Steve Priest
Senior Vice President, Chief Financial Officer at eBay
Thank you, Jamie, and thank you all for joining us today. I'll begin with our Q3 financial highlights on Slide 4 of our presentation. We delivered another strong quarter. Our results met or exceeded expectations across all key metrics, while our year-over-year comparisons reflect the extraordinary growth we experienced last year as a result of the pandemic. These results were underpinned by continued execution against our strategic pillars, including contributions from payments, Promoted Listings and focus categories.
Revenue grew 10% year-over-year on an FX-neutral basis. The transaction revenue grew by double digits for the sixth consecutive quarter, primarily due to contributions from managed payments.
Non-GAAP EPS was $0.90 per share, and our operating margin was 31.7%. We generated $502 million of free cash flow and returned approximately $2.4 billion to shareholders through share repurchases and cash dividends during Q3. Given the underlying growth in our business and strong free cash flow generation, I'm pleased to announce we've raised our share buyback target for 2021 from $5 billion to $7 billion.
Our pending portfolio transactions remain on track to close within previously communicated time lines. We anticipate the sale of Adevinta shares to Permira will close during Q4, while the Korea deal, which will close early next year or potentially by the end of 2021.
Turning to active buyers on Slide 5. We exited Q3 with 154 million active buyers on a trailing 12-month basis, representing a 5% decrease year-over-year. This decline was primarily driven by low-value buyers, a group that makes up more than half of our buyer base but only 5% of GMV. As Jamie mentioned, this ongoing trend is a result of our strategy to prioritize attracting and retaining high-value buyers. We are confident in this approach, but we recognize the reduction in low-value buyers could pressure our rolling 12-month active buy account in the coming quarters. Compared with Q3 of 2019, a low-value buyers are down 7%, while high-value buyers were up 6%.
Moving to GMV on Slide 6. In Q3, we delivered $19.5 billion of GMV, down 10% year-over-year on a spot basis and down 12% on an FX-neutral basis, in line with our expectations. The macro benefits to our business from mobility was significantly diminished in Q3 as restrictions faded across the globe, where we continue to see modestly positive underlying growth in our business. Compared with Q3 of 2019, GMV grew 9% on an FX-neutral basis. Consistent with prior quarters, our performance by market varied based on a number of factors, including relative mobility and country-specific macroeconomic trends.
Internationally, GMV was roughly flat versus Q3 of 2019 on an FX-neutral basis. A number of factors influenced the growth differential between the U.S. and our international markets during the quarter. Mobility is back to pre-COVID levels in many of our largest international markets, diminishing the volume tailwinds we benefited from in prior quarters. Changing consumer behavior, including an uptick in leisure activities and travel, also may have impacted e-commerce growth internationally.
Additionally, category mix varies in our international markets, which have lower exposure to certain fast-growing verticals like collectibles, but higher concentration of items from cross-border trade that are more difficult to source amid the ongoing supply chain disruptions.
Finally, our focus category rollouts are more nascent in our international markets. However, as our innovation playbook expands to more categories and countries, we are confident our international growth trajectory will improve.
In the U.S., GMV grew 22% versus Q3 of 2019. Growth in our domestic marketplace was driven by strong execution against our strategic pillars, more product rollouts within focus categories and steady growth within e-commerce.
Residential mobility improved in the U.S. but continues to trial the European markets, while leisure activities and travel increased in line with normal seasonal trends. Other external factors may be benefiting our U.S. business relative to international markets, including the lingering impact of government stimulus and scarcity benefits and supply chain disruptions. The precise impact of these effects is unclear, but they are likely a net positive contributor to U.S. growth in the near term. In aggregate, there are numerous puts and takes between regions, but we remain encouraged by the modestly positive underlying growth in our business.
Turning to revenue on Slide 7. Net revenue for Q3 was $2.5 billion, up 10% year-over-year on an FX-neutral basis and 11% on a spot basis. We delivered $2.4 billion of transaction revenue, also up 11% on an FX-neutral basis. Growth was primarily driven by managed payments, which contributed roughly 20 points of incremental revenue growth during the third quarter. The payments ramp drove an 80 basis point sequential increase in our take rate, which surpassed 12% in Q3.
Moving forward, we expect our sequential take rate increases to moderate as the managed payments rollout is nearly complete.
Within our advertising business, Promoted Listings grew 9% year-over-year, outpacing volume by 21 points. Early adopters of the new Promoted Listings products are seeing significant increases in performance, giving us confidence in the long-term potential for advertising revenue.
Marketing services and other revenue declined 7% year-over-year to $151 million, driven by the impact of sold item declines and shipping programs and headwinds within third-party advertising. We continue to purposely reduce third-party advertising in favor of Promoted Listings, which delivers superior performance and offer a better experience for both sellers and buyers.
Moving to expenses on Slide 8. In Q3, we delivered non-GAAP operating margin of approximately 31.7%. This represents the 2.7 point year-over-year decrease primarily driven by lower volume. Our cost of revenue has scaled in line with payments growth due to variable processing costs. This dynamic has pressured gross margins during our transition to managed payments. However, once the transition is complete, we expect gross margins to be more stable. Moreover, the incremental revenue from payments drive significant leverage in our fixed expenses, most notably sales and marketing and G&A.
Sales and marketing fell by nearly 4 points as a percentage of revenue year-over-year in Q3. In addition to leverage from payments revenue, sales and marketing was lower due to reduction in coupons and rewards programs that were previously targeted towards low-value buyers.
Product development increased 21% year-over-year as we continue to accelerate product innovation and support our longer-term strategic initiatives within payments, advertising and focus categories. Transaction losses rose as a percentage of revenue by nearly 2 points versus last year due to higher consumer protection losses from the payments transition and the lapping of onetime benefits in the prior year, which were partially offset by the benefits of fee netting.
Turning to EPS on Slide 9. We delivered $0.90 of non-GAAP EPS in Q3, up 9% year-over-year as ramping contributions from payments and the net benefit of share repurchases more than offset the lapping of COVID-driven volumes a year ago. GAAP EPS for the quarter was $0.43, roughly 50% lower than last year. The delta was primarily driven by a fair value adjustment on our Adevinta shares, partly offset by gains from other investments.
Switching to free cash flow on Slide 10. We delivered another strong quarter of cash generation in Q3 with $502 million of free cash flow, a 4% decline year-over-year. The decline was driven by the timing of working capital and CapEx spend, partly offset by operational efficiencies and the timing of 2020 cash taxes.
As a reminder, the managed payments transition has yielded meaningful working capital benefits. Through three quarters of 2021, this benefit amounted to approximately $300 million.
Moving to capital allocation on Slide 11. We ended the quarter with cash and nonequity investments of $5.1 billion and gross debt of $9.1 billion. During the third quarter, we returned approximately $2.4 billion to our shareholders through stock repurchase and dividends. We repurchased approximately 31 million shares to $2.3 billion at an average share price of $72.52. We also paid a quarterly dividend of $116 million in September.
Given our fortress balance sheet and strong underlying free cash flow, we are updating our share buyback plan for 2021 from $5 billion to $7 billion, which implies approximately $3 billion of repurchases during the fourth quarter.
Overall, our capital allocation objectives remain unchanged. We'll preserve financial flexibility to execute on strategy and drive long-term value creation. We aim to drive organic growth in our business, and we'll look for opportunities to supplement that growth with disciplined acquisitions and investments. We will optimize our financial flexibility, access to debt and cost of capital, and we'll continue to deliver meaningful returns to shareholders through share repurchases and dividends.
Moving to investments on Slide 12. As a reminder, we received 540 million shares in Adevinta from our Classifieds sale, which closed during June of this year, representing an equity ownership stake of approximately 44%. As a regulatory condition of the Classifieds sale, we committed to reduce our ownership stake in Adevinta to 33% or less over the 18 months following the close of the deal. In July, we agreed to sell approximately 135 million shares to Permira for roughly $2.4 billion. We believe the Permira share sale remains on track to close during Q4, and the 405 million shares that we would retain were worth close to $7 billion at the end of September.
Turning to Adient. The warrants we acquired in connection with our strategic partnership during the second quarter of 2018 were valued at $1.4 billion at the end of Q3, an increase of over $300 million quarter-over-quarter. You will find more information on the Adyen warrant in our 10-Q. Our stake in Kakao Bank has appreciated in value following the company's IPO in August. At the end of Q3, our investment was worth approximately $800 million.
Finally, in June, we announced plans to sell over 80% of our Korea business to eMark for approximately $3 billion. Upon deal close, we will retain an interest of just under 20% of eBay Career, which carried an implied value of roughly $800 million at the time of the announcement. We believe the deal remains on track to close by early 2022 with a possibility of closing before the year end. We remain excited about our portfolio of global investments, the potential optionality they provide and the significant value they collectively represent for eBay shareholders.
Turning to guidance on Slide 13. For the fourth quarter, we are projecting revenue between $2.57 billion and $2.62 billion, representing growth of 3% to 5% on an FX-neutral basis and approximately 4% to 6% on a spot basis.
Our pay rate has risen notably in recent quarters due to contributions from payments and advertising. Although we expect advertising to continue growing faster than volume, we expect the impact from payments on our take rate to moderate as we are nearing completion of our managed payments transition.
We are raising our 2021 full year outlook for payments revenue from $1.8 billion to $2 billion. Our revenue guidance implies GMV is down low teens on an FX-neutral basis versus last year and up mid- to high single digits compared to Q4 of 2019. Our GMV guidance assumes steady execution against our strategic pillars and continued innovation within focused categories. Our outlook also assumes minimal benefits from macro factors like mobility, stimulus and supply chain impacts. However, we note the macro environment remains dynamic and difficult to predict, with varied impacts from country to country.
We expect non-GAAP EPS of $0.97 to $1.01 per share in Q4, representing a 14% to 19% year-over-year growth. We plan to continue investing in product and technology to deliver better category experiences and improved customer satisfaction. We anticipate our non-GAAP tax rate to between 18% and 19% due to recent outperformance of our U.S. business. We expect our GAAP EPS in the range of $0.72 to $0.76 per share in Q4.
In closing, we delivered strong results in Q3 that met or exceeded their expectations across all key metrics. We continue to execute our strategic vision and grow our core marketplace while maintaining the balance and discipline that will enable us to generate tremendous value for our shareholders for years to come.
Managed payments is on track to deliver $2 billion in revenue this year. and our transition is on track for completion by year-end. However, we believe our payments journey is just beginning as this milestone unlocks new opportunities to reduce friction in the marketplace and provide additional financial services.
Advertising revenue continues to outpace volume, the sellers increasingly leverage our expanded product portfolio to amplify the exposure of their listings. We observed impressive momentum with our focus categories, which are meaningfully outpacing overall volume growth. We are confident we can continue expanding this innovation playbook to more categories and countries in the quarters ahead.
Our balanced approach to capital allocation has enabled us to reinvest in our business, generating consistently strong free cash flow and deliver attractive returns for shareholders through share repurchases and dividends.
As proud as I am of our numerous business accomplishments, what makes them even more impactful to me is knowing we are achieving these milestones while building sustainable, exclusive and circular economy platform for all.
Once again, I'd like to take this opportunity to thank our teams across eBay for their incredible work over the last quarter and their support for our amazing sellers and buyers in the eBay community.
One final note, we are in the midst of a multiyear journey to deliver a tech-led reimagination of eBay. As the impact from macro factors stabilizes, we are reviewing our internal goals for 2022 and beyond. We anticipate showing our longer-term goals and aspirations at an investor event early next year.
With that, Jamie and I will now take your questions. Operator, over to you.
