eBay Inc.

Good day, ladies and gentlemen, and welcome to the eBay Q4 2018 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 follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Suleem Freja. Vice President of Investor Relations. Mr. Freya, you may begin.

Thank you, Operator. Good afternoon. Thank you for joining us, and welcome to eBay's Earnings Release Conference Call for the fourth quarter of 2018. 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 are represent FX-neutral year-over-year comparisons unless they indicate 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 at least three months 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 the expected financial results for the first quarter and full year 2019 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 January 29, 2019, and we do not intend and undertake no duty to update this information. With that, let me turn the call over to Devin.

Thanks, Salim, and good afternoon, everyone. We delivered record earnings this quarter, with top-line results in line with our expectations, although we did see slowing consumer spend in December. In Q4, total GMV was up 2% and revenue was up 6%. while our active buyer base grew 4% to $179 million. Underlying these results, GMV on our marketplace platform grew 3%, StubHub volume was down 1%, and our classified platform grew revenue at 11%. Scott will go into more detail on our financial results shortly. First, let me provide a bit more context on our business. We continue to experience consistent active buyer growth, which historically has driven GMV. However, more recently, we've seen GMV growth drop below active buyer growth, the result of several factors. As discussed last quarter, while some of the simplified buying experiences we launched have been positively received by new buyers, they were causing some conversion pressure with our existing buyer base. Given that dynamic, we stopped scaling these experiences to our existing customers. This in turn has created some downward pressure on GMV as we lap acceleration from last year. will continue to roll out these experiences with new buyers. Additionally, non-structured data SEO pages are delivering less traffic and lower conversion compared to a year ago. And while we increased our marketing spend in Q4, we experienced lower returns than expected. As we enter 2019, we've aligned our tactics to directly address these issues and to capitalize on the opportunities ahead of us as we transition to a different eBay in 2020 with a comprehensive catalog intermediated payments, and a robust and high contribution advertising business. eBay is a unique company with a unique value proposition, and we're focusing on a few critical areas to build on this. First, we'll pursue several new efforts in our product experience, leveraging the foundation we've built over the last few years. For existing customers, we'll focus on conversion and frequency, removing friction, leveraging our vast customer data, and providing additional ways to compare value and surface unique inventory. Sellers will gain access to more data and tools with enhanced protections. We're also working to grow our new buyer base through delivering new experiences and messaging to encourage first purchase. All customers will benefit from enhanced delivery and returns through broader coverage of guaranteed shipping and our new return experience. We believe this will lead to an improved experience for both buyers and sellers, which we're confident will result in higher conversion rates and increased momentum in GMV. Second, we're rapidly moving significantly more SEO pages to a catalog structured data foundation. The expansion of our catalog has historically been constrained by the rate of seller adoption, but new AI capabilities will allow us to opt in millions of listings in the torso and tail of our inventory that we believe will drive SEO and social traffic moving forwards. We'll also make some substantial changes to our marketing strategy and spend as part of our continuous effort to maximize efficiency across the business. We'll reduce low ROI marketing and refocus our effort on acquiring new buyers to drive growth. While this will likely put pressure on GMV for a period of time, it will enable more profitability and a stronger foundation over the long term. We will continue to increase awareness around our brand, focusing on the value and uniqueness that differentiates the eBay experience. In addition, in 2019, we'll continue to invest aggressively in our key growth initiatives, advertising and payments, which are already showing great promise and represent a huge opportunity for the company to ensure they're set up for success. In our marketplace advertising initiative, we've made good progress this quarter. We had 600,000 active sellers promote 200 million listings in Q4, both significantly higher than last quarter, and we began rolling out placements more broadly in search results. This helped drive nearly 80 million of revenue this quarter, up nearly 150% year-on-year. For the full year, promoted listings delivered nearly 200 million of revenue, well above the expectation we set in October. We'll continue to ramp our advertising effort in 2019 while ensuring we achieve the right balance between user experience and monetization, as we build towards a billion-dollar advertising revenue opportunity. Looking at payments, we've been live in the U.S. for four months, and our confidence and our customers' confidence is growing every week. Since we launched in late Q3, we've enabled over 140 million of GMV, with over 3,500 sellers active in the program. To date, we've saved sellers over $1 million in payment-related costs, and we expect that savings to increase significantly as the program scales. We're also readying our launch in a second market, which we'll announce next quarter. We continue to expect to begin a full rollout in 2020, building to a $2 billion revenue opportunity at scale. At StubHub, there continues to be significant opportunity to deliver growth. We remain focused on improving the customer experience to increase conversion, while investing to drive loyalty and repeat usage of the platform. will further penetrate key international markets by leveraging our global event catalog to enable cross-border sales and improve conversion. Finally, we're already pursuing aggressive cross-merchandising efforts and traffic-sharing initiatives between StubHub and eBay and plan to scale those in 2019. In our classified platform, our key initiatives will be motors vertical expansion across several markets, including the UK and Canada, and driving further horizontal vibrancy and engagement. in part through our successful eBay integration, which drove 200 million of GMV to eBay in 2018 and contributed nearly a point of revenue growth to classifieds in Q4. There continue to be numerous cross-platform opportunities across Marketplace, StubHub, and classifieds to improve the user experience for our customers. We indicated last quarter that 2019 would be a transitional period. with slower growth as we invest to deliver on large opportunities in 2020 and beyond. At that time, we established a committee of our board to review our capital allocation strategy and to make adjustments as necessary to evolve our approach moving forward. As a result, as you'll hear further from Scott, we've made some significant changes to our capital allocation strategy, including instituting a dividend for the first time in our history and increasing our plan share repurchases to $5 billion in 2019. The purpose of these changes is to return more capital to our shareholders in a balanced way, highlighting our confidence in the free cash flow resiliency of our business and the opportunity ahead of us, and to significantly reduce our share count ahead of 2020. We are confident in our business and in our plan. eBay has never had more buyers, business sellers, or inventory in its history. In 2019, we will connect our buyers with our sellers' unique inventory while improving our user experience. We feel strongly about our ability to deliver value now and in the future to our customers, employees, and shareholders. Finally, I appreciate that there will likely be questions regarding the letter Elliot issued last week commenting on our business. We've issued our public response, and we will not be discussing this further during today's call. We would appreciate it if you limited questions to our results. Now, let me turn it to Scott to provide more details on our quarterly financial results in our 2019 guidance.

Scott Pestridge- Thanks, Devin. I will begin my prepared remarks with our Q4 financial highlights, starting on slide four of the earnings presentation. In Q4, we generated $2.9 billion of total revenue, 71 cents of non-GAAP EPS, and $1.1 billion of free cash flow, while repurchasing $1.5 billion of our stock. Moving to active buyers on slide five. In the quarter, we increased our total active buyer base by 2 million to a total of 179 million, up 4%. Buyer growth was stable, driven by increased marketing investments offset by pressure and SEO. On slide six in Q4, we enabled $24.6 billion of GMV, growing 2%, a three-point deceleration versus the prior quarter. The growth was driven by international, which delivered $14.9 billion of GMV up 5%, while the U.S. generated $9.8 billion of GMV down 1%. Moving to revenue on slide 7. We generated net revenues of $2.9 billion, up 5% organically, in line with the prior quarter. We delivered $2.3 billion of transaction revenue up 7%. and $582 million of marketing services and other revenue up 3%. Turning to slide 8, our marketplace platform, GMV, grew 3% in Q4, a two-point deceleration versus the prior quarter. U.S. GMV was down 1%, a three-point deceleration from the prior quarter, driven by a number of factors that Devin discussed earlier. Additionally, export headwinds continue to impact GMV growth on a year-over-year basis. International GMV grew 5%, decelerating two points versus Q3, with the U.K. and Germany decelerating roughly two points combined. This is driven in part by the dynamics that Devin discussed earlier. Additionally, specific to the U.K., macroeconomic pressures are negatively impacting consumer spending. Total marketplace revenue was $2.3 billion, up 6%, accelerating one point from prior quarter. Transaction revenue grew 7%, four points higher than GMV, with promoted listings growing nearly 150% and contributing nearly three points of growth to transaction revenue. Another point of growth was driven by fewer incentives as we shifted more spend to sales and marketing expense. Marketing services and other revenue was down 4%, decelerating seven points versus Q3. Most of this was the result of shifting our advertising efforts away from non-strategic third-party ad placements and towards our first-party promoted listings product. And as I mentioned, the shift is contributing to transaction revenue growth. For the full-year marketplace platform generated $90 billion of GMV, growing 5%, a one-point deceleration versus the prior year, and $8.6 billion in revenue up 6%, consistent with the prior year. On slide nine, we continue to make good progress on our payments initiative. As Devin mentioned, the number of sellers in GMV intermediated significantly increased in Q4, while our sellers continue to realize savings in payment-related costs. Looking forward, this is how buyers will pay on eBay and how sellers will be paid. Our sellers will benefit through continued expansion of realized fee reductions our buyers will benefit as we continue to deliver more payment options, including PayPal. A reminder on timing as it relates to the operating agreement we share with PayPal. We have the ability to intermediate up to 5% of GMV between July of 18 and July of 19, and 10% between July of 19 and July of 20 across two markets. We are pleased with our progress and remain confident in delivering $2 billion of annualized revenue and $500 million of annualized operating income at scale. Moving to slide 10, StubHub GMV was down one point, discolorating eight points from Q3. A softer Major League Baseball World Series was the primary driver of deceleration, highlighting the event-driven nature of the ticket marketplace. StubHub revenue grew 2%, down five points versus Q3, driven by volume deceleration partially offset by event mix. For the full year, StubHub delivered $4.8 billion of GMV and $1.1 billion in revenue, both growing 5%. Moving to slide 11. In Q4, classifieds grew revenue 11%, consistent with Q3. Germany continues to be a primary driver of the growth in classifieds. Ongoing strength in Germany is driven by our strong market position with our market-leading horizontal and vertical motors platforms, as well as our integration with eBay. For the full year, classifieds generated $1 billion of revenue, up 10% year-over-year. Turning to slide 12 and major cost drivers. In Q4, we delivered non-GAAP operating margin of 29.2%. This is down 60 basis points versus last year with approximately one point of favorable impact from foreign exchange. Cost of revenue is nearly flat year over year as a percentage of revenue as investments in the first party inventory program in Korea were offset by customer service efficiencies. Q4 sales and marketing expense was up nearly four points versus the prior year driven by approximately three points of marketing and promotional spending on our marketplaces and StubHub platforms, and one point from our acquisition in Japan. Product development costs were down one point as a result of our increased productivity, even as we continue to invest significant resources into strategic opportunities such as payments and advertising. G&A was down over a point, our fifth consecutive quarter of productivity as our continuing efforts to drive leverage bear fruit. and more than offset our investments in payments, data, and security that are within G&A. For the year, operating margin was 27.2%, down 120 basis points with 50 basis points of foreign exchange favorability, more than offset by increased marketing and payments investments. Turning to EPS on slide 13. In Q4, we delivered 71 cents of non-GAAP EPS, up 20% versus prior year. EPS growth was driven primarily by operational growth, the net benefit of share repurchases, benefits from our currency hedging program, and a lower tax rate, partially offset by increased marketing expense and investments in our payments initiative. GAAP EPS for the quarter was 80 cents, up $3.31 versus last year. The increase in GAAP EPS includes a $128 million loss recognized due to the change in the fair value of a warrant agreement and the lapping of a deferred tax accrual to address U.S. tax reform. As always, you can find the detailed reconciliation of GAAP to non-GAAP financial measures in our press release and earnings presentation. On slide 14 in Q4, we generated $1.1 billion of free cash flow up 39%. Full-year free cash flow was $2 billion, inclusive of a $300 million increase in cash taxes, primarily related to U.S. tax reform and the tax payment on the sale of Flipkart. While these factors negatively impacted free cash flow in 2018, the underlying strong cash flow dynamics of our business have not changed, and we expect free cash flow generation to return to normalized levels moving forward. Turning to slide 15, we ended the quarter with cash and investments of $8.6 billion. In Q4, we repurchased 52 million shares at an average price of $28.94 per share, amounting to $1.5 billion in total. This brings our repurchases for the year to $4.5 billion, representing approximately 11% of shares outstanding net of dilution. We ended the year with $3.2 billion of share repurchase authorization remaining. Moving to slide 16, capital allocation continues to be an important focus for us, and our key tenets underlying our commitment to disciplined investment have not changed. Since separation of PayPal, under our capital allocation framework, we have invested $1.3 billion in M&A. We have also realized nearly $3 billion in returns from disposition of assets and investments. And we have deployed $11.3 billion towards share repurchases, which represents approximately 140% of free cash flow and 25% of the company's shares outstanding, net of dilution. I think this demonstrates our longstanding commitment to discipline capital allocation and returning capital to shareholders. Turning to slide 17, heading into Q4, we indicated that 2019 was going to be a year of slower revenue growth with margin expansion. Based on this business profile, our board and management team actively engaged to review the best path forward for our capital allocation plans. This has resulted in a revised capital allocation strategy that accelerates return to capital to our shareholders, increases our commitment to capital return through the initiation of a dividend, and provides continued visibility through updated capital structure targets. We are initiating a quarterly dividend at 14 cents per share starting in March of 2019. The dividend will be payable to shareholders of record as of March 1st with a payment date on or about March 20th. Moving to the share repurchase, our board has approved an additional share repurchase authorization of $4 billion with no expiration And in 2019, we expect to repurchase approximately $5 billion of our stock inclusive of dilution offset. We expect to return approximately $7 billion of capital to shareholders across 2019 and 20 through our share repurchases and dividends. With regards to our capital structure, we expect to remain at our current BBB plus rating, which gives us ongoing flexibility to execute on our capital allocation strategy and is increasingly important as we implement our payment intermediation capabilities. We are targeting to have approximately $3.5 billion of cash and investments on our balance sheet as we exit 2019. And our mid-term leverage guidelines are approximately 1.5 times net debt and below three times gross debt to EBITDA. As always, we will continue to evaluate our capital allocation strategy as we move forward, ensuring that we drive optimal value on behalf of our shareholders. Moving to full-year guidance on slide 18, we are projecting 2019 revenue between $10.7 and $10.9 billion, growing 1 to 3 percent on an organic FX-neutral basis and 0 to 2 percent on an as-reported basis. The midpoint of our revenue growth range assumes marketplace GMV growth of 1 percent. This is driven by two primary factors. First, scaling back on some of the user experience plans will continue to create lapping pressure versus last year, particularly in the first half. Our new efforts to drive conversion, as Devin mentioned, will focus on removing friction, leveraging customer data, and ultimately surfacing inventory in more efficient ways. Second, we'll take a more disciplined approach on marketing and reduce low ROI spend, which will further constrain GMV growth in the short term, and may create near-term buyer growth pressure while leading to a healthier ecosystem over the long term. I'd like to spend a moment to discuss online sales taxes, such as Internet sales tax, value-added tax, and digital services taxes. The Internet and the rise of e-commerce has disrupted traditional sales tax regime for governments around the world. As domestic and international jurisdictions refine their positions, we will continue to advocate for balanced outcomes that protect and promote technology-enabled small businesses in eBay. At the same time, we are fully committed to enabling compliance with any new tax obligations. While some of this is contemplated in our outlook, it is important to keep in mind that this situation is dynamic and rapidly evolving. We expect StubHub to deliver growth relatively in line with 2018, and classifieds will continue to see growth stable double-digit growth. We expect operating margin of 28 to 29 percent for the year, which at the midpoint is more than one point higher versus 2018. This margin expansion will be driven by two points of operating leverage through marketing spend reductions and other targeted cost actions, partially offset by a one-point investment in payments, which we believe will deliver significant long-term results. Well, the impact of currency is negligible on the full year operating margin outlook. At current rates, we expect to have a modest tailwind in the first half and a modest headwind in the second. We expect non-GAAP effective tax rate in the range of 16% to 18%. We are projecting non-GAAP EPS of $2.62 to $2.68 per share, up 13% to 15%. This includes the impact of modest top-line growth, margin leverage, and the ongoing benefit of our share repurchase program, partially offset by a stronger U.S. dollar and our investments in payment intermediation. We expect free cash flow of $2.1 to $2.3 billion, which assumes capital expenditures in the range of 5% to 7% of revenue. Full-year gap EPS is expected to be $1.83 to $1.93 per share. Turning to Q1 guidance on slide 19. For the quarter, we are projecting revenue between $2.55 and $2.60 billion, growing 0 to 2 percent on an organic FX neutral basis. We expect non-GAAP EPS of 62 to 64 cents per share, representing 17 to 20 percent growth. EPS growth is driven primarily by the net benefit of our share repurchase program and the benefit of a lower non-GAAP tax rate and operational growth partially offset by our investment in payments intermediation. We are expecting GAAP EPS in the range of 40 to 44 cents per share in Q1. In summary, we entered 2009 focused on delivering shareholder value through modest revenue growth with expanding margins, strong double-digit EPS growth, and more capital return through share purchases and a dividend. We will do this by reducing our overall marketing investment while focusing on acquiring new buyers for healthier long-term growth and continuing to invest in upper funnel marketing and brand to drive consideration. This will enable us to drive two points of margin expansion, and we will reinvest one of those points into our payments initiative, which will generate significant future return. Finally, we have evolved our capital allocation structure and expect to return approximately $7 billion to shareholders over the next two years, through share repurchases, and initiating our first-ever dividend. And now we'd be happy to answer your questions. Operator?

Thank you. Ladies and gentlemen, if you have a question at this time, please press the star, then one key on your touchtone telephone. We ask that you please limit yourself to one question and return to the queue for any follow-ups. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Ross Sandler with Barclays.

Great. Hey, guys. So it sounds like 2019 will be a little bit of a reset year, and then 2020 we'll see re-accelerating growth. You've been able to do that in the past, as we saw in 2017. So I guess, Devin, what specific initiatives can you point to today that give you the confidence that you can deliver that accelerating growth in GMV in 2020? And then the second question is, You're guiding the operating margins up nicely in 2019. That's a reversal from the prior couple-year trend line. So do you feel like we're at a trough for operating margin and we'll see consistent improvement from here beyond 2019? Thanks.

Thanks for the question. Vis-a-vis GMV, I think you're right to point out the fact that GMV has dipped before and then reaccelerated. I've seen it several times in my time here at eBay. And I start by looking at the kind of – core health metrics, and to me, I always go to buyer growth and traffic, both of which are healthy and stable. We're going to focus intensely on conversion, as I said. We'll focus intensely on improving that traffic and buyer growth through an evolution of our SEO strategy. We'll focus on resetting marketing a little bit so that we're at a healthier base as we enter 20, and obviously in 20, we'll kind of lap that, and we'll end up with, I think, a healthier ROI on that spend. So I think that we've built a very solid foundation, but there are some things we've learned, and we'll make adjustments on that. And I think that gives us confidence that GMV will – this is not a trough of GMV, but we have the opportunity to accelerate beyond this. Keep in mind that in addition to GMV, there's an important revenue dynamic in 2020, which is in the second half of the year, we begin to operate our payments initiative without the operating agreement. And you've seen that advertising is scaling nicely, and we assume that it will continue to scale nicely. So I have a high degree of confidence in accelerating revenue growth in 20, and we believe that the actions we're taking in 19 will set us up well for re-acceleration of GMV as we move forward beyond this year. Vis-a-vis operating margin, You know, we're not going to guide, obviously, out beyond 2019. I just say with the dynamic I just said, we'll look for whatever opportunity there is to drive the improvement and growth of operating income. And in part, that will depend on what growth is. But I do think given that in the second half of the year, payments will reverse, start to reverse from an investment to a revenue contributor. the opportunity is there to go further if that's the most efficient way to drive operating income growth. So I think we've got a number of levers. We feel very good about our opportunity to deliver this year and then even better as we enter 2020. Thanks for the question.

Thank you. Our next question comes from Eric Sheridan with UBS.

Thanks. Maybe two if I can. One, just following up on the back row commentary, just wanted to understand if that was commentary broad-based about December or focused exclusively on the U.K. and whether you could quantify the rate of change you saw in December versus October and November and what you're calling out and how that might impact January. Second question, going back to Ross, when you look at 19 and you look at some of the headwinds, is there a way to tease out or quantify changes some of the headwinds to GMV or buyer growth and how we should be aware of those sort of arcing through the year, whether it be first half, second half, or it's going to be fairly steady as we go through 2019. Thanks, guys.

I'll take the first part just vis-a-vis holiday in December, and then I'll turn it to Scott for the rest of it, if that's okay. You know, look, I think obviously it's hard for us to know what happened out in the markets. beyond our own platform. But what we did see is over the last few years, there's been a shift in holiday spending. There's been an acceleration into November. There's been an acceleration into deals. There's been an acceleration into the kind of peak November shopping season because consumers know they're going to get good prices around that time. This year, what we did see is kind of across the board, a slowdown in December. Is that simply a remix of holiday shopping? Is that a macro effect? I don't know. And I think we'll wait and see what the landscape looks like. But we did see that effect more pronounced this year than we have in prior years. And Scott can take the second part.

Yeah, I think just a couple of points, Eric, that I'd kind of supplement to what Devin answered to Ross. I think first, the first half of the year had higher growth, better conversion, and and it's going to be tougher lapping. That's reflected in our Q1 guide, ultimately be reflected in our Q2 outlook, no doubt. And as we face into the second half, we started to see the deceleration with weakening conversion, and that ought to provide some easier lapping from a first half to second half dynamics. And then, you know, as I flagged in my comments, You know, we've got an operating margin dimension as well that will make first half look a little bit higher, second half a little lower from foreign exchange. But we expect to kind of fall within the range that we gave for the full year, both on revenue and EPS.

Great. Thank you.

Thank you. Our next question comes from Colin Sebastian with Robert W. Baird.

Great. Thanks. I have a couple as well. I guess first I just wanted to reconcile the ability to reduce marketing spend while still generating modest GMV growth. If you could provide a little bit more color on the mix shift and add formats or channels, that would give you confidence in generating that growth next year. And then secondly, I was just curious, given the fact that you have divested of Flipkart, there are significant changes to the landscape in India. I'm wondering if that in any way does open a new window for eBay in that market. Thanks.

Thank you, Colin. On the first part vis-a-vis marketing, you know, we did a high degree of experimentation last year. We tried a lot of different new things. We pushed to the efficient frontier of returns, and frankly, we pushed far beyond that. And we did that to see what we would get in terms of return, not just in GMV, but in buyers and healthy CLV. We've always been disciplined marketers. We're very ROI-driven, always have been. And as we reduced marketing already in the new year, We've obviously taken out the lowest ROI spend that we saw last year. There were some things we did that worked very, very well, and there's some things we did that did not return well. So that will have a GMV impact. We expect it'll have a GMV impact in the short run, but it won't have a value impact. In fact, taking it out will increase value overall, but have a short-term headwind on GMV growth. That's reflected in our guidance. So we're being surgical about what we take out. Let's keep in mind we're not stopping marketing. We're still going to market, but we're being very surgical in the way we reduce marketing spend throughout the year, and particularly in the first half. Vis-a-vis Flipkart, we have relaunched eBay India. That is phase one. Phase one is without domestic selling, but it is a domestic experience. Right now, Indian buyers are seeing eBay.India, again, we put that back into the market on New Year's Eve. And phase two will be the ability for domestic sellers to sell directly in the Indian market. And obviously, today, domestic Indian sellers are exporting as they were before the Flipkart transaction. So the export business is live. The domestic buying experience is live. And the next phase will be the domestic selling experience. I would say there are multiple opportunities. There are many other parties that have approached us about potential collaboration. We'll see how that goes, but I think the Indian market is still in its early phase. There's plenty of growth left. There won't be one or two parties that make up the entirety of the Indian e-commerce opportunity, and we certainly intend to have a share of it.

Thank you. Our next question comes from Anthony DiClemente with Evercore ISI.

Thanks a lot, Devin. Maybe if you could just talk about or give us your updated thoughts on your assets, your portfolio, the corporate structure of eBay, and if you've considered looking at divesting stuff over classifieds. I know you talked about cross-merchandising and cross-platform opportunities in your prepared remarks, but just want to hear more about that. And then Secondly, I wanted to just ask for your updated thoughts on the competitive landscape. When you look at the GMV growth guidance you're expecting, do you see any incremental competitive pressure from other marketplace competitors, be they niche-oriented companies like Poshmark, The RealReal, or others? Just wondering if you could kind of update us on how you think this new world of competitive landscape is evolving. Thank you.

Thanks for the question. On the first part, Look, I think our actions over the last three years prove that we are constantly reevaluating our portfolio, and we will. And we have taken actions that are in the best interest of our shareholders and will continue to do that. Vis-a-vis our existing portfolio, there are real and substantial synergies, as I mentioned, and they're growing across that portfolio. and those synergies are not only for our shareholders but for our customers. But we always evaluate our assets and we'll continue to do so. On the second part of your question, I don't, look, it's an intensely competitive industry. We're competing for $11 trillion of commerce. There's nothing fundamentally that changed in the last, 30 or 60 or 90 days. It makes for a good headline, but the fact is there's no incremental competitive pressure that changed our results materially. It is super competitive, and it has been. It was a year ago, and it is now. Is it slightly more competitive? Maybe, but did it dramatically change this holiday or last quarter? It did not.

Got it. Thank you very much.

Thank you. Our next question comes from Edward Yurama with KeyBank Capital Market.

Hey, good evening, and thanks for taking my question. I guess, you know, you did have some success with some of the marketing and the new initiatives to drive new customers last year. I guess, how are these consumers kind of aging? Are they behaving in the way that you would have expected? And then second, as you roll back some of these product enhancements, how is the existing customer that maybe had difficulty with some of the changes kind of reacting, and are they spending at their previous levels? Thank you.

You know, vis-a-vis the cohort of customers, we're always watching that, and I don't think there are material differences to the cohort of customers we've acquired, say, in the last six months from those that we've acquired in previous cohorts. We measure that all the time. to make sure that there's not something in our marketing spend or the way we target that is bringing in a less valuable set of customers. So we're constantly adjusting that. Keep in mind that at 4%, we're adding a couple of million buyers a quarter, and that's against the base of 179 million. So it takes time to mix this out. It's still a small number against a very large number. But for the reasons I said, we'll be aggressive about continuing to push the new product experiences, which are resonating well. The new customers are converting well on those experiences. And vis-a-vis the existing customers, it's more a factor of what we don't do rather than rolling it back. We tried and tested in select populations. We didn't have it rolled out broadly. We're hoping we could, but we'll go slower with that base. So there's no disruption of those customers, and they're largely stable. Great. Thank you so much.

Thank you. Our next question comes from Heath Perry with Goldman Sachs.

Great. Thank you. Devin, wondering if you could just spend some time on your technology priorities from here. To the extent we're going to see this improvement in margins and rationalization around some of the spending outside of marketing, how do you feel about the level of tech investments that you're going to be able to make under this structure? And If you could give us a sense of sort of where your priorities sit now after coming through last year, I would certainly appreciate it.

Yeah, I feel good about – I feel good that we can deliver on behalf of our customers with these levels of investment. I keep in mind a lot of our priorities – We'll continue. The tactics are evolving as the real experiences reach real customers, but building out our catalog and structured data will continue. That will continue to be an investment. It's critical to our future. We'll continue to invest tech resources in payments and ads. We'll continue to invest in search improvements. We'll continue to invest in conversion improvements. I don't, I would not enhance the margin in the short run if I thought that that was going to compromise the technology platform or our customers' experience in the midterm or long term. We won't do that. We have opportunity, given lower growth, to adjust marketing, which we said. There are areas that will be ruthless about finding efficiencies. You heard from Scott about how ruthless we've been with G&A, and we'll continue to be. I think it's a very healthy discipline in the face of lower growth, to drive expansion and to drive operating income improvement, which is what we'll do. But we will not touch critical capabilities or critical priorities. We would not do that in the face of trying to generate OI expansion in a quarter or two. We're running the company on behalf of customers, employees, and shareholders for the long term. And every decision we make is with that in mind. Great. Really appreciate that.

Thank you. Our next question comes from Steven Ju with Credit Suisse.

Okay. Thanks. So, Devin, I guess part of the benefits for payments is to take down friction for the buyers and, I guess, add value to the sellers. To the former point, are you starting to see any signs of hopefully higher conversion rates due to the greater choice of payments? And secondarily, you've now owned a Japanese asset for about six months now. I guess it's a large market, but it's also a well-contested market. So can you talk about what you might be doing to grow the opportunity? Is there a strategy in that market that will be different versus the Western markets? Thanks.

Both good questions. Thank you. Vis-a-vis payments, I think that the best analogy to look at is historically non-PayPal customers, because obviously PayPal we have not turned on yet. We'll turn that on later in the year. So we have looked at historical credit card purchasers on eBay and Apple Pay users on eBay, and both are showing higher conversion in the new payment experience. So we have confidence that we are on the right track. You know, we'll obviously measure the PayPal base once PayPal is wired on, but we think it is a good experience. I've rarely seen something that has so many positive benefits for customers, for our shareholders, for our partners, payment providers. There is a lot of goodness to go around with this, and we are really seeing positive early signs. Keep in mind, this is an optional trial, so nobody is required at this point to be using payments intermediations yet we've done 140 million since we launched, and it's growing rapidly. So we feel really good about the opportunity, and I think quarter by quarter the market will begin to see that, that this is real and it's happening and it's going to get really real after the second half of 2020. On Japan, Japan asset is growing very, very nicely. It's a young asset, so it's not yet at scale yet, But it is a very differentiated asset in the Japan market. The Japan market is fairly mature. You've got a couple of big entrenched players like Yahoo, like Rakuten, like Amazon. And we are growing rapidly with a different base. It's a business that is more browse and search oriented. It's a business that has more millennials, more women. It's a business more skewed to fashion and soft goods categories. and it's doing great. We couldn't be happier with the acquisition and its potential in the future. It is carving out a meaningful niche in a very, very large, the world's third largest e-commerce market, where we've had nothing, and now we look forward and say, this is going to be a big business for us in several years. Thanks for the question. Thank you.

Thank you. Our next question comes from Douglas Anmuth with J.P. Morgan.

Devin, in your prepared remarks, you talked about some of the cross-platform opportunities and benefits. Can you just elaborate on that a little bit in terms of what you saw in 2018 across the core and then classifieds and StubHub? And then just shifting over to sales and marketing, we saw deleverage, I think, almost 400 basis points in 4Q. Can you just flesh out the inefficiencies there across promotional activity and then also Japan and how we should think about promotional activity going forward? Thanks.

I'll let Scott answer the second. On the first part, I start and stop with the customers. And if I take a platform like eBay Classifieds, increasingly this is just becoming one consumer selling experience. It's really becoming an experience where you list and your listing ends up on both eBay and Classifieds, including the reverse, which is you may list on Classifieds and it ends up on eBay. Okay. To me, I've said this before, I'm not saying anything different. Classifieds is just a selling format. It's selling locally as opposed to selling globally. But it's consumer selling to consumers, which is something that eBay's done in its entire history. Vis-a-vis StubHub, increasingly, we are directing traffic and ticket sales to StubHub from the core eBay marketplace. If you go on StubHub and buy something today, you very well may see eBay being merchandised in the checkout flow, merchandised for your team or your event. We've really started this at the beginning of 2018 and are just getting up to scale. But with classifieds, we've proven that we can deliver for customers and we can grow those cross-platform synergies. We tend to do that with classifieds and stuff up. Scott can answer the marketing question.

Yeah, I mean, the largest deleverage that you mentioned is really driven by marketplaces. I'd highlight a few contexts that I think we talked about in the past, Doug. But first, remember, we've been shifting away from incentives that end up showing up in Contra. And as those shift and move into the marketing expense line, that pushes up a few areas. First off, buyer coupons, and those buyer coupons have been focused on both new and reactivated buyers as well as retained buyers to try and influence buying decisions. As Devin talked about, we pushed that spend pretty far out the curve, and we'll be modifying that as we look out into 2019 in one area that we'll be cutting back Second, we pushed pretty hard on SEM spend, search engine marketing spend, to really try and compensate for the softness that we saw in our SEO channel. And as Devin talked about, we've been working on our SEO channel with a number of different activities in 2019 that should favor that as we're able to dial back a little bit of SEM spend in 2019. And then finally, I'd call out brand spend. We certainly spent more in Q4 than we did in earlier quarters around brand and more than we've spent in prior years. And we'll dial that back a bit, but you should expect us to be spending on brand over the course of 2019 as well, just not to the same extent as we did in 2018. Okay.

Thank you both.

Thank you. Our next question comes from Dan Salmon with BMO Capital Markets.

Good afternoon, guys. Let's start maybe with Scott. Just thanks for all the detail on the capital plans. I'm guessing there's no sort of insights on what you're expecting to do with debt levels there specifically, though we can kind of back into it based on what you're talking about with leverage and cash balances to assume you go to market. I'm guessing no details there as you don't want to get ahead of yourself, but Would there be any reason we wouldn't expect you to do something in the market sooner rather than later? Is there any sort of visible hurdle that we should be waiting just as we think about layering that into our models? And then maybe just a comment on how you think about potential M&A. Is there any budget in there for it specifically? We'd expect it to be modest, but any color on that would be great. And then, Devin, just on the ad business with the growth that's going on there at Promoted Listings, we assume that the number of actions of revenue actions since you charge on a CPA basis is growing significantly as the coverage improves. Could you just maybe offer a little bit of color on pricing? We presume it's pretty strong, but that doesn't always need to be the case. And any comments on what you hope to do to drive further demand growth in 2019 as well?

Yeah, Dan, to your questions. First off, We do have kind of M&A baked into our outlook at, I would say, grossly speak, at gross levels that we've talked about in the past. And so enabling us to continue to be acquisitive within the same strategy that we've talked about within, you know, geo-expansion, tech and talent, near and verticals. And, you know, we expected that to continue, and that's assumed in our outlook. With regards to debt, look, this is an evolution of our capital structure. As I talked about, we're targeting $3.5 billion of cash and a 1.5 times net leverage ratio. I think that allows us to align our capital structure and our cash generation profile that's super strong with our priorities and our shareholder return objectives that we talked about. And to the extent that the ongoing use and access to capital debt markets that we need to, we'll do so. And if we don't need to, we won't. And so we're leaving ourselves a little room as we move forward there. Devin, on the second.

Yeah, I'll take the ads question. The pricing has been pretty stable so far. We've seen the growth coming from both the source seller adoption and the sync buyer consumption. So pricing has been stable. I think as we move forward, the sources of additional growth, the sources of being able to continue to scale at this rate, which has been high, is three areas. One on the seller side, more opportunity for sellers to source first-party ads. We still haven't fully opened up the funnel to sellers. One example would be API access. Our biggest sellers who genuinely interface with eBay through APIs, not through Seller Hub, don't yet have access to first-party ads, yet they want it. So we'll open that up. That's just one example. For buyers, there'll be more placements through things like unified ranking, which will make sure that we're serving the right listing to maximize conversion through search and browse results, not a separate slot for a first-party ad. The algorithm should fully understand how to maximize every pixel on the screen, and that's where we're moving to. And then finally, the model. There's been demand for a CPC model to go along with the CPA model, and I would expect at some point during the year we'll roll out a CPC model for brands in particular to complement the CPA model.

Great. Thank you. That's very helpful.

Thank you. Our next question comes from Justin Post with Bank of America, Merrill Lynch.

Sure. Just one quick one. I'm trying to get my GMV forecast kind of in order here. Did the softness in December continue through January? I'm sure we can kind of back into it by your 1Q guidance, but just wondering if you could comment on that. And then secondly, how does the company think about GAAP versus non-GAAP earnings? And do you think about ways to maybe close that gap? And I guess the biggest difference would be stock-based comp. But how do you think about that? Thank you.

Yeah, look, Justin, generally, I mean, you know, we don't comment about inter-quarter trends. I'd just say that, you know, at this point, January kind of ended up about where we thought it would and was kind of in line with the exit trajectory of December. And so that's about all I'll say on that one. Gap to non-gap. Look, we absolutely think about gap versus non-gap all the time. As you guys know, we provide all those reconciliations. Implied in our Q1 and 2019 outlook, you can see that our stock-based compensation is not expected to increase this year. Our expectation is flat. That will bring us closer in line. Not to mention the amortization of intangibles also has come down, and so that's bringing us closer in line. There's, of course, unusuals, and there have been significant unusuals for all U.S.-based companies around the world this last year with U.S. tax reform, not to mention then how you adjust and go forward. And so as we look at it, we closely monitor our costs at every line item, both GAAP and non-GAAP. I think we've demonstrated our capabilities to control those costs and also articulate them. And I feel pretty good about the operational aspects of the GAAP outlook for 19 in particular.

Great. Thank you.

Operator, we'll take one more question.

Thank you. And our final question comes from Igor Arunian with Wedbush Securities.

Hey, guys. Thanks so much for taking the question. So, you know, talking about the core users versus the new users, and we talked about that a bunch, and, you know, there was some pushback on the core user base taking up some of the structured data initiatives and specifically the product listing experience, but they're still focused as we go into 2019, obviously, on kind of bringing that new user experience to them as well. So can you maybe talk about what the balance between continuing to push those initiatives through or if there are other things that you're focused on to kind of bring them up to speed and catch them up to how the new users are experiencing eBay going forward? Thanks.

Yeah, I had a little trouble hearing you, but I think the question was really about product experience and the dynamic between new users and existing users, something like that.

Yeah, exactly. And then if there were some pushback on some of the initiatives that we've been pushing through, specifically the product listings and structured data, is there a focus to continue to push that through next year, or are there new things that you're focused on to catch them up and bring them up to speed?

Yeah, I think, you know, really everything we do is built on structured data at this point. So we'll expand the catalog further, as I said, which will help in the FCO outside the environment ecosystem. But, yeah, a lot of the existing base, particularly buyers, we're really talking about buyers, they'll get conversion improvements and frequency improvements. We're doing a lot to drive frequency improvements. of existing buyers so that they use eBay in different ways than just the rare purchase. You know, a lot of the, when we call, when we think about churn, a customer who didn't buy in the last year, oftentimes that's not somebody who we lost. It's just somebody who uses eBay in a very niche way. And there are a lot more opportunities for them to shop more broadly on our platform. So we think that's both product and marketing messages, frequency, will become a bigger part of what we do in 2019. I think that's another way we'll start to build a healthier base towards 20. And so you'll see new users get more aggressive, what I call retail-like experiences, and existing will get more incremental, but still important improvements to conversion and similar. For sellers, they will get protections. They'll get more data. They'll get better tools. We've got a big roadmap on behalf of our sellers, and we're excited about that. So, you know, we're very dialed in to tactical and targeted product enhancements in 2019 that will set us up well for both 19, the guidance you've heard, and beyond.

Great. Thank you so much.

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