generation of payment capabilities. The Marketplaces business is healthy and getting stronger, and GSI continues to help large retailers succeed in a multichannel world. From a capital allocation standpoint, we generated $411 million of free cash flow. We repurchased approximately 9 million shares of common stock and announced the $2 billion increase to our stock buyback program. We feel confident about our performance and are maintaining guidance for the full year. In Q2, our combined businesses generated net revenues of $3.4 billion, up 23%. Organic revenue growth was 18%, foreign currency movements decreased growth by roughly 3 points and the inclusion of recently closed acquisitions increased growth by roughly 8 points. Second quarter non-GAAP EPS was $0.56, a 16% increase year-over-year. Strong top line growth drove our outperformance relative to guidance. Non-GAAP operating margin was 27.3%, down 30 basis points from the second quarter 2011. The decrease was mainly due to acquisitions and business mix. Let me provide a little more context on our Q2 results. Compared to the guidance we gave back in April, there are 3 things worth highlighting that impacted our actual performance: First, and most importantly, better performance from our businesses, primarily Marketplaces, generated an approximately $70 million and -- $70 million in revenue and contributing an additional $0.02 of earnings. Second, a favorable ruling related to an indirect tax position in Korea positively impacted international Marketplaces transaction revenue by approximately $29 million and non-GAAP EPS by $0.02. And third, a higher sequential non-GAAP tax rate due to onetime adjustment of reserves related to U.S. taxation of certain foreign earnings from prior periods negatively impacted non-GAAP EPS by $0.02. In summary, there are several moving parts in the quarter, but overall, very strong results and a very strong first half to the year. We generated free cash flow of $411 million in the quarter. CapEx was 10% of revenues due primarily to investments in technology and infrastructure. We expect full year CapEx in the range of 8% to 10% of revenue. Now let's take a closer look at our segment results. PayPal had a strong quarter. Revenue reached $1.4 billion and total payment volume increased to $34.5 billion, up 27% and 23% respectively on an FX-neutral basis. We continue to expand our global footprint with international TPV increasing 24% and comprising 47% of overall TPV in the quarter. A few quick highlights on PayPal operational metrics. The net number of payments grew 31%, flat with the first quarter. On eBay TPV grew 18% on an FX-neutral basis, driven by strong eBay non-vehicles GMV growth and a 420 basis point increase in PayPal penetration. Merchant Services TPV grew 26% on an FX-neutral basis. This growth was driven by continued expansion of PayPal on merchant sites around the world and an increase in share of checkout. The deceleration versus Q1 was due to macro pressure in the euro zone and softness in cross-border trade to Europe. Transaction margin was 66.3% in the quarter, up 270 basis points. The increase was mainly driven by a higher take rate and lower transaction expense. And PayPal's segment margin came in at 25.8%, up 390 basis points from last year. The improvement was mainly due to transaction margin expansion and operating leverage. Let me touch on a few key operating metrics for Bill Me Later. More consumers are turning to BML for both convenience and choice. BML's TPV was up 39% in the quarter, driven by continued strong penetration on and off eBay. And Bill Me Later penetration in the U.S. on eBay and in the PayPal wallet increased to approximately 1.8% in the quarter. While small compared to other funding choices, this penetration helps to reduce our funding cost. Risk-adjusted margin for the quarter was 15.5%, down 1 point over last year due primarily to a higher loss rate. Now let's move to our Marketplaces business. Marketplaces had a strong quarter, with net revenues of $1.8 billion, up 14% on an FX-neutral basis. This was driven by FX-neutral transaction revenue growth of 14%, and marketing services revenue growth of 11% from our adjacent formats. A few quick highlights on Marketplaces' operational metrics. Sold items grew 20%, a 3-point acceleration from Q1, driven by strong double-digit growth across all our major markets. U.S. non-vehicles GMV grew 14%, up from 13% last quarter, driven by accelerating growth in active users and strong performance in category sales in fashion, tickets and parts and accessories. The user experience on eBay continues to improve, driving a robust domestic business. This more than offset the impact from weaker cross-border trade activity, which negatively impacted the U.S. growth rate. International FX-neutral non-vehicles GMV grew 16%, a 3-point acceleration. Performance was driven by strong growth in both APAC and the EU. Take rate, excluding vehicles, StubHub and the onetime item was flat versus last year. In Marketplaces, segment margin was 39.6% in the quarter, up 80 basis points primarily due to the benefit from indirect taxes partially offset by increased investments in technology and marketing. Now let's turn to our newest business unit, GSI. GSI had a good quarter. Revenue for Q2 was $221 million, up 9%, driven by strong volume growth, partially offset by the mix of merchant sales. Adjusting for the impact of the continued shift of clients to the service fee model, year-over-year growth would have been 12%. Global e-commerce merchandise sales, or GMS, grew 21% on a same-store sales basis. GSI marketing services, which is primarily demand generation activities, grew 27% and accounted for 26% of GSI's revenues in the quarter. And GSI's profitability is improving as we capitalize on the synergies we laid out at the time of the acquisition, resulting in a segment margin of 4.7% for the quarter. The margin is down versus the prior quarter due to seasonality and investments in the V11 platform. Q2 marks the 1-year anniversary of the acquisition of GSI, and we have made great progress in realizing the operating synergies of the businesses. PayPal's share of checkout on GSI's volume in the quarter was 13%, up from 12% last quarter. And GSI's marketing products and solutions have been integrated into Magento, part of our X.commerce business. V11's platform is progressing, but not as fast as we would like. We expect merchant deployment to begin after the upcoming peak holiday season. Further testing is required to meet our highest expectations of the product for our clients. We are leveraging GSI's expertise in serving large merchants to deliver -- to help us deliver commerce solutions across all of our platforms. We're making great progress, and we have further opportunities ahead. Turning to operating expenses. In Q2, they were 45% of revenue, slightly lower on a year-over-year basis, driven primarily by operating leverage. From a capital allocation perspective, we generated free cash flow of $411 million in the quarter. We've improved our financial flexibility by funding approximately 53% of the U.S. Bill Me Later loan receivables portfolio with offshore cash. We closed one acquisition and one disposition, and we repurchased 9 million shares of our common stock for approximately $350 million. And today, we also announced the $2 billion increase to our stock buyback program for the purposes of managing dilution from stock-based compensation. We end the quarter with cash, cash equivalents and non-equity investments of $7.6 billion, including approximately $700 million in the U.S. We have a strong balance sheet and free cash flow, which should allow us to finance our organic needs and stock buyback programs over the near to medium term, and we do not anticipate meaningful M&A activity in the near term. However, most of our cash is generated and resides offshore. We will remain opportunistic when assessing sources of additional liquidity, and to the extent we increase current levels, we expect it will negatively impact our net income and earnings per share. Now, let me turn to guidance. We feel great about the first half of the year. Despite significant macro headwinds in the second half of the year, we are maintaining the full year guidance we provided back in April. For the full year 2012, we continue to expect revenue of $13.8 billion to $14.1 billion, representing growth of 18% to 21%. And we anticipate non-GAAP EPS of $2.30 to $2.35, representing growth of 13% to 16%. Let me provide a little more clarity. First, our North America business is performing stronger than our expectations, and we continue to gain operating leverage on our cost base. Second, Europe and European currencies remain under pressure. This is impacting PayPal Europe organic growth, cross-border trade to Europe and translation of foreign revenue into U.S. dollars. And third, we continue to invest in marketing and technology and new growth opportunities such as emerging markets, offline and mobile. Our expected full year non-GAAP tax rate remains in the range of 19% to 20%, and we expect free cash flow to be in the range of $2.4 billion to $2.5 billion. We are increasingly confident in our outlook for 2012 and our plans for 2013. For the third quarter, we expect revenue of $3.3 billion to $3.4 billion, representing growth of 11% to 15% and we anticipate non-GAAP EPS of $0.53 to $0.55, representing growth of 10% to 15%. In summary, we feel good about our performance and we're excited about the opportunities that lie ahead. As PayPal continues its strong growth with increasing focus on simplifying and improving financial products and the consumer experience, the Marketplaces business is thriving, with strength across all geographies driven by improvements in buyer experience from our investments. And GSI is performing in line with our expectations as it continues to build its client portfolio and help eBay deliver commerce solutions for large merchants, leveraging our portfolio of assets. We're investing in our business for the long-term, and we are focused on delivering the next generation of global commerce and payments capabilities. And now, we'd be happy to answer your questions. Operator?

[Operator Instructions] Our first question comes from Scott Devitt from Morgan Stanley.

The question relates to frequency of purchase, really in the past 2 to 3 quarters, purchase frequency in Marketplaces or the gap between sold items growth and the active user growth seems to have inflected. And if I'm thinking about this the right way, there seem to be 4 broad buckets. The first would be trust and search improvements you've made over to past several years. The second would be the recent marketing campaign, third would be mobile engagement and fourth would be potentially SKU growth from large merchants in the fashion inventory that you've added, which is improved selections. I'm just wondering, John, maybe if you could rank order those in terms of their effects on this change in frequency of purchase or any other factors that would've driven it and how sustainable that you think that is.

Yes. Thanks, Scott. The answer is yes, yes and yes. As you said, there -- the way I look at it, there's really 2 things going on here. One, we've made an enormous amount of change to the site over the past several years, including trust in search, including bringing more selection. And that was clearly driving greater frequency of our existing users or more transactions per user. And that continues to be the case. Starting 9 months ago was really the first time we began marketing to new users, right? It started in the fourth quarter last year, Buy It New, Buy It Now. And we're seeing a nice response in new users coming. And when we poll them, they like what they're seeing and they're doing a second and third transaction. And then -- the thing that I think underlies both is Mobile, because if you think about it, 4 years ago, the only time you could access eBay is when you were in front of a laptop or in front of a desktop, which is maybe a couple of hours a day. Now, you can access eBay 7 days a week, 24 hours a day with your mobile device. And that's helping with existing users and it's helping acquire new users as you saw. 600,000 new users in Q2 alone. So to be honest, even our internal metrics, we can't tease these out separately to force rank them, but I'll just say, the way I'm thinking about it is our existing users like it, MPS is going up and they're buying more. And the new news, really, in the last 9 months is an accelerating growth rate of new users who are trying us whether it's through mobile or through the web. They like what they see and they're coming back. And we want to keep pouring kerosene on that latter fire to keep it going.

Our next question comes from Colin Sebastian from R. W. Baird. Colin A. Sebastian - Robert W. Baird & Co. Incorporated, Research Division: I guess, first, curious on the impact for mobile, more specifically some very impressive stats there. And I wonder if you can talk about what usage is specifically driving this growth, for example, in Marketplaces, the people are carrying their phones into the stores or is it perhaps tablets where we're seeing couch commerce become more impactful? And then related to PayPal, roughly how much of the mobile volume is related to eBay transactions versus the other applications of PayPal in the phones?

Well, Colin, Mobile, it's really interesting because -- I'll give one statistic upfront then I'll comment more on your direct question, but for -- as we're now saying, $10 million of volume is closing on a mobile device on the eBay business. What's interesting is our analysis indicates that at least that much of volume that closes on the Web, their consumer access their mobile device at some point in the shopping experience. So as you said, mobile is impacting a significant portion of eBay's business, either at some point in the shopping experience and/or the transaction closes on it. The kinds of things we're seeing that's interesting on eBay Mobile is, let me just take the parts category, the motor parts category I referenced earlier, as I said 340,000 parts a day are being closed. As we unpack that, we're finding more and more users, in this case, our target motorist buyer, which is a male, 30 to 50 years old, they're actually using their mobile device while they're under the hood. And they can scan the VIN code or take a picture of the back of the car. And when they see the parts they want, if they do a search on their mobile device while they're under the car, our search results only show them parts that fit their car. And so that they're ordering right there on the spot. So similarly, as you described it, we're seeing consumers go into stores or walk down the street, use their mobile device either to do their investigation or in some cases, to shop. So what we're certain about is mobile is having a profound impact in consumer behavior, and are -- we are aggressively driving innovation, both to close transactions on mobile but also to enhance the shopping experience, even if the transaction doesn't close on mobile. In many ways, PayPal is the same thing. If you look at PayPal Here, it's a great example of driving new use cases where PayPal can be used. So to your direct question, PayPal is used as the way to pay on a significant portion of the eBay transactions closed on mobile devices but not all. But what's really growing is PayPal off of eBay in the mobile arena, because retailers and merchants are finding when they put PayPal Mobile Express Checkout on their app or on their website, they're seeing significantly increased conversion. And what we know in both business units is mobile shoppers and mobile payers are 3 to 4x more valuable than Web-only, simply because they're more engaged with our products and they're buying more. So it's -- I can't underestimate the importance of mobile to what we see as the future of commerce and payments. Colin A. Sebastian - Robert W. Baird & Co. Incorporated, Research Division: That's very helpful. And then just one maybe a follow-up quickly, perhaps it's philosophical in nature and the marketplace. Just given more high-profile brands and retailers on the site now, the sweet spot for eBay historically hasn't been new in season merchandise. So I guess my question is whether eBay, as a platform, is now ready to compete in these new product categories, and where you're seeing incremental strength in transaction volumes potentially.

The way I'll tease that out, Colin, is I don't think new in season is ever going to be our sweet spot. But new items is absolutely our sweet spot. And retailers and brands are finding new items that may be one season out of season, or 2 seasons out of season, all the way through liquidation stock. That's their sweet spot for eBay. So we estimate over 70% of the items are new on eBay. And buyers are responding to expanding selection because what you're having is more and more sellers, be they retailers or be they traditional eBay sellers, are bringing more of their new but somewhat out of season inventory on to eBay. There's one other category, it's interesting, that's kind of evolving, which is the scarce category. eBay has always been the place where something may be new and scarce, and so the auction format is really an interesting vehicle for that. And recently, we just announced a holiday collective of designers who are designing exclusive goods for the Holiday on eBay. The reason designers love it. It allows them to go directly to consumers and that will create scarcity value. So that's, I would say, a small but growing category of goods on eBay.

Our next question comes from Gil Luria from Wedbush Securities.

To follow up on the mobile theme. Can you quantify, even just a little bit, what the uptick on conversion is when a retailer adds PayPal to their mobile offering? And then how is that driving a higher share of online transactions? Have you quantified what share you believe you now have of online transaction -- of mobile transactions versus online transactions?

Well, Gil, let me just make a comment upfront. I think one of the decisions we made early on in mobile that has served us very well is from the beginning, we said, "We're not going to worry if it's incremental or not." And so it's a kind of thing we could've spent years having our financial analysts figuring out, is this incremental? Is mobile profitable, dot, dot, dot. We said, "We believe mobile is a movement that consumers want." And we've invested heavily in that. Now when we sit down with a retailer, what we can say is, "When you put Mobile Express Checkout on your mobile websites or on a mobile app, cart conversion will go up because it's very proven that consumers don't want to enter in their credit card information into a mobile device, and PayPal is the safest way to pay." And we think conversion can go up to 10%, 20%, 30%. I mean, we've not released exact statistics because it varies by retailer, but I think retailers find that their cart version goes up when they put Mobile Express Checkout on their mobile web or app. And by the way, Mobile Web -- Mobile Express Checkout is the same integration as Express Checkout. So and what it's doing is -- for the retailers is the same thing I described it was doing for eBay earlier. It allows the retailer to extend their reach outside the limitations of their store. And so now, if you're a retailer like Office Depot, who just signed with PayPal, no longer will the only way -- time you reach your consumers be when they're in the Office Depot store or when they're on the Office Depot website, but through mobile, Office Depot can be reaching their consumers 7 days a week, 24 hours a day. So retailers see the value of mobile and increasingly, they're embracing PayPal Mobile in aggressive ways.

And a quick follow up...

Yes, the only -- maybe the only other comment that I would make is just in terms of percent of overall volume, last year, we said we did $5 billion of GMV on a mobile device, of a total of $69 billion. Now this year, GMV has been growing in the midteens. And we expect $10 billion to be on a mobile device. So the share of mobile transactions as a percent of our total is growing dramatically. And to John's point, the share of PayPal at -- PayPal's share of wallet or share of checkout is significantly higher on a mobile device than it is on the desktop.

And then the quick follow-up, is this a U.S.-based phenomena? Are you seeing more of this shift to mobile in the U.S. or is it just in line with the penetration of smartphones in other countries as well?

It's the latter, Gil. It's sort of stunning to see how globally consistent this is. And the U.K. and Australia are furthest along because they have the highest smartphone penetration, following by U.S., followed by Germany. But the slopes, the slopes are all very consistent.

Our next question comes from Tom Forte from Telsey Advisors. James Cakmak – Telsey Advisory Group: This is James actually calling in for Tom. The first, this is following on -- when you look at the usage patterns of legacy users versus newly active users, are the adoption patterns for mobile similar for both? And when you look at the purchase sizes, can you speak to the differences between the 2 different cohorts? And then secondly, there's been a lot of news going on with the Federal, potential Federal legislation on the online sales taxes. Can you speak to where eBay stands and the implications for your business?

James, on the first, to be honest, we -- there is nothing that we see that's particularly insightful or actionable about the difference between new users and, as you call them, legacy users or we call them our existing users. We see new users coming in through the mobile channel and staying on mobile channel, some come in the mobile channel and move online. But there's no, I'd say, no standout patterns or standout differences in the pattern between the 2. And with respect to online sales tax, our position is the same as it has been for years now, that our focus is on protecting small business from undue taxation or taxation that is differentially difficult for them to handle administratively. And so while online sales tax will probably happen at some point in the future, our focus is to do nationally what we did last year in California where we worked with the California legislature and created a small business exclusion, where a small business that sold less than $1 million in California didn't have to collect cross state sales tax. And that's just -- because it's a burden -- administrative burden they can't handle. So we'll continue to do that to protect the smallest of our sellers.

Our next question comes from Heath Terry from Goldman Sachs.

Just a couple of quick questions, and then one maybe broader, one that we're thinking about. Bob, is there a way for you to parse out for us what guidance would have looked like for the full year on an FX-neutral basis? And then John, do you have a sense of what mobile growth that you're seeing is incremental or -- versus a shift of purchases between the platforms?

Yes, I'll go with the first one. Heath, the -- just for the first half of the year, organic growth rate, so excluding FX and M&A, was 18%. And essentially implied in our guidance for the second half is 18% organic growth rate. That's the middle of the range. So stripping out currency and any M&A activity in the second half, it's pretty much flat throughout the year. I'll just say the only nuance there is Q3 organic growth is a little bit lower and Q4 it's a little bit higher. And that's just our anticipation of what transpires in Europe during the third quarter.

And then, Heath, on Mobile, as I said a minute ago, the -- we are not overly focused on what is incremental or not because the way we're thinking about it is, the fact is consumers like using their mobile devices, whether they buy or pay on their mobile device or just use it as part of a shopping experience. And we know that consumers that engage with their mobile apps are 3 to 4x as valuable as to those that don't. So that's how we're thinking about it. We are -- we believe it's helping our growth rate. We believe we're very well positioned to be the leader in mobile commerce and the leader in mobile payments. But we're just going to keep investing in the general area.

Okay. Got it. With the growth of PayPal again being well above overall e-commerce, how much of that would you say is new merchants accepting PayPal and how much of that is PayPal gaining share within that existing merchant base? And is there anything in particular that you would attribute that share gain to?

Well, I think PayPal's historical growth formula continues where I would -- on one dimension, we're simply expanding new merchants, right, adding new merchants. And we continue to add new merchants globally. I mean the -- whether it's in places like Brazil and Latin America, whether it's Asia, whether it's Europe. We're adding more merchants online. And now we're adding those merchants with mobile and with offline. So that you begin to see PayPal everywhere. So kind of ubiquity. Then, we're trying to focus on building great products so that it increases more volume per user. People are using PayPal more and you see that happening. Today, we're adding digital uses, we're adding BML uses, we're adding mobile uses. And then the third area where there's absolutely more focus and David has brought -- David Marcus has brought more focus is adding more consumers to the top of the funnel. The truth is we've been adding sort of 1 million -- roughly 1 million new consumers a month for the last 3 years, and as the denominator gets bigger, our active user growth rate is coming down a little bit. And Dave has really brought an increased focus on the product experience for new users signing up to streamline registration flows, allow someone to sign up on a mobile device. You may have seen we bought Card.io yesterday. You can envision a world in the not-too-distant future where you can just frankly snap -- take a snapshot of your driver's license and credit cards to form a PayPal account. So I think one of the pieces of the PayPal play book that I think you'll see increased focus on is just consumer acquisition, which then again leads to consumer engagement, which leads to -- which is supported by the merchant ubiquity. And as you said, we're growing. We think we're going 2 to 3x faster than the market. So we're clearly gaining share in Web. We're gaining share in mobile, and our aspirations in offline is if we can get a little piece of that offline market, we think that can really add to our business.

Our next question comes from Ronald Josey from ThinkEquity.

So a few here. One, maybe a quick one on housekeeping. For guidance, Bob, can you tell us a little bit more on what you're basing FX rate -- the base FX rate is for guidance for full year? And then sticking with guidance I think you had just mentioned that 3Q is a little bit lower, 4Q needs acceleration. But specifically, 3Q is lower due to Europe. And I wonder if you can talk about Europe as it relates to Marketplaces versus PayPal. I feel that PayPal was more impacted. And in the last question, I promise, is just in terms of -- do you still believe that Marketplaces can grow sort of in line with e-commerce?

So our guidance for the second half of the year in essence, it has this S pot [ph] in effect. So that's what the guidance is based on. That being said, at this stage of the year, our hedges have us fairly well protected for clearly for bottom line and for the most part, for top line. So we feel relatively good on how protected we are for the second half of the year. In terms of the second half guidance, I refer to organically our growth rate of 18%, a little bit lower in Q3, a little bit higher in Q4, but 18% on average. And the reason we expect Q3 to be a little bit lower is in general, Q3 is our softest quarter, driven by Europe. And this go around with the Olympics. We expect a little more impact in the quarter as a whole. So that's what -- that's why Q3 is a little bit lower. I would just say, by business units in our Q2 results, Marketplaces, despite the relative headwinds we're dealing with in the macro economic environment in Europe, Marketplaces had a great quarter across-the-board in Europe. So we're expecting continued strength there. And PayPal who's got a little a broader exposure to the overall environment was a bit slower. And in our guidance, we're assuming that is well going into the second half of the year. Your third question, market...

Yes, I'll do this one. Since you couldn't get it down fast enough. We're going to -- instead of having only a 1-question rule, we're going to have to start imposing the 3-question rule.

At least, Ron, was kind enough.

Yes. So, Ron, on marketplace growth rates relative to e-commerce, what I said last year at Investor Day is that the number I look at to compare marketplace to market growth is our fixed price growth rate because it's the apples-to-apples comparison. And fixed-price grew 20% this quarter. So it's clearly growing faster than e-commerce. And that's true in almost every market. What's also happening is auction growth rates are coming back a little bit and simply, the mix of fixed-price and auction are such that our blended growth rate, GMV growth rate, this quarter is 15%. So we actually think the marketplace grew roughly at e-commerce growth rates in Q2. Where all the dialogue for us is going forward and the kind of focus Devin Wenig is bringing to the marketplace is, "All right, how do we build on top of that?" And he's got focus on how we leverage our data more effectively, a strong multiyear focus on leveraging our data and he brings some great experience from his experience on Reuters on leveraging data across the platform. How do we expand more aggressively to BRIC markets, initially with cross-border and then overtime with domestic. Again, a second big multiyear initiative. And then a third is, how do we bring more selection on to eBay, be it C2C selection, be it local selection from local retailers, be a Milo or be it from large retailers. And so those are 3 broad areas, the whole area of local; local, BRIC and data are areas that we think there's incremental growth opportunity and over the next 3 years in Marketplace, and that's what Devin's really got his team focused on.

Our next question comes from Brian Nowak from Nomura.

I have a question on PayPal incremental margin. It came in a little bit higher than expected again this quarter and it's kind of the highest we've seen since 2010. So I'm just curious about why they couldn't kind of stay in this low 40s range or even trend higher as you continue to grow and get positive leverage off the model. And in particular, in 2013 as investment flows. And then kind of stepping back, what's a better way to think about the 25% to 26% segment margin guidance on 2013?

Yes, thanks, Brian. So yes, segment margins through the whole first half of the year, very strong and driven by 2 things: one, transaction margin has continued to get stronger. We've continued to invest quite a bit, but we're getting good operating leverage in the business. But the biggest driver has been on transaction margin, and we have 3 things going on in our take rates, 2 which we expect to continue and one which we do not expect to continue. And it's the same as what we experienced in the first quarter. Take rate's gone up because of Bill Me Later's strong growth. We expect that to continue. FX fees on our cross-border business, we expect that to continue. But the third one is our -- in the money revenue hedges that we benefited from a little bit in the quarter, both first and second quarter that made take rate a little bit higher than what's the sustainable level. So I expect that to come back in line over time. In terms of what it all looks like going forward, at the beginning of this year, we upped our guidance for segment margins for PayPal, the 25% to 26% range. We're at the high end of that through the first half of the year. And we'll see how it plays out as we close out 2012 and position for 2013. But we feel very good about the transaction margins and the incremental margins the business is generating and feel very good about the operating leverage we're getting while continuing to invest in future growth opportunities.

Our final question comes from Spencer Wang from Credit Suisse. Spencer Wang - Crédit Suisse AG, Research Division: Just a couple of housekeeping questions for Bob. Bob, I know you called out the FX impact on cross-border trade. I was wondering if you could just maybe quantify what exactly the impact was on both on TPV and GMV. And then for Marketplaces, could you help us just quantify that onetime item that impacted the segment margin in Marketplaces, or is that the Korea tax issue?

On the second question, yes, it's the $29 million and it was -- it is the Korea international VAT issue, and it flows both through Marketplaces, international transaction revenue and through to segment margins. The first question, in terms of FX impact on TPV and GMV. I'm not -- I'm not sure I understand the question, Spencer, because it's kind of directly in the -- it's directly in the materials we gave you as reported, an FX for both GMV and TPV. So maybe... Spencer Wang - Crédit Suisse AG, Research Division: Sorry, I was wondering if you could isolate maybe just the cross-border impact, Bob. Is that possible or in terms of the demand impact.

Yes, I would -- it's not -- I'll give you -- for deceleration for PayPal TPV Q1 to Q2, we declined by 2 points Merchant Services. And I would think about half of that being cross-border trade. So roughly 1 point. So 25% of PayPal is cross-border. And 1 point overall impact. You can get a sense as to what the impact was on TPV. It wasn't -- it was less significant on GMV. So not terribly material for the Marketplace business. Thank you, operator.

Okay. Thank you, everyone. We'll see you next quarter.

Thank you, and ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect, and have a wonderful day.