eBay Inc (EBAY) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the eBay Q3 2002 Earnings Conference Call.

During the presentation, all participants will be in a listen only mode, and we will conduct a Question and Answer session afterwards.

At that time, if you have a question, please press the '1' followed by the '4' on your telephone.

As has been reminded, this conference is being recorded on Thursday, October 17, 2002.

We now extend the conference over to Mr. Mark Rubash, Vice President of Finance.

Please go ahead, Mr. Rubash.

Thank you, and good afternoon.

Welcome to eBay's earnings release conference call for the third quarter of 2002.

Joining me are Meg Whitman, our President and CEO, and Rajiv Dutta, our Chief Financial Officer.

This conference call is also being broadcasted on the Internet, and is available through the Investor Relations section of the eBay Web site.

Before we begin, I would like to take this opportunity to remind you that during the course of this conference call, management may make forward-looking statements regarding matters that involve risks and uncertainties, including those relating to the company's ability to grow its business and user base.

Our actual financial results could differ materially from those discussed during this call.

Factors that could cause or contribute to such differences include, but are not limited to: our need to manage an increasingly broad range of businesses to deal with the increasingly competitive environment for online trading.

To manage the integration of PayPal and the litigation, regulatory, credit card association and other risks specific to PayPal.

To manage our other regulatory and litigation risks even as our product offerings and geographies expand.

To maintain site stability and continue to expand our model to new types of merchandise and sellers.

To continue to expand outside of the US as well as the timing and commercial success of new features and functions added to our Web site.

The price and demand for advertising offered on our Web site, the success of the company's commercial partners and commercial relationships, and the costs of announced and prospective joint ventures, acquisitions and other commercial transactions.

More information about potential factors that could affect eBay's business and financial results is included in eBay's Annual Report on Form 10-K for the year ended December 31, 2001.

Its quarterly results on Form 10-Q, its registration statement on Form S-4, its current reports on Form 8-K, and other periodic filings and prospectuses.

All forward-looking statements are based on information available to eBay on the day hereof and eBay is under no obligation to update such statements.

We will begin today's call with Meg and an overview of our business, followed by Rajiv who will provide greater detail on our financial performance.

Following Rajiv's discussion, we will be happy to respond to your questions.

Now it is over to Meg.

Thank you Mark, and welcome to today's conference call.

Q3 was an outstanding quarter for eBay.

In fact, it was our best ever.

Across every key performance and financial measure, eBay achieved record results.

Just listen to some of the numbers.

Gross merchandise sales or GMS totaled to $3.77b, which represents a 60% year-over-year growth.

Online transaction revenues came to $263.6m, which signifies a 73% growth year-over-year and the second sequential quarter of acceleration.

Pro forma operating margins reached 32%, up from 30% from the past two quarters and operating cash flow totaled $112m, an increase of 82% from the prior year period.

These results clearly demonstrate the power of our business model and the inherent growth leverage it provides.

But more than that, it demonstrates the strength and resilience of our dedicated buyers and dedicated sellers. eBay makes inefficient markets efficient.

In light of an item, the typical product cycle includes two segments of inefficient distribution and pricing.

When a product is new and scarce, and when it is used, vintage or at the end of a life stage.

Our entrepreneurial users instinctively understand this reality, and use eBay to take advantage of it with great results.

Our sellers now represent every link in the distribution chain, from large manufactures and wholesalers, to small liquidators and individual merchants; and our buyers today are just as likely to visit eBay to find last years shoes, or this year's digital camera, as they are a prized collectible.

The quarter's results also validate the company is currently refocusing on managing the marketplace.

And what does it exactly mean to manage the marketplace?

Questionably, it means we get up every morning thinking about the needs of our buyers and sellers, and the expansion of our platform.

We build up new and using categories, we give sellers tools to extend their sales, we attract new buyers and increase the activity of current ones, and make the site easier for everyone to use.

In short, we help our users achieve success.

Now, perhaps nothing illustrates our role as the marketplace manager better than our strategy of continuously simplifying and improving the overall trading process.

Our most recent big achievement in this area is the acquisition of PayPal.

As most of you know, PayPal payments are quickly becoming the currency of the net, and online payment is a crucial part of eBay's trading process.

Combining eBay and PayPal will allow us to expand trading, improve trust and safety, accelerate growth and fundamentally strengthen both businesses.

Even with the early close of the acquisition, we have already begun to integrate PayPal into the eBay platform, just in time for the important holiday shopping season.

The service is now featured on the most-visited pages of the trading process 'sell your item, view item and checkout'.

And buyers can now specifically ask for listings that offer PayPal.

Deeper integration into the rest of the cycle will quickly roll out over the coming months.

In addition, PayPal has just launched an important new feature call 'multi-currencies'.

What this does is to allow users to send and receive and hold funds in euros and pounds sterling in addition to US dollars.

Support for additional currencies such as the Canadian dollar and the Australian dollar will be added in the coming months.

The ability to support different currencies will make PayPal even more attractive for the growing number of users outside the United States, which of course ties in perfectly with our accelerating growth overseas.

These efforts, which will help energize PayPal, already healthy growth trajectory.

Earlier this month, PayPal surpassed the 20 million-user mark, which is double the number of registered users it had just one year ago.

More than $10b has been sent to the PayPal network since its launch in October of 1999.

Payments, of course, is just one of the ways we are affecting the marketplace.

Category development continues to be our main focus for driving transaction growth, and this focus continues to bring results.

By-categories now generate more than $1b in annualized GMS.

Motors, computers, consumer electronics, books, movies and music, and sports and they are growing.

In Q3, we saw double digits year-over-year growth in every top-level category, from the well established to the up and coming.

Among our largest categories, for example, year-over-year GMS grows 35% in sports, 34% in computers, 44% in book, movies and music, 77% in consumer electronics and 116% in eBay motors. eBay motors is now a $3.8b business on an annualized basis, the work we have done in the categories this year including the insurance program and integrated marketing.

Our collaborative sales effort with our partner autotrader.com has produced excellent results across the board.

The motorcycle category generated a 199% growth in GMS year-over-year, while parts and accessories grew 174%, and cars and trucks 98%.

According to Nielsen/NetRatings, eBay motors is the most popular auto-motor Web site by far, outperforming the classified listings, manufacture Web sites, and even triple A. Seven million users came to eBay motors in August. 46% more than the next grand site, and it accounted for one third of all auto-motor page users on the Web that month. eBay Motors has clearly [patterned] consumer desire for greater convenience and efficiency in the used auto-market.

Up and coming categories also gained ground this quarter.

On a year-over-year basis, GMS for Jewelry rose 61%, Home and Garden grew 90%, and Clothing and Accessories jumped at 98%.

An important contributor to growth in Q3 was our 'back-to-school' marketing campaign.

Taking advantage of the traditional retail calendar, in August, we staged an integrating marketing effort to promote eBay as the destination for back to school shopping.

This included on-site merchandising, online advertising and public relations, which brought buyers to the site to shop for returning students of all ages.

And the results were excellent.

Again, with a difficult retail backdrop, eBay's August GMS for children's clothing grew more than 40% compared to August of 2001, while musical instruments grew 30% and consumer electronics jumped at 47%.

The 'back to school' campaign is just the latest example of our integrated marketing approach.

Our goal is not only to acquire new users, but also to increase activity among current ones, and encourage buyers to become sellers.

And we have got some exciting plans is the works for our holiday shopping season, which we will tell you more about at the Analyst Day.

Despite the uncertain economic climate or maybe because of it, sellers are finding eBay a very compelling place to do business.

Today, the vast majority of eBay's sellers are individuals and small businesses.

On eBay, they find instant access into the national and international markets, very low distribution costs, mechanism to maximize prices, extreme flexibility in adapting to market trends and most of all, enthusiastic consumers who want to buy.

In fact, eBay may be the best place to start a new business today.

Entrepreneurs are finding ways to make the power of eBay work for them.

Let me just give you a couple of representative examples: [Leebaders], who is the owner of Joe and Lee discount golf shop in southeastern Massachusetts, has been in business for years, when an employee got the idea of listing golf clubs on eBay.

Four years and 16,000 transactions later, the spin-off company 'Three Balls' operates at its own warehouse and sells golf equipment exclusively on eBay.

We employ 15 people to manage an average of 1500 listings at any given time.

And to help support Lee and the thousands of other successful sellers like him, we just launched a new faculty site called eBay Force.

The popularity of Force site items on eBay translates into ever-growing momentum for GMS.

In sporting goods alone, GMS jumped 67% year-over-year this quarter.

Another example is Sean [Carrolca] at Mermaid Books in San Francisco.

He found eBay before he launched his business online.

Starting with an antique book collection owned by his grandfather, Sean began selling a few books on eBay four years ago.

Today, Mermaid books specializes in modern first editions by popular authors and sells nearly 1000 books a month.

Interestingly, land-based bookstores have begun to buy from Sean in bulk to resell off-line.

All starting with varied interlocking ways, small businesses are using eBay to fuel their success.

Because of the entrepreneurs on eBay and their peers on Half.com, GMS in the book category jumped 64% year-over-year.

Half.com had an especially strong quarter in Q3, cashing into the new texts book market at the heart of the 'back to school' shopping season.

Managing the eBay marketplace means always supporting our best entrepreneurs.

As part of that effort, we recently expanded our popular power-seller program.

The program now includes more sellers, provides more rewards for top-sellers.

We have created two new top-tier segments: platinum and titanium, and we have made it easier for good sellers to become members of the beginning bronze level.

Managing the marketplace also means helping all sellers find more business, and we are doing that through innovative efforts like our trading assistance program.

This program allows experienced sellers to offer their services to other users on the site for assistance using eBay, whether to buy or sell.

Launched in February, the program already has more than 13,000 participating sellers across every US state and in a number of other countries, and feedback so far has been incredibly positive.

In a recent internal survey, trading assistance members reported that a 15% of their business now come from helping other users on eBay.

Not only is the program allowing users to become more successful, it is bringing new items to the site and boosting trade overall.

Another way we have for our users' trade is through product development.

Two features in particular have given sellers flexibility in pricing and merchandising their items.

The first is fixed price trading, which contributed 22% of eBay's GMS in Q3, up from 19% in recent quarters.

Buy-it-now continues to be extremely popular.

In Q1, we rolled out a new pure fixed price format internationally, in which the item is listed at a set price, the seller chooses and it never defaults to an auction. [The ultimate] is the easier offering of multiple items within one listing, which is helping more end-of-life items to the site.

Already, the new format accounts for 10% of eBay international GMS.

The same feature was introduced in the US about 12 weeks ago and it is gaining attraction as well.

While this is useful for sellers, the fixed price also appeals to buyers, especially those who prefer the immediacy and convenience of fixed price trading.

The second feature is actually the eBay stores. eBay stores are helping sellers build their own brands by providing a powerful opportunity to merchandise and cross-promote their listings.

There are now 36,800 stores in the US, a 27% increase from Q2, and more than 14,000 stores on eBay's international sites.

With new features entering this quarter, we have also seen a shift towards higher-level stores.

The number of featured stores for which sellers pay $49.95 a month jumped 25% sequentially.

It is clear that eBay stores have become a great merchandising depot for sellers on eBay.

Just as we helped sellers manage the marketplace in the US to maximize growth, the same focus is helping us build wider trade around the world. eBay's international business continues to grow at a remarkable rate.

As a result, our profitable, international operations now account for 26% of our net revenues, up from 24% last quarter, representing year-over-year growth of 152%.

Our more established international sites are showing more strength. eBay Germany continues to be an unbelievable powerhouse, showing strong growth and increasing profitability.

In Q3, eBay Germany transaction revenues showed a sequential growth of 25%, and just as we have seen in the US, eBay Germany is beginning to attract brand name sellers.

Next year, Motorola and music wholesale seller JPC are selling on the site, as are a number of Germany's first division soccer clubs.

All this has actually made eBay Germany a very popular place.

According to the latest Nielsen/NetRatings data, eBay Germany's reach is 42%, which means just under half of the Germans online spent time on our site in August.

EBay's newer international sites are also showing accelerating momentum.

Formally, part of [eBizard], eBay France was brought onto the eBay globing trading platform just one year ago.

Even with the typical summer season, eBay France has shown sequential growth in Q3 of 20% in listings and 13% in GMS.

Our initial users also grew 13% sequentially, allowing eBay France to surpass the 600,000 users mark.

Furthermore, the French community is exhibiting trading patterns quite similar to that of Germany, with vibrant trading in motors, computers, consumer electronics, books, movies and music, and toys, just to name the top few.

With 55 million users around the world, the technology that keeps eBay running smoothly is of course a critical part of our growth, and in Q3 we again saw usage reach record level.

By the end of the quarter, during daily peak usage period, the site was supporting an average of 435 million pages, 50 million searches, 5.25 million bids, and 2.8GB of outbound data per second.

Much of this was made possible by the ongoing roll-out of G3, our next generation architecture.

Invisible to our users, G3 is already giving us a greater level of scalability, productivity and flexibility for innovation.

Quarter after quarter, the eBay marketplace continues to deliver terrific performance.

Think about it - what other business today is achieving 73% growth year-over-year in transactions while extending operating margins and generating increasing amounts of cash?

That level of success is due to our community of users - buyers looking for practically everything, and sellers demonstrating the drive and innovation that are the hallmark of a small business success story.

I am very proud of the achievements of our community, and I am tremendously excited at working hand-in-hand with eBay employees.

Our users are accelerating eBay success quarter after quarter.

And now I will turn it over to Rajiv for some more details of our financial results.

Thanks, Meg.

I am very pleased to report another quarter of excellent financial results, reflecting continued acceleration in our core transaction business, improved operating leverage, and out outstanding internal cash returns.

In short, the global eBay market place continues to thrive, providing greater efficiency for sellers and greater value for buyers around the world.

During the quarter, eBay's community of 55 million users traded $3.77b in gross merchandise sales, up 60% year-over-year growth rate, compared to the 51% growth rate in Q3 2001.

This GMS level produced a record $263.6m in online transaction revenues, reflecting a year-over-year growth rate of 73% - an accelerating transaction revenue growth in both the US and the international.

A strong top line performance combined with our continued focus on operating efficiency allowed us to deliver 32% pro forma operating margins record earnings per share and record operating cash flows.

With these strong Q3 results, and momentum into the holiday season, we remain confident in our corporate outlook for Q4 and beyond.

In addition, our recent acquisition of PayPal combined with our accelerated integration plans should help strengthen both businesses over the long term.

I will continue with key financial highlights, then review the balance of our financial results.

Provide some color on PayPal's third quarter performance, and predictive remarks with our latest financial guidance.

Moving along to our key online metrics for Q3, confirmed registered users increased to 54.9 million, up 46% year-over-year increase.

Listings increased to a record 160 million, up 47% from the same quarter a year ago and gross merchandise sales reached a record $3.77b, up 60% from Q3 2001 and an annualized run rate of $15b.

The strong GMS growth rate reflects three important trends - strong and new user growth, increasing activity by existing eBay users and improved convergence rates and average selling prices for our sellers.

Now moving to a more detailed look at our consolidated audited results starting with the top line.

On a consolidated basis, eBay reported a record $288.8m in Q3 net revenues, representing a 49% increase over Q3 2001.

A year-over-year revenue growth was driven by a 73% increase in online transaction revenues, partially upset by a 40% decrease in third party advertising as well as decreases in both end-to-end services and off-line revenues.

Overall, transaction revenues now represent 91% of eBay's total net revenues, up from 78% in Q3 2001.

In the US business, net online transaction revenues totaled $188.3m, representing a 52% year-over-year growth and a third consecutive quarter of accelerating growth.

This rate compared to 48% growth in Q2 and 45% growth in Q1.

The Q3 transaction growth rate in the US reflects solid growth across thousands of eBay categories.

Including net revenues from third party advertising and end-to-end services, total US online net revenues grew 34% year-over-year to $208.5m.

International net revenues grew 152% year-over-year to $76.2m, or 26% of consolidated net revenues.

International transaction revenues grew 153% year-over-year to $75.3m or 29% of consolidated net revenues, was driven largely by strong growth in Germany, the United Kingdom, and South Korea.

I will now review the balance of our Q3 financial results. eBay reported a record growth in profits of $243.4m in Q3, reflecting a 84% gross profit margin, up from 82% in the prior year.

This gross margin improvement is primarily due to strong revenue growth, cost efficiencies in customer support and site operations, and the elimination of lower margin Butterfields revenue.

Q3 sales and marketing expenses increased to $88m, or approximately 30% of revenues, which is consistent to the percentage of revenues in the prior quarter and down from 34% of net revenues in Q3 2001.

The sequential dollar increase in sales and marketing reflects reduction in costs for our Q4 advertising campaign, increased online and off-line advertising support for eBay Motors and eBay Sports and increased international businesses offset by lower expenses after the sale of Butterfield.

EBay's new user acquisition costs continue to be very efficient.

As the company evolves, however, it is important to understand that the overall percent for sales and marketing increasingly consist of programs that both increase the activity of existing users and attract new users to the marketplace.

This trend in marketing expenses is particularly true in the more developed markets such as the United States and Germany.

Product development expenses totaled $24.2m in Q3, are approximately 8% of net revenues compared to 9% of net revenues in Q2 of this year.

The sequential percentage decline reflects an actual increase in total product development spending offset by required capitalization for major site development efforts.

General advertisement expenditures in Q3 increased to $39.4m or 14% of net revenues, which is consistent with that of the prior quarter.

The dollar increase resulted primarily from expenditures to support our international employee base and investments in trust and safety programs, offset by continued improvements in our accounts receivable collection experience.

At the operating income level, eBay reported GAAP income operations of $19.1m, a 176% year-over-year increase.

Pro forma income operations increased to $92.2m, which is 101% higher for the $46m reported in Q3 2001.

The primary difference between GAAP and pro forma growth rate results from the accounting change that ended the requirement to advertised goodwill.

On the combined basis, net interest and other income interests expense to a total of $6.1m compared to the $8.3m reported in Q2 this year.

This net sequential decrease results primarily from an impairment of certain equity investments.

Consistent with our more [upstream] guidance, our pro forma effective tax rate decreased to 36%, whilst 38% was reported in Q2, reflecting increasing profitability in our international operations.

In total, GAAP net income for Q3 2002 was $61m, 224% above the $18.8m we reported in Q3 2001; and GAAP EPS grew to a record $0.21 per diluted share.

Pro forma net income increased to $62.7m in Q3, representing 80% growth from $34.9m we reported in Q3 2001.

Pro forma EPS grew to $0.22 per diluted share - $0.03 better than our most recent guidance and 77% higher than the $0.12 we reported in Q3 2001.

And finally, we exited Q3 with an even stronger balance sheet.

At the end of September, eBay had nearly $2.1b of total assets, including more than $1.4b of cash and investments.

The record earnings level once again led to record cash flows. eBay generated $112m marketing cash flows in Q3, an 82% increase from the prior year period.

Capital expenditures in Q3 totaled approximately $20m, primarily relating to the purchase of site hardware and software.

As a result, free cash flows in Q3 were at $92m, up 96% from Q3 2001.

These cash flows highlight not only the strong growth and increasing leverage in our business, but also the fundamentally low capital intensity of our business models.

Before I provide our financial guidance, I would like to provide a few details on PayPal's Q3 financial performance.

PayPal delivered exceptionally strong Q3 results, driven by strong metrics across the board.

This is entirely consistent with eBay's strong performances quarter [indiscernible] overlapping user base.

PayPal entered Q3 with $19.7m total users that generated $1.79b in total payment volume, a 93% year-over-year increase.

For those who are familiar with PayPal's business, total payment volume is the value of all payment transactions processed in the PayPal system, both on eBay and off.

In Q3, 78% of PayPal's total payment volume came from auction related transactions.

Based on the same volume, PayPal generated $59.3m in total net revenue, representing a 98% year-over-year increase.

At the bottom line, PayPal generated $5.9m in pro forma net income, up from the $1.2m net loss recorded in Q3 2001.

Additional metrics and financial information on PayPal's results are included in today's press release.

Beginning with Q4 of 2002, eBay will report PayPal's results in a separate Payments segment that will include the operations of PayPal and Billpoint until the phase-out of PayPal is completed, which we expect to be in the first half of 2003.

Now, wrapping up with our financial guidance.

We expect the Q3 momentum in our transaction business will continue through Q4 and beyond.

In addition, we are also confident in PayPal's business outlook, and we expect to begin realizing synergies from this important transaction over the next few quarters.

On a consolidated basis, we now believe that net revenues in Q4 2002 could range between $372m and $381m.

Excluding the effect of PayPal, we believe that Q4 net revenues for the core eBay business could range from $312m to $317m.

As you may recall, when we announced the sale of Butterfields, we did not reduce our expectations for Q4, but $6m to $7m of the deal would have contributed.

In a fact, we were able to replace a large part of the deal with higher margin transaction earnings.

In addition to this improvement, we are now raising our Q4 revenue expectations by an additional $4m to $6m.

What this means for the full year 2002?

Is that we now believe consolidated net revenues range between $1.172b and $1.181b versus a $1.1b previous guidance.

This includes $60m to $64m of incremental revenues from the PayPal acquisition.

Excluding PayPal, core eBay revenues in 2002 are expected to range between $1.112b and $1.117b from stronger than expected transaction revenues that more than offset declining advertising revenues and the loss of those future revenues.

On the expense side, in Q4 we expect to increase market spending both in the US and international to take advantage of eBay's continuing evolution as a holiday shopping destination.

We will also make continued investments in the US and international customer support and transportation capabilities.

In the US, we will soon begin rolling out our Q4 marketing campaign.

This campaign includes online spending across hundreds of sites, as well as press and TV advertising throughout the holiday season.

Overseas, we will also increase our overall level of marketing spending in Q4 based on the continuing success of our investments there.

While significant, we believe that these investments will result in continuing strong user growth and demand generation, and can be made while continuing to deliver strong bottom line profitability.

For Q4, we now expect that consolidated pro forma operating margins could range between 27% and 28%, reflecting continued strong core eBay operating margin offset by lower margins of PayPal revenues.

On the bottom line, we expect Q4-02 pro forma earnings for diluted share could range between $0.22 to $0.23, reflecting a $0.01 increase over our earlier guidance, primarily reflecting better than expected performance in the core of eBay's business.

On a GAAP basis, earnings per diluted share could range between $0.19 and $0.20, reflecting approximately $14m in charges for annualization of PayPal's non-goodwill intangibles and staff based compensation.

For the full year 2002, we expect pro forma earnings per share to range between $0.81 and $0.82, representing a $0.04 to $0.05 increase over the guidance we offered last quarter.

And on a GAAP basis, we expect earnings per share to range between $0.76 and $0.77.

For the full year 2003, our consolidated net revenues will reflect a combination of the core eBay business and our new Payments segment.

With this new segment, there are few moving pieces that can be confusing.

So let me take a moment to walk through them here.

The core eBay business is expected to range between $1.47b and $1.52b, which is consistent with our previous guidance of $1.5b to $1.55b, less about $30m from Billpoint as we save up on these operations.

The Payments segment is expected to range between $300m and $310m, which is as the following.

Our current expectations for PayPal fees business, excluding gaming and the assumption that PayPal will incrementally pick up large parts of Billpoint volume and revenues synergies that we expect as we more deeply integrate PayPal onto the eBay platform.

Hence, on a consolidated basis, net revenues for 2003 could range between $1.77b and $1.83b.

On a bottom line, we expect consolidated earnings for fully diluted shares 2003 to range between $1.02 and $1.05, and pro forma earning per share could range between $1.12 and $1.15,

In conclusion, eBay had an outstanding Q3.

These results were made possible by a combination of effective marketing, both in the US and overseas, continuous product innovation, and an unrelenting drive for operational efficiencies.

While these are the building blocks of a good institution, our success would have been incomplete without the part of the millions of businesses working alongside us to create the eBay marketplace.

Building on this trend, our expectations for Q4 and beyond remain strong.

Thank you for joining us today, and we will now be pleased to take your questions.

Thank you, sir.

Ladies and gentlemen, if you would like to ask a question, please press the '1' followed by the '4' on your telephone and you will hear a three-tone prompt acknowledging your request.

If you would like to withdraw your question from the queue you will need to press the '1' followed by the '3' on your telephone.

Once again, ladies and gentlemen, if there are any questions at this time, please press the '1' followed by the '4'.

One moment, please.

Our first question comes from Mark Rowen from Prudential Securities, please go ahead.

Thanks, and congratulations on a nice quarter.

A couple of questions, first, Rajiv, I am just looking at the strong quarter you had where users were up 46% year-over-year, listings 47%, gross merchandise sales 60%, revenue 73% and EPS 79%.

You see a strong progression from users to EPS in the growth rates.

Then, when I look at your guidance for 2003, where it looks like you are guiding EPS up about 40%, which is significantly less than what we have here, I am wondering what the cause for that significantly lower growth rate in EPS is.

Secondly, on autos, in our work we calculated that eBay now is the largest used car marketplace in the country and in the world.

I wondered if you could comment on that and confirm that, and maybe give us the number of vehicles that were sold during the quarter?

In answer to your first question, Mark, regarding 2003 guidance, in pretty much every quarter we make a decision to really balance the needs of the business versus delivering incremental profit.

In Q3 we are now at a 32% operating margin to the existing business.

This, as you will recall, is well ahead of our overall goal of getting to a 30-35% operating margin, which we had laid out to support our longer-term business model.

We think this is actually a very good operating margin, which really has demonstrated the power of the business.

That said, we intend to be around for a long time and we think that it is important to continue to invest in the future.

This includes the technology infrastructure, which includes developers as well as advertising.

We have to think about continuing to build this marketplace to really realize the opportunity that we a head of us.

Mark, I will take the question on the auto business.

We continue to be really pleased with the progress of this business, as you saw from the results.

I think that a lot of that is due to the changes that we made to the site in terms of the insurance program, as well as the increasing of good selling efforts that we are doing especially with the independent dealers, with our partners at autotrader.com.

In terms of the rough number of cars on trade, last quarter it was around 20,000.

Remember that motors are not only cars, but also motorcycles as well as parts and accessories.

There were about 20,000 cars, trucks and the remainder was motorcycles, parts and accessories.

All of these segments has been growing really fast.

As I said in our remarks, I think the reason is that we make this market [efficient], and this buying and selling of used cars, parts, accessories and motorcycles is absolutely perfect for the eBay marketplace.

Great.

What are your plans for Cruise?

Did I see that you were planning to sell that, or is that still a continuing part of the strategy for eBay motors?

No, we have decided to sell that business.

Consistent with our strategy of focusing on the online marketplaces, we have decided that the land-based businesses are not essential to our go-forward strategy.

Cruise was very important in the early days.

I continue to believe that it is one of the reasons that we have been so successful in the car business, in that it set up our credibility in the early days.

However, as we go forward our strategy is a little bit different and I think that Cruise will be more successful as an independent player.

They will continue to be a prefer solutions provider for eBay motors, but it is probably better for eBay to focus on the online activities and let Cruise develop their destiny as the off-line auctioneer.

Great, thank you.

The next question comes from Anthony Noto with Goldman Sachs.

Please go ahead.

Thank you very much.

A couple of question, the first one of which, Rajiv, really pertains to the operating margins.

Now you do not have Butterfields and that we therefore can eliminate the drag it has on operating margins.

The fact that you now start to be profitable internationally, and assuming a 40% U.S. tax rate, I am getting to an international operating margin of about 15%.

That may not be exactly correct.

However, this also implies that you have a 40% operating margin in the U.S. business.

So, my first question is that right?

Do you really have a 40% operating margin in the U.S., if I assume a 40% U.S. tax rate and that you are paying no international tax?

If so, given the state that your business is at, is it possible for your domestic business to reach operating margins greater than 50%?

Then I have a question on free cash flow and capex.

I am glad you give me a pause, because I would not remember all those questions going forward.

On eBay's core business, we have not broken out the operating margins of the different businesses.

I will point out that Butterfields was certainly a lower margins business, but it was on a very small revenue base.

One of the things that we keep reiterating when talking about operating margins is that, to a large degree, operating margins is a constant balance for us between investing and delivering profitability to the Street.

Again, what we think is really important to do is to fill the seats for the future.

We have done that very effectively in the past.

If you think back to 1999, when the operating margins of the business were 4%, we grew that to 12%.

Based on the guidance and riving numbers ahead this is going to be close to the 30-32% operating margin.

We want to demonstrate a continuing progression.

At the same time we want to ensure that the business continues to get appropriate investments.

This is, literally, a decision that we face each and every day, each and every quarter.

Right, I understand.

Is it fair to assume that your U.S. all-in tax rate is 40% and that internationally you are not paying any tax?

Relative to our overall structure, I think it is absolutely fair to say that the tax rate we pay on U.S. businesses is similar to what every other company would have to pay in the U.S.

It is not an incorrect assumption.

We do have a very favorable international tax structure to the extent that the contribution of profits from overseas businesses increases acts to depress our overall effective tax rate.

Free cash flow generation is pretty significant now.

What do you think of the user free cash flow at $90m this quarter?

Also, what are your capex plans for the next year?

And then, Meg, obviously you are accelerating growth sequentially year-over-year.

Could you talk to the consumer behavior in terms of their average spend per year, how that is changing and maybe whether the categories they are buying in per year has grown from one category per consumer to three or whatever the numbers are?

On an overall basis we generated strong cash flows.

We continue to expect to generate strong free cash flows from the business.

We have used this cash to make appropriate investments, including our purchase of the 15% joint venture in Australia.

We have used it for repurchasing our interests in Billpoint that enabled the PayPal transaction.

We think it is appropriate to have some level of cash in the business relative to our overall market capitalization that gives us strategic flexibility.

Beyond that, we are not at the point where we talk about this much more.

We actually do think that this business model is going to continue to generate increasing amounts of cash.

For 2003 capex, we have said that, as a proportion of revenues, the capex is going to continue to be decline.

This year our total capex would have been about $120m, and we expect that, relative to our revenue growth rate, this will decline next year.

With regards to the consumer, you are right, Anthony, in that we saw tremendous strength with the consumer this quarter.

I think that some of our efforts have begun to pay off.

We talked in the past about increasing activity per user, both in terms of the average price they are willing to spend on eBay and also the number of categories in which they shop.

Rajiv mentioned that AFP went up this quarter.

I think that is a result of more comfort with the eBay platform and, by the way, some of the success of our efforts in trust and safety.

In terms of activity per user we have tried really hard to cross-merchandise, whether it be on the home page, the category theme pages or through our direct marketing.

The activity per user actually went up this quarter.

You can see our growth level in terms of GMS per user went to about $68.56 this year versus $62.54 a year ago.

I think that the efforts we have made to make eBay a great user experienc and easier have actually started to pay off in those kinds of measures.

Our next question comes from Mark [Mahaney] from Morgan Stanley.

Please go ahead.

Hi, we have a couple of questions.

First, as for reasonable outlooks for advertising and services, can you give us some color on what we should expect for next year?

Specifically, should we expect the advertising revenue to decline in 2003 versus 2002?

We continue to see a difficult market out there and right now we are actually forecasting a decrease in output of dollars for advertising for eBay next year.

At least for 2003 I would not look for a rebound in that one.

A couple of more questions.

You spoke a little about the conversion rate, Rajiv, and said that it was up.

If you could provide a little color to that it would be great.

For the second question, Meg, you talked a lot about the new initiatives for the fourth quarter, including PayPal, but in marketing effort it is really in some respects going to be a pretty strong online Christmas.

Can you give us a sense of what you think your biggest surprise is going to be when you report your December quarter results, from a directional standpoint?

Relative to the seasonalities, actually, it is true.

If you consider eBay this year versus a year ago, we actually saw an increase in conversion rates.

We were very happy with that, particularly in reflection of the fact that this is a slower period of the business for us.

We had strong improvements in conversion grades, in ASPs and in fact pretty much across all metrics.

Was it pretty much across the board in the different segments?

It was really driven by improved conversion from the U.S. in international, across all our categories.

In terms of the fourth quarter, we are going to say a lot more about that at the Analyst Day.

But, as you know, three years ago no one really thought of eBay as a holiday shopping destination.

They do today, and we want to capitalize on that.

I think we have become much better at the integrated marketing campaign.

We have a really great marketing program online.

I think, by the way, that the industry is going to be very well at the holiday season as well.

So, one plus one could be very good for eBay.

We feel comfortable, though, with the guidance we have provided so far.

In terms of the biggest suprise, I continue to think that our core U.S. businesses will be well and our more mature international markets ought to be able to take advantage now of eBay Germany, eBay Korea and eBay U.K. as a shopping destination.

We want to give everyone a chance to ask question.

So, if you could please try to limit your thoughts to just one question.

Okay, we thank you.

Our next question comes from [Jeetil Patel] of Deutsche Alex.

Brown.

Please go ahead.

Hey guys, actually a couple of questions.

First of all, you have been launching some individual portals as relates to the motor site and sports site.

Do you think we will see more of this type of individual category portals, and have you noticed anything different in terms of customer behavior, i.e. your increased trading and, obviously, sellers putting more products on the site as relates to some of these types of initiatives?

Obviously, motors have been pretty successful up to this point.

Secondly, if you look at new users, can you give us a sense of what percentage of new users are coming from international versus domestic?

If you can break that up to give a sense of what the breakdown is in terms of international versus domestic.

In terms of total users and whether the activity of these new users is increasing relative to what you have had historically, or whether it is the existing user base increasing the amount of transactions on the site.

I will take the first one in terms of marketplaces.

The way we are thinking about this is that we have two main objectives in our marketing strategy.

One is to build the eBay brand and the eBay marketplace.

The second is to become known for a number of specialty sites, if you will, which attract large groups of users who say: 'okay, eBay bought that for me.'

They come to use eBay at first, and then understand all the other categories that could actually be relevant for them.

You can think of it as an overall marketing strategy supported by motors, sports, technology, and home.

We then also have an emerging for the business category as well.

These are the four marketplaces that attract a whole new set of users who say: 'oh, I did not know that eBay was for me.'

It has really worked very well.

As you might have seen, in the last 30 days we had a very nice integrated launch on the home page, in [trans], on radio and with PR and is paying really nice dividend.

On the user front, in answer to your question, on an overall international now counts for little more than a third of our total user base.

On a quarter-to-quarter and month-to-month basis, the number of users who are coming to both U.S. and international is about even - approximately the same contribution from both U.S. and international.

Our next question comes from [Lionel Safarastrew-ph] from Piper Jaffray.

Please go ahead.

Yes, good afternoon.

A quick question first on AOL's new initiative that they may be launching a marketplace that could potentially compete.

Could you talk about the competition as you see it from these new marketplaces.

What Amazon has, going beyond music and video, and what AOL is thinking about launching?

Also, what is the potential impact if your traffic relationship were to terminate.

As far as competitiveness is concerned, from the beginning the best minds and brands have competed in this space, and I do not think that is going to change.

We do not know a lot about AOL's new classified ads site.

We will see more when it launches and how competitive it really is.

I cannot give you too much more color on that.

We continue to have a strong relationship with AOL.

We are one of the largest advertisers on the AOL network and continue to be.

We love the traffic they deliver to us and they continue to sell our ads.

We will see. eBay has now become a destination in itself.

We have many marketing partners.

I think AOL is going to continue be a strong marketing partner of ours, because we are one of their largest customers now on a worldwide basis.

Overall, I would say that the relationship is very strong.

Our next question comes from Sean [Milmy] from Soundview Tech Group.

Please go ahead.

Thank you very much.

Just a really quick question.

Meg, you talked a little bit about [BMW] doing better in the quarter.

I was wondering if you could give us an update on Half.com integration and what you see six to twelve months for Half.com and how it works with eBay going forward?

Half.com had a very strong quarter, as we said on the call.

Cashbooks are a very sweet spot for Half.com and a lot of the changes we made to the site in terms of cross marketing between eBay and Half.com is starting to pay off.

We are very pleased with Half.com.

Over the next twelve months we want to try and bring the best of Half.com to eBay.

The user integration is done.

We have all of the names reconciled.

We will bring the best of Half.com to eBay, including this whole ease of listing.

We are excited about that.

What about Half.com the brand if you look out a year from now?

I do not know, exactly.

If we are able to migrate the best functionality to eBay perhaps the Half.com brand will not be necessary.

However, Half.com, I have to tell you, has quite a loyal following, so it is a little early to tell.

I think it is the users who will end up telling us the right thing to do on that.

Our last question for today comes from Derek Brown from WR [Hambrek].

Please go ahead.

Hi, just wondered if you could provide us with an update on connection to eBay and where that stands in development, customers using it and what sort of timeline we might expect to see as a product from that?

We are excited about the partnership with Accenture.

We announced it in May and they are working alongside us on a new product called 'Connection to eBay.'

The objective is to help large retailers and manufacturers sell effectively on eBay.

As we have learned that really requires a full outsource solution.

We are working away, and there are a number of sellers who are up on eBay in a test mode.

It is a bit of a long sales cycle, because these are very large companies.

We are excited about that.

In addition, you cannot forget about return by channel advisors, and a number of the other POPs] who are also working with [median five] for large businesses helping them sell on eBay.

This is an emerging part of our business.

I also think the introduction of pure fixed price in the U.S., where it is a lot easier to list a large number of items in one listing, will also help these big sellers.

Okay, thanks.

Okay, is that the last question, operator?

Yes, ma'am

Okay, thank you very much for joining us.

We appreciate your time.

Ladies and gentlemen, that does conclude your conference call for today.

You may disconnect, and thank you for participating.