eBay Inc (EBAY) 2002 Q4 法說會逐字稿

Ladies and gentleman, thank you for standing by.

Welcome to the eBay Q4 2002 earnings conference call.

During the presentation, all participants will be in a listen-only mode and afterwards we will conduct a question and answer session.

At that time, if you have a question, please press the one followed by the four on your telephone.

As a reminder, this conference is being recorded, Thursday, January 16th, 2003.

I would now like to turn the conference over to Mr. Mark Roobask (ph), vice president of finance.

Please go ahead, Mr. Roobask.

Thank you, and good afternoon.

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

Joining me are Meg Whitman, our president and CEO, and Rajiv Dutta, our chief financial officer.

This conference call is also being broadcast on the Internet and is available through the Investor Relations section of the eBay website.

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 uncertainty, including those related to the company's ability to grow its business and user base.

Our actual finance results could differ materially from those discussed during this conference 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, both in specific vertical categories and generally; to manage the integration of PayPal and the litigation, regulatory credit card association, and other risks specific to PayPal; to manage our other regulatory tax and litigation risks, even as our product offerings and geographies expand; to maintain site stability on all of our sites; to continue to expand our model to new types of merchandise and sellers; and to continue to expand outside of the U.S.; as well as the timing and commercial success of new features and functions added to our websites; the success of the company's commercial partners and commercial relationships, and the cost and benefits of announced and prospective joint ventures, acquisitions and other commercial transactions.

More information about potential factors which could affect eBay's business and financial results is included in eBay's annual report on Form 10-K for the year ended December 31st, 2001, quarterly reports on Form 10-Q and other SEC filings and prospectuses.

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

We'll 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, over to Meg.

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

Every so often, a thriving company comes to a defining point in its history, a time when all moving parts clearly combine to demonstrate the business' true potential.

These moments are usually a springboard to the success that lies ahead.

When shareholders, analysts and customers look back at these moments, they realize they witnessed something quite special. 2002 was such a time for eBay.

By almost any metric you examine, whether it's gross merchandise sales, new user growth, transaction revenues or operating margins, the company achieved extraordinary double-digit growth.

But more than that, we have outstanding momentum we achieved in 2002 fully validates our long-term strategy and now sets the stage for all that we hope to accomplish in the months and years ahead.

Now, let me give you some perspective on our 2002 results.

Gross merchandise sales, or GMS, which is the value of all the items sold on the site totaled $14.87 billion in 2002, a 60% increase over 2001.

For the first time in our history, net revenues surpassed $1 billion, totaling $1.21 billion for the full year, representing 62% annual growth.

Registered users grew to more than 61 million during the year, an increase of 46% over the prior year, and those users listed more than 638 million items in 2002, a 51% increase from 2001.

These statistics show that the eBay marketplace is a business powerhouse fueled by the unlimited potential of a global army of individuals and small merchants.

But the most important development in 2002 for eBay's long-term success were our achievements in managing the marketplace.

For the first time this past year, eBay's employees began pulling in a coordinated fashion all the levers that make our marketplace really tick, and the results were fantastic.

Our work in category structure and management, as well as our bold steps in marketing contributed to transaction revenue growth excluding payments of 73% over the course of the year.

Exporting eBay to markets around the world created new avenues for growth.

In 2002, 28% of our online revenues, excluding payments came from our international operations.

Investing in the fixed price format opened up the platform to new items and new users.

In 2002, 21% of our GMS came from the fixed-price format.

Our strategic acquisition of PayPal is already bearing fruit, as you can see from this quarter's results.

And building our management team has brought new expertise to the breadth and depth of talent growing the business, and to cap it all off, eBay's performance in Q4 was nothing short of phenomenal.

Let me give you just a couple of examples.

GMS for the quarter totaled $4.6 billion, which represented 68% year-over-year growth.

Online transaction revenues in Q4 came to # $396.5 million, an amazing 122% growth year over year and the third sequential quarter of acceleration.

Pro-forma operating margins held at 32%, consistent with Q3 even as we absorbed a full quarter of the lower margin PayPal business, and operating cash flows totaled $182.9 million, an increase of 119% from the prior year period.

As a result of Q4's better than expected results, we're updating our guidance for 2003 and Rajiv will give you more details on that in just a minute or two.

Now, eBay's impressive Q4 performance was the result of three key factors - first, the growing acceptance of e-commerce.

The fundamentals of Internet usage have grown at a steady clip for the past several years.

More people are coming online than ever before and more Internet users are shopping each month, both in the U.S. and around the world.

According to the e-spending report from Goldman Sachs, Harris Interactive (ph) and Nielsen net ratings, online spending this holiday season jumped more than 24% year over year are and shoppers stated that more than 16% of their holiday budgets were slated for online purchases.

This record level of e-commerce activity clearly demonstrates that consumers are growing increasingly familiar and comfortable with shopping online, a trend that bodes well for online commerce in general.

It truly was a very merry e-Christmas.

Second, eBay became a mainstream shopping destination this holiday season.

Our marketplace provided an unparallel (inaudible) in Q4, and as a result, eBay was the number one shopping destination on the Internet for each of the last eight weeks of the year as measured by weekly unique visitors.

Thanks to our millions of entrepreneurial sellers.

In Q4, buyers found greater selection and value on eBay than ever before.

The breadth and depth of items available on the site fulfilled the needs of a much broader audience, making nearly every shopper's visit to the site a rewarding one.

Third, almost every part of the business was focused on delivering the best holiday experience for our community of users.

Our strategy of helping users become more successful produced greater than anticipated results in Q4 across the board.

Through category management, product development, merchandising and marketing, we created programs that benefited sellers, helped buyers and accelerated trading on the marketplace overall.

Our efforts created a nearly perfect holiday season on eBay.

Carefully managing our categories continues to be an important way we grow the business.

Because of our ongoing seller education program, our users listed more items in Q4 than ever before.

Marketing not only attracted new users but spurred activity per user.

As a result, every category experienced double-digit GMS growth sequentially as well as year over year.

Not surprisingly, holiday-related categories performed extremely well in Q4.

Gross merchandise sales for books, movies and music grew 54% year over year.

Jewelry increased 68%.

Clothing and accessories increased 107%, and home and garden jumped 132%.

Toys and consumer electronics, which I'll discuss in a minute, also saw healthy growth this quarter.

Perhaps more interesting is the fact that categories not typically associated with gift giving also demonstrated strong growth this quarter.

Gross merchandise sales for eBay motors, for example, jumped 102% year over year during a seasonally slower period for motors.

Collectibles grew 21% year over year.

Coins and stamps rose 74% year over year, and one of our newer categories, business and industrial increased 70%.

Now, let me highlight some of the elements that made our holiday plans this quarter so successful.

Q4 presented opportunities for new seller programs in a number of categories.

In toys, for example, our in-house team spent time with retailers, manufacturers and other industry experts to come up with our 20 hot toy picks.

In October, we unveiled this list to our community, which gave them a chance to share in the annual toy-selling frenzy.

Our efforts met with great success.

As a result, listing for Fur Real Friends, for example, one of the most sought-after toys of the season jumped from 91 listings in October to nearly 6,000 in early December.

GMS for the toy category overall grew 44% year over year and the category hit a record 1.1 million new listings in the first week of December, and many items attracted more than 30 bids apiece.

In consumer electronics, another popular holiday category, we staged a test program for free shipping.

We encouraged sellers in that category to offer free shipping as an added buyer incentive that we could then promote on the home page and throughout the site.

The test was a great success.

At its peak, there were more than 60,000 listings that offered free shipping.

Buyers saw this as an added value and bid higher, and # sellers saw greater revenue per item.

This no doubt contributed to the overall growth in consumer electronics.

GMS rose 63% year over year.

Programs that helped sellers also, of course, benefit buyers especially those features that help make trading on eBay faster and easier.

In Q4, we launched gift services which allowed sellers to offer gift wrapping, sending items directly to gift recipients and expedited shipping.

Sellers advertise these services with a special gift icon and the items were heavily promoted on the home page.

In addition, buyers were able to search directly for items with those services.

Sellers liked the additional exposure on the site while buyers liked being able to buy, pay, and ship right away, which was especially useful for last-minute shoppers.

Boosting the vibrancy of trade during the season was also a priority.

We saw record new user opposition and site traffic in Q4, due in part, we believe, to the integrated marketing campaign and its combination of off-line and online elements.

EBay's television ad campaign with the tag line, "do it eBay" ran from November 11th through the end of the year, supported by print ads and extensive holiday publicity.

Defining eBay as a broad marketplace for almost any kind of item, the campaign raised unaided awareness of eBay as a shopping destination by nearly 50%.

The campaign also encouraged trial among those who had never visited the site and reminded current users to try eBay again.

After the campaign began, weekly unique visitors increased 17% and the number of active users jumped 33% year over year.

Once visitors landed on the home page, our onsite holiday merchandising helped them quickly find what they were looking for.

Echoing the "do it eBay" theme, our promotions highlighted key categories in an online catalog, specific hot gift items such as toys and the convenience of buy it now, PayPal, and gift services.

This integrated approach increased traffic throughout the site and boosted user activity levels.

The online catalog alone generated three times the bids of a typical home page promotion.

The fixed price format also played its part in fueling the high volume of trade this season.

The convenience and speed of our (inaudible) buy it now, pure fix price and Half.com were heavily promoted throughout Q4.

Buy it now was actually featured in one of the three TV spots we ran nationwide and all three options were included in our onsite merchandising.

So it's no surprise that by the end of Q4, fixed price accounted for 24% of our GMS, up from 19% a year ago.

Pure fixed price which allows sellers to offer an item at a set price without an auction accounted for twice as much GMS during the holiday season than it did in October.

As a result of the marketing campaign, online promotion and seller programs, we were actually able to stretch the holiday season this quarter at eBay.

We began earlier this year with a promotion for holiday decor in early November.

We extended our promotions later because of buy it now, PayPal, and gift services.

And last-minute gifts that don't require shipping, such as gift certificates, magazine subscriptions and vacation packages allowed us to promote holiday shopping right through Christmas Eve.

Gross merchandise sales clearly benefited as a result.

Throughout November and December, GMS in the U.S. was consistently higher than the same period in 2000 and 2001, especially the week before Christmas when GMS was 48% higher than the same week in 2001.

Now, of course, the trends that helped boost growth in the U.S. in Q4 were also present in other parts of the world.

EBay's profitable international business, excluding payments, grew at a remarkable rate, showing extraordinary year over year revenue growth of 172%.

International operations now account for 35% of the company's gross merchandise sales and 27% of its transaction revenue.

Holiday shopping helped fuel this growth in nearly every market.

Taking a page from the eBay.com playbook, eBay UK launched an integrated holiday campaign around the theme, "be inspired this Christmas."

Direct mail, online advertising and PR brought new and current members to the site while onsite merchandising helped to make shopping easy.

As a result, new users on eBay UK grew # 168% year over year.

Listings grew 109%, while GMS jumped nearly 200% from the prior year period.

EBay Germany delivered outstanding results this quarter, as well.

Taking advantage of a strong, online holiday season with its own integrated marketing campaign, eBay Germany saw triple-digit growth in a number of key metrics.

And in a first for eBay international operations, eBay Germany generated more than $1 billion in gross merchandise sales in Q4, an increase of 177% year over year.

Transaction revenue also jumped significantly by 199% year over year.

At the same time, new users grew 125%, and listings 120% compared to the same period last year.

Now, naturally, a strong quarter for e-commerce is good for online payments.

Now, integrated into most functions on eBay, PayPal was also a regular feature in our holiday promotions.

The convenience and safety of paying with PayPal made holiday shopping on eBay easier than ever, boosting results for both companies.

PayPal ended Q4 with 23.3 million users, an 82% jump year over year.

Those users generated $2.1 billion in total payment volume, a 77% year over year increase, and in Q4, 66% of PayPal's total payment volume came from eBay and other online trading sites, a 23% sequential increase; while the portion of total payment volume that came from all eBay businesses, excluding gaming, showed an 18% sequential increase.

In a record-breaking quarter, like Q4, the technology to keep eBay running smoothly is put to the test and just as we expected, our technology infrastructure more than rose to the occasion.

At peak usage, the site supported in one day 533 million page views, 67 million searches, 6.8 million bids and 3.7 gigabits of outbound data per second.

During the busiest week, there were nearly 18 million listings on the site, # more than 40% greater than the year's average.

The ability to support this surge in activity was made possible by our dedicated technology team and the ongoing investments we have made in this area, such as B-3, our next generation architecture.

Invisible to our users, B-3 is delivering ever greater levels of dependability, scalability and productivity.

If 2002 was a defining year in eBay's history, then it was the year made possible by our loyal community of users and our dedicated employees.

Make no mistake about it, what is happening at eBay is really quite remarkable.

Few businesses today can achieve 122% year over year transaction revenue growth, while at the same time investing for the future.

That level of success is being reached one transaction at a time by buyers looking for practically everything and sellers building businesses with passion and innovation.

And if our community is making eBay the shopping destination on the Internet, then eBay's employees are leading the charge providing the kind of support, marketing and technological innovation our users need to succeed.

2003 holds tremendous promise for eBay.

Our plan is to invest even more in the areas that make 2002 and Q4, in particular, such a success.

In 2003, you're going to see eBay's seasoned management team focus heavily on marketing and promotional activity to accelerate trading on the site.

You're going to see product development advances that make it easier for our users to trade and technology innovations that expand the platform itself.

We're going to build payments, customer support and trust and safety so that users can enjoy an even better experience than they do today.

We're going to invest heavily in international to tap the huge potential that appears to be the hallmark of Germany, the UK, Korea and so many of the other markets we've entered, and we're going to do all of this with the same financial discipline that we've always shown.

In short, our focus on execution in 2003 will be relentless.

Working together with our community, I believe eBay is poised to become one of those great companies that come along only rarely in a generation.

To put it mildly, I couldn't be more excited about our future.

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

Thanks, Meg.

In the routine reporting of eBay's quarter-to-quarter performance, it is easy to overlook the larger trend shaping our future.

Earlier, Meg referred to 2002 as a defining moment in eBay's history and reflecting on this year, and Q4 in particular, I could not agree more.

The year was characterized by execution, investment, and performance.

Individually and in the aggregate, these accomplishments have broadened and strengthened the company across many dimensions.

Every aspect of the business reflected this focus on execution.

In every quarter throughout 2002, the core U.S. business saw accelerating year-over-year revenue growth.

In 2002, eBay's international business excluding payments grew by 172% over the prior year.

And following our recent acquisition of PayPal, over 80% of eBay U.S. listings now offer the option of electronic payment.

And as we ended the year, Q4 transaction revenues accounted for 96% of our total revenues, reflecting a strategic focus on our core transaction business, de-emphasizing online advertising revenues and making the tough decisions to exit several businesses.

We have often reiterated our strategy of balancing returns with appropriate investment to capitalize on the company's long-term opportunities - 2002 was no exception.

Investments this year included a significant enhancement of our technology infrastructure, several customer support and trust and safety initiatives, considerable focus in various product enhancements and as we approached the holiday season, an integrated marketing approach that included the large-scale use of mass media for the first time in our history.

It is a testament to the inherent profitability of the eBay business that we were able to make these investments that provide long-term returns to our shareholders while at the same time deliver even greater levels of revenues, profits and cash.

Including one quarter of PayPal's operations, the company's total net revenues for 2002 grew by 62% over the prior year to more than $1.2 billion.

Excluding PayPal for the full year, eBay reported a pro-forma operating margin of 32% as compared to 24% a year ago - an increase of 8 percentage points - even as the company grew revenues across new categories, formats and geographies and made strategic long-term investments.

And as we have pointed out before, in eBay's case, these operating margins are quickly reflected in cash flows given the company's unique business model that's acquired minimal amounts of working capital and fixed assets.

Total operating cash generated in 2002 amounted to $480 million and free cash flows in 2002 were $341 million.

So what exactly accounted for eBay's success in Q4?

On the top line, eBay reported consolidated Q4 revenues of $413.9 million, which represents 89% year over year growth.

Relative to the guidance we provided at our analysts here in October, this is up $33-$42 million better than expected.

Let me highlight two elements that contributed to this great net revenue performance.

First, as Meg described, Internet and e-commerce fundamentals are strong, which represent a rising tide for all players.

And second, the investments that we made across the business, which were successfully executed by a team around the world, moved the dial.

In Q4, we increased our quarter over quarter sales in marketing investment by $17 million in the core eBay business, primarily to support our integrated marketing campaigns.

We also invested in product development, fixed price, and PayPal integration, making eBay a more relevant holiday shopping destination.

What this translated into was strong growth in three core drivers: new registered users, the number of existing users who were active, and the average activity of these users in terms of gross merchandise sales.

During Q4, eBay added 6.8 million new confirmed registered users.

Active users, which we define as all users on the eBay platform who have bid, bought, or listed over the trailing 12 months increased to 27.7 million - this was up from 24.2 million last quarter.

And these active users spent more on the platform.

Gross merchandise sales for active users over the trailing 12 months increased to $513 in Q4 compared to $487 a year ago.

And these complimentary trends played out across our business segments.

In the U.S. business, excluding PayPal, our users generated $3 billion in Q4 gross merchandise sales, a 47% year-over-year increase.

This GMS volume drove a 58% increase in U.S. net online transaction revenues over Q4 2001 to $211.4 million, representing the fourth consecutive quarter of year on year acceleration.

By peeling these results back another layer, what is evident is that the growth in the core eBay U.S. business was broad based across many categories including collectibles, toys, jewelry, consumer electronics and motors.

In fact, every top-level category in the U.S. saw strong, double-digit year on year growth.

Our fixed price offerings also contributed to this success.

Fixed price had an increasing impact on the U.S. business throughout the quarter and in the month of December.

Fixed price represented 24% of U.S. gross merchandise sales.

In the international business, our users generated $1.6 billion in GMS, which was up 133% over the prior year representing an accelerating growth rate.

This gross merchandise sales volume powered 173% year over year increase in international transaction revenues to $107.4 million.

Here too, strong results were evident around the globe.

Internet Auction Company in Korea will be reporting their results next week.

And in the payments business, as Meg mentioned, PayPal delivered exceptionally strong Q4 results driven by strong metrics across the board.

Sixty-six percent of PayPal's payment volume came from eBay and other online trading sites, up from 58% in Q3.

In turn, this # increased eBay U.S. addressable gross merchandise sales penetration to 51%, up from 44% in Q3.

And based on this payment volume of $2.1 billion, PayPal generated $72.6 million in total net transaction revenues.

Including the $5.1 million in net revenues from bill point, total net transaction revenues from our payment segment was $77.7 million.

And as we have previously disclosed, bill point operations will be completely phased out during the first half of 2003.

These record revenues with a continued focus on operational efficiency led to outstanding bottom line results.

In the core eBay business, which excludes PayPal, gross margins in Q4 increased to a record 86%, up from the 84% gross margin achieved in Q3.

This gross margin was achieved while we continued to make investments in our worldwide customer support organization and technology infrastructure.

Total operating expense for the core eBay business totaled $174 million in Q4, representing 51% of eBay net revenue, down from 52% of revenues in Q3.

This leverage was achieved even as we rolled out our largest-ever integrated marketing campaign, including more than $14 million in TV advertising.

At the operating income level, the core eBay business reported record pro-forma income operation was $117.2 million, representing a 35% pro-forma operating margin.

In the PayPal business, we also saw strong operating performance.

PayPal delivered gross margins of 54% in Q4, reflecting the expected impact of a four percentage point sequential increase in credit card funding mix, holiday seasonality and exit from the gaming business, and integration with the eBay platform.

In Q4, PayPal operating expenses totaled $25 million, or 33% of net revenues.

Complimenting this inherent operating leverage was the notable improvement in the transaction loss rate, which declined from # 42 basis points in Q3 to 37 basis points in Q4.

As a result of strong payment volume and revenue growth and solid operating leverage, PayPal's Q4 pro-forma operating profit totaled $15.2 million, or approximately 20% of net revenues.

On a consolidated basis, eBay reported record GAP (ph) income from operations of $113.9 million, 174% year on year increase.

Pro-forma income from operations increased to a record $132.4 million, a 139% higher than the prior year.

The difference between GAP and pro-forma amounts results from $12.1 million in amortization of acquired intangibles largely relating to PayPal, $5 million for stock-based compensation, and $1.4 million in payroll taxes on employee stock option exercises.

Consolidated net interest in other income and interest expense totaled $24 million, which compares to $6.1 million supported in Q3 of this year.

Excluding the gains on the sale of crude international, certain butterfield's (ph) properties and certain other equity investments, pro-forma net interest and other income and interest expense totaled $6.6 million, up from the $6.5 million reported last quarter.

Our pro-forma effective tax rate for the quarter was 36%, consistent with the prior quarter.

In total, GAP net income for Q4 totaled $87 million, a 235% increase over the prior year, and GAP EPS grew to a record 28 cents per diluted share.

For the full year 2002, GAP net income totaled $249.9 million, a 176% increase over 2001.

On a pro-forma basis, Q4 net income totaled $87.6 million, a 128% increase over the prior year.

Pro-forma EPS also grew to 28 cents per diluted share, approximately double the 14 cents we reported in Q4, 2001.

For the full year 2002, pro-forma net income totaled $254.9 million, an 85% increase over the prior year.

And, of course, these record earning levels, once again, led to record cash flows.

EBay generated $182.9 million in operating cash in Q4, a 119% increase from the prior period.

Cap-ex in Q4 totaled approximately $44 million, primarily relating to the purchase of site-related technology and expansion of our data warehouse environment and the buildout of PayPal's new customer service center, as well as the required capitalization of certain product development costs.

As a result, free cash flows in Q4 were a record $138.6 million, up 98% from Q4, 2001.

These cash flow levels illustrate the key strengths of eBay's business and financial model: growth, leverage and low capital intensity.

In short, eBay had a terrific year that was marked by accelerating growth in the fourth quarter.

This particularly strong momentum has caused us to re-evaluate our expectations for the year.

That said, it is important to recognize the impact the holiday season had on our Q4 results.

Our earlier analyses indicate that the same dynamics that triggered better than expected Q4 results may also signal a shift in seasonality for eBay that increasingly reflects a blend of retail and historic eBay patterns.

In addition, eBay's success has not gone unnoticed.

Going forward, we also expect to see increasing competition in the U.S. from a variety of companies across several vertical categories.

Even taking these factors into account, however, we now expect that consolidated net revenues for 2003 could be as much as $70 million higher than the upper end of our previous guidance to a new total of $1.9 billion.

This net revenue upside is balanced and it derives from the strength of our U.S., international, and payments businesses.

From a quarterly perspective, we believe that 2003 net revenues to be about $440 million in Q1, $460 million in Q2, $480 million in Q3, and $520 million in Q4.

Without question, this is a very positive revenue outlook.

And to ensure that we capture this business momentum to the greatest extent possible, we will invest heavily in Q1 and throughout the year in the same areas that contributed to eBay's success in 2002: product development, technology, customer support, trust and safety, and marketing.

While significant, we believe that these investments will result in continuing strong user growth and demand generation, and can be made while raising the bar on financial leverage.

As a result, we now believe that excluding certain charges, the company's pro-forma earnings per diluted share for the full year 2003 could be as high as $1.27, 12 cents higher than the upper end of the range we had previously indicated.

From a quarterly perspective, we expect pro-forma earnings per diluted share to be 30 cents in Q1, 30 cents in Q2, 31 cents in Q3, and 36 cents in Q4.

This earnings distribution reflects both our natural seasonality, as well as a pattern of investment that we intend to make in 2003.

I would also like to note that these earnings per share expectations imply higher operating margins for 2003 than our previous guidance had implied.

This primarily reflects better than expected performance in the core eBay business.

In addition, we anticipate a decline in our 2003 effective tax rate to 34% due to the increased profit contribution from our international business.

On a GAP basis, we expect earnings per diluted share could be as high as $1.12, 7 cents higher than the upper end of our previously-guided range, and from a quarterly perspective, we expect GAP earnings per diluted share to be 26 cents in Q1, 27 cents in Q2, 27 cents in Q3, and 32 cents in Q4.

In summary, at the core of eBay's success in 2002, we had a very powerful formula: an unwavering commitment to business execution and financial discipline; the passion and constant innovation of our community; the skill, knowledge and creativity of the world-class team of employees; and the emerging promise of e-commerce.

In our view, this is the formula for continuing success, and as we enter 2003, our confidence in the future could not be greater.

Thank you for joining us today.

We would now be pleased to take your questions.

Thank you, sir.

Ladies and gentlemen, if you would like to ask a question at this time, you'll need to press the one followed by the four on your telephone, and you'll hear a three-tone prompt acknowledging your request.

If you would like to withdraw your question from the queue, you'll need to press the one followed by the three on your telephone.

Once again, ladies and gentlemen, if you have any questions at this time, please press the one followed by the four.

Our first question comes from the line of Anthony Noto with Goldman Sachs.

Please go ahead.

Thank you very much and congratulations.

Rajiv and Meg, obviously a lot of positive things going on.

I was wondering if you could comment a little bit on the relationship and revenue derived from branded retailers and manufacturers.

I know that was still a small piece of your business, but obviously with the mainstream adoption and purchasing that's going onsite, there must be increased demand.

I was just wondering how much supply and partnerships you accomplished there in the quarter.

Rajiv, you may have mentioned this, I may have missed it, but could you give us an update on cap-ex for 2003 and the impact on the free cash flow objective that you had talked about during the earnings date.

Then, Meg, just lastly, as you're looking at '03 with so many positive things going your direction, what worries you the most about 2003?

Thanks.

Okay, Anthony, let me answer the big business question.

You know, big sellers are continuing to experiment and grow their business on eBay, and that has been helped, actually, by the API (ph).

You might know that December marked the second anniversary of the API.

We now have over 200 license fees and over 100 live acts on the API, and that has really helped the big merchants.

In addition, the fixed price format has really helped the big merchants, because they can now sell large quantities of single items, whether it's through the wholesale lots or through the pure fixed price format - and we saw that activity actually in Q4 and continue into Q1 a bit, as well, so it is slow and steady progress.

We remain excited about that channel, but still today, you have to remember that you know, eBay is the home of small business primarily.

And, Anthony, from a cash flow perspective - so total cap-ex, if you look back at the full year 2002, was about 11% of revenues, and as we look forward into 2003, as I've said before, we expect those to decline as a percentage of revenues and it's probably in the order of somewhere, you know, just short of about $200 million for the year.

And what this implies, if you sort of take a look at our, you know, the guidance that we provided for operating income, this implies operating cash somewhere in the neighborhood of between $750-$800 million and free cash of between $550-$600 million.

In terms of what we're focused on, you know, it's really about execution in 2003.

We will increase the number of employees.

International becomes even more important next year, and just focusing on making sure that every new employee has the eBay DNA, understands how we do business, understands the importance of the community of users.

Making sure we have the back-office infrastructure in place to handle this accelerating growth is really what we're focused on, so no real change in strategy.

No - nothing external that worries me anymore than it always worries me.

I - you know, it's really all about execution, dotting the i's and crossing the t's.

Great.

Thank you very much.

You're welcome.

Next question.

Our next question comes from the line of Mark Rowen with Prudential Securities.

Please go ahead.

Thanks, good afternoon.

First of all, congratulations on the quarter.

Second of all, thanks for wreaking havoc on my model with the PayPal acquisition.

Rajiv, a couple of questions on PayPal.

One, you said that the penetration rate went to 51% from 44.

Did that 44 include bill point, and does the 51% include both?

And second, could you give us a little more detail on the source mix and the withdrawal mix that caused the gross margin increase there?

And then, another question, can you just give us, Meg, an update on some of the newer markets, particularly in Europe and what's going on there.

Thanks.

Okay.

So your first question about PayPal, so - in fact, the overall penetration on eBay U.S. had indicated it was up to 58% of PayPal's volume came from on - off the eBay volume, a bit of that volume came from eBay U.S.

And in turn, what happened is that eBay U.S. addressable GMS went from 51%, that was up from 44%.

So this was very, very positive, and it's largely the result of the PayPal integration that we put into place, you know, very early on, both acquisition on the fourth of October.

And this does not include bill point.

Bill point separately was about $5.1 million.

So if you included both of them together, just the payment transaction revenue that was done through a payment mechanism, what was it last year versus this year, and was there an increase?

There was a very significant increase, and in fact, Mark, what I'll direct you to is one of our attachments to the press release that actually has the numbers for PayPal.

You can add the two of them up together and come to that answer.

Okay.

Terrific, thanks.

In terms of the newer markets in Europe, obviously, the big growth engines in terms of absolute GMS and absolute transaction revenues, it's the UK and Germany, but we are really pleased with the progress that Italy, France, Spain, (inaudible) and the Netherlands have made.

The eBay formula is working - the teams there are applying it, and we're starting to see some really nice momentum, and I think those countries will, you know, really start to hit their stride in 2003 and 2004, but we're really pleased with their progress.

And, Mark, can you repeat your question on funding mix again?

Yes, on PayPal, the source mix - in other words, how many people pay by credit cards or the percentage of people versus PayPal transfer or bank transfer, and then the withdrawal mix, which I'm assuming was part of the reason for your gross margin increase or outperformance at PayPal?

Well, actually the overall credit card mix declined by about 4% to 54% in Q4.

It actually increased, deteriorated by about 4%, and the reason for that, of course, is a couple of things - one is holiday seasonality, the second is that - remember that PayPal exited the gaming business, which is almost entirely bank payment, and the third is the integration onto eBay, and we know that new users tend to be largely credit card oriented.

Okay.

So what caused the gross margin increase if the mix deteriorated then in PayPal?

To a large extent, volume, and this is absolutely a business that does benefit from volume.

Okay.

Great.

Thank you.

Our next question comes from the line of Mary Meeker with Morgan Stanley.

Please go ahead.

Yes, thanks.

Can you hear me?

Rajiv?

Yes.

Okay, great.

Sorry about that.

First, can you give us a sense of how big used was as a percent of total?

Second, your new marketing efforts based on the strength in user growth and the improvement in unaided brand awareness certainly are working.

What's working best?

And do you have increased confidence post the fourth quarter efforts and momentum that this is going to continue to drive new user growth and also incremental revenue growth?

And then the third question is, can you give us an update on conversion rates?

Thanks a lot, and congratulations.

In terms of use, Mary, we have actually not done the statistical analysis of exactly how much was used versus how much was, you know, end of life, overstocked, returned.

My sense is that we had, you know, probably a slight uptick in the overstocked, liquidated kind of area on eBay.

You know, it is - traditional holiday shopping is more focused on products at least that are new in box.

They may not be new in season, but new in box.

So I would say probably as a percentage used went down as a percentage of the total.

In terms of marketing, what's working?

I have to tell you, I think actually this whole notion of an integrated campaign worked really well wrapped in the do it eBay wrapper.

So TV worked with the print ads, print ads worked with our onsite, you know, traffic development efforts with AOL, with, you know, a host of partners driving traffic to eBay's home page.

And then good news is, once we got them to eBay, the site worked harder than ever, and that was very useful.

It was useful for bringing new users, the activities for existing set of users, and the GMS per active user picked up really nicely.

So we're - I think it is very hard to isolate.

Well, if you just didn't do one thing, what would have happened?

I think it is the integrated effort which really got eBay into the consideration set in a way that had never occurred before.

So do it eBay is with us for a while, and you will continue to do iterations on it?

Yes, do it eBay is with us for a while.

We are re-evaluating now our marketing plan for 2003, where we will do more TV than we had previously anticipated.

In fact, I think there's a good chance we will do the TV in virtually every quarter this year because it did work so well, both in bringing new users and sort of bringing eBay to the daily consideration of, check eBay first before you buy anyplace else.

Okay.

And conversion rates?

Well, conversion-rates, Mary - you know, one of the really interesting things about Q4 was that even as we saw a massive increase in the amount of listings, conversion rates actually held.

And one of the things that is absolutely true for conversion rates, and Q4 was no exception, is there tends to be a natural equilibrium around conversion rates and it tends to be quite stable, and Q4, you know, was completely in keeping with the seasonal trend.

Okay.

Great.

Thanks, Meg, Mark, Rajiv.

Thank you.

Our next question comes from the line of Lanny Baker with Salomon Smith Barney.

Please go ahead.

Lanny Baker with Salomon Smith Barney, your line is now open.

Please go ahead with your question.

Thanks a lot.

I'm curious about your free cash flow.

It looked like in the last 12 months, your operating income and your free cash flow are running about the same level.

Do you - you know, how long do you think that continues?

When do the tax benefits of the lost - you know, lost carry-forwards expire?

And I think you've talked about getting to a billion dollars in free cash in a couple of years.

Are the tax benefits still in place in that time period?

So I think the answer is, Lanny, that, you know, we certainly have calculated in the benefit of tax benefits in 2003, but it is unpredictable going forward.

Generally speaking, as we look at this business model, there's just a couple of things that are absolutely true today, will remain true in the future, which is that the amount of cash that drops, too - if you would compare our EBITDA to our operating cash, there's an extraordinarily high # correlation and that's because there is not much that gets held up in working capital and I think, you know, that is something that you can look forward to in the coming years.

Okay.

Do you have a target for the conversion of EBITDA to free cash?

No, we don't.

We have not actually disclosed any such number, but you can sort of get a very good sense of it by looking at historical numbers.

Okay.

Just one last question, and that is, can you - do you have a sense of what the company's free cash would have been different from 341 had you had PayPal for the whole year, so we can think about the growth rate?

No, probably not something I want to do on the fly over here.

But, you know, suffice to say that yes we were helped to a degree by PayPal in Q4, but clearly the vast majority of cash was right from the eBay business.

Okay.

Well, it looks great.

Thanks.

Thanks.

Our next question comes from the line of Jeetil Patel with DB Securities.

Please go ahead.

Congratulations, guys.

A couple of questions.

Meg, you talked about continuing on the marketing strategy for - or ad campaign for 2003, and it's obvious you had a pretty sizable improvement in terms of users coming on to the site, you know, and given that you tend to replicate the model, you know, what you have done in the U.S. internationally, should we expect this type of strategy to play out internationally as well as it relates to the UK, Germany, you know, and Korea and other markets out in the European arena?

And then secondly, as it relates to international, it's about 27% of transaction revenue, total transaction revenues today - do you think that internationally given the way that business is scaling in addition to the U.S. can actually get up to and call it a 50/50 mix in terms of versus the U.S., and I guess what would be the impact?

Is there any margin differences, international operating margins, longer term, versus domestic?

If you think about 2003, I don't anticipate that we will utilize TV ads throughout the United States.

You have to remember, we just utilized TV in a major way for the first time in 2002.

You know, eBay is just becoming to that scale in the United States where we feel like TV is good use of funds.

So I don't anticipate that we will do that in any European markets or any other market in 2003.

The only one that, you know, may get to that point, of course, would be Germany, which is the largest market outside of the United States.

Ultimately, does TV play a role in those countries?

Perhaps but not in the near term.

That formula of Internet marketing, PR, you know, continues to work very well for us.

In terms of the percentage mix that eBay international could ultimately become, we said at our analysts day in October that ultimately, eBay international could be larger than eBay U.S.

And I think we think that is still true.

I can't put a time limit on it.

I think we are all so pleased and somewhat surprised at how fast eBay has been adopted internationally.

So I ultimately think this model works as well outside of the United States as inside of the United States, and you know, it's ultimately going to be bigger outside the United States.

Yes, and margins - there is no margin difference outside of the United States versus in, when the countries are mature.

Albeit lower tax rate in international?

Correct.

Okay, thanks.

Next question.

Our next question comes from the line of Heath Terry with CF First Boston.

Please go ahead.

I think you were talking there about the maturity of those markets.

Can you just quantify that for us a little bit?

When you look at Europe and Asia, would you say that Europe is 50% of where the U.S. is, Asia is at 30%?

What kinds of numbers would you throw to that?

And then the second question, you know, when you - and I know you've been kind of asked this before, but I just thought I would try and see if this has changed a little bit, but when you look at the '05 guidance that you have given for the traditional eBay business, now that you have a little more experience with the payment business, how additive do you see that being to the revenue and operating income targets that you have set for '05?

The maturity varies tremendously by country, and you might recall a chart that we showed at our analyst day that showed per capita - GMS per capita in various countries and it's actually pretty predictable.

There's a curve that, you know, is up and to the right based on the number of years we have been in the marketplace.

The only aberration to that is Germany, which - where on a GMS per capita is actually equal now to the United States.

That said, there are some structural advantages I think we enjoy in Germany.

One is that the store hours, of course, in Germany are relatively consumer unfriendly.

Most stores close on Saturday afternoon not to open again until Monday, and most German retailers are not allowed to have sales, and we benefit from that because along comes eBay, 24/7 marketplace where sellers can sell for whatever they want.

And because there's also not the level of Internet competition in Germany that there is in the United States, and payments are all by electronic funds transfer, there's some very unique characteristics of the German market.

So Germany is at the same GMS per user as the United States.

Every other country in the world is at a fraction of where we are in the United States.

In terms of the $3 billion...

The $3 billion goal, you know, I mean, I think there's no question that we are even more confident in our ability to achieve the $3 billion goal for eBay.

The business performance is very strong.

The momentum is terrific.

With regards to PayPal, you know, we've only owned this business for three months and it is a little early to put a number on it that far out yet.

We are very pleased with the integration.

We are very pleased with the momentum.

It's clearly benefiting eBay, the synergy is terrific, and I think stay tuned.

We'll update it as we go along.

Great.

Thanks.

Our next question comes from the line of Safa Rashtchy with Piper Jaffray.

Please go ahead.

Good afternoon and congratulations on an awesome quarter.

Meg, Rajiv, the quarter was just a tremendous upside, nearly $30 million over your guidance.

Could you just at a fairly high level, qualitatively maybe, talk about what happened?

Did you just underestimate most of the factors that would lead to that?

Because the upside didn't come from just revenues.

Your revenues were up.

Your margins were up.

Your expenses were lower.

Or was it kind of reverse Murphy's Law, everything went well?

And along with that line, or related to that, it appears that the guidance going forward is somewhat conservative.

Are there any factors affecting your decision on that, or are you just trying to be conservative?

Thanks.

Safa, I think you've characterized it correctly, that we benefited from a lot of things here.

First of all, the Internet, e-commerce was very strong.

We repositioned eBay as a holiday shopping destination for the first time.

I mean, we've been moving toward that, but for the first time, I think we were in the daily consideration of holiday shoppers and that was because of the breadth and depth of the merchandise, and quite frankly, I think the integrated marketing campaign.

And then because volume - obviously, there's scale leverage in every business that we're in - we were able to bring a lot of that $35 million upside to the bottom line.

As we go forward, you know, we -- we're confident enough to take up Q1 guidance pretty dramatically and Q2 guidance as we, you know, go through the rest of the year.

Obviously, at the end of every quarter, we will update.

But as Rajiv said in his script, you know, it does potentially represent a seasonality change for us where we become more like our - the business of our sellers, which is more retail oriented.

And you recall historically, Q1 was actually the first quarter for eBay, not Q4.

So, you know, we just have to be mindful of, you know, holiday seasonality and other - and some other factors.

And the one other thing I would add, Safa, is that we are anticipating that our sellers may begin to pay that, and (inaudible), and that's also factored into the guidance.

But that said, I think, you know, we are raising guidance for the year by $70-$130 million versus the numbers we had given you just in October, and what this is deriving from is international/U.S. ad payments, and so we feel really good about the momentum in the business.

Great.

Thank you, congratulations, again.

Thank you.

Our next question comes from the line of Krista Sulber (ph) with Thomas Weisel Partners.

Please go ahead.

Hi, guys.

A couple of quick questions.

First, on the revenue as a percentage of GMS, I assume that with the addition of more internationals as a greater percentage of your mix and as motors becomes a more important category that, that could trend down.

Although it does seem that you are wrapping more and more services around your businesses so it may tend to actually stay flat.

So if you could comment on that.

And then if we do see a weak retail market, i.e., you know, overall retail demand starts to diminish, do you feel that you're in a position then to take share as the value-oriented consumer could then look to eBay as a point of trial?

Thanks.

Let me comment on what we call the take rate, which is, you know, the revenue percentage, percentage of GMS.

There's lots of things that push that number around.

Obviously, higher selling prices, our take rate goes down, but as we continue to monetize our international markets and GMS international becomes a bigger percentage of the total, that actually draws the take rate up.

Increased motor business actually drives take rate down.

So what we have said before is that we expect take rate to roughly be in this area for the foreseeable future, and we don't really see any big changes that would move that in any meaningful way.

If you look back historically, it bounces around quarter to quarter, but I think that's probably a pretty good planning assumption for the next 12 months.

As we think about retail demand, you know, I think eBay benefits in lots of different kinds of environments.

I think we benefit in tough economic times, because customers certainly are looking for items of value and also, people are selling to, you know, help make ends meet and monetize the assets that are in their house.

So we benefit in weaker economic times.

I also think we may benefit in quite good economic times, because we certainly did very well in 1998, 1999, and 2000.

It's - the thing that's interesting about the eBay market is that it's incredibly adaptive.

We have millions of entrepreneurs who quickly figure out what people want to buy faster than we ever could as a company.

So the adaptive nature of the market gives me confidence that no matter what kind of economic times we're seeing, we will actually do reasonably well.

Thank you.

Why don't we take one more question, or two - one more question.

Our last question for today will come from Steve Weinstein with Pacific Crest.

Please go ahead.

Thanks.

Hi, everyone.

Actually, let me try and sneak in two quick questions.

First, can you just talk about any differences in the use or adoption of fixed price in the different geographic regions you're in?

And then second, there was a pretty meaningful tick up in transaction revenue rates for PayPal.

Where would you expect that to be for the rest of '03?

In terms of fixed price, I'll take that one.

You know, it varies all over the map.

As you know, Korea is actually a higher percentage of fixed price than the option format, and that's (inaudible), but the brands have adapted to fixed price very, very rapidly.

Germany is quite high.

The UK is quite high, not as high as in the U.S. yet, but it's quite high.

I think there's a maturity to the marketplace, as well, that, you know, as each market gains critical mass, people want more in terms of format alternatives, so I would say Korea is probably the big outlier.

Everyone else is sort of following a normal pattern.

Interestingly, (inaudible) which is, you know, our 19.5% ownership and the eBay (inaudible) trading community in Latin America is actually also quite high percentage of fixed price.

You know, with respect to your question, Steve, regarding the take rate so to speak for PayPal, you know, just like with eBay, that's also influenced by the size of the payment transaction, and there's no question that, you know, smaller-value transactions actually increase the amount that PayPal derives from the overall total payment volume, and so if you look at Q4 '01, it's at about %3.22, Q4 '02, it's about # 2.4%.

And it's also helped by international because there's a higher take rate on cross-border transaction.

Right.

And longer term, I would sort of expect this to bounce around at this level until we actually learn more and until we get some broader penetration.

If anything, I would actually anticipate that this would decline very slightly as the average volume of transactions on eBay - on the transaction side would actually increase.

All right.

I actually got word that we need to take one more question.

So if you have one more, operator, we will take that, and then we do have to get off.

At this time, I am showing no further questions queued up.

I could certainly reprompt if you'd like.

That's okay.

No, that's okay.

Thank you very much.

Okay, thanks all.

Okay, thank you very much.

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

You may all disconnect, and thank you for participating.