eBay Inc. (EBAY) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for your patience. You have joined the eBay Q2 2017 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference maybe recorded. I would now like to turn the call over to your host Vice President of Investor Relations, Mr. Selim Freiha. Sir, you may begin.

Thank you. Good afternoon. Thank you for joining us, and welcome to eBay’s earnings release conference call for the second quarter of 2017. Joining me today on the call are Devin Wenig, our President and Chief Executive Officer; and Scott Schenkel, our Chief Financial Officer. We’re providing a slide presentation to accompany Scott’s commentary during the call. All revenue and GMV growth rates mentioned in Devin and Scott’s remarks represent FX-neutral 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 the Investor Relations section of the eBay website at investors.ebayinc.com. You can visit our Investor Relations website for the latest company news and updates. 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 related to our performance. You can find the reconciliation of these measures to the nearest comparable GAAP measures in the slide presentation accompanying this conference call. In addition, management will make forward-looking statements 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 the future performance of eBay Inc. and its consolidated subsidiaries, including expected financial results for the third quarter and full year 2017 and the future growth of our business. Our actual results may differ materially from those discussed in this call for a variety of reasons. You can find more information about risks, uncertainties and other factors that could affect our operating results in our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q, copies of which may be obtained by visiting the company’s Investor Relations website at investors.ebayinc.com or the SEC’s website at sec.gov. You should not rely on any forward-looking statements. All information in this presentation is as of July 20, 2017, and we do not intend and undertake no duty to update this information. With that, let me turn the call over to Devin.

Thanks, Selim, and good afternoon, everyone. Q2 is a good quarter for us. We delivered strong top and bottom line financial results led by acceleration in our core eBay platform. At a time when retailers are struggling more every day, we were able to accelerate growth by improving our customer experience and beginning to reinvigorate our brand. Overall, total GMV was up 5% for the quarter while revenue was up 7%. Active buyer growth was stable at 4% as we added nearly 2 million buyers to our platforms in Q2. Excluding buyers in India, which will no longer report after our Flipkart transaction closes, growth in buyer acquisition was 5% accelerating a point. GMV on our Marketplace platform grew 6%, a one point acceleration driven by strength in the U.S., our Classified platform grew revenue at 11% and StubHub volume was down 5%, driven by tough comps and a weaker event landscape than we expected. Finally, we’ve returned $0.5 billion to our shareholders in the form of stock repurchases Now let me take a moment to put our Q2 performance in the context of our strategy. Two years ago, we began repositioning our business for long-term success by driving the best choice, the most relevance and the most powerful selling platform while sharpening the eBay brand. At the time, we said we’re confident in our ability to deliver improved user experiences and to accelerate growth on our core eBay platform, now we’re doing just that. We’ve made significant progress to modernize and simplify eBay while bringing forward its unique strengths. We’ve created a product catalog that covers well over half our inventory. We’ve built and launched hundreds of millions of new products and browse spaces and we’ve rolled out a significant number of customer improvements at an accelerating pace. And we’ve begun to reposition the eBay brand to be more differentiated while also correcting longstanding misperceptions about eBay. Over the past two years, we’ve added 14 million active buyers while improving the GMV growth of our core platform and accelerating revenue growth. We’ve delivered well over $4 billion of net income while returning $5 billion of cash to shareholders through share repurchases. We’ve also created renewed vibrancy and energy across our company and our culture as we work together to execute our business strategy and to accelerate growth. As an example, over the past two years, our employee satisfaction has increased while our turnover has decreased. Another important element of our culture is our ongoing commitment to make eBay more diverse and inclusive, which is a competitive advantage in recruiting world class talent and ensuring that our workforce reflects the diversity of our marketplace. In summary, we’re on track with our plans. We’re making progress in our business and our organization and we’re right where we expected we would be. We continue to drive best choice by providing our consumers with great selection and value. We’re focused on attracting and retaining sellers and brands that bring differentiated inventory to eBay and this continues to yield good results. For example in Q2 we collaborated with Disney to offer exclusive Pirates of the Caribbean merchandise and we launched nest and EGI [ph] as new brands on our platform. Growth in the global number of eBay business sellers accelerated in Q2, the second straight quarter of acceleration. And just last week, we announced the partnership with Shopify to enable their merchants to list and sell their products on eBay directly from their Shopify account, which will expand merchants and inventory over time. Finally, we launched a price match guarantee on our eBay deals platform ensuring our consumers always have access to the best inventory at the best prices. Traffic to our new structured data enabled user experiences was at 9% exiting the quarter with continued strong conversion in our SEO channel while conversion in our organic and pay traffic channels continues to be stable. Within SEO where our experiences have been in place the longest conversion further improved then we saw strong acceleration in traffic growth this quarter. The rollout of our new homepage has expanded to all users across eight key geographies. We leveraged our structured data and AI to deliver and experience tailored to each eBay user’s interests and passions. Early evidence shows users are responding well to the new homepage with lower bounce rates and better engagement. This tells us we’re matching users with content that’s more relevant to them and we stepped up our brand’s marketing in Q2. In April, we rolled out a national fashion campaign and in June we launched the first activation of our new brand platform fill your cart with color using multiple channels including television, digital and social. And while it’s still very early to determine the overall efficacy of our brand advertising, we’re seeing promising early results with better fashion – better purchase consideration in our fashion category and an increase in traffic from new to eBay visitors. We recently began building on our brand marketing with the launch of a significant out of home campaign in the U.S., the next phase of our television and social advertising. We plan to continue to invest in our brands in the second half of this year including the international rollout of the new campaign. Finally, we continue to execute our plans to deliver the most powerful selling platform. In Q2, we engaged our developer community by hosting a developer conference at our San Jose campus and we announced significant enhancements to our suite of APIs. Over time this will enable better innovation on our platform, which will benefit our sellers of all sizes. We also continue to expand adoption of our Seller Hub product while adding capabilities to enable sellers to more effectively manage their eBay businesses. Our Classified platform had another strong quarter of revenue growth driven across our broad portfolio of assets. We’re focused on increasing traffic and engagement through better mobile experiences and improving our verticals. And our inventory integration between Marketplace and Classifieds continues to perform well. Finally, StubHub had a challenging quarter driven by continued lapping of strong growth comps coupled with the U.S. events landscape that was significantly weaker than we had anticipated. Last year, we’ve benefited from record setting events such as Hamilton and Copa America along with strong NBA and NHL postseasons and good performance of top selling MLB teams none of which repeated in Q2 of this year. While U.S. growth lags, we continue to expand our global event marketplace with significant double-digit international GMV growth this quarter and we continue to improve the product experience this quarter with innovations in our native app social commerce and a globally integrated event catalog. While we expect to face tough growth comps again in Q3, StubHub is well positioned to grow over the long-term due to our leading consumer brand expanding industry partnerships and continued innovation. In summary, Q2 was a good quarter for our business with accelerating volume and revenue growth in our core Marketplace platform. In the two years since implementing our strategy, we’ve made the product and technology investments necessary to enable us to deliver growth acceleration. Our focus continues to be on improving the customer experience and we won’t hesitate to trade-off short-term results when necessary. Looking forward to the second half of this year, we expect good execution and an increasing pace of product innovation. And with that I’ll turn it over to Scott to give you more detail on the Q2 results.

Thanks, Devin. Let’s begin with Q2 performance, starting on Slide 4 of the earnings presentation. In Q2, we generated $2.3 billion of total revenue, $0.45 of non-GAAP EPS and $517 million of free cash flow. We repurchased $507 million of our stock and this week our Board of Directors approved an additional $3 billion share repurchase authorization. Moving to active buyers. In the quarter, we increased our total active buyer base to 171 million while trailing 12-month growth was stable at 4%. Underlying the overall trends, we saw stable retention and continued positive momentum in new user acquisition with particular strength coming from the U.S. and Korea. On Slide 6, in Q2, we enabled $21.5 billion of total GMV, up 5%. By geography, the U.S. generated $8.8 billion of GMV, up 30%, while international delivered $12.7 billion of GMV, up 7% year-over-year. Moving to revenue, we generated total net revenues of $2.3 billion up 7% on an FX neutral basis and up 6% organically, both stable versus the prior quarter. We delivered $1.8 billion of transaction revenue, up 6%, and $511 million of marketing services and other revenue, up 9%. Turning to Slide 8. Our Marketplace platform grew GMV by 6% in Q2, one point acceleration versus the prior quarter. U.S. GMV accelerated one point quarter over quarter to 5% and international GMV grew at 6%, stable versus the prior quarter. Underlying those trends, our B2C growth rate was 6% year-over-year and C2C growth was 3%, both slightly improving versus the prior quarter. Total Marketplace revenue was $1.9 billion up 7% year-over-year, two point acceleration versus the prior quarter. Transaction revenue also grew 7% and accelerated two points versus Q1, one point faster than GMV as the pricing changes we announced in Q1, which are enabling increased investments to drive velocity for our sellers went into effect. Marketing services and other revenue grew 4%, a deceleration of two points versus the prior quarter. The deceleration was driven by the elimination of certain third party ads on our site in addition to lapping significant Q1 growth from our co-branded credit card revenue, which is recognized annually in the first quarter. As we continue to shift our advertising strategy away from third party and towards first party advertising, this will favor transaction revenue putting ongoing pressure on MS&O revenue growth. Moving to Slide 9. StubHub GMV declined 5% year-over-year decelerating 11 points from Q1 while revenue grew 5%, a deceleration of 14 points versus the prior quarter. This quarter we lapped the strongest growth rates from all of last year in addition to facing into a weaker events landscape as Devin discussed earlier. While we will continue to face comps tough comps through most of Q3, we believe Q2 will be the low point of growth for this year. Moving to Slide 10. In Q2, Classifieds grew revenue 11%, one point acceleration versus Q1. We’re seeing strong growth across our key markets driven by improved user traffic and engagement, partially offset by ongoing monetization headwinds as traffic shifts to our mobile app platforms. Turning to Slide 11 and major cost drivers. In Q2, we delivered non-GAAP operating margin of 27.3%, which is down 180 basis points versus last year, 80 basis points of which was driven by a stronger U.S. dollar impacting all spend categories. I will focus my remaining comments on the operational dynamics of our expenses. Cost of revenue increased year-over-year driven by our Ticketbis acquisition, our first party inventory program in Korea and incremental investments in eBay customer support. Q2 sales and marketing expenses decreased as a percentage of revenue as productivity and marketing channels and reallocations across platforms more than offset increased Marketplace brand advertising. In June, we launched a new multichannel brand campaign in the U.S. which will rollout across our key international markets throughout the remainder of the year. Product development costs were relatively flat as a percentage of revenue as we are now lapping increased product investments from the second quarter of last year. We continue to drive operating leverage to fund ongoing investments in key areas such as the expansion of structured data and the product experience enhancements across our platforms. G&A expenses were up year-over-year driven by the addition of Ticketbis operating expenses and investments in data, security and employee benefits and services. Turning to EPS on Slide 12. In Q2, we delivered $0.45 of non-GAAP EPS, up 5% versus prior year with FX negatively impacting EPS growth by five points. EPS growth was driven by revenue growth and the net benefit of share repurchases partially offset by the cost dynamics described earlier. GAAP EPS for the quarter was $0.02 down $0.36 versus last year. Our GAAP results were negatively impacted this quarter by a non-cash income tax charge of $311 million caused by the foreign exchange remeasurement of a deferred tax asset related to the ongoing realignment of our legal structure. As always you can find the detail of reconciliation of GAAP to non-GAAP financial measures on our press release and earnings presentation. On Slide 13 in Q2 we generated $517 million of free cash flow, which was down 16% on a year-over-year basis primarily driven by timing differences of cash tax payments. CapEx was 8% of revenue in Q2 and we continue to expect to be in the range of 7% to 9% of revenue for the year. Turning to Slide 14. We ended the quarter with cash, cash equivalents and non-equity investments of $13.6 billion of which $4.9 billion is in the U.S. Our capital allocation strategy is designed to manage the capital structure in a way that optimizes our financial flexibility, access to debt and our cost of capital to enable capital return and drive long-term shareholder value. In Q2, we raised $2.5 billion of debt, which we plan to use for general corporate purposes, repayment of our near-term debt obligations, share repurchases and M&A activity. Additionally, we repurchased 15 million shares at an average price of $33.79 per share amounting to $507 million in total. We ended the quarter with $479 million of share repurchase authorization remaining and as I previously mentioned our Board of Directors approved an additional $3 billion authorization this week. We remain committed to capital return at a minimum of 50% of free cash flow for the full year and we will continue to be in the market opportunistically at levels above that. Before discussing our Q3 guidance, I’d like to remind you that we will start to utilize hedge accounting to better protect revenue from currency movements in the second half of 2017. As I mentioned on our January earnings call, we implemented a new hedging program that is intended to reduce volatility of our top-line from foreign exchange. Going forward are hedging results will be recorded in our net revenue line and not our interest and other line. With that let’s turn to our Q3 guidance on Slide 15. We are projecting revenue between $2.35 billion and $2.39 billion representing organic FX neutral growth of 6% to 8% year-over-year. Our guidance assumes continued improvement in marketplace volume and revenue growth. We expect non-GAAP EPS of $0.46 to $0.48 per share representing year-over-year growth of 3% to 7% on an as reported basis. EPS growth will be driven by revenue growth and the net benefit of our share repurchase program offset by continued investments to drive improved user experience and to market our brand. Additionally, we expect FX to impact us by approximately five points of growth on a year-over-year basis. For Q3, we expect GAAP EPS in the range of $0.30 to $0.32. For the full year, we continue to expect revenue in the range of $9.3 billion to $9.5 billion, organic FX and revenue growth of 6% to 8%, non-GAAP operating margin in the range of 29% to 31%, non-GAAP EPS in the range of $1.98 to $2.03 per share and free cash flow of $2.2 billion to $2.4 billion. Assuming foreign exchange rates remain where they are today, we would expect revenue dollars to be slightly above the high-end of our guidance range. We are updating our full-year GAAP EPS guidance to $1.65 to $1.75 per share reflecting the impact of the previously mentioned non-cash income tax charge recorded in Q2. As our legal structure realignment process continues throughout this year, it may result in further non-cash adjustments that are not currently factored into our GAAP guidance. In summary, we are seeing positive momentum and we expect to launch an increasing number of product enhancements throughout the remainder of this year in addition to increasing our brand advertising to drive improved consideration in traffic. As we significantly changed the eBay user experience, the improvement in our results may not always be linear. However, we believe we are investing in the right initiatives to meet our commitment to accelerate growth. We are on the right track and execution will be key for the second half of this year as we continue to set the business up for longer term success. Now, we’d be happy to answer your questions. Operator?

Yes, sir. [Operator Instructions] Our first question comes from the line of Eric Sheridan of UBS. Your question please.

Thanks so much for taking the question. Maybe taking a step back as we look into that part of the year, I want to know if you could frame some of those key investments that you think are necessary to continue the momentum in the business that you’re seeing in Q2 over Q1 and what we should be watching towards those investments play out in terms of the key metrics on either the top line users, sellers GMV? How should we be measuring that? Thanks so much.

I’ll talk about the investments and then Scott can just frame it. It’s not a lot different than what we’re doing. We think we’re on the right track and we will continue to build out our catalog and continue to build out our structured data foundation. You’ll see an accelerating pace of user innovation on top of that meaning the eBay site will continue to evolve. There are some significant product deliverables in the second half built on that foundation, which we’ve already announced, which in the coming weeks and months we’ll update on when the delivery is, but there is significant move on things like guaranteed delivery and things like authentication. And all of that’s built on the same foundation and we’ve already discussed that and we think those are on the right path. You’ll also see us continue to expand the brand advertising campaign. As an example, we’ve launched it in the U.S. We have not launched it yet internationally and that will happen in the second half. So on the back of those things, what we’re seeing is traffic improve, buyers improve and conversion improve. We like that. So, we’re going to keep expanding the surface area of that and it’s on that basis that we’ve given the guidance in the second half that we’ve given, which implies continuing improvement. I don’t know if you have anything to add, Scott.

No, you covered it.

Okay, next question.

Thank you. Our next question comes from Ross Sandler of Barclays Capital. Your question please.

Great, guys I just had couple questions. First is the spring seller update, can you just talk about the overall impact to back half revenue, just going to be revenue neutral or accretive and you know if StubHub continues to underperform and I think Scott’s comment about exceeding the high-end of the revenue range that he just made. What would that imply for marketplace of GMV ex-FX relative to that 8% at the high-end? And then second question is any – I think you mentioned the U.S. active buyers are picking up in the second quarter. Any early feedback or metrics around the ad campaign that launched in the quarter? Is that was driving in or is it something else? Any color there would be helpful. Thank you.

Yeah, let me work backwards real quick, first off on active buyers. As Devin called out excluding India we grew active buyers by 5%, which accelerated nearly a point quarter-over-quarter with particular strength in the U.S. and we’d call that also augmented by Korea. Three dynamics under there, some of which we’ve talked about, some of which I’ll just expand upon. First is retention. We continue to see that stable as we exposed more users to our new experiences. New buyers, we see new buyers coming particularly from our new SEO landing pages based on the structured data pages that that underlie that. And we’re starting to activate the brand much more at scale than we have and we expect that to supplement new buyer growth with increased consideration. This is in early phases, but we’re happy with the early start. If I go back to your first couple questions, first maybe start with guidance. You know as I called out the Q3 organic revenue as well as the total year organic revenue of between 6% and 8% is really going to be based on the acceleration that we expect to see in marketplaces GMV and revenue. The pricing change that we made will continue to favor transaction revenue and much of that as I call that my remarks will be reinvested to try and accelerate the pace that we see in our growth. What was the other one? Active buyers…

I think that was it.

That was it. Anything to add…

How the brand campaign is doing? I just say – look we’re pleased with it. I think the response has been really good. To some extent we started feathering brand marketing in earlier in the year, but we really kicked that in at the back half of Q2 and you’ll see that continue throughout the year and expand internationally. We’ve seen traffic respond nicely. It’s a little early to be calling virus, but we’ve seen traffic respond nicely and we’ve seen that traffic come from new to eBay users, which is really the intention of a brand campaign as to expand those – expand our consideration. And you know a month, a month and a half in, we think that’s happening, but with all brand campaigns you’re going to keep it on and that’s what we’re going to do. So we’ve – again, it’s – these are all themes, we think we’re on the right track and we’re going to keep doing it but on an accelerating pace.

Yeah, let me double click real quick on Marketplaces GMV. If you back up here, we’ve accelerated Marketplaces GMV from 4-ish to 5% to 6% over the course of the last year, and this has been driven by the U.S., which has accelerated roughly one point per quarter over that same time period, while international has been relatively stable. So we’ve made the most improvement, as Devin called out, to our foundation and as well as changes to the Marketplaces ecosystem in the U.S. and we’re in the – and we’re further along in the brand activation, as Devin called out, in the U.S. And those improvements, the changes in the ecosystem, the brand are in the process of rolling out across our platform and our properties internationally. And so in a global ecosystem, it’s highly dependent on many factors. But as I said, things won’t always be linear, but we believe we’re making the right investments and we’re making balanced trade-offs to drive that growth, and our outlook and guidance assumes that.

Thanks. Let’s go ahead and go to the next question.

Thank you. Our next question comes from Douglas Anmuth of JP Morgan. Your line is open.

Thanks for taking the question. Devin just wanted to ask you about structured data. You talked about SCO being strong and conversion improving. I hope you could also just talk about what you’re seeing in terms of organic and SEM as well. Thanks.

Yeah, those are stable. Those are kind of in line with where they’ve been because we haven’t yet fully penetrated that. If you look at where we’ve taken structured data in the last quarter in Q2, we’ve really expanded its presence in SCO. We’re up to 22% of total SCO shares now on these new experiences. And it’s interesting that those experiences have been in place for longest in SCO and we see the most surface area. And I think two quarters ago, we started saying, we’re seeing really nice double digit conversion gains, those are actually moved up again this quarter. And we’re really seeing very nice traffic acceleration in SCO now. So we like that. In the core where we’re just starting to intersect with things like search in the homepage, we’re pretty stable and I guess that’s to be expected. We think that will move up over time. But we also said you’re not going to get the gains at the edge that you’ve got near the middle, near the core. We think we will get gains, but it will be a bit of a different profile. But still this is playing out kind of the way we had hoped it would, which is we’re seeing conversion gains, we’re improving SCO, we’re moving from the edge into the core. And I’ll just reiterate what I said, I believe last quarter, which is this is not -- the pace isn’t linear. It’s actually going to speed up in the second half. And you’ll be able to see the new experiences in eBay from space by this holiday and we still believe that, that will be the case.

Okay, thank you.

Thanks. Next question.

Our next question comes from Colin Sebastian of Robert W. Baird. Your line is open.

Thanks guys. I had a couple of questions. First, with the active buyer activity picking up, I wonder if you’re seeing a corresponding increase in seller activity, not only in terms of number of sellers but more granular metrics such as number of listings per seller or something like that. And then secondly, as a follow-up on the advertising strategy, Devin, are you closer to the point now where some of the investment in the brand initiatives at the top of the spending funnel can graduate towards more of a transactional or a direct response effort? And if that’s the case, how quickly should we expect to see the benefits of that shift in volume?

Yeah, two good questions. So let’s start with active buyers. On the seller side, we’re seeing a really nice acceleration of the number of sellers on eBay. It’s the second straight quarter of acceleration. So we’re seeing a lot of small and medium-sized businesses start selling on eBay for the first time, we’re really happy about that. I also talked about brands while we’re acquiring a lot of SMBs and small sellers, we’re also starting to acquire brands at an increasing pace, which is excellent. I am really pleased about that. So listings. I think what’s interesting is over time, listings, as structured data penetrates our site and our experiences, listings will become a less important metric than products will. We’re not quite there yet, but I’ll just give you one example. So listings are growing, but we’re working with sellers to take duplicates now. And we’ve been pretty aggressive about that right now because it clutters the site and it depresses conversion. So listings might not linearly or exponentially keep going up. There may be periods when it comes down but we’re actually adding the number of products. So the most important thing are sellers and inventory and both are increasing at an accelerated pace. Vis-a-vis marketing, Colin, we’re doing both at the same time. So we’re doing the brand and there’s a significant amount of consideration work that’s implicit in the brand. But we’re also doing a lot of the normal advertising that we do, which is buy this. And you saw some very active over the last several weeks selling our deals, selling deals that are in our Price Match program. So it’s all of the above, and that’s implicit in our expectation of further acceleration in the second half.

Thank you.

Thanks. Next question.

Our next question comes from Richard Kramer of Arete Research. Your line is open.

Yeah, thanks very much. Two quick questions. First of all, looks as if your principal competitor is very aggressively ramping sponsored listings in 1P ads. Can you give us a bit of an update of where you are in this transition from the 3P ads that are sort of rolling off of MS&O to the 1P ads that should be boosting Marketplace growth? And is that a significant factor in the second half of the year? And then just another question just in the U.K., we’ve seen a number of instances where new management was reaching out and visiting sellers, especially maybe in response to some things like mandating the standard images rather than the watermarked ones. And can you comment on sort of your balance of sellers and do you see if you will a larger number of sellers sort of graduating to being more professional sellers on eBay? Or are you still in the funnel where you’re trying to bring new sellers on at the very early stage, if that makes some sense?

It does, two [indiscernible]. So our first-party advertising business is a big priority. We think it’s a really good opportunity, and it is growing rapidly. It is also small, and it is not a major factor in our second half guidance. So implicit in our guidance is standard GMV, the way we’ve historically defined it, will continue to improve. But with that said, we haven’t backed down on the 1P opportunity at all. This quarter, we continue to expand the SKUs that are available, the number of sellers it’s available to. And an example is in our latest seller release, some core anchor stores got credits for promoted listing. And that’s about to activate and they’re about to start using those credits to further enhance the penetration of 1P ads. So we’re kind of in a year-over-year – really acceleration here [indiscernible]. Keep in mind, our commitment to the ecosystem was while this ramps, we’re also going to take down third-party ads that bring people off of eBay. And then as an example, you heard in Scott’s remarks, this quarter, we took down our off eBay PLAs entirely in the U.S. So in the MS&O line, you’re seeing a little bit of mix shift between transaction, revenue and MS&O. And if you net the two, you’re not yet seeing the type of growth that we’re seeing on the left side of the ledger, if you will, because on the right side of the ledger, we’re taking down ads that suppress GMV and make the ecosystem less healthy. And we’ll keep doing that until we get to the place where those bleed off and then we’re just in the growth phase of the 1P ad strategy. On the U.K. thing, I wouldn’t – look, we are still bringing in a lot of small businesses. And in many ways, that’s the heart and soul of our company, and we’ll continue to focus on them. I don’t – I’ve never viewed it as one or the other. I’ve never viewed it as a large professional seller can’t sell right alongside a very small mom-and-pop seller, even a consumer. To me, that’s what is unique about eBay. What’s unique about eBay is the seller base in the inventory and we’re actually leaning into that to make sure that we don’t end up as a me-too to any other competitor. But we occupy a very distinct place in the e-commerce world. And it’s for that reason that we’re being more aggressive than ever reaching out to small sellers. And a great example of this is the Shopify deal where Shopify has got lots of small merchants will bring onto our platform. And you’ll see other activities in the second half of us getting more aggressive in small seller acquisition. Thanks for the question. Next question.

Next question comes from Paul Bieber of Credit Suisse. Your question please.

Great, thank you for taking my question. First off, I was wondering how we should think about this trajectory of gross margins through the rest of the year given the investment in 1P in Korea. And then secondly, on the Classified business, why is that such an important part of the eBay portfolio? And I was hoping you could walk us through the synergies between Classifieds and the Marketplace business?

Yeah, on gross margin, I think it’s more the same. I think you’ll continue – we’ll continue to see the dynamics with our Ticketbis business along with first party from Korea. And so those dynamics I don’t expect a massive shift between first half to second, but it will continue to be the factor in our overall gross margin. On Classifieds, we’re the world’s leader in consumer selling and it just happens to be the Classified as a format for consumer selling. We sell globally, we allow consumers to access global consumers and we allow them to access local consumers. But both of those are important. It happens to be we’ve organized it as a business unit, but it is part and parcel and core to our business. To directly answer your question around synergies, the synergies are getting more and more every quarter because we’ve co-mingled the inventory now, so our buyers can see the best inventory whether or not it ends up being listed on a Classified format or on core eBay format. So we talked about that integration two quarters ago, and we’ve seen GMV each quarter improve since we’ve rolled it out two quarters ago. So to me this absolutely core part of eBay. We’re good at it, we’ve grown it over a decade, and it wouldn’t have grown the way it has grown if not for being part of our business.

Yeah, I mean, we talk about Classifieds and eBay as two different platforms because they’re two different sites. But the fact of the matter is we go after the same segment, consumer segment, as Devin talked about. And so increasingly, what you’re seeing in each of the – in some of the major markets is a blending of that inventory to try and make sure that we’re addressing customer needs across to do different sites and platforms. And I think it’s been very successful and it’s always been a go-to-market strategy together in their respective markets.

Thank you.

Next question.

Our next question comes from Justin Post of Bank of America. Your question please.

Great. I guess my questions are all around margins. Can you first say if there’s any unusual items in your margins this year that are depressing them x – excluding FX? And then on FX, if the exchange rates start to level off or even improve, would that help your margins next year? And then finally, can you quantify how big that Korea first party business is for revenue? Just thinking about the impact on Marketplace revenues and also what the impact is on gross margins? Thank you.

Yeah, I mean, the first party – I’m going to breakout Korea first party. It’s not in the greater scheme of things a massive contributor on dollars. On a year-over-year basis, it’s been growing nicely and does impact gross margins and that’s why we’ve called it out. With respect to margins, a couple of things. As I called out, foreign exchange was 180 basis points of the – was 80 basis points of the 180 versus prior year decline in margins. The rest of the decline was really driven by investments in and the integration of Ticketbis. And so at a broad level, if you want to call that an unusual, that’s a year-over-year change that’s driving most of it. But similar to the last couple of years, we’ve offset many of the investments that we’ve been making to accelerate growth via leverage/productivity. And so I feel like as we look at the first half of the year, there’s always unusuals. We’ve called out Ticketbis in this case. But the fact of the matter is, I think, we’ve done a reasonably good job of operationally trading off the investments with productivity, recognizing that we do have that Ticketbis acquisition and foreign exchange. Maybe a bit more dynamic and get to your other question about foreign exchange, if you look at the last two years, those dynamics aren’t that dissimilar with the ad that I would put in here, which is we had a standup costs in the first year of separation. And so again, a little bit of an unusual as we stood the company up as a standalone entity. As we look at year to year, we’re able to offset much of the foreign exchange impact, the gains that we recorded historically in line and now that will be in revenue, as I called out in my remarks. But over time, a stronger U.S. dollar will pressure our margin rate and over time, a weaker will help. But it’s going to be muted on both sides, if not eliminated, with our hedging programs.

Great, thank you.

Next question.

Our next question comes from Brian Nowak of Morgan Stanley. Your line is open.

Thanks for taking my questions. I have two. The first one on the U.S., the GMV continues to accelerate nicely in the Marketplace. I was wondering if you can just talk to any specific categories in particular that are driving that strength in the U.S. growth? And then the second one on the seller side; Devin, as you think about the seller services, are there any specific examples of new services that you’ve rolled out this year that had a positive impact on the seller growth or seller selection or anything, just so we can think about what you’ve learned in kind of new seller services year-to-date?

On acceleration in market places, we have seen nice progress in fashion, we’ve seen nice progress in electronics, we’ve seen nice progress in home and garden. To some extent, the investments we’re making are horizontal. They have lifted the water line for all of our categories. But I’d say we’re particularly excited in the second half about fashion, electronics and home and garden as we approach the holiday season in the second half. On seller services, the way that I look at what we’re doing for our bigger sellers who need – who generally take more services is we’re beginning to package the suite of services like Seller Hub with an increasingly rich data profile and that’s becoming part of our store subscription. So you can almost think of it as the store subscription is almost Seller loyalty plan where they’re paying us a fee. For that, they’re getting both price benefits to listing, plus a set of services like data and inventory management in the new products that we launched within the last year. So we’re not yet offering other services to those sellers. But I think we’ll see as that expands over time if there are other products and services that they want that we can begin to add more and more value to our stores. That’s the way we kind of looked at the commercial model vis-a-vis our larger sellers.

And if you go back to some of the conversations we’ve had in the last few quarters, we’ve invested a lot in structured data and we’ve invested a lot in new experiences. And I think you’re seeing that pay off in our parts and accessories experience, which is also where we’re seeing nice growth in very differentiated based on the experiences that we’ve developed.

Great, thanks.

Next question. Our next question comes from Mark May of Citi. Your question please.

Thanks a lot. You Q3 guidance obviously implies further revenue acceleration despite a – I think it’s 100 basis point tougher comp and despite, as you mentioned, the continued headwinds from StubHub, Did the company exit Q2? And/or are you entering Q3 seeing this acceleration? And that’s what’s giving you the confidence to provide that outlook or are there some things that you plan to do or see throughout the quarter that’s driving that expectation for improved growth going forward? And then just quickly on the comment regarding Q3 revenue potentially being above your guidance, if FX rates hold, can you just clarify that comment. Is that because you’re using maybe a different FX assumption in your guidance? Thanks.

I won’t get into the kind of where we are at this week but I would say that we’re seeing improved -- we’re generally seeing improvement in all the metrics that we want to see. We’re seeing as time goes on and as we penetrate more and more with our strategy, our new product, our better customer experiences, we’re seeing buyers traffic and conversion improve. And it’s that, that gives us the confidence to give the guidance that we gave. So I won’t get into this week versus last week, but I would say this business has gotten healthier consistently over time. It’s not always perfectly linear. But we think we know. And we expect to see the continuation of that. And we also expect to see acceleration in the second half. We’re going to go faster with a lot of the foundation now in place, and I’m seeing the results we’re hoping for, we’re going to go accelerate and go faster. So it’s -- that’s implicit in it. And I just say vis-à-vis, the revenue growth, Scott will talk about the FX, the GMV acceleration is the primary driver of the revenue acceleration. They tend to go in lockstep.

As I mentioned in my prepared remarks, if FX rates remain where they are today, then all I was calling out was that the revenue dollars that we report at the end of the year would be at or above, really above the high end of the range. That said the organic FX neutral growth rate of 6% to 8% remains and that’s driven by the dynamics we just talked about.

Operator, we will take one more question.

Yes, sir. Our final question comes from Ron Josey of JMP Securities. Your line is open.

Great, thanks for taking the question. I wanted to go back a little bit to the new homepage and the product. And Devin, you talked about lower bounce rates and better engagement rates from the new homepage. Are you seeing the same on mobile with the mobile product pages launched? And if you could comment around mobile conversion rates as well that would be helpful. Thank you.

It’s a little bit different because the homepage is obviously a different experience on mobile than it is on the desktop. But what I would say is that historically for everyone’s e-commerce business, mobile conversion is less than desktop conversion. But we’re seeing improvements in mobile conversion alongside the improvements of the desktop from a lower base but we’re seeing the improvements as we begin to roll the structured data experiences out to mobile as well. So SCO on mobile is driven just the same by structured data experiences. Our product pages are now in our native app and in our mobile web experience. So it’s moving right along at the same, yes, mobile is less than desktop, but it is for everyone and we’re seeing it move up lockstep with the desktop, so we’re pretty pleased by that, no real difference depending on the floor mat.

Thank you.

Thank you. And ladies and gentlemen that does conclude the Q&A session and our call for today. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful day.