Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the eBay Second Quarter 2023 Earnings Conference Call. [Operator Instructions]. Thank you. It is now my pleasure to turn the call over to the Vice President of Investor Relations, Mr. John Egbert. Sir, please go ahead.

Good afternoon. Thank you all for joining us for eBay's Second Quarter 2023 Earnings Conference Call. Joining me today on the call are Jamie Iannone, our Chief Executive Officer; and Steve Priest, our Chief Financial Officer. We're providing a slide presentation to accompany our commentary during the call, which is available through the Investor Relations section of the eBay website at investors.ebayinc.com. Before we begin, I'll remind you that during this conference call, we will discuss certain non-GAAP measures related to our performance. You can find the reconciliation of these measures to the nearest comparable GAAP measures in our accompanying slide presentation. Additionally, all growth rates noted in our prepared remarks will reflect organic FX-neutral year-over-year comparisons unless indicated otherwise. During this conference call, management will make forward-looking statements including, without limitation, statements regarding our future performance and expected financial results. These forward-looking statements involve known and unknown risks and uncertainties. Our actual results may differ materially from our forecast 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 periodic reports on Form 10-K, Form 10-Q and our earnings release from earlier today. You should not rely on any forward-looking statements. All information in this presentation is as of July 26, 2023. We do not intend and undertake no duty to update this information. With that, I'll turn the call over to Jamie.

Thanks, John. Good afternoon, everyone, and thank you all for joining us today. We delivered another solid quarter in Q2, exceeding expectations across all key metrics while investing in a disciplined manner to support our long-term objectives. Before I jump into the details around our second quarter results, I'd like to discuss the evolution of our strategy. Three years ago, I articulated our ambition of becoming the best global marketplace to buy and sell through a tech-led re-imagination of eBay. This would help us realize the enormous untapped potential of this company and put it firmly on a path to sustainable long-term growth. Since then, we've renewed our focus on products where we are uniquely positioned to offer meaningful choices and value for our customers. We've accelerated innovation to adapt to the changing needs of buyers and developed world-class shopping experiences in our focus categories. And we've changed our marketing strategy to support these experiences, pivoting to a full funnel approach aimed at attracting and retaining enthusiast buyers. These accomplishments make it a logical time to embark on the next phase of our journey. The foundational work of our tech-led re-imagination will continue, including our prioritization of non-new products, expansion of focus categories in ads and payments initiatives. And now we're raising the bar for innovation and have set our sights on an even more ambitious vision which is reinventing the future of e-commerce for enthusiasts only at eBay. We will achieve this vision in the coming years by focusing on 3 key pillars: relevant experiences, scalable solutions and magical innovation. Let's start with our first pillar, relevant experiences. This means we are solving the specific and ever-changing needs of our customers across all shopping occasions. Through our focus category strategy, we've proven that when we build relevant experiences, we…

Thank you, Jamie, and thank you all for joining us today. I'll begin with highlights from the second quarter on Slide 10 of our earnings presentation. Next, I'll review our key financial and operating metrics in greater detail. Finally, I'll provide our outlook for the third quarter and offer some additional commentary on the remainder of the year before we begin Q&A. As usual, my comments will reflect the year-over-year comparisons on an organic FX-neutral basis unless I note otherwise. We delivered solid results in Q2 as our GMV, revenue and EPS exceeded expectations and came in at or above the high end of our guidance ranges despite ongoing macroeconomic uncertainty. Gross merchandise volume was down 1% to $18.2 billion, an improvement from down 3% in Q1. Revenue was up 5% to $2.54 billion, which outpaced volume by 6 points, driven by accelerating growth within our advertising business. Non-GAAP operating margin is 26.9%, down roughly 1.7 points year-over-year, primarily due to the impact of eBay international shipping ramp and recent M&A. We delivered $1.03 in non-GAAP earnings per share, up 5% year-over-year. And we generated $492 million of free cash flow while returning $383 million to shareholders through repurchases and dividends. Let's take a closer look at the key drivers of our financial performance during the second quarter. Gross merchandise volume was down 1% to $18.2 billion, an improvement from down 3% in Q1 due to continued momentum within focused categories and a notable acceleration in cross-border trading. Foreign exchange represented a 1 point headwind to reported GMV growth in Q2. GMV growth in our focus categories accelerated modestly and outpaced the remainder of our marketplace by roughly 7 points during the second quarter. We launched a new focus category in U.S. streetwear, extended trading cards to Canada and broadened…

[Operator Instructions]. Your first question is from the line of Eric Sheridan with Goldman Sachs.

Maybe bridging the strategy to potential impact for the P&L. When you think about the 3 pillars you laid out that you're investing behind over the medium to long term, how should we think either collectively or individually of those pillars as drivers of either buyer growth, continued ramp in spend per buyer and/or potentially amplifying ROI on the platform over the medium to long term?

Yes. Look, we're excited about the evolution of our strategy here with reinventing the future of e-commerce for enthusiasts. When you look at the pillars, Eric, first on relevant experiences, we've had a lot of success with this to date, right? Our focus categories have been about creating relevant experiences in specific categories and we've seen a CSAT change, a GMV change, et cetera. And so we're expanding this now to kind of every site-wide experience that we have on the site, including a new design for Gen Z shoppers, including going to every e-mail, every notification. And frankly, new technology and tools enable us to do that. And so we feel really great about that and the impact on customer satisfaction and on GMV. On the scalable solutions, think about all the foundational work that we've done in payments and really being able to take that to the next level with things like financial services and building on that or eBay International Services. When you combine the scale of eBay in 100 countries with the GMV that we do, we're able to roll out programs like the EIS, eBay International Shipping, and open up that opportunity for our sellers and just drive a lot more cross-border trade and a lot easier experience for our sellers. And then think of magical innovations is really raising the bar on the experience that we're going to have on the site. I talked about some of the new AI products that we're launching. I mean, these are products that are out the gate having over 80% customer satisfaction, having sellers tell us this is going to unlock more inventory because you're making it so easy to list on the platform, products like live commerce. We've now done over 300 live commerce and sellers and buyers are getting really engaged in that. And so that opportunity for us is to drive that customer lifetime value for a buyer as well as attract those new buyers on the platform. What I'm excited by is really the intersection of a couple of these. When you think about the intersection of relevant experiences combined with scalable solutions, only eBay can provide that, and that's why we think we're going to be able to reinvent the future of e-commerce in a really uniquely eBay way.

Eric, if you think about the financial architecture in terms of linked to the P&L, you're seeing us continue to invest. The underlying business, as we're moving forward is in a very healthy space. We're seeing great momentum not only with the focus categories, but also the monetization initiatives and the strength on the horizontal platform. And so we continue to invest to drive the momentum in the underlying business. We remain committed to the architecture that we put out back at our Investor Day last year with the sorts of mid-single-digit GMV growth and the P&L architecture that comes off the back of that. The timing of that, as we always said, will be a function of the macro environment that we continue to operate in. So hopefully, that covers the question for you from the link between strategy and architecture.

Your next question is from the line of Nikhil Divani with Bernstein.

My first one is on margins. I think the operating margin has kind of stepped down this year, and that's continuing to the back half as well. Can you just talk about the primary factors that are weighing on that and the degree to which they are temporary versus structural? I know you're not guiding to '24 yet, but when you think about next year, what are the levers that would allow you to improve from this kind of 26% margin level?

Let me give you a little bit of color on the year-over-year margin. Obviously, we have seen some modest deleverage associated with the current macro environment, which obviously reflected in our full year GMV commentary, and that's bringing a lot of pressure on margins. I would refer probably to 4 discrete items that have impacted 2023. Firstly, we've talked about eBay international shipping. This is both strategically important for us as we open up the aperture across 132 million buyers across 190 countries and gives us a great opportunity to drive more commerce through eBay and, at the same time, drive accretive operating profit dollars. As a reminder for you all, we are now the principal in that relationship versus an agent and, therefore, the accounting treatment has impacted our margins in '23. The second item will be around M&A. We have been more acquisitive of late to drive sustainable long-term growth in the business. And as I mentioned in our prepared remarks, we would expect EIS and M&A together to be a 1 point headwind to margins in '23. The third element, which is slightly nuanced is the FX fluctuations and lapping that we have seen or will see through the second half of the year. We did benefit from significant hedging gains in the fourth quarter of 2022, which we will ultimately lap. And in totality, that will equate to 0.5 point of FX-driven margin dilution for the full year and 2 points in quarter 4 alone. And then finally, obviously, the reinvestments in our business. We are seeing focused category momentum, 7 points of growth over the core platform, horizontal investments in search and buyer and seller experience are driving dividends. And obviously, the investments in our monetization initiatives like payments and ads is bearing fruit. And so as I think about margins for 2023, we have some unique items, as I've said, such as eBay International Shipping, the M&A and the FX fluctuations we've talked about. But we've also been investing in the business because we feel very confident about the trajectory of the business and how it's driving long-term sustainable growth. I think that as it pertains to 2024, I'm not going to get ahead of myself. We've given you a lot of color for the third quarter. We've added some color for the full year. We are -- remain committed, as I mentioned to Eric, to the medium-term goals that we've put out at our investor event. This will really -- the timing will be the function of the duration and severity of the macro headwinds we're currently facing. And obviously, we'll give additional color for '24 in the quarters ahead.

And you alluded to that Investor Day GMV framework, which kind of assumed the non-focus categories would be flat. I guess what's the strategy in your playbook to ensure that those non-focus verticals also remain stable going forward?

First of all, our strategy when we go back to it in terms of relevant experiences on the site, we're doing a lot of work outside of just the work that we're doing in focus categories. In fact, the majority of our investment is going there. So if you think about the magical listing experience, that's going to help unlock C2C inventory across every category on the site. The second thing I would say is that when you think about our model and what we laid out, we have a real multiplier effect on our buyers. So as we continue to roll out focus categories and as we're seeing success there, that actually helps lift all tides across the eBay marketplace. So take a sneakers buyer. The average sneaker buyer comes in and buys sneakers over $100, they're going to spend $400 in sneakers but then $2,000 on the rest of the platform outside of that. And that nature really allows us to help grow the overall marketplace, including our non-focus categories. The last thing I'd say is when you think about things like the scalable solutions that we're building, take eBay international shipping, that's going to help every category. That's going to help focus categories like handbags coming out of Japan, et cetera, but it's also going to help our non-focus categories. And when you think about cross-border trade on the platform, it's really 1 in 5 transactions or 20%. So it you a lot of opportunity, both in our focus category work and the non-focus category work, and we feel committed and confident in our ability to get those to fly in the medium term.

Your next question is from the line of Michael Morton with MoffettNathanson.

I would like to maybe start off with EIS being deployed in the U.S. currently. If we could talk about any contributions you're seeing at this point to U.S. GMV. And maybe some color on timing and kind of contribution expectations going forward would be great because it seems like it's a program that you're very excited about. And then a second question, we've talked about the full funnel marketing spend in the past, and you've mentioned millennials and Gen Z and the active buyer numbers have been improving. I was -- would love to dig down on those cohorts maybe a bit or if you could kind of bucket the strength you're seeing in active buyers. Are you having some effectiveness in converting the millennials and Gen Z who have maybe grown up in a different era of interacting with marketplaces?

Yes. Okay. So first, let me talk about eBay international shipping. So the whole program makes cross-border shipping and selling much easier. So eBay handles the custom forms, we handle the duties. We handle the immediate returns. And sellers are protected from things like item not received claims on the platform. So we're in the process of basically rolling this out. Most sellers are adopting it. And while it's early days for the new program, we're seeing a really positive reception from sellers in terms of shippable listings, the conversion that we're seeing, et cetera. Why we're excited by it is because 20% of the business on eBay is cross-border, but less than half of our big 3 inventory is available to be shipped internationally. So opening up that inventory, we think, is a unique advantage for eBay and a unique value proposition for our sellers on the marketplace. When you think about the full funnel marketing that we're doing and that shift, we're really seeing it pay off in terms of our buyer strategy. So this quarter, we saw, once again, new or reactivated buyers was positive for the fourth straight quarter. Our new buyer growth was positive for the second quarter. And take a category like P&A where we've been doing full funnel marketing, really targeting on enthusiasts, there, we're seeing that new and reactivated buyer growth being double digits faster than the rest of the platform. So we feel really good that the investments that we're making are driving the right buyer outcomes. They're exactly where we expect them to be and where I've been talking that they would be. And when you look at it, categories like what we're doing in sneakers. This quarter, we just launched Authenticity Guarantee for streetwear, which is a great kind of Gen Z younger consumer category. We're in the middle of sponsoring fashion island -- sorry, Love Island in the U.K., which is kind of currently on air right now, sponsored by our eBay U.K. business, also bringing in a different type of cohort. So we feel really good that the strategy is working. We're bringing in the enthusiast buyers that we want and that we're seeing a great payoff out of the full funnel marketing approach.

Your next question is from the line of Ken Gawrelski with Wells Fargo.

A couple of more kind of macro and competitive questions, please. First, could you just speak to where we are in the evolution of the consumer preference for goods versus services? Have you seen a normalization of that trend? And has there been any benefit yet in results? And then the second one, could you just speak about the competitive environment, especially in the kind of the lower end of the market, maybe where we've seen in the market where there have been some aggressive moves by China drop shippers. Anything you could touch on there, any impact you may be seeing and what actions you might be taking to combat those efforts?

Yes. So look, on the first one, clearly, inflation and rising are impacting discretionary demand. I think what makes our platform more resilient is that consumers can come here and find amazing values. So if you think about the refurbished category, which has been a focus category of ours, that grew double digits year-over-year and was the second largest contributor towards our focus category outperformance. In general, on the platform, we're seeing used growing faster than new. And that's what's great about eBay on the buy side. On the sell side, it is also a place to make extra income. And so we're really leaning into what we're doing on a C2C standpoint, including the new Magical Listing rollout because tougher economic times are an opportunity for us to bring more sellers onto the marketplace. When you think about the kind of a lower ASP market or the cross-border trade, as you mentioned, we noted that this quarter, we're actually seeing some strength in the cross-border trade of our business. That has to do with supply chain easing up and there being an opportunity for those sellers to export items in. And so we're actually seeing good health in what we're doing from a cross-border trade business. We've been doing a lot to enable that and make it easier. I talked about eBay international shipping, but we've also been rolling out new capabilities and payments over the past couple of quarters. with buyer and seller FX to make the payments process of that easier. And we've been working on with some of our sellers to do forward deploying of our inventory which has just helped kind of ease some of that supply chain pressure. So overall, we feel really good about the values that people are getting from this and the initiatives that we're investing in to make it easier for our sellers to export items throughout the globe.

Your next question is from the line of Deepak Mathivanan with Wolf Research.

Two quick ones from us. First, can you add additional color on the factors driving strong trends in the first-party ads business? Are sellers also seeing additional performance gains or is this primarily driven by expansion in ad load in some of the areas of the website? And then second, on M&A, Steve, you alluded to kind of being acquisitive, how should we think about the appetite over the next few quarters? Are there any specific areas where you think there are additional opportunities?

Yes. So our first-party ads is really a success based on the execution of the team and what we're seeing in terms of return on ad spend. So this quarter, we grew 49% year-on-year. Some of that is due to some one-time factors. Steve talked about the accounting change that we've had. We also talked about the halo attribution that we rolled out for sellers. But in general, it's really based on the success of the products and the innovation that we're seeing. So if you look at our Promoted Listing Standard, it continues to be the workhorse of our advertising portfolio where we're driving more optimization and more relevance. And secondarily, when you look at our new products, they once again grew 30% quarter-over-quarter. They're the -- key one being Promoted Listings in Advanced. And the team continues to innovate to make it easier for sellers. So this quarter, we launched a feature called suggested campaign which makes it easier for sellers to add Promoted Listings Advanced to the work that they're already doing in advertising. And as we talked about, we now have 2.1 million sellers using the product and 800 million listings. So we feel great about the growth that we're seeing there. As Steve commented, some of that gap will narrow because of some of these onetime factors, but we see revenue continuing to pace out GMV because of the success of what we're doing in ads. Steve, maybe you want to take the second one?

Yes. So we've been very thoughtful and considerate as we've looked to M&A, it's really to structurally improve the core marketplace. And so if you think about where we've , my shipment is really helping fuel and support the growth in parts and accessories, our biggest focus category. We recently launched in the TCG Player, which is supporting our trading card business. And Certilogo, which is the most recent acquisition really supporting our fashion category. So we've been very, very thoughtful about the entities that we lean into and partner with or we ultimately buy to really support the long-term sustainable growth of the platform, and we'll continue to be thoughtful. And as a group, we look at each potential acquisition on its merits and make the best decisions to drive long-term sustainable growth and shareholder value.

Yes. And I'd just add, if you look at Certilogo as an example, it's a perfect acquisition for eBay. They have great relationships with brands. They're driving this ability to have these unique QR codes to make sure that products are authentic, and it's leading into a trend that we're seeing, frankly, two trends. One is the younger Gen Z consumer caring more about sustainability and preloved and what happens with garments. And frankly, governments and regulators, especially in Europe, making sure that products don't go into the landfill, but they get a second and third and fourth life, which drives consistently right into the strategy that we've been talking about as the pioneers of e-commerce and driving the circular economy and driving the benefits for the overall planet.

Your next question is from the line of Tom Champion with Piper Sandler.

We were positively surprised by international GMV growth this quarter while domestic was maybe a little bit lower. Just curious, any context or one-timers to consider here? And Jamie, I'm curious with the marketplace essentially flat year-over-year for the first half, would it be reasonable to expect GMV to return to positive growth in '24. Maybe for Steve. It's a more reserved year for buybacks. Any reason why you wouldn't monetize the Adevinta stake to bridge the gap between the current period and maybe a return to GMV growth? Any comments on those would be really helpful.

Tom, I'll pick up the first one and the third. I'll let Jamie comment on the second. So the first one with regards to international versus U.S. GMV dynamics, there's a couple of items that are worth reflecting on. As a reminder for you all, the GMV is reflected on the geography where the seller is domiciled, i.e., where the sale takes place. So first, it's associated with lapping dynamics. If you recall, Europe, in particular, got hit harder as we sort of went through the awful events of the war in Ukraine and the economic fallout associated with that. And they got hurt earlier, and we started to lap through that versus the U.S. in the first half of 2022. Secondly, we saw the supply chain challenges that we're also lapping and the easing of those supply chains, particularly for our cross-border business that Jamie talked about earlier is helping drive international GMV momentum as we have an increase in cross-border trade, obviously fueled by some of the benefit from eBay international shipping. The one thing I would say on the overall GMV basis, I continue to be very enthused by the overall level of momentum because we're leaning not only to focus category in the U.S. but also internationally, and those investments are bearing fruit across all of our geographies. Jamie, do you want to just touch on the other question before I talk about capital...

Yes. Look, I think the momentum we're seeing is a reflection of the strategy that we have laid out and seeing it working. So if you think about focus categories, which was our largest one that we've -- we took on P&A, which was our largest one that we've taken on to date, having that grow mid-single digits, the category over $10 billion and be at market rates of growth speaks to the fact that we know how to roll out this playbook and make it successful. And frankly, we're continuing to invest back into categories that we've already launched because of the return that we're seeing. We feel good about things like what we're seeing in refurb with the double-digit growth, et cetera, the success that we're seeing in ads and payments. So we're really happy with the momentum that we have there. As Steve talked about, we'll kind of deal through the macro pieces. But we're continuing to invest behind the strategy because we feel like it's working and the investments are really paying off for the customer and for shareholders.

Tom, specifically pertaining to your question on capital returns, we remain committed to the return of 125% of free cash flow as we talked about to shareholders through stock buybacks and dividends between '22 and '24. As I look over the last 18 months, we've returned $4.4 billion to shareholders, which is 130% of free cash flow. Specifically around certain assets that we hold, I'm not going to share any specific details on any of our specific investment stakes, but it will continue to be our priority as it's always been to drive a disciplined approach and to maximize shareholder value through the investment portfolio.

Operator, can we do one final question, please?

Your final question comes from the line of Doug Anmuth with JPMorgan.

It's Wes on for Doug. Just a quick question on P&A. Outperformance has been solid, but just kind of curious what you're seeing on the supply side there or if you feel like you're constrained on any front on P&A.

Yes. No, Wes, we're seeing good supply from our sellers in that category. I mean if you look overall in the business, supply is in great shape. We did.9 billion listings on the platform. We have over 500 million in P&A. The key for us has really been helping sellers make sense of -- I mean helping buyers make sense of all that inventory. And as we roll out the new fitment changes, as we've rolled out guaranteed fitment, we're finding that the experience is just so much easier for all of our segments of key buyers, whether they're now using the My Garage feature on the site. We just launched these 2 new AI features which enable us to make the buying experience so much better. Once we know your car, we can tell you, here's the key upgrades to do. We can help you with things like your engine codes. And look, this is the second quarter of mid-single-digit growth, which we believe is at market rates of growth. And so we're feeling great about that. As I said, our buyers in P&A are growing double digits faster than the rest of the markets when you look at our new and reactivated buyers. So we're pleased with what we're seeing. We're continuing to invest and roll out new features and new capabilities. We're seeing particular strength in CBT right now. But overall, really pleased with what we're seeing in our motors P&A, and frankly, across our focus category portfolio.

Ladies and gentlemen, thank you for your participation today. This concludes today's conference call. You may now disconnect.