eBay Inc

NASDAQ:EBAY

Earnings Call Analysis

Moderate Q3 Growth with Prudent Q4 Outlook

eBay reported a solid Q3 with advertising revenue up 24%, reaching $366 million, and total ad penetration over 2% of GMV. First-party ads led the growth at 36%. Non-GAAP operating margin fell 2.5 points YOY to 26.4%, reflecting investments and modest volume de-leverage. Free cash flow increased by 23% to $777 million, and the company purchased $650 million in shares. Looking ahead to Q4, eBay anticipates a modest holiday season with 4% to 2% YOY GMV decline, an organic FX neutral growth between negative 1% and positive 2% for revenue, and non-GAAP EPS forecasted to be between $1.00 and $1.05, reflecting a 6% to 2% YOY decrease. The company remains committed to driving cost efficiencies to maintain margins and plans to grow expenses slower than revenue in the next year.

Stable Earnings Amidst Economic Headwinds

The company reported a robust gross merchandise volume (GMV) of approximately $18 billion, with a revenue increase of 4% reaching $2.5 billion. Despite the economic pressures of inflation and rising interest rates eroding consumer confidence, non-GAAP earnings per share rose by 3% to $1.03, indicating a consistent performance in a challenging market.

Focus on Growth Categories Proving Effective

The company's strategic concentration on focus categories—such as motors, parts, and accessories—has resulted in these sectors outperforming the rest of the marketplace by roughly seven percentage points. The innovative eBay Guaranteed Fit program, expansion of services to the UK and Germany, and the onboarding of sellers to enhance listing data have supported this area's resilience and have mirrored industry growth rates.

Collectibles as a Pillar of Strength

With over $10 billion in GMV from collectibles in the past year and features like eBay Live growing in popularity, the company has strengthened its footprint among collectors. Initiatives such as the eBay vault and improved grading systems have enhanced the buying and selling experience, positioning eBay as a preferred platform for collectibles enthusiasts.

Growing International Shipping Program and Ad Revenues

The eBay International Shipping Program (EIS) has expanded its reach with positive seller reception, and this, along with a 24% growth in advertising revenue to $366 million, showcases the company's successful efforts in expanding and optimizing its service offerings.

Leveraging Tech Innovations for Seller Convenience

eBay is employing artificial intelligence and computer vision technologies to facilitate easier listing processes for sellers, demonstrating a forward-thinking approach in enhancing user experience and potentially reducing environmental impact by encouraging more second-hand sales.

Maintaining a Robust Financial Position

A free cash flow generation of $777 million alongside a disciplined capital return strategy has maintained the company's strong financial position. The continuity in repurchasing shares and paying dividends, amidst a detailed investment in product development, highlights the company's commitment to creating long-term shareholder value.

Forward-Looking Strategies Amidst Softening Demand

Anticipating a 4% to 2% decline in GMV in Q4 due to macroeconomic challenges, the company is positioning itself defensively by prioritizing cost efficiencies. Expected non-GAAP earnings per share of $1.00 to $1.05 reflect caution in the face of an uncertain holiday season demand, with macro softness more notable in Europe.

Navigating Market Volatility

Although the market presents challenges, the company remains committed to balancing growth and profitability. With the strategic use of Adyen's services and consideration of acquisitions like Adevinta, eBay demonstrates adaptability and a proactive stance in optimizing its business model for sustainable success.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. My name is Bhavesh, and I'll be your conference operator today. At this time, I would like to welcome everyone to the eBay Q3 2023 Earnings Call. [Operator Instructions]

I will now hand the call over to Mr. John Egbert Vice President of Investor Relations. You may begin your conference.

[John Egbert, executive]

Good afternoon. Thank you all for joining us for eBay's Third 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, and all earnings per share amounts reflect earnings per diluted share 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 November 7, 2023. We do not intend and undertake no duty to update this information.

With that, I'll turn the call over to Jamie.

[Jamie Iannone, executive]

Thanks, John. Good afternoon, everyone, and thank you all for joining us today. Our teams delivered solid results during the third quarter. We generated gross merchandise volume of approximately $18 billion, while revenue grew 4% to $2.5 billion. We delivered non-GAAP earnings per share of $1.03, up 3%, while returning over $780 million of capital to shareholders. We achieved these results despite continued challenges in the global macro environment. Inflationary pressures and rising interest rates continue to weigh on consumer confidence and pressure demand for discretionary goods.

As Steve will discuss in greater detail, we've observed softening consumer trends to date in Q4 and particular challenges in Europe, suggesting we may see a more muted seasonal uptick over the holidays. We are focused on controlling what we can control, being prudent about our costs, leaning in operational efficiencies and continuing to drive innovation for our customers.

Last quarter, I discussed our vision of reinventing the future of e-commerce for enthusiasts, which is focused on 3 strategic pillars: relevant experiences, scalable solutions and magical innovation. And I'm pleased that we made meaningful progress against each of these pillars during Q3, which I'll discuss in greater detail.

I'll start with our first pillar, relevant experiences. Our relevant and focus categories continues to drive underlying growth in our business, and we've observed a meaningful improvement in our growth relative to the market in every category we've invested to date. Focus categories grew roughly 7 points faster than the remainder of our marketplace in Q3. Year-to-date, our focus categories have grown at approximately 4% year-over-year.

For context, we estimate market rates of growth in those same categories were in the low single digits on average during the first half of 2023 as several of these categories are comprised of highly discretionary goods, which have been more acutely impacted by a challenging macro environment.

We continue to push the envelope of innovation in motors, parts and accessories, or P&A, by developing features that enhance our customer value proposition. These investments have fueled mid-single-digit GMV growth for P&A for 3 consecutive quarters, which is in line with industry growth for this segment of e-commerce in our largest markets.

The eBay Guaranteed Fit program has contributed to this momentum by delivering a game-changing level of trust. This program enables tens of millions of P&A shoppers to buy with confidence knowing their auto parts will fit or they'll receive their money back, which has yielded a measurable uplift in conversion.

Additionally, we have not observed a material impact on product returns as our fitment have reduced the likelihood of buyers receiving a part that does not fit their vehicle. Given the success this program has had in the U.S., we were incredibly excited to roll out similar programs in the U.K. and Germany during Q3, where our unaided awareness among P&A shoppers is significantly higher than it is in the U.S.

The Guarantee Fit program is underpinned by multiple years of investment in P&A technology, including our acquisition of myFitment. We have been steadily onboarding sellers into the fitment toolkit to enhance their P&A listings with more robust fitment data, which improves findability for parts and protects buyers from unnecessary returns.

By the end of Q3, roughly 2/3 of large U.S. P&A sellers have adopted the toolkit. On average, sellers are observing conversion uplift of double digits or higher for listings enhanced by this toolkit, driving incremental GMV for eBay.

In early October, we reached a major milestone with 2 billion pieces of fitment data added to live listings using myFitment's technology. While this is outstanding progress, we continue to invest in simplifying the onboarding process, making it faster to import listings and identifying more vehicle matches for our more than 550 million live P&A listings.

During Q3, we continued to deliver relevant experiences for the collectibles category across a number of areas. We generated over $10 billion in GMV from collectibles over the last 12 months, and more than 1 in 4 eBay buyers purchased at least 1 collectibles item over the past year. These buyers carry some of the highest conversion, repurchase and retention rates on eBay. And they are also among the heaviest cross-category shoppers on our platform, which supports our other categories.

Our goal is to remain the world's most loved destination for passionate collectibles enthusiasts, providing access to the most compelling assortment of inventory across multiple categories in a high-trust environment.

In service of that vision, during Q3, we launched direct submissions to the eBay Vault. This enables any U.S. resident to send in trading cards valued at $250 or higher from their personal collections to the Vault, even if they were not purchased on eBay.

In July to coincide with the National Sports Collectors Convention the industry's biggest event, we announced Vault Enhanced submission, which now enables us to gather large amounts of high-ASP cards in person at tentpole events attended by top collectors. During one weekend at the National Loan, we added tens of millions of dollars of assets under management at eBay Vault, including a signed Jackie Robinson card valued at approximately $1 million.

During Q3, we also wrote out a revamped condition grading system for trading cards, which greatly improves transparency for collectibles in this category. New listings now carry more precise details, including whether a card has been professionally graded and the numerical grade or 1 of several predefined card conditions. Existing listings will be also migrated to the new standard over the coming months. Sellers have been asking us for this feature for some time, and we believe it will drive improved trust for buyers, better and more consistent price realization for sellers as well as more robust data and insights around individual card values for eBay.

In response to our growing community of collectors and enthusiasts, last year, we introduced eBay Live, an interactive live shopping experience within the eBay app. This feature marries eBay's unique scale with an engaging shopping experience that we believe enthusiasts across the collectibles, luxury and fashion categories are increasingly seeking. Buyers can interact with influential sellers and check out in real time without leaving the stream. And sellers have loved this tool as they can move items at scale and increase their sales velocity while listing items as fixed price or as extended auctions. eBay Live is currently in beta, but we continue to expand its availability to more sellers and categories.

While we've been thoughtful about the pace of onboarding as we fine-tune the beta experience, Q3 market inflection point as we hosted over 1,000 live events saw [ our million fire ] tune in and grew GMV from eBay Live by 4x quarter-over-quarter.

Now let me turn to the second pillar of our evolved strategy, scalable solutions. We're pleased with the progress we're making with our eBay International Shipping program, or EIS, which makes cross-border trade more seamless and cost-effective for sellers and buyers. We continued to scale EIS during Q3 and now have over 400 million live listings from U.S. sellers shippable to international buyers in more than 190 countries.

Sellers have had an overwhelmingly positive reaction to the new program with customer satisfaction rates approximately 30 points higher than the previous global shipping program it replaced. In October, we launched combined shipping for EIS, which allows buyers to order multiple items from an international seller and pay one consolidated shipping fee.

Q3 also marked another strong quarter for our advertising business. Total advertising revenue grew 24% to $366 million. First-party ads grew 36% to $345 million or 36 points faster than FX-neutral GMV growth. Over 2.3 million sellers adopted a single ad product during Q3, and we currently have over 850 million live Promoted Listings.

Promoted Listing Standard, our cost per acquisition ad unit, was once again the largest contributor to growth in Q3 driven by continued optimization of placements, ad rate improvements and the recurring benefit of the Halo attribution change we discussed last quarter.

Promoted Listings Advanced, our cost-per-click product, was the fastest-growing product in our ads portfolio on a year-over-year basis. PL Advanced continues to benefit from the simplifying and automating of core elements of the campaign setup and management processes.

In September, we launched smart targeting for PL Advanced, which makes creating and managing CPC campaigns easier than ever. Previously, these campaigns took a lot of time to set up and manage as sellers have to manually set keywords and manage campaigns individually. Now through smart targeting, eBay uses AI to manage keywords on behalf of sellers and optimize campaigns dynamically, all with just a few clicks to set up. As part of the smart targeting launch, we've also extended CPC ads to the similar items recommendations module when users are viewing another item, using fully automated targeting and bidding technology.

Moving to our third pillar, magical innovations. Last quarter, we discussed our magical listing experience, which represents the biggest transformation of the eBay listing process in our 28-year history. For over 2 decades, 2 of our biggest focuses were at odds with each other: making it a simple and fast as possible to list an item and ensuring listings are rich and comprehensive to maximize sales.

Now generative AI allows us to leverage our treasure trove of images and listing data to quickly create compelling listings. Early users have told us these capabilities will unlock more of the inventory in their closets and garages, which could ultimately keep more products out of landfills.

The first phase of our magical listing experience leverages generative AI to instantly populate the item description within the listing flow based on a product's title, category and other aspects. This feature rolled out to 100% of mobile app users in the U.S., U.K. and Germany during Q3.

In October, we extended the generative AI descriptions to 50% of desktop users in these countries. The first phase of the magical listing experience has been incredibly well received by sellers as usage, adoption, customer satisfaction and content acceptance rates have all been higher than expected.

As much as sellers have enjoyed the first phase of magical listing, we believe the next iteration will be so simple and easy to use that all of our sellers will love it. This experience will enable sellers to point their camera at an item, take a photo, and eBay does the rest. Behind the scenes, we have powered this experience with our proprietary computer vision technology and generative AI to seamlessly populate the description, category and any other item aspects.

Our camera-based magical listing experience has been in employee beta for several months and is currently in a limited beta with a number of large sellers. Feedback from our beta sellers has been extremely positive as they found the new experience intuitive and easier to use. We are incredibly excited to bring this experience to more sellers over the coming months.

As part of our magical listing initiative, we also rolled out a vastly improved background removal tool powered by AI during Q3. Sellers have told us that simpler, cleaner images of their products have a significant impact on conversion. Our enhanced tool has now rolled out to all users in the core listing flow, and sellers have told us they are already noticing significant quality and performance improvements from the revamped tool versus our prior version.

Overall, I'm incredibly pleased by the progress we are making across all 3 pillars of our strategy. It is particularly encouraging to see how recent advancements in AI and machine learning can help us address more long-standing pain points for sellers and buyers on eBay in efficient and scalable ways.

Next, I'd like to highlight the impact we're having on the communities we serve. In Q3, we released our second annual small business report, which examines the sentiment of our global sellers. Despite macroeconomic uncertainty, eBay sellers are confident they can build their businesses and give back to their communities. In fact, more than half of eBay sellers expect their overall business to grow in the next 12 months, and over 2/3 expect their businesses on eBay to increase over the next 5 years.

We also recently announced the winners of our up-and-running grants. This program is currently in its fourth year and provides entrepreneurs with capital to invest in their businesses, along with training and mentorship to help them grow and thrive.

The third quarter also marked the 20th anniversary of eBay for Charity, a program created as a way for people to give back during times of crisis. It has evolved to a global platform supporting countless organizations and causes and raised more than $1.3 billion for nonprofits to date. In Q3 alone, the eBay community raised $40 million, up 16% year-over-year.

All of these efforts demonstrate our purpose-driven community, and we are honored to be recognized for our progress. We're proud to be ranked on the U.S. News & World Report's inaugural list of Best Companies to Work For. eBay was also recognized as a top corporate philanthropist by the Silicon Valley Business Journal and San Francisco Business Times.

In closing, I'd like to thank our extraordinary eBay team for delivering another solid quarter and continuing to innovate for our customers. We made significant progress against our long-term objectives during Q3. Our accelerating pace of innovation is fundamentally changing the eBay experience, driving higher customer satisfaction and paving the way for new growth and revenue opportunities.

As the macro environment remains uncertain, we'll be balanced in how we invest in the future, prioritizing our highest-ROI investments in order to generate long-term shareholder value.

With that, I'll turn the call over to Steve to provide more details on our financial performance. Steve, over to you.

[Stephen Priest, executive]

Thank you, Jamie, and thank you all for joining us today. I'll begin with highlights on the third quarter on Slide 11 of our earnings presentation. Next, I'll discuss our key financial and operating metrics in greater detail. Finally, I'll provide our outlook for the fourth quarter and some closing thoughts before we begin Q&A. As usual, my comments will reflect year-over-year comparisons on an organic FX-neutral basis, unless I note otherwise.

Q3 was another solid quarter for eBay as we met or exceeded expectations across all of our key financial metrics despite ongoing uncertainty in the global economy. Gross merchandise volume was down 1% to approximately $18 billion. Revenue grew 4% to $2.5 billion, outpacing volume by 5 points. Non-GAAP operating margin was 26.4%. We delivered $1.03 of non-GAAP earnings per share, and we generated $777 million of free cash flow while returning $783 million to shareholders through repurchasing dividends.

Let's take a closer look at our financial performance during the third quarter. Gross merchandise volume was down 1% organically to approximately $18 billion or roughly flat year-over-year on a total FX-neutral basis. Foreign exchange represented a nearly 2-point tailwind to reported GMV growth. However, the U.S. dollar appreciation during the quarter created a GMV headwind of more than $100 million versus rates implied in our Q3 outlook.

Focus categories continue to drive underlying momentum in our business, growing roughly 7 points faster than the remainder of our marketplace. P&A was once again the largest contributor to growth and maintained mid-single-digit GMV growth for the third straight quarter, in line with market rate of growth for this segment of e-commerce.

eBay Refurbished was the fastest-growing focus category on a percentage basis, while GMV growth in our luxury focus categories was positive for the third straight quarter as our combination of value and quality has served customers well in the current economic environment.

Next, I'll walk through our results on a geographic basis. U.S. GMV was down 2% organically in Q3, an improvement of over 2 points sequentially. On a total FX-neutral basis, U.S. GMV was down 1%. Although the U.S. economy has been more resilient than our other markets, demand for discretionary goods continues to be impacted by the cumulative burden of elevated inflation and the highest interest rates observed in over a decade. U.S. consumers are increasingly seeking value, which has shifted some demand to inventory offered by our CBT sellers.

International GMV was roughly flat on an FX-neutral basis and up nearly 4% as reported. Our international markets continue to experience more severe macroeconomic pressure than the U.S. with the U.K. seeing consistently negative e-commerce growth since early 2022, while Germany has now faced multiple quarters of economic contraction. This pressure has been mitigated by continued strength in cross-border trade, which offset far weaker trends in Europe.

Moving to buyers. Trailing 12-month active buyers was stable quarter-over-quarter at 132 million. On an organic basis, active buyers remained at approximately 131 million for the third straight quarter. Confused spite also flat sequentially at 16 million. Spend points was stable quarter-over-quarter at around $3,000 annually but modestly year-over-year.

Turning to revenue. We generated revenue of $2.5 billion during the third quarter, up 4% organically, outpacing volume by 5 points. Total FX-neutral revenue growth inclusive of M&A was 5%, while currency had a de minimis impact to reported growth. Our take rate was 13.9%, down modestly quarter-over-quarter but up nearly 50 basis points year-over-year. The combination of FX and the ad revenue recognition change in Q2 represented a sequential take rate headwind of over 10 basis points in Q3.

Advertising was again the largest tailwind to our take rate on a year-over-year basis and also quarter-over-quarter after adjusting for the Q2 accounting change. eBay International Shipping and recent M&A in aggregate added 5 basis points to our take rate sequentially. Total advertising revenue grew 24% to $366 million and reached just over 2% penetration of GMV. First-party ads grew 36% to $345 million or roughly 36 points faster than FX-neutral volume.

As noted last quarter, the revenue deferral release for CPC ads in Q2 created a sequential headwind of $9 million for first-party ad revenue growth in Q3. While we are pleased with the continued robust growth in Promoted Listings, year-over-year growth decelerated slightly as we lack the notable acceleration during the prior year period, which was driven by a series of performance optimizations.

Our legacy third-party display ads, which have been impacted by a combination of secular and macro headwinds in recent quarters, decelerated further during Q3. In recent months, we have actively deprecated third-party ads in certain circumstances to improve the user experience. First-party ads remain our primary focus as we continue to invest in scaling, optimizing and automating our Promoted Listings portfolio.

Financial services had a modestly positive impact on our take rate sequentially as our in-house payments capabilities have advanced in recent quarters. We have identified more opportunities for GMV, revenue and cost optimization. Adyen continues to be an incredibly strategic partner for us in financial services. During Q3, we expanded our usage of Adyen's merchant acquiring services to cover additional forms of payment. This development has positive implications for our Adyen model probability, which I will discuss shortly.

Moving to profitability. Non-GAAP operating margin was 26.4% during the quarter, down roughly 2.5 points year-over-year. Roughly 1.1 points of this delta was driven by the combination of recent M&A and the eBay International Shipping program. Foreign exchange also represents a year-over-year headwind of approximately 40 basis points. The remainder of the margin variance was driven by investments in our business and modest volume deleverage.

Gross margin was down nearly 90 basis points year-over-year primarily from the ramp of eBay International Shipping. Within our operating expenses, we observed a 1-point increase in product development expense as we invested in product and engineering talent to drive innovation across eBay. Sales and marketing was down modestly as a percentage of revenue year-over-year in Q3 as our investments in full-funnel marketing initiatives were offset by cost efficiencies, including lower spend on coupons and incentives.

During the quarter, we also accrued an additional $50 million to G&A expense on a GAAP basis related to pending legal matters. This adjustment is reflected in our non-GAAP reconciliations, while additional details on the accrual will be provided in our 10-Q filing.

We continue to focus on driving expenses out of the business, which is a crucial part of our path to long-term sustainable growth. And where we do choose to invest, we are able to partially offset that with OpEx savings driven by our structural cost program.

Turning to our balance sheet and capital allocation. We generated free cash flow of $777 million in Q3, up 23%. Our balance sheet position remains robust as we ended the quarter with cash and non-equity investments of $5.4 billion and gross debt of $7.7 billion. We repurchased over $650 million of eBay shares at an average price of approximately $44 during Q3 and had $1.7 billion remaining under our current buyback authorization at the quarter end.

We paid a quarterly cash dividend of $132 million in September or $0.25 per share. Since the beginning of 2022, we have returned nearly $5.2 billion to shareholders through repurchasing dividends of roughly 125% of cumulative free cash flow over that period. We generated non-GAAP earnings per share of $1.03 in Q3, up 3% year-over-year, benefiting from a nearly 4% reduction in share count from our repurchase. We delivered GAAP earnings per share of $2.46 with the delta driven by unrealized gains on our equity investment portfolio primarily from Adevinta.

Our investment portfolio is detailed on Slide 21 of our earnings presentation. Our major equity investments and warrants were valued over $4.5 billion at the end of Q3. Our 404 million Adevinta shares were valued at roughly $4 billion at more than $1 billion versus the prior quarter. As we disclosed in late September, we have expressed support for the proposal made by the consortium of investors to Adevinta, under which we would retain a portion of our current holdings. As these discussions are ongoing, we are not in a position to provide any further comments on this transaction or the implications of such a transaction to eBay today.

Our Adyen warrants were valued at nearly $200 million at the end of the quarter. As a reminder, our warrant value is calculated based on several assumptions, including adding share price and the probability of our remaining warrant tranches vesting. During Q3, the probability of vesting was positively impacted by an evolution on our usage of Adyen's products and services. The 3 remaining warrant tranches now carry probabilities ranging between 0% and 95%. However, the increase in probability was more than offset by a price decline in Adyen shares during the third quarter.

Moving on to our outlook. Although our third quarter volume trends were slightly better than expected, we did observe softening consumer demand in September that carried through October. This macro softness was most pronounced in Europe, particularly in the U.K. and Germany, our second and third largest markets, respectively. We have also seen tapering demand in the U.S. market quarter-to-date. Given these trends, our base-case expectation is a continued pressure on discretionary demand will lead to a relatively muted seasonal uptick in volumes during the holiday season.

For the fourth quarter, we expect to generate between $17.9 billion and $18.3 billion of GMV, representing an organic FX-neutral decline of between 4% and 2% year-over-year or spot growth between negative 2% and flat. The strength in U.S. dollar also creates an incremental FX headwind to fourth quarter GMV of roughly $400 million versus our prior guidance on a spot basis. This is on top of more than $100 million FX headwind to Q3 GMV.

On a sequential basis, we estimate FX will represent over a 1-point headwind to GMV growth and nearly 1 point of pressure to revenue growth. We anticipate Q4 revenue between $2.47 billion and $2.53 billion represents organic FX-neutral growth between negative 1% and positive 2% year-over-year. This implies revenue will outpace volume by 3 to 4 points on an organic FX-neutral basis in Q4.

As a reminder, our core take rate is typically down sequentially by 10 to 15 basis points in Q4 due to seasonal ASP and category mix, although this trend has occasionally been masked by payments and ads growth in the recent past.

Given our tempered outlook for Q4 volume and continued uncertainty in the global economy, we believe it is prudent to lean in more heavily into cost efficiencies to protect margins and earnings in this environment. We forecast non-GAAP operating margin between 26.1% and 26.7% during Q4, which would yield margins to the high end of our prior guidance range for the full year.

We forecast non-GAAP earnings per share between $1 and $1.05, representing EPS growth between negative 6% and negative 2% year-over-year. At current rates, FX would represent a 4-point headwind to year-over-year EPS growth in Q4 as we lap meaningful hedging gains in the prior year period.

Our outlook for free cash flow of just under $2 billion this year remains unchanged. As I noted last quarter, we expect de minimis free cash flow in Q4 due to the delayed timing of cash tax payments in 2023. Our capital expenditures for the full year are expected between 4% and 5%, while our non-GAAP tax rate should remain unchanged at 16.5%.

In relation to 2024, it is premature to offer specific commentary as we are in the midst of our planning process. We remain committed to find an appropriate balance between growth and profitability to ensure we are positioned to durable financial returns in the years ahead. As such, we plan to grow expenses more slowly than revenue next year as we scale and leverage the investments we've made over the last few years. We will remain good stewards of capital as we continue to target returning 125% of cumulative free cash flow to shareholders through repurchases and dividends through 2024. We will target a certain level of capital returns from quarter-to-quarter while maintaining the flexibility to lean in opportunistically when appropriate.

In closing, our Q3 results highlight the resilience of our marketplace and business model amid continued challenges in the global economy. Our fortress balance sheet and operational discipline have enabled us to adapt to rapidly evolving demand environment while continuing to invest for the future, protecting earnings and delivering meaningful capital return to shareholders. I'm extremely proud of our teams for staying focused on our strategic pillars amid this uncertainty and further laying the groundwork for long-term sustainable growth.

With that, Jamie and I will now take your questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Colin Sebastian from Baird.

[Colin Sebastian, analyst]

I guess first off, Jamie, there was some discussion at the seller conference a few weeks back about extending focus categories to more verticals. I think home and electronics were a couple of those in discussion. I wonder how quickly we should see focus coverage grow in proportion to total listings. And if that's true, is that something that could drive volume growth through 2024?

And then, Steve, I just wanted to go back to some of the macro factors you reviewed. And you mentioned, I think, a shift towards CBT. And just hoping you could discuss some of the implications of that shift on revenues and margins.

[Jamie Iannone, executive]

Yes, Colin, thanks for the question. So as you know with focus categories, we don't preannounce the next categories that we're going into for competitive reasons, et cetera. We do continue to roll out new areas as well as invest back into areas of the business.

So have a look at this quarter. We launched U.K. authentication for jewelry in our U.K. business. We're actually opening up an authentication center in Japan to allow for cross-border trade out of Japan, which is great. We launched -- or expanded in P&A our Guaranteed Fit program. So that had launched just in the U.S. We've seen great results by creating a game-changing level of trust in that category, and we've expanded that now to U.K. and Germany this quarter, and we're excited to see the impact of that on those markets.

Our other categories like refurbished continue to do well. We've seen double-digit growth from that perspective. We launched some new enhancements in trading cards this quarter with the new classification system that we've put in place and new direct submission in the Vault. So we're going to continue to balance new focus category opportunities expansion in other categories like we did with jewelry in the U.K. and like we did recently with streetwear as well as investing back in the focus categories and what's working because we like the ROI of those investments.

Steve, do you want to take the second part?

[Stephen Priest, executive]

Yes, definitely. Colin, so in terms of the negative on organic FX growth that we saw from a GMV standpoint, there's a number of macro impacts that we are looking at. So the first thing I would say, in September, we observed some softening in consumer demand, which has carried through to October, and that helped imply the guide that we went forward with.

This has been most pronounced in Europe. A couple of our biggest markets, U.K. is the second largest market and has continued to experience negative e-commerce growth since early '22. Germany, our third largest market, has now faced multiple quarters of economic contraction. And the U.S., as I said, we're starting to see some softness, and we would expect the holidays period to be a little bit more muted.

So when I look back on the third quarter and the dynamics that are at play, U.S. GMV declined 2% on an FX organic basis and international was roughly flat. The European softness has helped -- been helped by some of the CBT trade that we've seen that has been resilient. Think about consumers looking for value, and the cross-border trade coming out of the Far East has been more resilient.

And as a reminder, for our investor community, the GMV is measured where the seller is domiciled. And so you got softness in Europe. We're lapping through some of that dynamic. But the strength in CBT has sort of helped the international dynamic in Q3.

[Operator]

Our next question comes from the line of Ross Sandler from Barclays.

[Ross Sandler, analyst]

Steve, just a follow-up on that macro comment. As you guys look across different discretionary categories and price points, do you think it's just mostly like the macro conditions you described with the consumer weakening around GDP, et cetera? Or are any of these new competitors like Timo and Shein having an impact at the low end as some of your peers have flagged?

And then the second question is pleasantly surprised and happy to hear about the operating margin increase next year. So can you just flesh that out a little bit for us? Is that a function of lapping some of the International Shipping investments and kind of discrete R&D investments? What other factors might drive that op margin increase next year?

[Stephen Priest, executive]

Thanks, Ross. I'll kick off the macro one and then Jamie can add, and then I'll cover the margin question. So from a macro basis, just to reiterate, we did see at a macro level softening in September, seeing that continue through October. We describe Europe has been softer from an overall perspective based on the macro data that we will see.

The U.S., we have continued to see some softness across the board. And it's really a function of discretionary spend as consumer sentiment is down, inflation is up and obviously the impact of interest rates.

But Jamie, maybe Ross' question...

[Jamie Iannone, executive]

Yes. No. I don't think it's, in particular, any specific other competitive thing. Your question on T-Mo, we have not seen a significant impact from T-Mo or Shein on our business. When we look at our cross-border trade, as Steve talked about, it continues to remain healthy. We believe that's because of our differentiated strategy and our approach.

If you remember, we've been talking about this for a while. We've been strategically moving away from low-quality, low-ASP items, and that hasn't been a focus for us for years. I think the other big difference for our platform, Ross, is that we're -- a vast, vast majority of our traffic is organic. So I think as others are implicated by kind of the paid search or other marketing spend out there in the market, we're less so and more resilient just because so much of our traffic is driven organically on the platform.

[Stephen Priest, executive]

And then with regards to your question, Ross, on '24, obviously, there will be a number of puts and takes that will impact '24. We're in the middle of planning at the moment. The thing I would say is we will continue to be very disciplined and get the balance right between growth and profitability. We've been making various investments over the last few years, which we will continue to leverage and scale as we get into sort of 2024.

We are looking at every area of our cost structure. Obviously, in terms of external spending with suppliers, we've been very measured in terms of our approach to the structural cost program this year with the influx of AI that will really help us sort of lean in to support the operation next year and use the benefits of that as we go forward.

And we can control our cost structure. I mean we are operating in a rather dynamic macro environment. And so we will lean in, as we've said, and make sure that our costs grow more slowly than revenue in 2024.

[Operator]

Our next question comes from the line of Nikhil Devani from Bernstein.

[Nikhil Devnani, analyst]

I had a couple, please. Just following up on that operating leverage theme. As you think about prioritizing kind of the highest ROI investments next year, what initiatives are really making that top of that list? And which ones are you maybe more willing to push out a little bit if times get tougher?

And then on the focus categories, it's kind of nice to hear the market share stability. When you observe what's changed pre and post your improvements, is this a function of conversion rates functionally improving? Or are you also now able to kind of drive better traffic to those focus categories?

[Jamie Iannone, executive]

Yes. So first, on the initiatives, we're still obviously in planning for next year. But I'd say a couple of things. As Steve talked about the cost structure, one of the things we're looking at is how do we leverage AI and technologies so that our costs don't grow as our volume grows.

So I'll give you an example of -- one of the areas we've been investing a lot in is our customer support. And so if you look at like our GCX expenses, our customer support expenses, we've been rolling out conversational help bots over the course of the last few quarters, really advancing what we're doing there so that we can focus a lot of our efforts into handling more calls in greater volume with higher customer satisfaction.

As an example, we just launched that as a trial in Germany. We've had that live in some of our English markets. An example of some of the initiatives that we're going to do next year to manage the business and make sure that, as Steve said, we're going after the growth opportunities in the business while being prudent about our expense structure.

When you think about focus categories and what's driving the success there, I would say it's a couple of things. One is that if I look at like for P&A, for example, this is our third quarter of seeing mid-single-digit growth, which is in line with market's. And we're just now launching Guaranteed Fit, which is one of the big value propositions for us in that category to our markets, our second and third largest markets, in U.K. and Germany, where we do have a leading marketing position from that standpoint.

And what we're seeing is that the new work that we've been doing in fitment, for example, has really been helpful. I talked about 2 billion new fitment combinations based on myFitment and that our sellers are seeing double-digit increases in their conversion.

So to your point, I think we're doing a better job with our full-funnel marketing in each category, acquiring enthusiasts into those categories. And then when we bring them on, we're having a better experience for them in converting them into sales and converting them into repeat buyers because of the changes we've made in trust, because of the changes we've made in experience.

I mean think about like our luxury category. This is the third quarter where we're seeing positive growth in luxury even in this market, and you're seeing kind of what's happening and what others are saying. And it's because of the customer value proposition that we're bringing to these categories that we're seeing those results.

So we're going to continue to innovate and push forward on that strategy because we like the results that we're seeing and the consumer is responding. And then we're enhancing the focus category work with a lot of site-wide investments. And those site-wide investments not only help us in focus categories, but they help us in our other core categories in the business.

So I'd use the example of magical listing. It certainly helps sell a sneaker faster or a trading card or a watch or a handbag, but it also helps sell a musical instrument faster or a board game or a book or all the things that people sell on eBay because we're taking so much time out of the listing process that we're looking to unlock more of what's in people's closets, garages and basements with this technology. And we think that those investments will help both focus categories and our other core categories on the business.

[Operator]

Our next question comes from the line of Thomas Champion from Piper Sandler.

[Thomas Champion, analyst]

Jamie or Steve, I'm wondering if you could just talk a little bit about EIS and how that is performing relative to your expectations around transactions or inventory and how the cost drag is performing and whether you're making progress there. And then maybe, Steve, specifically for you, noticed the buyback uptick this quarter. Can you just walk us through the thought process behind that?

[Jamie Iannone, executive]

Yes. Thanks, Thomas. So look, on EIS, we love the success we're seeing in the program. It's making cross-border trade much easier on the program. eBay handles everything for the seller, the customs, the duty forms of buyers, we intermediate the returns and we protect sellers from item-not-received complaints. So we continue to ramp the program over time.

Half of our big 3 inventory is not available, we ship internationally. So we're excited about the goal of this program, which is basically make it super easy for sellers so they don't have to think and we handle all of that cross-border trade for them.

We continued to scale it during Q3. We now have over 400 million live listings. We launched some new features with the program, for example, the ability to combine shipping. So for example, I was with a seller or a buyer -- a collectible buyer in Japan of trading cards who's buying trading cards out of the U.S. Now he can buy multiple trading cards, we can combine them in a single shipping invoice, just making the whole EIS program a lot better.

The last thing I'd say is that when I look at the program overall for sellers, it has a 30-point higher customer satisfaction than the previous program that we've had. So all of the work that we did to bring things in-house last year, Steve talked about the financial implications, we're seeing that in CSAT in sellers, and we're seeing them react in terms of what's available internationally.

Steve, do you want to handle the second part?

[Stephen Priest, executive]

Yes. And just to say, Tom, with regard to EIS, really pleased with the momentum, largely in line with our expectations from a financial architecture standpoint. As we said, we expect this fragrance accretive to operating profit for this year. And by the year-end, it will be in line with the core margins on the platform. So pleased with what we're seeing.

Specifically, with regards to your question on capital returns, the beauty of the eBay franchise, where we're generating just under $2 billion of free cash flow a year, gives us the ability to invest in the business but continue to drive healthy returns to shareholders. We laid out a path to 125% of free cash flow to shareholders through stock buybacks and dividends cumulatively between '22 and '24. Since the beginning of 2022, we've returned nearly $5.2 billion to shareholders, and we're roughly at 125%. So we're right on track with the commitments that we made.

[Operator]

Our next question comes from the line of Lee Horowitz from Deutsche Bank.

[Lee Horowitz, analyst]

Two, if I could. So the macro environment is obviously a massive challenge for the business at the moment. But as we look out to next year, can you maybe help us better understand what levers do you think you have at your disposal to perhaps get volumes back to even modest growth if the macro environment proves to be persistently weak in the medium term?

And then just to contextualize some of the comments around slower cost growth into next year are relative to revenue, I think investors would be pleased to hear it. But does this more cautious stance on investment impact in any way the pace at which you think you can roll focus category coverage out over the next [ 2 ] to 24 months? Or are those investments already fully baked and the pace shouldn't be impacted in any way?

[Jamie Iannone, executive]

Yes. So I would say a couple of things. One is we're not going to get ahead of ourselves on 2024 and talk about that on this call. We've laid out the strategy that we have for expanding focus categories for the site-wide investments that we're making, and we feel really good about what we're driving and the underlying changes in the business.

On the expenses side, I wouldn't think about it as pulling back in areas that we think will drive growth in the business but more what I talked about earlier, which is finding opportunities to create leverage out of the model. When you think of things like cost of payments, when you think of things like how we're going to use AI to enable our -- the efficiency of the organization, the whole motto here is control what we can control. And that's why we think we've planned for the architecture that Steve laid out, and we're really not going to get ahead of ourselves on anything more from 2024.

But our main goal, and we've been doing this through the structured cost program, is to drive efficiency in the organization without driving the key layers -- the key levers and the innovations that have driven growth on the platform.

[Operator]

Our next question comes from the line of Michael Morton from MoffettNathanson.

[Michael Morton, analyst]

If we could start maybe with authentication. For a few quarters now, you've highlighted it as a headwind to gross margins, which makes sense. I'd love to know if this is a line item that we should expect to see some leverage on as we go forward in the future. It's just tricky to think about as we're all like marketplace analysts, right, and literally high incremental margins. But when you're doing something like authenticating, like if you double the amount of shoes you're authenticating, like the people are touching on it boxes, it's inventory. So any thoughts there on how we should think about that line item going forward in the next 12, 24 months? You don't need to get too detailed but just the leverage aspect.

And then just talking about the leverage that you saw in sales and marketing. I understand and appreciate that you have a lot of direct traffic, but so do some other marketplaces that have seen a lot of increased competition across social, in search. So just impressive to see that leverage and would love to -- and I know you guys have invested in full-funnel advertising over the last 12 months to really get your improved product out there. So just to help us understand how you're seeing that leverage when other marketplaces are having such a challenging environment would be great as well.

[Stephen Priest, executive]

Michael, I'll pick up the first one. So we've been really pleased with the levels of trust that we are continuing to build on eBay, particularly focused around our focus categories. And so the first thing I would say is thinking about authentication as a trust metric that's really driving CSAT. And so it's a great return on investment. Because it's not just about the category that one shops in, but also it's about the cross-category shopping that goes away from that.

So every consumer that spends about $400 of sneakers on the average buyer spends $2,000 also on the platform. And it's really the fact they get attracted to it. So you should be thinking about this as an investment that we're making and then the requisite return on investment.

The second thing I would say is it's not just about authentication because some people look into eBay and think it's all about authentication. Fitment is the P&A, and warranties are salary refurbished and certified refurbished, which authentication is to watch, your sneakers and handbags. And so we're continuing to, a, get scale as we sort of driving this to the overall platform, but also we're getting the benefits of trust and the benefits of cross-category shopping as we go that forward. So it continues to be relatively de minimis. But I would think of it as an overall return on investment.

Jamie, do you want to pick up the question with regards to the traffic?

[Jamie Iannone, executive]

Yes. Look, we've shifted our marketing strategy as we've talked about, and we're telling our story in new and different ways. Rather than focus on those large brand campaigns, we've been doing really targeted marketing spend to enthusiasts in our focus categories through this full-funnel approach, using a real full-funnel mid-, lower upper. And all of that full funnel makes our lower funnel work harder.

We've been doing partnerships with influencers, leveraging social media in better ways. And so the whole shift in our marketing strategy is not to just go after kind of active buyers and a big brand campaign but really market the value proposition that we have on the platform with a really targeted approach to go after enthusiasts in that category. And that's why I think you're seeing the results that we've talked about in P&A, which is our third quarter of -- in market lines of growth in the mid-single digits is because of the effect of the marketing programs.

[Stephen Priest, executive]

The only thing I would add is just the size and scale of eBay and the general operational efficiencies we get with this. To Jamie's point on full-funnel marketing, we get to a point where we've got paid, owned and now earned marketing across the board, which really brings additional consumers to eBay and continue to drive that level of trust on the platform to ultimately drive the underlying GMV momentum.

[Operator]

Our next question comes from the line of Eric Sheridan from Goldman Sachs.

[Eric Sheridan, analyst]

Maybe 2, if I could. Going back to the comments on the broader softening of the e-commerce environment. How does that typically show up in your model? When you think about what you've seen in the U.K. or Germany, is it slower buyer growth? Is it less velocity or repeat behavior on the shopping level? Is it basket size? How should we be thinking about the signals you're watching for, for elements of the softening versus what might be a recovery as we move through Q4 and into next year? That would be number one.

And then when you look about the seller services side of the equation, I know you've made a lot of progress on ads and payments and shipping, what do you think the biggest friction points still are to continue to solidify the seller services side of the equation for the marketplace, especially if the macro environment does become a little more uncertain and sellers are looking for systems for marketplaces?

[Stephen Priest, executive]

Eric, I'll take the first one. It generally shows up in traffic, as you would imagine. When you think about eBay and consumers looking at discretionary spend, and the wallets generally get a little pressured. That's really where it tends to show up.

If I reflect on our business -- and let's not forget, half of eBay's GMV is generated outside the U.S. And if you think about Europe, think about the likes of the U.K. and Germany, our second and third largest markets, when you look at the data in terms of e-commerce excluding grocery, U.K. was shrinking at 3 points in September and Germany was down minus 7%. And so we're seeing quite a precipitous decline in some of that e-commerce growth out of those couple of key markets. And invariably, as those consumers continue to get pressured in their wallets has an ultimate impact on traffic and discretionary spend.

Jamie, in terms of the other item?

[Jamie Iannone, executive]

Yes. On seller services, Eric, it's really been across the board. If you think about our B2C sellers, it's been a key focus for us for over 3 years now. We started with eBay stores and a lot of innovation that we did when I first got back to eBay. Since then, we've been building out the ad portfolio as we've been talking about each quarter. We continue to enhance our shipping profile and our shipping services.

So one example is like in our P&A category, we now have the ability for a B2C seller to say, I have multiple warehouses that I can ship out of, and we'll ship out of the one closest to the buyer to get it faster to the buyer. In our German business, we just launched a more expedited returns process, which helps sellers manage returns in easier ways. EIS is helping them get more global-scale demand. Payments is giving them more payment choices.

So when you think about -- I was just with a seller in Australia who sells tires. And he was like, I love the integration that you guys did with Afterpay because in this economy, a lot of people buying a new set of tires are using the buy now, pay later solutions.

So I would say it's a combination of all of the things that we've done that are really being great services for B2C. At the same time, we invested a lot in the C2C experience with things like the magical listings, really letting them list with a whole lot more e.

As I've talked about last quarter, the customer satisfaction for a brand-new product there is amongst the highest I've ever seen. And what casual sellers are telling us is this is going to allow them to unlock more inventory because of how easy we're making it. And that's now scaled out to 100% of our business across U.S., U.K. and DE.

So we continue to invest a lot in our sellers. We continue to grow the number of live listings on the platform, and we continue to raise the customer value proposition that we're giving them on eBay.

[Operator]

Our final question comes from the line of Deepak Mathivanan from Wolfe Research.

[Deepak Mathivanan, analyst]

Jamie, given that consumers are increasingly looking at deal shopping during this holiday season due to macro pressures and inflationary environment, some of the other e-commerce platforms like Etsy are kind of incentivizing sellers to step up discounts and are also doing promos on their own to drive volume. Is that something that eBay can do? Do your buyers react to this? And do you see opportunities to maybe mitigate some of these macro pressures with product initiatives if this kind of persists for a while next year?

And then maybe one quick one for Steve. Steve, can you help quantify the cash outflow due to the taxes in 4Q? Is that a constraint to kind of stay on your buyback cadence for 4Q? Or any additional color you can provide there would be great.

[Jamie Iannone, executive]

Yes, Deepak, the only real key finding and promotion stuff we do, we do it in conjunction with our sellers, where they're kind of funding those coupons. And that does work and that's in partnership with our sellers. We sometimes also do that with our external Promoted Listings products that we've been talking about, one of our new ad products. But we really moved away from the couponing that was unhealthy that we did back in 2019, and we have no plans to reintroduce that type of couponing because it wasn't driving the type of ROI that we wanted.

The bigger point for eBay overall has been the shift in strategy to focus on used, non-new and seasoned and refurbished. Because when customers face these inflationary environments, they're continuing to look at eBay for better value. Our refurbished business is up double digits because people are getting like new products for 40% off. Our used business is growing faster than our new business because the demand that people see and the values that they can get on eBay.

So we just did a survey and we found that 90% of consumers that responded to the survey said that they purchased pre-loved goods on eBay in the past year. So our play on value is really the new strategy of what we're going after of driving those businesses, and that's what's resonating with our customers.

Steve, do you want to talk about the cash implications of taxes?

[Stephen Priest, executive]

Yes. Obviously, we talked about the free cash flow dynamics and the timing of the cash payments of '23, impacted by the California state disaster tax relief, which has shifted our cash tax payments to October is being paid during Q2, Q3, and that's really the reference we are talking about.

We don't get into sort of forecasting our buybacks on a quarter-to-quarter basis. Really pleased with the continued momentum we've got on that at around 125%. And that's really an average over the cycle that we talked about. But we're bang on track and happy with where we are.

[Operator]

Thank you. Ladies and gentlemen, we will conclude today's conference call. Thank you for participating. You may now disconnect