eBay Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 22, 2023

Key Takeaways

  • Q4 financial results: GMV of $18.2 B and revenue of $2.5 B beat expectations, delivering a ~30% operating margin and non-GAAP EPS of $1.07, up 2% year-over-year.
  • Focus categories drive growth: Specialized verticals like motors parts & accessories, authenticated luxury goods, and refurbished items grew over 7 points faster than the rest of the marketplace in Q4, sustaining double-digit CAGR since 2019.
  • Advertising momentum: First-party Promoted Listings revenue rose 27% to $276 M, with ad penetration nearing 1.8% of GMV and newer Promoted Listings products growing over 20% quarter-over-quarter.
  • eBay International Shipping launch: New cross-border program reached 80% buyer satisfaction and is expected to bolster GMV over time, but will introduce a 30–120 bps headwind to gross margin in 2023 due to principal revenue recognition.
  • Cautious 2023 outlook: Q1 GMV is projected down 4–5% FX-neutral, revenue flat to +2%, non-GAAP EPS $1.05–1.09, while full-year expenses will grow ~2% with modest margin headwinds from recent M&A and shipping program rollouts.
AI Generated. May Contain Errors.
Earnings Conference Call
eBay Q4 2022
00:00 / 00:00

There are 12 speakers on the call.

Operator

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 4th Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, There will be a question and answer session.

Operator

Thank you. It is now my pleasure to turn the call over to Mr. John Egbert, Senior Director of Investor Relations. Sir, please go ahead.

Speaker 1

Good afternoon. Thank you for joining us for eBay's Q4 2022 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 Jamie's and Steve's commentary during the call, which is available through the Investor Relations section of the eBay website at investors. Ebayinc.com.

Speaker 1

Before we begin, I'd like to remind you that during this conference call, where 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 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.

Speaker 1

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 ks, 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 February 22, 2023, and we do not intend and undertake no duty to update this information. With that, I'll turn the call over to Jamie.

Speaker 2

Thanks, John. Good afternoon, everyone, and thank you for joining us today. 2022 was a year of consistent execution for eBay as we made significant progress against our long term objectives. Our focused categories drove underlying growth in our business as we expanded global coverage for our 16,000,000 enthusiast buyers. In motors, parts and accessories or P and A, growth accelerated as we improved our fitment capabilities, increased supply of OEM parts and enhanced trust signals for buyers.

Speaker 2

We extended authentication to new categories like trading cards and fine jewelry and opened authentication centers in several new countries for handbags. We opened the vault to store and digitally transact valuable items and adoption has grown steadily week over week. We retired legacy technology, simplified the architecture of our core services and improved our tech velocity. Our advertising growth accelerated as we scaled our 3 newer Promoted Listings products, optimized performance and automated more elements of campaigns. We expanded our financial services portfolio by adding FX conversion, new forms of payments like Klarna and Afterpay, faster debit card payouts and the digital wallet.

Speaker 2

And we balanced our investments innovation with prudent cost discipline to establish a strong foundation for sustainable profitable growth for many years to come. Now turning to the 4th quarter. We delivered solid results in Q4 as our key financial metrics came in ahead of expectations despite the ongoing macro uncertainty. We generated over $18,000,000,000 in GMV and more than $2,500,000,000 in revenue. We delivered an operating margin of close to 30%, while making critical investments in product and marketing to support our long term growth strategy.

Speaker 2

Non GAAP earnings per share for the quarter were $1.07 up 2% year over year. Our focus category strategy was a major component of our strong financial performance during the Q4. Focused categories grew more than 7 points faster than the rest of our marketplace during Q4, which was 2 points faster than the prior quarter. Establishing a game changing level of trust between sellers and buyers has been an important driver of the momentum in our focus categories. Authenticity guarantee enables trust in our luxury categories like watches, sneakers, handbags and fine jewelry.

Speaker 2

We have observed notable turnarounds in GMV growth since we launched authentication, improved the product experience and drew awareness to the great inventory in these categories. In aggregate, our luxury focused categories have grown at roughly double digit CAGR since Q4 of 2019, proving these investments have been highly effective. We dramatically improved trust in our refurbished offering by introducing warranties and hassle free returns, which attracted more brands and new categories to our marketplace. Those investments paid dividends in Q4 with positive year over year GMV growth and the biggest sales week ever for refurbished goods during Cyber Week. Just in our motors, parts and accessories category is most reliant on fitments for ensuring the compatibility of auto parts with a specific vehicle.

Speaker 2

During the last few months, we have taken major steps forward with our fitment capabilities. We acquired MyFitment in Q3 to help sellers populate their listings with accurate fitment data, which ensures compatibility for buyers. In Q4, we began making myFitness technology accessible to all buyers, starting with a pilot group of P and A sellers. Listings enhanced by this technology are seeing immeasurable uplift in conversion and we will expand this program further in 2023. Our significant investments in Fitment over the past few years allowed us to launch a prominent fits your vehicle badge in Q4.

Speaker 2

Similar to the Authenticity Guarantee logo we show on luxury goods, this badge provides a clear indication of which parts fit your vehicle throughout the buyer journey across search, merchandising, view item and checkout. This is no small feat with over 500,000,000 active P and A listings on eBay and the increasing complexity of vehicles in the marketplace. These advancements have significantly elevated our capabilities for P and A shoppers, and I'm pleased to share a new program we launched just last week called eBay Guarantee Fit. This program is the breakthrough for trust and P and A that Authenticity Guarantee is in luxury and warranty bar for eBay refurbished. It provides buyers with assurance that eBay will stand behind them if a part doesn't fit their vehicle.

Speaker 2

Guaranteed Fit is a huge milestone for the P and A category and the culmination of our multiyear fitment journey. I'm incredibly proud of our teams I'm also excited about our team's work in collectibles, which has benefited from a steady cadence of product development and partnerships, including most recently our live commerce beta. During Q4, we scaled up a number of eBay live events with select sellers, Bring a healthy level of viewers, engagement and GMV to participating sellers. We also introduced the eBay Live Hub, where users can subscribe to channels and receive notifications about future events. This hub will serve as a central discovery point as we broaden the availability of live commerce to more sellers and categories this year.

Speaker 2

Our acquisition of TCGplayer has also greatly enhanced our collectibles category. And in Q4, we began developing synergies between our respective marketplaces. In addition to its customer base of nearly 800,000 hobbyists, a major competitive advantage for TCGplayer is its relationship with thousands of local brick and mortar hobby shops, with many subscribing to its point of sale and channel management solution. Through this software, sellers can now more easily streamline listings and inventory on both TCG Player and eBay. TCGplayer also further diversified its marketplace by introducing comics during Q4, which is a natural adjacency to collectible card games.

Speaker 2

EBay's historical sales data enabled TCG Player to launch Comics with robust pricing intelligence, which will help us scale this offering. While our integration is in its early days, I'm incredibly excited to see what TCGplayer community will bring to eBay over time. One of the key pillars of our strategy is being the platform of choice for sellers. EBay's scale and global footprint represent key advantages for our platform as we work toward achieving this vision. In 2022, roughly 1 5th of our GMV was facilitated through cross border trade.

Speaker 2

Sellers who activate their listings internationally can reach buyers in over 200 countries globally. However, less than half of the inventory in our top three markets that's currently available for export due to the friction associated with these transactions. To unlock more valuable inventory for global buyers, Last fall, we announced a major revamp of our cross border capabilities with the launch of eBay International Shipping. Under this program, eBay handles any customs forms, coordinates duties with buyers and intermediates returns. Sellers are protected from item not received complaints, while buyers benefit from greater selection and lower shipping costs.

Speaker 2

The program is resonating well as we gradually ramp enrollment for sellers, while buyer satisfaction on eBay International Shipping transactions reached 80%. Steve will discuss the financial implications of this program, and I'm confident it will increase cross border inventory and drive incremental GMV for eBay. Investments in AI are also improving customer perception of our shipping capabilities. In Q4, we deployed a new machine learning model for estimated delivery dates in the U. S.

Speaker 2

And select international markets, enabling us to make more accurate delivery predictions to buyers. Applying this model in the U. S. Reduced the average delivery estimate by 1.5 days for all domestic listings, resulting in a noticeable uplifting conversion. A separate model deployed for eligible authenticity guarantee products resulted in average reduction of approximately 2 days for U.

Speaker 2

S. Listings. These rollouts are just a Moving on to ads. Our marketplace continues to benefit from innovation in our advertising business, which delivered strong growth in Q4 despite headwinds in the broader digital ad market. Promoted Listings drove 1st party ad revenue of 276,000,000 up 27% or more than 30 points faster than GMV growth.

Speaker 2

Over 2,000,000 sellers adopted a single ad product in Q4 and we eclipsed 700,000,000 live Promoted Listings. Additionally, our total ads revenue is nearing 1.8% penetration of GMV. Promoted Listing Standard was again the largest contributor to growth, both on a sequential and an annual basis, as optimization gains from prior quarters continued to benefit ad rates. In Q4, we also improved our merchandising algorithms to show a greater diversity of products, which improved buyer satisfaction, while also preserving relevance and conversion. Our newer ad products also continued to scale nicely in Q4 and grew more than 20% quarter over quarter.

Speaker 2

Promoted Listings Advanced, our cost per click product, continues to be a standout among the new products. Seller adoption of Advanced has grown as we have expanded access and automated more elements of campaign management to make this powerful ad unit easier to use. In Q4, we launched Quick Setup, a one click campaign creation solution for sellers, where eBay automates and optimizes the campaign structure, ad groups targeting and keyword bids for CPC advertisers. We also introduced multi user account access across our full suite of ProEdit Listings, which enables eBay sellers to delegate campaign management to trusted third parties like brands or ad agencies. Turning to payments.

Speaker 2

We continue to roll out additional payment services to support high ASP transactions and improve buyer conversion. During Q4, we introduced split payments in the U. S. For transactions over $1,000 enabling buyers to spread large purchases across 2 credit cards. We've already processed transactions from thousands of buyers at an average order value of over $3,000 and we're excited to expand this offering globally later this year to better support our focus categories.

Speaker 2

Additionally, building on the success of Afterpay, we recently partnered Zipp to introduce a suite of buy now, pay later options to our Australian buyers. Zipp supports purchases of up to $10,000 extending our ASP coverage in this valuable market. By managing our end to end payments process, we are also able to leverage our own proprietary risk models to assess transaction requests across our marketplace. Last year, our risk and protections team without enhanced controls that allowed us to approve transactions that may have otherwise been declined in the past, enabling over $500,000,000 in annualized GMV and reducing potential escalations to customer service. In connection with risk management, we continue to invest and the security of our marketplace to ensure our capabilities remain world class.

Speaker 2

Last week, we announced the acquisition of 3 pm Shield, a provider of state of the art marketplace compliance tools. 3 pm Shield offers effective solutions for the prevention and identification of counterfeit listings and prohibited items. Combining this technology with our proprietary data will further enhance the integrity of our marketplace. Before we move on, I'd like to touch on the actions we've taken to sharpen our focus as a company and run our business more efficiently, particularly in light of the uncertain economic environment. Earlier this month, we made the difficult decision to eliminate approximately 500 jobs of roughly 4% of our global employee base.

Speaker 2

This decision solid a thoughtful review of our organization to ensure our people and roles were aligned with priorities that advanced eBay's commitment to long term sustainable growth. These changes provide additional flexibility for us to invest efficiently and create new roles in high potential areas of our business like new technologies, trusted customer experiences and key markets. There is no easy way to say goodbye to our talented colleagues. Their passion and accomplishments over the last few years have helped us get us to where we are today. We are incredibly thankful for their contributions and are committed to supporting them

Speaker 3

through this difficult

Speaker 2

transition. Next, I'd like to share a few milestones from our ESG efforts last year, starting with re commerce. In 2022, our marketplace generated 4 $600,000,000 in positive economic impact to the sale of pre loved and refurbished goods. This activity avoided 1,600,000 metric tons of company mission and kept 73,000 metric tons of waste from going into landfills. We commerce continues to provide significant economic benefit for sellers and buyers during these uncertain times.

Speaker 2

And buying pre loved items shows no sign of slowing down. In fact, just yesterday, we published our 3rd annual re commerce report, which found that 90% of surveyed respondents engaged in re commerce during 2022. Cost savings were the most popular and motivated for buying pre loved, especially among Gen Z buyers, 64% of whom said its financial savings as a primary reason for shopping re commerce and sustainability was the 2nd most important factor with people increasingly turning to pre loved to help the environment. This positions us well as we continue to pave the way as an industry leader enabling economic empowerment and sustainability through our platform. Now let's turn to impact.

Speaker 2

I'm always amazed by the tremendous generosity of the eBay community. In Q4, eBay for Charity enabled sellers and buyers to raise more than $35,000,000 And for the year, customers raised over $163,000,000 This represents an all time high and fundraise through eBay for charity since we started this program 20 years ago. The eBay Foundation granted nearly $23,000,000 in 2022, primarily to non profit organizations advancing inclusive entrepreneurship and through our employee matching gifts programs. This represents another all time high for annual foundation grants. I'm fortunate to lead a purpose driven company with a team dedicated to helping communities around the world while protecting our planet.

Speaker 2

For the 4th year in a row, eBay was included in the Dow Jones Sustainability World and North American Indices. We were also included on CDP's A List for 2022, which recognizes companies that are leading the way in environmental transparency and performance on climate change. Additionally, eBay ranks number 1 on cross border commerce Europe's list of the top sustainable marketplaces operating in Europe. Looking to 2023, I'm incredibly excited about the road map ahead of us. Today, I'll offer just a glimpse of a few areas where you should expect to see progress from us this year.

Speaker 2

We'll continue to innovate for customers in our focused categories and extend to new countries and categories this year. We will continue our work in P and A by expanding the Guaranteed Fit program and Fit2 Vehicle badge globally. We'll also grow our tire installation capabilities after we began improving the end to end tire shopping experience and broaden our network of installation partners in 5 markets during Q4. We'll ramp assets in the Valk and extend eligibility for more collectible items, like live commerce to better engage with enthusiasts. And we will further develop the category landing pages we debuted for sneakers, watches and handbags in Q4, which offer trending inventory and personalized recommendations powered by machine learning.

Speaker 2

Sellers across our marketplace will benefit from the expansion of our international shipping program to more markets, which will drive incremental GMV as sellers tap into our global demand. We will continue to scale our advertising offering as we track toward our next $1,000,000,000 by 2025. We'll simplify and grow adoption of Florida listings advance, deliver more AI driven optimization and further expand our ads portfolio. Finally, just as we have done in focus categories, this year we will adapt our one size fits all approach to build more relevant and compelling localized experiences in some of our European markets. We will enhance local discoverability, reduce friction through simplified selling experiences, offer new local forms of payment and address other market specific experience gaps in search, language and return policies.

Speaker 2

In closing, I would like to thank our extraordinary eBay employees for their accomplishments this year. Their unrelenting focus on serving our community that supported our sellers and buyers during these challenging economic times. I'm confident that with our talented eBay team, our strategic vision and a persistent focus on operational excellence, we will continue to develop compelling experiences for customers and create long term value for our shareholders. With that, I'll turn the call over to Steve to provide more details on our financial performance. Steve, over to you.

Speaker 3

Thank you, Jamie, and thank you all for joining us today. I'll begin with highlights from the Q4 on Slide 9 of our earnings presentation. Next, I'll review our key operating and financial metrics in greater detail. Finally, I'll provide our outlook for the Q1 and some additional color on 2023 before we begin Q and A. As usual, my comments will reflect year over year comparisons on an FX neutral basis, unless I know so otherwise.

Speaker 3

We delivered solid results in Q4 as our key financial metrics exceeded expectations and landed near the high end or above our expected guidance today just. Gross merchandise volume declined 6% to $18,200,000,000 where FX was a 6 point headwind to reported growth. Revenue was down 1% to approximately $2,500,000,000 which outpaced volume by 5 points, primarily due to FX and robust growth within our advertising business. Non GAAP operating margin was 29.9%, down 1.8 points due to volume deleverage and continued investment in other than marketing to support the strategic initiatives. We delivered $1.07 of non GAAP earnings per share of 2% year over year, and we generated $533,000,000 of free cash flow, up 43% year over year, while returning $419,000,000 to shareholders through repurchasing dividends.

Speaker 3

Our Q4 results demonstrate the continued resilience of our marketplace amid economic uncertainty. I'm extremely proud of our teams delivering on their quarterly financial commitments, maintaining prudent cost discipline and executing key deliverables in support of our long term growth objectives. Let's take a closer look at our financial performance during the Q4. Gross merchandise volume was down 6% year over year, decelerating roughly 1 point sequentially. Our business remains resilient despite headwinds from geopolitical uncertainty, inflationary pressures, low consumer confidence and rising interest rates.

Speaker 3

Additionally, FX was a headwind of approximately 6 points to GMV, roughly 0.5. Greater than Q3. Momentum in focused categories continues to drive underlying growth in our business. In aggregate, focused categories outgrew the remainder of our marketplace by over 7 points year over year during Q4, roughly 2 points faster than the prior quarter delta. Motors, parts and accessories growth accelerated sequentially and remain the largest contributor to this outperformance, and we are excited to see what recent rollouts like Fit Your Vehicle badge and Guaranteed Fit program for DUKA momentum in this category.

Speaker 3

Refurbished goods also contributed positively to growth in Q4 as we continue to expand to new brands and categories. We've also made the onboarding process for 3rd party sellers more scalable to increase the breadth and depth of refurbished selection on our marketplace. Within our luxury and trading cards categories, that continue to see healthy trends in authenticated item transactions in Q4, which has mitigated the macro driven ASP pressure observed across these industries in recent months. As you'll recall, we closed the acquisition of TCG Player at the end of October. The partial quarter GMV revenue and expenses are included in our financials for Q4.

Speaker 3

But based on the timing of the deal close, TCG Players' contribution is not material to results. Looking at our business on a geographic basis. Our U. S. GMV declined 9% year over year in Q4, decelerating by roughly 2 points versus the prior quarter.

Speaker 3

International GMV declined 4% on an FX neutral basis, which was stable sequentially. Compared to Q4 of 2019, our total marketplace grew 2%, a deceleration from 6% last quarter. 1st 2019, U. S. GMV rose 12% in Q4, while international GMV was down 5%.

Speaker 3

Although macro headwinds remain more pronounced in Europe, our focused category strategies continue to drive underlying growth internationally, including positive year over year growth in P and A and notable strength in luxury categories during Q4. Moving to active buyers. 134,000,000 active buyers shopped on eBay during the trailing 12 months. We had 132,000,000 active buyers, excluding our TCG Blair acquisition and buyers from our Turkey business, where we ceased operations in July. Excluding these impacts, active buyers are down roughly $1,000,000 sequentially as a gradual improvement in buyer reactivation over the past few quarters has led to modest stabilization in our active buyer accounts.

Speaker 3

The GTS buyers accounted for over $16,000,000 of our active buyers in Q4, but less than $500,000 sequentially and churn within Enthusiasts remains de minimis. The net downward migration of Enthusiasts to the mid value group was also the lowest we've observed since we began disclosing these buyer groups as lapping pressure has eased in recent quarters. Average spend per enthusiast rose again sequentially and continue to be healthy at above $3,000 annually. Turning to revenue. You'll notice in our Q4 earnings release and upcoming 10 ks that we are now presenting the single net revenues line, which better aligns our reporting with how our business is operated.

Speaker 3

We provided 1 final quarter of marketing services and other revenue in Slide 12 of our earnings presentation. Today, I'm moving forward when we refer to take rate, we will be referencing our all in net revenue divided by GMV. Net revenue was down 1% to over $2,500,000,000 during the 4th quarter, a one point acceleration versus Q3. Our take rate was 13.8% in Q4, roughly 40 basis points sequentially. Although FX hedge gains were the most significant driver of our sequential takeaway increase in Q4, we continue to see healthy contributions in both advertising and payments revenue.

Speaker 3

Our advertising business continues to build momentum. Total ad revenue grew 19% during the quarter, while 1st party ads grew 27%, outpacing volume by more than 30 points for 2nd straight quarter. This extraordinary result was primarily driven by optimization and performance improvements in our standard Promoter Listings product, healthy growth in our newer products, most notably our cost per click ads also contributed meaningfully. Our legacy third party display ads were weaker in Q4 due to industry wide headwinds over the holidays. These ads represent an increasingly smaller portion of our mix.

Speaker 3

Managed payments contributed nearly 10 basis points to our sequential take rate expansion, driven by new financial service offerings. These include buyer and seller FX conversion that facilitates cross border trade, faster debit card payouts and new high SP transaction services supporting our luxury categories. Importantly, both advertising and payments remain on track to meet our multiyear revenue targets we discussed at our Investor Day. Moving to profitability. Non GAAP operating margin was 29.9% in Q4, of nearly 1 point sequentially, but down 1.8 points year over year.

Speaker 3

Gross margins were down modestly year over year due to volume deleverage and authentication costs, partly offset by lower payment processing fees. Sales and marketing rose by over 1 point as a percentage of revenue as we invested in full funnel marketing to support our focus categories. While product development was relatively flat, of some onetime impacts offset continued hiring of technical talent. Our G and A expense rose as a percentage of revenue due to charitable contributions and other one time items. In Q4, we recognized a GAAP charge within G and A expense of $50,000,000 related to pending legal matters.

Speaker 3

You'll see these adjustments included in our GAAP to non GAAP reconciliations in the appendix of our earnings presentation. Additional details on this accrual will be provided in our upcoming Form 10 ks. We generated $1.07 of non GAAP earnings share in Q4, up 2% year over year, benefiting from a 12% reduction in share count from our share repurchase. To deliver GAAP earnings per share of $1.23 with the delta being driven by a recovery in our equity investment portfolio. Turning to our balance sheet and capital allocation.

Speaker 3

Free cash flow grew 43% for $533,000,000 in Q4, driven primarily by the lapping of cash tax payments and investment sales in the prior year. Our balance sheet position remains strong as we ended the quarter with cash and non equity investments of $5,900,000,000 and gross debt of $8,900,000,000 following a successful $1,200,000,000 debt raise in November. We repurchased roughly $300,000,000 of shares, an average price of approximately $42 during Q4 and have over $2,800,000,000 remaining under our current authorization. We paid a quarterly cash dividend of $119,000,000 in December or $0.22 per share. Our investment portfolio is detailed on Slide 20 of our earnings presentation.

Speaker 3

Our equity investments were valued at approximately $3,400,000,000 at the end of the 4th quarter. Following the sale of the de minimis number of shares in December to satisfy regulatory requirements, our 404,000,000 Adeventa shares for value that roughly $2,700,000,000 Our Agile investment value is calculated based on the probability of our remaining warrant transfer investment. In addition to the acquisitions we completed in 2022, we continue to evaluate inorganic opportunities to accelerate our strategic objectives by our build by partner framework. We closed the acquisition of 3 pm Shield last week, which will strengthen trust in our marketplace by helping us prevent and detect problematic listings with even greater precision. Moving on to our outlook.

Speaker 3

For the Q1, we forecast GMV between $18,000,000,000 $18,300,000,000 representing organic FX neutral growth between negative 5% and negative 4% year over year. This GMV outlook includes an estimated $100,000,000 from onetime benefits already recognized in Q1 and anticipates an FX headwind reported growth between 2 and 3 points. We We expect to generate revenue between $2,460,000,000 $2,500,000,000 representing organic FX neutral growth between flat and up 2% year over year. We anticipate a non GAAP operating margin between 29.1% 29.7% and we forecast non GAAP earnings per share between $1.05 1.09 dollars representing EPS growth between flat and up 3% year over year. Although we are not providing full year guidance at this time, given the dynamic operating environment.

Speaker 3

We will share some directional color on how we are currently thinking about 2023. Our baseline expectation is that the external demand environment does not materially improve during the first half of the year as a result of continued macro uncertainty across our largest markets. While we do see potential for an improvement in underlying economic conditions as the year progresses. It is too early to predict the second half recovery, eyeing out with confidence. As a result, we currently expect our sequential GMV growth beyond Q1 to roughly approximate the seasonality we observed during 2022, excluding the impact of currency.

Speaker 3

For the full year, we expect to grow total non GAAP expenses, inclusive of cost of revenue by approximately 2% year over year on a spot basis as we continue to invest in strategic growth initiatives in 2023. This forecast contemplates onetime impacts to our P and L, the recent M and A and the rollout of the eBay International Shipping Program this year. These one time factors combined are expected to represent a year over year headwind for operating margin of of approximately 120 basis points versus 2022. Our expense growth forecast is also net of roughly $100,000,000 of OpEx savings financial cost program as we continue to look inward for cost efficiencies in our business.

Speaker 2

I'd like

Speaker 3

to share some additional context on the one time impact to margin. Over the past year, we accelerated our progress towards several core strategic objectives for the acquisitions of TCGplayer, KnownOrigin, MyFitment and 3 pm Shield. While we are excited about the synergies and long term growth potential of these assets, lowering them into a scale in the marketplace with our level of profitability does present a natural drag on margins in the short term, which will diminish as our integration work progresses. The rollout of eBay International Shipping will improve seller velocity and global availability of unique inventory over the long run. Our role in intermediating shipping and returns in this program will shift us to a principal relationship with sellers versus being an agency in our previous global shipping program.

Speaker 3

From an accounting perspective, this means revenue from the new program will be recognized on a gross basis, while the vast majority of expenses are variable and recognize the cost of revenue. While the operating margin headwinds in this program will abate as we progressively scale it through 2023, its primarily variable costs or impact our reported gross margins. We expect this program to generate incremental operating profit this year despite representing a headwind of 30 basis points to gross margin in Q1, rising to 120 basis points in Q4. Additionally, we expect foreign exchange to represent a headwind of approximately 1% to GMV in 2023 between 3% to 4% to non GAAP EPS following the unwinding of recent U. S.

Speaker 3

Dollar strength. To forecast our non GAAP tax rate to remain at 16.5% throughout 2023. On the capital allocation front, I'm pleased to announce our Board recently approved a 14% increase to our quarterly dividend, rising to $0.25 per share in 2023. We continue to target returning approximately 125% of free cash flow to shareholders between 2022 2024 and our broader capital allocation priorities remain unchanged. Our fortress balance sheet is a tremendous competitive advantage in this environment.

Speaker 3

It enables us to invest organically in our business, accelerate our strategic objectives with disciplined inorganic investments, while still delivering healthy capital returns to shareholders. In the current macro environment, we believe it is prudent to balance the timing and magnitude of share repurchases with our capital needs from quarter to quarter. Our first priority is offsetting dilution and we expect to be opportunistic with regard to larger repurchases. In closing, our Q4 results capped off a resilient year for eBay in 2022 as we make meaningful progress towards our long term strategy despite significant macro uncertainty. We've exceeded consensus expectations for GMV, revenue and EPS during Q4.

Speaker 3

Our focus categories continue to outperform and are driving underlying growth in our business. Our advertising revenue continues to meaningfully outpace volume growth, while payments initiatives continue to scale in line with expectations. We achieved a full year operating margin of 30% despite contending with a more challenging macro environment than we anticipated at the beginning of the year. We generated nearly $2,200,000,000 in free cash flow in 2022, and we turned over $3,600,000,000 to shareholders through free purchases and dividends, equates to nearly 170 percent of our free cash flow. I'm proud that eBay continues to pave the way as an industry leader, enabling economic empowerment and sustainability to our platform.

Speaker 3

We once again achieved carbon neutrality in 2020 2 and remain committed to reducing 90% of our carbon emissions from our operations by 2,030. I'm incredibly appreciative of our team's focus and execution during 2022 as we delivered on a number of our core strategic objectives despite navigating an uncertain macro environment. I'm confident our investments in 2022 enabled us to exit the year stronger than when we entered it, keeping us on a path to sustainable long term growth. With that, Jamie and I will now take your questions.

Operator

Your first question is from the line of Colin Sebastian with Baird.

Speaker 4

Great. Thanks and good afternoon guys. A couple of questions for me. Maybe Jimmy at a high level, first off, You seem generally satisfied with the strategic focus on enthusiast buyers and the non new in season segment that you outlined a year ago. But I wonder If you could talk about any ways in which you'd say this strategy has evolved through the year as you plan for the next couple of years.

Speaker 4

Some of that may be more nuanced, but curious on your views there. And then Steve, I just wanted to drill down A little bit more on the 2023 outlook. I think we understand the GMV perspective and the and some of the margin impacts. On the take rate, should we assume that that gap between GMV and revenue growth continues to grow given the increasing contribution of advertising and payments through the year. Thank you.

Speaker 2

Yes. So first on the kind of where we are, We're pleased with the progress that we're seeing. So if you think about focus categories outgrowing the rest of the business by 7 points, the double digit change that we've seen in customer satisfaction. We took on our largest focus category at the end of last year with parts and accessories, and we're seeing that return to market share growth, which is great. It's a very large business.

Speaker 2

We outlined that at Investor Day being over $10,000,000,000 And the shift that we made to non new in season, I think, is really helping us, especially in these challenging economic times. All the work we did and refurbished to build that as a strong category on the eBay. Now we're seeing we had our largest week ever during Cyber Week and during challenging economic times, people really turn to value. And I think we're leaning into where the consumer is headed. I'd point you to the re Commerce report, which we put out yesterday, which said 90% of the respondents are bought re commerce in 2022 and Gen Z, 64% of them said it was because of the financial value that's provided.

Speaker 2

So We think we're right in there. We're going to continue to enhance and build on that strategy. We're doing a lot of additional work in artificial intelligence and bringing that not only to our focus categories, but also to our horizontal businesses. I talk about the work that we did in search as one example of that, the work that we did in advertising with the merchandising there as a second one. And then you see us continuing to expand what we're doing on the horizontal side.

Speaker 2

I just and with eBay International Shipping. Cross border trade is now 1 in 5 transactions on eBay. It's unique value propositions that we have, especially for the individual consumer. And we're making that a whole lot easier with what we're doing with eBay International Shipping. And that's another kind of huge opportunity across the board on the horizontal side.

Speaker 2

So over the course of the year, I'll get into more and more details about it, but we feel really good about vector that we're on. Steve, do you want to take the second part? Yes. Hi, good afternoon, Colin.

Speaker 3

With regard to Asset Payments, first, I'd say is I'm really pleased with the execution from the teams. They did a tremendous job and we're tracking well towards the direction that we gave at Investor Day in terms of our medium term targets in terms of payments and adds. We don't give any specific guidance on the call associated with that and payments for 2023, but you should expect them to continue to outpace GMV as they did in 2022. So great execution from the teams. I'm pleased with where we are.

Speaker 3

All right. Thank you.

Operator

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

Speaker 5

Hey, good afternoon, guys. Steve, maybe a quick one for you. Could you please talk about the GMV growth you've seen internationally? It looks like international FX neutral exceeded domestic for the Q2 in a row. And I'm just curious if you're kind of surprised by that result.

Speaker 5

I think you referenced P and A and maybe luxury driving that. And then curious that the $100,000,000 benefit, I believe to GMV in the guidance. I think there was some reference to that in the guidance. Maybe Jamie, just a quick one for you, if I could. Can you just talk about authenticity and how you feel like you are executing and whether you've turned a corner there.

Speaker 5

I think most of the recent acquisitions have been centered around authenticity and removing fake goods. How do you feel about your progress there and how much further do you need to go? Thank you.

Speaker 3

Hi, Tom. I'll pick up the first one. Obviously, we're seeing different dynamics based on our international business and the U. S. Business based on the macro environment, very dynamic macro environment that we've been operating in.

Speaker 3

And obviously, some of those challenges were more pronounced and international business earlier than the U. S. And we call that some color with regards to that as we guided the Q4 actually in terms of some of the U. S. Softness that we saw in October coming through that.

Speaker 3

The thing I would say is that the execution of our focus categories, both in Europe and the U. S. Is seeing underlying momentum. P and A, for example, we're number 1 in a couple of the key markets in Europe, in the UK and Germany and number 2 in the U. S.

Speaker 3

And things like P and A, luxury, refurbishing good momentum both internationally and in the U. S. Specifically pertaining to the €100,000,000 that we laid out in the prepared comments, this is a specific GMV benefit as a one time item in Q1, which we do not expect to continue through the year. It's most notably around Chinese sellers keeping their stores open through the Lunar New Year, which is not typical for this time of year. And Jamie, how to you?

Speaker 2

Yes, Tom. So on the authenticity, we're feeling great about what we're seeing in terms of the that it's having on customer satisfaction and the execution of it. If you think about it for those focus categories like luxury, handbags, sneakers, watches, Authenticity is what provides the game changing level of trust. That's different in other categories. So in refurbished, for example, It's the 2 year warranties and the 30 day hassle free returns.

Speaker 2

And in something like P and A, we just launched this week Guaranteed Fit, which is really the game changing level of trust, which is guaranteeing that that part is going to fit your product, which is really key. The acquisition that we did recently with 3 pm Shield. It's really a state of the art market compliance capability that they've built using really advanced AI technologies to help keep prohibited items off the platform. And that's really just continuing in this theme of building trust on the marketplace and eBay as a trusted place to shop, which has paid massive dividends, given us a great ROI from the investments that we've made to date, and we feel really good about the progress and where we are.

Speaker 5

Got it. Thank you.

Operator

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

Speaker 6

Hey, guys. Thank you for taking the question. I had a couple on GMV growth, please. Steve, you mentioned that U. S.

Speaker 6

Softness that you called out in October. Did that persist or did you see any kind of changes in trends there better or worse? And then in terms of the 2023 growth framework, thanks for that. But is 2022 the right year to use for seasonality given And just post COVID dynamics, it feels like you started the year well. Just wondering why GMV would step down in Q2, Q3, especially as you invest in the marketplace as well to make it better.

Speaker 6

Thanks a lot.

Speaker 3

Hi, Nikhil. Thank you for the questions. First of all, with regards to the Q4 and coming in, as we said in our prepared comments, really pleased to see some of the execution, particularly in a couple of key focus categories like P and A and Refurb continue to sort of be highlights for the Q4 as we came through. We, as we've mentioned, came through towards the top end of the guide. And really, we did have less headwinds that we'd expected on an exchange rate basis with the U.

Speaker 3

S. Dollars we went through, but some core strength in The focus categories as we come through the Q4. With regards to the sequencing, we're dealing with an incredibly dynamic macro environment and we wanted to give some color for the investor community as we start to think about 2023. And obviously, the macro dynamics has been challenged during 2022. And so in that directional color, we've given a comprehensive guide for the Q1.

Speaker 3

We continue to execute in the underlying business. But based on the uncertainty that we are facing at the moment and the continuation of that macro challenge, We felt it was most prudent just to sort of lay out that sequencing related to 23.

Speaker 6

Got it. Thanks a lot.

Operator

Your next question is from the line of Ross Sandler with Barclays. Your line is

Speaker 7

open. Hey, guys. Just a quick follow-up to that GMV sequencing answer on that last one. So it doesn't sound like you really ascribe to the theory that Consumers may shift some wallet share away from services and back to goods in 2023, which is kind of the opposite of what happened in 2022. So Any comment on that?

Speaker 3

And then I guess just what would it take

Speaker 7

to get back to that GMV framework that you laid out at Analyst Day? Is there anything else in your control that you can see to get those GMV growth rates up to the mid singles? And then the second question is just we're seeing A lot of inflation around the world, different rates in different countries. You guys have a lot of cross border corridors. So how is lower inflation in the U.

Speaker 7

S. Potentially than places like the U. K. And Germany impacting your business as far as the cross border? Thanks a lot.

Speaker 8

Hi, Ross. I'll pick those up. So with regards to the

Speaker 3

GMV sequencing, we haven't guided the full year. We're just trying to give some directional alignment. We're just trying to plan our business effectively around the dynamic macro environment that we're seeing. Again, put a very guidance for the Q1. Really pleased with the execution of the strategy, which is working well and leaning into the focus categories that we're to execute.

Speaker 3

We mentioned the fact that we do see, as many commentators say, a very, very challenged and uncertain first half of the year. Again, we're just giving some direction or alignment about how we think about things as we navigate through 2023. So just providing some color accordingly. With regards to the Investor Day GMV framework, we're leaning in exactly where we said we would, whether it's luxury, whether it's P and A. Jamie talked extensively about the benefits of authentication impacting the business.

Speaker 3

And so we are seeing underlying positive growth in our business as we execute the strategy, continue to be fueled by the momentum that we're seeing with payments and ads. In terms of the timing of the GMV framework that we laid at Investor Day, that's really a function of the potential severity and duration of the macro environment that we're operating in, which will obviously have an implication in terms of the timing of when we get to those longer term targets. And then finally, with regards to inflation, as you imagine, inflation is impacting a number of our businesses across the U. S. And in Europe.

Speaker 3

Europe has been more pronounced over recent quarters because of particularly because of the energy challenges as we go forward. And in addition, you've got some labor pressure being impacted in Europe as well that's impacting the business. Specifically around eBay. We do have a resilient business. But however, general inflation does have a, I suppose a mixed impact on our business because we lean into non new in season items that really just help impact where Consumers are looking for value, and we have a lot of pre loved and refurbished items on our platform, and that performance in Q4 was a great reflection of that.

Speaker 3

However, because of the macro challenges, we're not immune to the inflationary pressures on the discretionary consumer spending. So

Operator

Your next question is from the line of Stephen Ju with Credit Suisse. Your line is open.

Speaker 9

Okay. Thank you. So Jamie, I think we spent quite a bit of time talking through the re commerce opportunity on this call. Now Given eBay's history with cataloging, I have to think that having increased parameters on how gently or not gently used the same item maybe and how that's described from seller to seller. That's probably creating a unique sorting problem.

Speaker 9

Can you talk about how you are tackling the opportunity and ultimately, certainly the correct results to the user?

Speaker 2

Yes, Stephen, I basically would just point you, for example, to parts and accessories, right? What we're doing there is using our knowledge around fitment and all the investments We've made over the last couple of quarters and being able to say, if you're looking on the site in parts and accessories, you're going to see these big green check marks that say fits your vehicle. And now with what we released just last week, we're actually going to say it's guaranteed to fit. Think about that as like authenticity guarantee for vehicles. So we're continuing to category by category find the best way to improve that search experience.

Speaker 2

In something like refurbished, It's certifying the quality of that refurbishment and saying we're going to stand behind that with a 30 day hassle free return, eBay money back guarantees. So the combination of the great work that our search team does with AI to really drive more relevance on the platform, drive better recall in our search results, etcetera, combined with the category specific work that we're doing to really optimize that experience on a category by category basis It's really the intersection of those 2. It's what's working out, I think, so well for us and why we're seeing strong numbers in the strategy and in the focus categories that we've rolled

Speaker 3

Thank you.

Operator

Your next question is from the line of Doug Anmuth with JPMorgan. Your line is open.

Speaker 8

Great. Thanks so much. I just want to shift gears and ask about expenses, Steve and the 2% growth in non GAAP expenses. In 2023, if you could just talk about some of the key investments here and puts and takes and I guess in particular how we should be thinking about sales and marketing assuming that you'll continue to do full funnel marketing on the focus categories. Thanks.

Speaker 3

Hi. Good afternoon, Doug. I think at a macro level, I would say that we will continue as we always have been to lean into the short term to drive operational efficiencies through the likes of the structured cost program, where we're going very deep on the organization, while at the same time continuing to invest for the future for the long term trajectory in growth of the business. Business we will be making in 2023 is continue the strategic playbook, is continue to invest in product that customers want is continue to invest in trust on the platform and then continue to invest in full funnel marketing in terms of making sure that we get the communication and message out to our customers. The 2% increase Year over year non GAAP expense growth includes the 120 basis points of margin headwinds that we talked about associated with M and A and the eBay International Shipping Program and its net of $100,000,000 of the structured cost program that we've laid out.

Speaker 3

So if I stand back, we've got a couple of headwinds with those two items I've talked about. We're leaning in to drive cost efficiencies and we're continuing to invest for the future long term sustainability of the business.

Speaker 8

Great. Thank you, Steve.

Operator

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

Speaker 2

Hey, guys. Thanks for taking the questions. So first, Can you give

Speaker 10

us some color on the growth in focus categories where you've had the user experience enhancements for a while now, specifically sneakers and luxury watches and some of those categories. I understand that macro is volatile, but are you seeing sustained share gains in these categories now? Any additional color on recent growth there would be great. And then Steve, can you unpack the 2023 EPS guide for us for a little bit? Clearly, we recognize There's a lot of uncertainties, but how should we think about sort of the magnitude and cadence of buybacks for this year?

Speaker 10

And maybe is it fair to use 2022 seasonality also as a proxy for quarterly cadence on EPS as well?

Speaker 2

Yes. So, hi, Deepak. Let me take the first one. So, yes, we're really pleased with what we're seeing with focus categories. It's growing 7 Faster than the rest of the platform.

Speaker 2

The way to think about that is plus 2% if you look at it on a quarter over quarter basis. When you look at our coverage, we're at about 25% across the whole business. If you look at our big three markets where we've been focusing, it's about 28% coverage, so making nice progress there. But it's not just about investing in new coverage, it's also about investing and existing categories that are driving the underlying growth in our business and balancing reinvestment there. And we're really pleased.

Speaker 2

We continue to invest Sneakers, we launched 2 years ago, but we're continuing to invest with managed shipping, which we launched in 2022. We talked on the call about luxury goods having roughly double digit growth rates over the past couple of years. So we are seeing that market share return to market share growth for those businesses, which is really healthy. And I'd say the largest one of which is P and A, and we're really excited by the progress that we're seeing in P and A. On the product side, the work we're doing in fitment and guaranteed fit and making the catalog available via the apps, the new acquisition of My Fitment further increasing our ability to do there, Combined with the marketing that we're doing in the U.

Speaker 2

S, we're doing the actual personalities from Car Talk In the U. K, we're associated with Pin My Rides. We're really going after that enthusiast buyer, and it's really working. So I'm really pleased with the performance on Focus category. Steve, maybe you want to take the second part?

Speaker 2

Yes. So Deepak, we've obviously given

Speaker 3

a very comprehensive Q1 guide. And as I mentioned earlier, because of the uncertainty associated with the dynamic macro environment, we've not given a full year guide at this point. With regard to the seasonality question that you had, that pertains to directional color associated with GMV. So that's how I would sort of bucket that. Specifically thinking about capital returns that we've laid out.

Speaker 3

Just sort of taking a step back, in 2022, we returned $3,600,000,000 to shareholders through dividends and buybacks, which is 170% of free cash flow. As you're thinking about capital returns, We remain committed to the 125 percent of free cash flow target that we laid out at the Investor event between 2022 2024. So we're sort of tracking above that. And as I think about 2023, our priority really to start with is going to be to be committed to offsetting dilution in terms of the sort of share count, while continuing to balance the capital needs of the business. We have lent in and done a 14% increase in the dividend from $0.22 to 0.25 But for me, our fortress balance sheet continues to be a key competitive advantage in this environment to enable us to continue to invest in the business.

Speaker 3

So Hope that gives you a little bit of color about how we're thinking about 2023.

Speaker 1

Operator, can we do one last question, please?

Operator

Your final question comes from Mark Mahaney with Evercore. Your line is open.

Speaker 11

Thanks. Two questions, please. This advertising continued ramp penetration out of 1.8 percent of GMV. As you've looked at the 3rd party data points and maybe as you've looked at that penetration within verticals. Do you have a better sense of how high that penetration can rise overall?

Speaker 11

And then secondly, just talk a little bit about you had to step up in the focus category marketing spend and just your confidence level that you're getting a good return on that. There's third deleveraging the model, but there's a lot of noise in there. So just how do you look at that and the proof that that's actually working out for you? Thank you.

Speaker 2

Yes. Thanks, Mark. So on the ad side, like we said at Investor Day, we have line of sight to 3%, which we still feel great about. If you look at the performance, Promote listing standard continues to be the workhorse of the product and we're continuing to drive additional penetration there, hitting 2,000,000 sellers and 700,000,000 listings. But we're also excited by our new products.

Speaker 2

They once again grew 20% quarter over quarter, and we're making it easier for sellers. I talked about quick setup, which makes it much easier to come into the program and use the program. And then we're working on things like multi user access, which we just launched, which enables more flexibility to actually bring in an ad agency to help you manage your ad campaigns. So feel great about the potential there, growing 30% plus over volume and what we're seeing. On the focus category side, been really happy with the performance of the marketing spend.

Speaker 2

If you think about it, we've shifted our model from being really kind of lower funnel optimization to doing more full funnel. And that's driving more enthusiast buyers into the platform and it's allowing the overall spend to work a little bit harder. Form and it's allowing the overall spend to work a little bit harder. But at the same time, it's really allowing us to bring buyers in and then leverage them across multiple categories. So if you think about like a sneaker buyer, they will come in and buy $4.50 in sneakers, but then they'll buy $1900 in other products, in other categories.

Speaker 2

A handbag buyer will buy $2,500 but then spend $5,000 elsewhere. When you look at that return on marketing spend, usually full funnel has a longer return on it, but we think it's the absolute right spend. We're seeing the right change in consideration And we're really driving, I think, the unique value proposition that we have to offer at eBay. So you're going to continue to see just like we've done in parts, really specific marketing tailored to those enthusiasts with the right full funnel approach, because we like the performance of what we're seeing.

Speaker 3

Thank you, Jamie.

Speaker 2

Thanks.

Operator

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

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