Good day, ladies and gentlemen, and welcome to eBay's first quarter 2013 earnings conference call. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I would like to hand the conference over to Tom Hudson, vice president of investor relations. Sir, you may begin.

Good afternoon. Thank you for joining us and welcome to eBay's earnings release conference call for the first quarter of 2013. 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 they clarify otherwise. This conference call is also being broadcast on the Internet, and both the presentation and call are available through our Investor Relations section of the eBay website at https://investor.ebayinc.com. In addition, an archive of the webcast will be accessible 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 a reconciliation of those measures to the nearest comparable GAAP measures in the slide presentation accompanying the call. In addition, management will make forward-looking statements relating to our future performance that are based on our current expectations, forecasts, and assumptions and involve risks and uncertainties. These statements include, but are not limited to, statements regarding expected financial results for the second quarter and full year 2013 and the future growth in the Payments, Marketplaces, and GSI businesses. Our actual results may differ materially from those discussed in this call for a variety of reasons, including, but not limited to, changes in political, business, and economic conditions; foreign exchange rate fluctuations; 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 increasingly social aspect of commerce; an increasingly competitive environment for our businesses; the complexity of managing an increasingly large enterprise with a broad range of businesses at different stages of maturity; 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 a reasonable cost while maintaining site stability and performance and 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 reports on Form 10-Q available at https://investor.ebayinc.com. You should not rely on any forward-looking statements. All information in this presentation is as of April 17, 2013, and we do not intend and undertake no duty to update this information. With that, let me turn the call over to John.

Thanks, Tom, and good afternoon everyone, and welcome to our Q1 earnings call. We had a strong start to year. Revenue and non-GAAP EPS were both up 14%, and our new user growth continued to accelerate for both eBay and Paypal. But before getting into our first quarter results, I want to briefly recap what we shared with you at our analyst day three weeks ago. Simply put, we see accelerating change in the external market. Led by mobile, a commerce revolution is underway. Technology is creating a new retail interface, and a new consumer experience. It’s seamless, web-enabled, omnichannel, and multiscreen. It’s less about location and more about consumer engagement, anytime, anywhere. And eBay Inc. is well-positioned to capitalize and lead in this rapidly changing environment. Let me briefly recap three areas that capture the strength and opportunities for our company. First, the $10 trillion commerce market represents a bigger addressable market for our company. In fact, as we shared at analyst day, by 2015 we expect eBay Inc. to enable $300 billion in commerce volume. That’s up from $175 billion in 2012. This is one of the ways we will measure our success. And as a first step on our journey toward $300 billion, we enabled $49 billion of commerce volume in Q1. Second, our three core businesses are strong. Each has proven monetization models and strong momentum, and we’ve built a powerful set of technology and innovation capabilities. And third, we’re well-positioned to lead and compete in what we see as the four emerging battlegrounds of omnichannel commerce: mobile, local, global, and data. On the mobile front, we believe we’re perfectly positioned to benefit from broad consumer adoption of mobile. We’re integrating mobile into every aspect of our business, and we have a proven ability to leverage…

Thanks, John. During my discussion, I’ll reference our earnings slide presentation that accompanies the webcast. As John mentioned earlier, and we discussed at analyst day in March, we are expanding our addressable market. We have a portfolio well-positioned to capitalize on needs, and we are accelerating our mobile leadership position and the rate of innovation in our company. Q1 was a strong start to the year, and our first deposit on a multiyear plan. As a strategic partner of choice for merchants of all sizes, we enabled $49 billion of commerce volume in the quarter, up 19%. The eBay Inc. take rate was 7.7%. Revenue in the quarter was $3.7 billion, up 14%, and non-GAAP EPS was $0.63, up 14%. User growth accelerated 1 point for both Paypal and Marketplaces. We are maintaining our full year guidance. Let’s now take a closer look at the results from the quarter. In Q1 we generated net revenues of $3.7 billion, up 14%. Revenue was negatively impacted by 1.5 points from leap year and the timing of Easter. Organic revenue growth was 15%, with foreign current movements and the divestiture of Rent.com each decreasing growth by approximately half a point. First quarter non-GAAP EPS was $0.63, up 14%. Non-GAAP operating margin was 27.4%, up 50 basis points from the first quarter of 2012, and in line with our expectations. We generated free cash flow of $638 million in the quarter. Capex was 8% of revenue, primarily due to investments in search, data, and site operations. Now a closer look at our segment results. Paypal had a strong quarter. Revenue reached $1.5 billion, up 20%, on an FX neutral basis. A few quick highlights on Paypal’s operational metrics. Total active accounts growth accelerated 1 point to 16%. TPV grew 22% on an FX neutral…

[Operator instructions.] Our first question comes from Gil Luria.

Your first quarter results and the guidance for the second quarter put you at the lower end of your longer term growth guidance, as well as this year’s full year growth guidance. Where do you expect the acceleration to come from for the balance of the year, for the second half of the year, and for the balance of your longer term guidance?

As you indicated, in the first quarter, I’ll just start with ECV, in terms of commerce volume. We grew by 19% in the quarter, as you know, with the tougher comps of Easter and leap year on a year over year basis. That weighed down on growth a little bit. So I’d have it a little bit higher than the 19% we reported. In our implied guidance for the first half of the year, roughly speaking, we’re at 14-15% top line growth. And consistent with with what we told you back in January, we have the second half growing a bit faster than the first half. So in effect, no real change from where we were a couple of months ago. As we think about going into ’14 and ’15, the plans that we highlighted for you across all three of the businesses in terms of protecting our existing core businesses and expanding our served market, whether it’s mobile, whether it’s global, whether it’s local, or whether it’s more engagement with consumers across all of our platforms, we expect that to be contributors to growth going forward. So far one quarter into our 12-quarter journey, we’re pretty much at the high end of what the expectations are that we laid out in January, and on track for the full year, and feel great about the next two year journey we shared with you a few weeks ago.

Your user growth has accelerated in both Paypal and Marketplace. Is it that you’re adding more customers that take the time to ramp up their spending? Is it that you’re getting more customers in emerging markets where they don’t spend as much per customer? Is that part of the factor there?

As you know, this has been the experience with accelerating user growth across both platforms. The newer users have a tendency to be less engaged at the early stages of their lifecycle. And then our challenge, obviously, is once we get them on board and back to either starting to use again or being new to eBay and Paypal is to engage with them in new and different ways to increase their engagement over time. So that’s the more active user growth. In the early stages, it results in less engagement, but our intentions are to increase that over time. In terms of where they’re coming from, it’s a little bit the same themes we’ve been sharing with you in the past, John highlighted this as well, new users are coming from mobile, new users being reengaged, and new users coming from emerging markets. Those have been kind of the three buckets of increased active user growth that we’ve been experiencing, really for five quarters now.

And one other thing that I don’t think we fully understand yet is we know that mobile users are more engaged than non-mobile users. And as you saw at our analyst day, multiscreen users buy twice as much as non-multiscreen. So we know mobile’s significantly increasing consumer engagement, and we’re getting a greater number of new users from mobile. Marketplaces had over 4 million new mobile users to the Marketplace platform via mobile device, and the first quarter alone we had a little under 3 million company-wide. So as those consumers go through that ramp up that Bob talked about, of their first year to two years on our platforms, we’ll see if they ramp up engagement more quickly than has been historical fact. But I think it’s a positive trend one way or another as our mobile strength continues to be a source of advantage.

Our next question comes from Heath Terry from Goldman Sachs.

I was wondering if you could give us an idea about what drove the marketing leverage in the quarter. To what extent is that due to more direct customer relationships that you’re gaining through mobile? And particularly, seeing that kind of leverage at the same time that you’re seeing the kind of growth that you are in users, what is being able to drive that user growth with less marketing mean longer term for the margin opportunity in the business?

I think what we’re experiencing is a couple of things. As you know, we’re always trying to optimize sales and marketing in terms of the different levers that we invest behind to drive traffic to our respective sites given it’s our largest component of overall cost. So we’re constantly tweaking around the edges to optimize. And as John highlighted, new users coming through mobile devices have more of a tendency to come direct, so as we learn more about the new active users coming from mobile and how they engage, that influences how we’re spending money. At the same time, in our quest to optimize, I would also highlight that I do expect us to spend more as we go into the second quarter of the year, as we’re continuing to tweak and optimize. So while we had really good leverage in the quarter, I don’t expect it to be as good as we go into the second quarter of the year.

Our next question comes from Mark Mahaney from RBC Capital Markets.

When would you like to be able to, or when would you hope to be able to disclose the total payment volume offline? When do you think that could be material enough to do that? And if I could just follow up on Heath’s question on the marketing leverage, Bob you answered it, but any more color? I don’t think it was a shift of marketing spend programs from Q1 to Q2, but that’s pretty significant leverage year over year. Maybe you don’t want to talk about it for competitive reasons, but do you feel like you’ve found new channels of marketing that you hadn’t been able to utilize as well in the past? Any more color there would be great.

On TPV offline, as it becomes meaningful and material. As we talked about, kind of our three-year plans for Paypal in an omnichannel world, our primary focus in the short to medium term is on merchant ubiquity and test and learning with consumers. And as we get adoption, and it becomes material, we’ll begin to share more with you about our progress. In terms of marketing leverage, this is the biggest component of our costs. We’re constantly trying to optimize the most efficient and effective sources of traffic. And we tweak, adjust, and adapt and learn, particularly with the users coming from mobile. That informs our thinking on how we spend money going forward. We’ll continue to do the same to get the best, most efficient traffic for our merchants.

And the way I’d elaborate on it just a little bit, I don’t think we see any structural shift in our cost structure per se at this time, but as we are always doing, inside that marketing spend we are aggressively exploring and testing new marketing channels. Whether that’s mobile, obviously the way consumers behave on mobile and the role of traffic generation on mobile is different than it is on the web. Social channels, we’re being very aggressive in exploring and seeing if there are opportunities. We’re testing some little things with loyalty. So you can assume we’re always looking for new ways to drive healthy new user growth and healthy traffic to our site. And we’re seeing some early signs of success. So that’s a continuous process, and we’re really ramping up our focus on that this year.

Our next question comes from Ron Josey from JMP Securities.

I wanted to dive a little bit deeper on what you’re saying on what’s leading the company to believe Europe to be slightly worse, and potentially maybe break it out by geography if possible.

When we kind of started the year back in January, and talked about the general macroeconomic assumptions as we came into the year, we highlighted our belief was that the U.S. would get slightly better during the course of the year and that Europe, after a somewhat, in terms of the overall market, lackluster year in 2012. We didn’t expect Europe to get much better this year. So here we are, three months in, and on the margin, I would say in the U.S. we feel the same, maybe even modestly better, and Europe was a little bit slower than last year than we expected coming into the year. So in the aggregate, modestly slower. Within Europe, the U.K. was a bit slower than what we expected. I think it was a combination of not just slower traffic, but also a weaker currency, and as you know, currency is a kind of cross-border trade dynamic for us as well. So all in all, we expect fairly stable and on the margin a little bit weaker to the first three months.

Our next question comes from Sanjay Sakhrani from KBW.

I was wondering if you could just talk about the take rate in the payment segment, and just looking at that kind of year over year degradation, I know you guys cited some of the impact. But I’m just wondering if we should consider that kind of degradation throughout the rest of the year. And then secondly, this offline merchant rollout that you guys have, and the discussion you guys had at the analyst day about the rollout over the next three years, I was just wondering if there was a specific method as to how you’re going to roll that out in terms of category.

On the take rate, the modest degradation, we have really two things. One is large merchant growth, although [unintelligible] have a tendency to have lower take rates. That was a modest impact. But the bigger impact in the quarter, and I would expect it to continue a little bit as we go through the next couple of quarters, is from our hedges. And we hedge transaction exposures through the top line and Paypal. And given how the currencies, particularly European currencies, or the U.K., weaken during the course of the first quarter, it negatively impacted our Paypal revenues and our take rate. And last year it was the opposite. It worked in our favor. So the combination of those two had a degradation on Paypal’s take rate in the quarter, and I would expect that to be a modest impact going forward this year as well, given where the pound is. But I would say more hedges rather than fundamental real difference in terms of overall take rate with our merchants.

And with respect to your second question on offline merchant rollout, we’re trying to stage it to maximize our learning would be the simplest way to say it. So if you look at who are the large retailers that we directly integrated with first, it’s a real mix, and we were pretty conscious about that, trying different retailers and different verticals so that we could maximize the breadth of our learning. And if you look at who else will make up the roughly 2 million, offline merchants will be live by the end of this year. Paypal Here, if you have large merchants on one end, you have Paypal Here on the other hand. That will be distributed across a pretty wide spectrum of verticals and subverticals where they have smaller merchants. And then Discover’s more in the middle. And so I don’t think you’ll see us do merchant rollout vertical by vertical. But I do think you’ll see us, as David and [Hill] talked about at the analyst day, looking for solving pain points in a little bit more of a vertical by vertical location. So it’s more of the consumer engagement, the kind of consumer use cases that make sense in a fast food restaurant or in a place where there are lines. You know, how do you avoid getting around lines. That will be more focused in fast food and restaurant verticals. Or the ordering from table and paying from table, in restaurants. Or the Paypal check in. One of the areas that I think you’re going to see some particular take up over time is the enabling a merchant to give personalized service, and enabling a consumer to receive personalized service by checking in. And we think that’s going to be a really interesting and potentially exciting consumer enhancement. And again, whether that happens in one vertical or another, I don’t know, but you are going to be testing that in different locations during 2013. So we’ll learn a lot this year, and I would imagine as we roll things out in ’14 and ’15, we will have some slightly vertically different solutions.

Our next question comes from Douglas Anmuth from JPMorgan.

I just wanted to ask two things. First, Bob, you talked about the growth accelerating in the back half, and I just wanted to get some more color on what you get that confidence that overall growth will actually accelerate in the back half. And second, just in terms of the weaker Europe that you’re seeing and the impact on FX. Is there any way that you could quantify that for us as it relates to your ’13 guidance?

On the back half of the year, a combination of things. First, investments that we’re making throughout the course of the year to drive more active users and more engagement. So that’s kind of the macro theme across all three businesses. And then just relative to year over year comps, we expect Paypal’s growth rate will accelerate in the second half of the year. The comps will be a little bit easier, Marketplaces will be a little bit tougher. The in process metric that’s obviously really important for us is that active user growth number. So what gives us the confidence is the ability to bring on those more active users from the variety of different sources that we talked about earlier today, but also a few weeks ago at the analyst day. In terms of currencies, from an earnings standpoint, we’re relatively hedged now for most of the year. So we feel pretty good that we’ve kind of protected earnings based on where rates are today. Where we’re exposed is more from the revenue hedges we have in place. If they are out of the money, and I would say the pound hedges are out of the money hedges today, that will impact the Paypal take rate. So that’s where you see that. It will have a marginal impact on the as reported Paypal revenues throughout the course of the year.

Our next question comes from Scott Devitt from Morgan Stanley.

Bob, you mentioned earlier Korea, China, and Europe I guess as headwinds related to the international business today. And I was just wondering if you could talk a little bit more about bringing improvements from the U.S. to international markets and also the brick opportunity, and when you expect either of those to show more prominently in international results. And then the second question is around GSI and what it is that drove the take rate down, and how [V11] is progressing.

On the first one, just to clarify, my commentary on headwinds for Korea and China had more to do with sold item growth versus GMV growth. So year on year, first quarter 2012 we had a real nice acceleration of sold items growth, particularly in Korea, as we expanded into new lower ASP verticals. So a year later, you saw pretty decent deceleration in sold items growth, greater than GMV deceleration. And that was primarily driven by Korea and higher standards for sellers coming out of [unintelligible] China. So that’s more a sold items commentary. In terms of GMV commentary, I just said a modest headwind for Europe, relative to what we expected earlier back in January. Separately, just on how do we deploy new feature functionalities, polices, processes for Marketplaces, I think as you know we kind of deploy things in a market, test and learn, and then deploy throughout the rest of our geographies. That’s been a consistent theme for how we deploy new features for a long time now. Sometimes that means we try stuff in the U.K. and then bring them to Germany and bring them to the U.S., and other times that means we try stuff in the U.S. and bring it to markets outside the U.S. So the changes, whether it was ETRS or eBay 2.0 or Refresh Brands, those things, for the most part, while they take different flavors, market by market, we have deployed them throughout most of the markets in which we operate. Third, GSI, good same-store sales growth, 1 point deceleration Q4 going to Q1. We feel pretty good about that. The revenue was flat year on year, and that was primarily due to decisions we’ve made along the way to lower take rate with some clients to get more of our efforts and energies focused on driving growth. So we did that throughout the course of the last year, including in the fourth quarter. Our take rate on average is lower because of those changes we’ve made, and then in particular in Q1, because of differentiated growth rates from clients that we have at GSI. We expect that gap between same-store sales and revenue to stay wide throughout the course of this year . And then last, on the new commerce platform at GSI or [V11], we certified that back in December, and our expectations are to roll that new, exciting platform out to our launch client here in the second quarter. So we’re excited to get that big milestone behind us and begin to roll it out for other GSI clients during the course of the year.

Just real quick, two other small things I’d add to Bob’s answer. One on V11. One of the positive byproducts of some of the slippage in V11 over the last 12 to 18 months has been that we’ve taken significant parts of V11 functionality and put them in V9 and V10. And so whether it’s ship from store, pick up from store, those are now in V9/V10, so it can take the [urgency up] for existing clients to migrate and reduces it. And so I think we’ve significantly derisked the migration challenge. And in fact we have some clients that are finding that the enhancements on V9/V10 are meeting their needs currently. So that’s one. Second, I forget if you commented on this, Bob. Scott, you asked when will our success in bricks begin showing up in international GMV, and the short answer is in the short term it might not, because you remember a lot of the early focus is on import in the bricks, and to the extent that import is coming out of the U.S., it will show up in U.S. GMV. So over time, it will show up in international GMV, but it will be directly a function in the early days on where the Russian consumers are buying from, whether it’s dotcom in the U.S. or dot U.K. or dot AU, or even dot Germany. So I wouldn’t equate a 1 to 1 connection there.

Operator, I think we have time for one more question.

And our next question comes from Stephen Ju from Credit Suisse.

John, I wanted to dig a little bit deeper into brick, and in particular the Russian market. It seems like it’s still very much a cash-centric economy, and presumably the operating conditions are a bit more difficult because you have more transactional friction. Are there any comparisons you can draw for us versus what the environment was like when eBay was still very young and Paypal was not widely used? And how do you view the development currently for this market over the next three to five years? And do you feel like the curve will be steeper or less steep versus what you have seen in other emerging markets?

What we find intriguing is a couple of things. One is without a whole lot of explicit focus, we’re the largest B2C ecommerce provider today in Russia. Frankly, with no Russian language site. And that’s just a function of early adopter Russian consumers using eBay sites around the world and using Paypal to import. One of the things that is intriguing about the market is there’s two major sources of friction in Russia that are somewhat distinct from elsewhere. One is as you said payments, and the other is shipping, or delivery. And so we view those as both market development opportunities. And so on payments, we’ve worked to get our local approval for our local capabilities, which we have. And we’re talking with various stakeholders in Russia about how we can use technology, which is what Paypal is, to reduce friction in payments throughout the country. So we’re talking with banks and some of the providers, the people that take cash in and convert it into a digital currency. So we think there’s great opportunity to innovate to reduce friction there. We’re doing the same thing on the shipping side, on the inbound customers clearance and on shipping. So over time, I can’t say as we know long term what that trajectory is going to be, but we feel like any market that’s got friction which is a problem to be solved, and technology and our platform can solve it, it’s an attraction for us, and that’s why we’re excited about the market. I will say the first couple of weeks since our Russian site launch, we’ve had strong acceleration of new users. And those new users are beginning to buy. So still early days. It only launched a couple of weeks ago, but it’s a market that we like a lot, and I’m sure we’ll learn a lot, and a market that I think will benefit from the kind of technology innovation that we can bring to [unintelligible] for consumers.

Thank you very much, and we look forward to seeing you between now and 90 days from now, or talking to you at the end of the second quarter.