eBay Inc (EBAY) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the eBay Q1 2003 earnings conference call.

During the presentation, all participants will be in a listen-only mode.

Afterwards, we will conduct a question and answer session.

If you have a question press the one followed by the 4 at that time.

As a reminder, this conference is being recorded Tuesday, April 22, 2003.

I would now like to turn the conference over to Mr. Mark Rubash, Vice President of Finance.

Please go ahead, Mr. Rubash.

Good afternoon.

Thank you and welcome to eBay's earnings release conference call for the 2003 first quarter.

Joining me are Meg Whitman, our President and Chief Executive Officer 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 we may discuss some non-GAAP measures in talking about our company's performance.

You can find the reconciliation of those measures to GAAP measures in the tables of our earnings release.

In addition, management may make forward-looking statements regarding matters that involve risk and uncertainty, including those relating to the company's ability to grow its business and user base.

Our actual financial results could differ materially during 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 large company with a 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 website, the success of the company's commercial partners and commercial relationships and the costs and benefits of announced and prospective joint ventures, acquisitions and other commercial transactions.

More information about potential factors which could effect eBay's business and financial results is included in eBay's annual report on form 10K for the year ended December 31, 2002, quarterly reports on form 10Q and other SEC filings and prospectises.

All forward-looking statements are based on information available to eBay on the date hereof and eBay assumes no obligations 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'll be happy to answer your questions.

Now over to Meg.

Thanks, Mark, and welcome to today's conference call.

Q1 was another great quarter for eBay.

The company delivered record results across every part of the business, right on the heels of our most successful Q4 holiday season ever.

Our Q1 results clearly demonstrate the power and momentum of the eBay market place.

Now let me step back a moment to discuss the dynamics that led to such a splendid Q1.

As many of you know, the success of Q4 was driven by several trends, including the evolution of e-commerce, the growing appeal of eBay as a mainstream must-visit shopping destination, and eBay's ability to execute against category management, product development, merchandising and marketing goals that help bring together more buyers and sellers.

While Q1 is traditionally our strongest quarter, we thought the strength of the business in Q4 might detract from Q1 growth rates.

In addition, we, like many other companies, were concerned about the business impact of a war in Iraq.

As it turned out, the trends that powered our Q4 results continued to drive the business in Q1, and more than compensated for the war's effects.

In fact, we are now more confident than ever in the depth of the U.S. market, the potential of international expansion, and the promise of online payments, both on eBay and off. eBay is on a great trajectory.

Let me highlight a few metrics that underscore the momentum in the business this quarter.

Gross merchandise sales or GMS, which is the total value of goods traded, showed an accelerated growth rate of 71 percent year-over-year, demonstrating the underlying vibrancy of the market.

Transaction revenues, excluding payments, which represent the health of the core business, jumped 78% year-over-year.

And the pro forma operating margin, which increased to 35%, demonstrates the natural leverage inherent in the eBay and PayPal models.

This unprecedented growth, which has confirmed our belief in the vast potential of the business, gives us a strategically important opportunity to increase our investments against key parts of the business.

Rajiv will talk more about the specific investment plans here in just a few minutes.

As I just mentioned, behind this quarter's remarkable growth rates there were powerful trends fanning the flames of the market place, energizing buyers, inspiring sellers, and accelerating vibrancy of trade.

I would like to spend a moment on these trends and how they are impacting the business.

First e-commerce continues to broaden its appeal.

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 com-score networks, U.S. e-commerce in Q1 rose 22% year-over-year.

Consumers are not only becoming increasingly comfortable with shopping online, we are seeing a growing desire to participate in the e-commerce phenomenon.

As a result, there's an even wider audience for eBay.

Second, eBay is now clearly a mainstream shopping destination.

This larger and more mainstream audience is finding what they want on eBay.

With more than 16 million items in 27,000 categories on the site at any given time, eBay's consumer proposition is unparalleled online or off.

The selection, value, and convenience of shopping on eBay meet the needs of almost every kind of shopper, resulting in more active buyers.

In fact, according to Nielsen net ratings, eBay was the number one shopping destination on the internet for the last two months as measured by monthly unique visitors.

Third, our community of users continues to innovate.

Taking advantage of this larger audience, savvy sellers turn on a dime, identifying trends and offering new types of goods at a pace nearly impossible anywhere else.

Their invasion makes the consumer profit ever green, helps attract more shoppers, and improves the market place.

All of this drives the business forward. [INAUDIBLE], we manage the market place.

While these trends help bring people and items to eBay, our strategy of managing the marketplace allows us and our community to benefit from them.

Every day we focus on helping our users become successful by improving the user experience, building out new and existing categories, helping sellers expand sales, attracting and activating buyers, making online payments easier and creating new communities around the world.

Each of these trends is powerful alone.

But together, they fuel a chain reaction of consumer trial and success that speeds the [INAUDIBLE] of the market place.

Now, let me touch on how this growth played out in key areas of the business.

Results were excellent across all parts of the business.

GMS showed year-over-year double digit growth in every top level category.

In fact, eight of eBay's categories now deliver more than $1 billion in global GMS on an annualized basis.

Those categories are eBay motors, collectibles, computers, consumer electronics, media, sports, clothing and accessories, and finally toys.

The growth in these categories were driven by our efforts to manage the market place as we influenced supply and demand throughout the site.

We also saw record new user acquisition and site traffic from our ongoing marketing campaign and its combination of online marketing, print ads, and [INAUDIBLE] TV spots.

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

Collectibles, traditionally the home of repeat shoppers, showed strong growth in Q1.

With year over year GMS growth of 23% the collectibles category now generates $1.2 billion in annualized GMS.

Helped in part by the TV spots, the category also benefited from users shopping in new ways.

Hard core collectors are still active to be sure, but we are also seeing a wide variety of shoppers come to find unique gifts, taking advantage of the wealth of unusual and hard-to-find items on the site.

This trend became evidence during the Q4 holiday shopping season and it has carried through into the new year, underscoring the new mainstream appeal of one of eBay's oldest categories.

The media category, which includes books, movies and music, continued its strong growth trajectory in Q1.

Even as offline retail books and music showed signs of a continuing decline in sales, GMS increased 52% year-over-year, making eBay's media category a $1.6 billion business on an annualized basis.

This growth came from our efforts to manage the marketplace, including promotions with book authentication partner, PK Books, and seller education among [INAUDIBLE] book sellers and music merchants.

Half.com also grew nicely, benefiting in part from second semester textbook sales.

As we announced in Q1, we plan to further integrate half.com into the eBay platform.

Half.com's catalog functionality will eventually reside on eBay, creating one vibrant marketplace for all kinds of media items.

EBay motors also delivered impressive results across the board.

In Q1, year-over-year GMS for cars and trucks grew by 88%, that of motorcycles grew 142%, and parts and accessories grew 179%.

In February, eBay acquired certain assets of CarAd.com, which gives car dealers a simple way to list and manage more vehicle options on eBay motors.

In addition to the new service, eBay expanded its outreach to dealers through an account management program for top sellers, greater presence at industry shows, and kick-off of specialized eBay education seminars geared exclusively to dealers.

Dealers' response has been excellent.

Daily average listings for passengers cars in the U.S. have jumped 24% since Q4, demonstrating the power of new entepreneurs making the most of the marketplace.

A key factor in eBay's success within categories is our ongoing commitment to develop features and functionalities that help sellers as well as buyers.

One important example of this is our portfolio of fixed priced trading options, buy it now, pure fixed price, and half.com, which I mentioned earlier.

Fixed price trading as a whole now contributes 26% of eBay's GMS, up from 24% in Q4.

Pure fixed price, which allows sellers to offer items for a set price without the auction format, has also proven to be very popular, now accounting for 10% of the company's global GMS.

Another thriving example is eBay stores.

Launched less than two years ago, eBay stores have proven to be a very popular way for eBay sellers to merchandise and brand their merchandise on eBay.

At the close of Q1, there were nearly 100,000 stores worldwide, with slightly more stores outside the United States than on eBay.com.

One of the most encouraging and powerful trends we see at eBay today is the vibrancy of our international sites.

Almost every site showed strong double digit, and in many cases triple digit year-over-year GMS growth in Q1.

Year-over-year GMS grew 62% in the Netherlands, 71% in Belgium, while while GMS in Australia, France, Italy, and Spain each jumped by more than 100%.

Internet auction company in Korea also showed healthy momentum this quarter.

On a local currency basis, the company reported 53% growth in GMS year-over-year and 81% increase in revenues compared to the year ago quarter.

As a result, internet auction remains the top e-commerce site in Korea.

Perhaps more astonishing is the fact that the business is growing even faster in our two largest international market, eBay U.K. saw GMS growth of 191% year over year, while Germany's growth grew 180%.

As a result, our international operations have become a significant part of the business much earlier than we expected, now accounting for a remarkable 37% of the company's GMS and 30% of its transaction revenues.

A strong quarter for e-commerce is, of course, good for online payments.

Now almost fully integrated into the eBay platform, PayPal showed impressive growth in Q1, both on eBay and off.

PayPal ended the quarter with $2.6 billion in total payment volume, an 80% rise from Q1 of last year.

International use of PayPal helped fuel some of this growth, especially in the U.K., where PayPal was integrated into the eBay U.K. site and we began allow the use of switch and solo debit cards.

PayPal's visits off eBay also showed very strong double digit growth despite exiting the online gambling business.

There is no doubt that PayPal's integration with eBay has boosted business for both companies.

With the kind of growth rates we've seen over the past several quarters, the technology that keeps eBay running is crucial to our success.

Over the past two years, we have made important investments in product development and V3, our next generation architecture.

These investments have allowed us to deliver ever-greater levels of dependability, scalability and productivity , even as we grow rapidly.

At peak usage in Q1, for example, the site reported in one day 626 million pay view, 79 million searches, and 7.7 million bids.

During the busiest week, there were 19.9 million live listings on the site, a 10% increase from the holiday peak we saw in Q4.

Each quarter, the eBay market place continues to deliver on its promise.

There are few other businesses today achieving our rate of growth while expanding operating margins and generating increasing amounts of cash.

This kind of success allows us to generate short-term gains, while significantly investing in the long-term growth of the business.

I continue to be extremely proud of the achievements of our entrepreneur community of users and our employees, who are driving the growth eBay.

Together, I know we can achieve greater success in the future.

And now I'll turn it over to Rajiv for a review of our financials.

Thanks, Meg.

As you just heard, Q1 was an outstanding quarter, characterized by momentum, execution, results and investment.

In Q1, we saw the same upward trends we have seen across all the underlying metrics of our business over the past four to five quarters.

The sustained momentum has given us a broader, larger and more engaged community than ever before and even more confidence in the potential power of the eBay business model.

All three of our key operating metrics, registered users, listing, and gross merchandise sales, achieved accelerating year-over-year growth rates in Q1 compared to the growth rates in Q4.

Specifically, registered users in Q1 reached 68.8 million, up 49% year-over-year.

Listings reached 220 million, up 59% year-over-year.

And GMS was $5.3 billion, up 71% year-over-year.

We haven't seen user growth this strong for four quarters, listings growth this high for five quarters, and GMS growth rates at these levels for six quarters.

And when these users came to eBay they got a better site experience.

Unparalleled selection, availability, and value, and better customer support.

As a result, more users than ever before were active.

Active users, which we define as users who have bid, bought or listed on the eBay platform over the trailing 12 months, increased to 31.1 million, representing 57% year-over-year growth, an accelerating growth rate for the third consecutive quarter.

These active users continue to increase their spending on eBay.

Gross merchandise sales for active user over the trailing 12 months increased to $524 in Q1 from $492 a year ago.

A significant increase.

In fact, GMS per user and GMS for active user has both increased for each of the last six quarters.

Clearly, user activation is as important today as new user acquisition in driving the fundamental growth of the business.

Our results were equally strong across all parts of the business.

The U.S., international, and PayPal.

In the U.S. business, excluding payments, our users generated $3.3 billion in Q1 gross merchandise sales of 45% year-over-year increase.

GMS volume drove a 49% increase in U.S. online transaction revenues over the year-ago period to $235 million.

While every top level category grew at least 23% year-over-year, the larger than expected upside was due largely to strength in fashion, collectibles, motors and technology related categories such as computers, consumer electronics and networking.

In the international business, our users generated $2 billion in gross merchandise sales, which grew 146% over the prior year.

This performance was fueled by continued strong triple digit growth rates in Germany and the U.K. and Australia, and accelerating growth in France, Italy and Korea.

This GMS volume powered 166% year-over-year increase in international transaction revenues to $138 million.

And finally, the payments business delivered exceptionally strong Q1 results both on and off eBay, driven by PayPal's own momentum and the continuing benefits of integration into eBay.

PayPal's total payment volume for the quarter was $2.6 billion or 80% higher than the year ago level, representing accelerating year-over-year growth.

This acceleration reflects an increasing penetration on eBay where in Q1 56% of addressable GMS in the U.S. closed using PayPal, and strong performance off eBay by payment volume was up 50% year-over-year, despite exiting the online gaming business.

These core drivers of our business led to another quarter of better than expected results in the top line, which combined with the inherent leverage in our business model and the investment choices we made throughout the quarter dropped record profits to the bottom line and generated record cash flows.

On a consolidated basis, eBay reported net revenues of $476 million, up 94% year-over-year, and net transaction revenues of $466 million, up 118% year-over-year.

These growth rates do reflect the fact that we acquired PayPal in Q4 of last year.

Transaction revenues, excluding payments, totaled $372 million, up 78% year-over-year.

Q1 pro forma operating profit totalled $166 million, which translates to a 35% consolidated pro forma operating margin.

This represents a 270 basis point increase over the prior quarter and is an all-time record, reflecting improved growth margins in the U.S., international and payment segments.

This operating profit translated to a record $116 million in consolidated pro forma net income, or 36 cents in pro forma earnings per diluted share.

This EPS level represents 104% year-over-year increase.

Including $12 million in net GAAP expenses, not included in the pro forma results, consolidated GAAP net income totalled a record $104 million or 32 cents per diluted share.

GAAP diluted EPS grew 94% year-over-year.

So let me now provide you with a little more detail on where the six cent EPS upside came from during the quarter versus our guidance.

First, a strong revenue performance in all parts of the business combined with inherently low variable costs dropped significant upside to the bottom line.

Second, though we invested as planned in Q1 and even a little bit more, we elected not to increase our spending even more during the quarter, due to the uncertainty surrounding the war in Iraq.

As it has turned out so far, the actual impact the war has had on our business has been less than expected.

Third, the strengthening Euro over the U.S. dollar added $3.3 million to the company's operating income during Q1.

And finally, a faster than expected increase of the international component of our profits has driven our pro forma effective tax rate down 4 percentage points to 32%.

The net result was a records earnings level, which once again led to record cash flows.

EBay generated $190 million in operating cash flows in Q1, a 106% increase from the prior year period.

Capital expenditures during Q1 were approximately $44 million, primarily consisting of purchases of site hardware and software facilities costs for PayPal's Omaha customer support center.

As a result, free cash flow in Q1 were a record $146 million, up 81% from Q1 2002.

Or put another way, this means that an average eBay listing in Q1 generated 56 cents in free cash flow, replicated across 220 listings.

We exited Q1 with an even stronger balance sheet.

At the end of March, eBay had nearly $4.6 billion in total assets, including almost $2.2 billion in cash and investments.

As I mentioned earlier, Q1 was also a quarter when many important investments were made across the business.

Let me give you some of the most significant examples.

We increased the reach of our marketing and promotional efforts in our largest European markets where we are seeing the fastest growth, while we continued to feed early stage Asia Pacific initiatives.

In total, our online and offline marketing expenses increased by $15 million sequentially in Q1, with a large part of the difference related to international marketing investments.

We continue to aggressively hire talented product developers as we sharpen our focus in improving the site experience for our users.

Specifically, over the last two quarters, we have hired over 100 employees in our product development group alone.

And, we continue to staff customer support and safety operations in both the U.S. and internationally.

In aggregate, these investments represented more than $20 million in quarter-over-quarter increases.

Investments like these not only move the dial in our short-term performance, they also strengthen the foundation for our user future success.

Before I talk to you about future guidance, I would like to mention some specific considerations that factored into our revenue outlook.

As Meg described in detail, Q1 our results reflected strong internet fundamentals and the momentum carried forward from the December quarter.

At the same time, within these overall results are identifiable patterns of weather related and general seasonality.

Therefore, we remain watchful factors that could impact user growth and user activity going forward.

For example, as a community increasingly reflects the mainstream and our European business continues to increase the percent of total, we expect that summer seasonality will be more pronounced this year than in the past.

The implementation of value-added taxes of that across our European Union sites in July 1st, which requires us to collect and remit taxes on the fees we charge nonbusiness sellers, could impact the behavior of these important users.

Even taking these factors into account, we now expect that consolidated net revenues for 2003 could be as much as two billion, fifty million dollars, or $150 million more than our most recent guidance.

This net revenue upside will be balanced across our U.S., international and payments businesses.

From a quarterly perspective, we believe that 2003 net revenues could be about $500 million in Q2, $510 million in Q3, and $564 million in Q4.

We are clearly pleased with this revenue outlook.

In Q2, and throughout the year, we will invest heavily in key areas to expand organizational capacity and to support the overall growth of our business.

Key areas in which we are investing in Q2 include product development, infrastructure, customer support, marketing, and payment.

Let me give you some details.

In product development and infrastructure, we plan to further build out capacity to insure we are well prepared to harness future growth cost effectively.

We continue to invest in our API program to broaden the appeal of the platform to a diverse range of users.

In billing, we will roll out our next generation billing system to insure it's scaled with the global growth of the platform, and in information management we will expand data management analysis and reporting tools.

In customer support, we have begun to ramp up operations of our new international support center in Vancouver, and we will further expand support capability in Europe.

Cost and safety will also be a focus, as we further refine our core detection tools and processes around the world.

These assets are all part of our goal to improve the efficiency and quality of the support we provide to our global community.

In marketing, we are continuing to bolster our efforts internationally, especially in Europe.

In the U.S. we intent to continue our integrated Do it eBay brand campaign and begin a major campaign around eBay motors, as that business enters its seasonably stronger period.

And with PayPal, we will continue integration into the eBay platform and add incremental PayPal features to the eBay site.

We will increase product development capability and further extend the PayPal business internationally.

We will also continue to invest in PayPal's site development and infrastructure, continue to improve fraud detection tools, expand customer support capabilities and build the off eBay business.

Overall, we believe that these investments reflect our ever careful balance of investing for the long term and delivering increasing profits and cash to the bottom line.

Therefore, we now expect that eBay's pro forma earnings per share, which excludes certain charges, could be as high as $1.41 for the full year 2003, 15 cents higher than previous guidance.

Notably, this EPS guidance implies a pro forma operating margin of over 32%, which represents an increase from the 31% margin implied by previous guidance.

On a quarterly basis, we expect pro forma EPS of approximately 33 cents in Q2, 33 cents in Q3, and 39 cents in Q4.

In terms of Q2, specifically, while the investments we outlined just a moment ago will result in a temporarily lower operating margin for the quarter, it is imperative that we invest in the business today in order to both drive and accommodate the growth of the business tomorrow.

Taking into account various GAAP adjustments, which we estimate will approximate 11 to $12 million per quarter through 2003, we expect GAAP earnings per diluted share could be as high as $1.27.

From a quarterly perspective, we expect GAAP earnings per diluted share to be 30 cents in Q2, 30 cents in Q3 and 35 cents in Q4.

In summary, eBay is seeing strong upward trends across the board.

Whether it be in gross merchandise sales, U.S. or international transaction revenue, users, active users, GMS per active user, total payment volume, or even stores.

These results continue to strengthen our confidence in the unique long-term prospect of our business.

At the same time, we are ensuring that the company is well positioned for the future by making strategic investments in marketing, product development, customer support, cost and safety, and infrastructure.

It is the inherent nature of eBay's business model, the efforts of our community, and our world class team of employees that enable us to make these investments while taking up guidance for both revenue and profits.

Thanks for joining us today.

We would now be pleased to take your questions.

Thank you, sir.

Ladies and gentlemen we will begin the Q&A session.

If you have a question please the one followed by the four on your telephone.

You will hear a three-tone prompt.

If your question has been answered and you would like to withdraw, press the one followed by the 3.

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

One moment, please, for the first question.

First question comes from the line of Shawn Mill with SoundView.

Please go ahead.

Thank you very much.

Good afternoon.

Congratulations on a great quarter.

Just a quick question, Rajiv.

If you could talk a little bit more about PayPal.

They turned in another excellent quarter.

Could you -- do you have any additional breakdown on how the business did internationally in the quarter?

And secondly, can you talk about, I know there was an opportunity when you looked at buying the business to actually use PayPal to collect fees from the user community.

Where do you stand on that?

Thanks.

So, Shawn, PayPal has just had very strong results.

You know, it has accelerated GMS growth in Q1.

Internationally, we have right now a PayPal product in the U.K., and the U.K. business has actually been very strong.

There is a significant amount of investment slated for Q2 to continue to develop local products for PayPal over the next several quarters.

So I would say stay tuned.

With respect to collecting eBay fees, that, too, is a program that is very much in the works.

So stay tuned.

Thanks.

Our next question comes from the like of Mark Rowen with Prudential Securities, please go ahead.

Thank you.

Congratulations on a very impressive quarter.

Couple of questions.

First, Meg, do you have any concerns that with such strong listings growth over the last few quarters, that that's going to cause supply to outrun demand on the sites, particularly in the U.S.?

And are you seeing any signs of that?

Second, Germany, which has been so incredible still at triple digit rates, how long do you think that that can continue to grow at triple digit rates, just the large numbers?

Then Rajiv, I have a couple of detail questions, if I could.

Okay.

Actually, we have no concern that supply and demand gets out of balance.

It is the natural economics of this market place where supply and demand just balance themselves.

If there's too much supply on the site, sellers pull back a little bit.

If the demand is excessively strong, they put more product out there.

So it functions like an economy.

In addition, our efforts against activation, you can see have really paid off in terms of GMS per active users.

Active users continue to grow in a very nice direction.

In terms of Germany, Germany remains, you know, extraordinarily strong.

It is the number one e-commerce site in Germany by a very large margin.

We benefit from, you know, the fact that there's efficiencies through electronic fund transfer, and retail in Germany is not that efficient.

The reach in Germany now is about 50%, meaning 50% of all German internet users visit eBay Germany in any given month.

We expect the trend to continue for quite some time.

It is extraordinarily well-positioned in the German market.

And what's kind of fun, the U.K. is showing those types of signs.

Okay.

And then just a follow-up on that listings growth question.

Do you think in the near term that -- I know in the long term it balances out, and it's kind of like an echo system, but in the near term, do you think that growth will have to slow so that demand can catch up to it?

And then Raj could you give us the gross profit and operating margins at PayPal?

I don't know if I did the math right here on this supplemental sheet it looks like the gross margins were 54% at PayPal, is that right?

Let me answer the first question.

You know, supply and demand actually react much quicker than over an extended quarterly period.

It reacts on a day-to-day basis and week-to-week basis.

We saw expansion of listings in Q4 that continued right through Q1.

That said, as you know, Q2 and Q3 are our seasonably weakest quarters.

They are the slowest growth.

And we are mindful of that as we gave out guidance.

Q1 has always been our strongest quarter, turned out to be an incredibly strong quarter, even on the heels of Q4.

So I wouldn't worry too much about the supply and demand imbalance.

It doesn't get out of whack.

It adjusts incredibly rapidly.

And Mark, on your question on PayPal eBay gross margins.

Actually, we can't give out pro forma numbers without providing a full reconciliation at the same time by the new regulars that are out there.

What I can say broadly is that both eBay and PayPal margins grew very strong.

And in fact, PayPal margins were particularly strong helped by very good transaction processing costs.

And I think that, you know, one of the things that we are very mindful of is, we need to make more investment.

Particularly, PayPal is a big opportunity and coming into Q2, that is really what we are targeting.

Great.

Thank you very much.

You're welcome.

Next question.

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

Please go ahead.

Thank you very much.

A couple of questions.

Meg, you all gave a lot of different metrics for the U.S. business in terms of GMS and net revenue growth.

I was wondering, because you had a price increase last year in the first quarter if you could provide some comparison of listings growth.

I mean, your basis in the first quarter was the fourth quarter, just so we have a sense of underlying unit growth.

And then secondly, Rajiv, in the past you've talked about operating margins long-term being 35 to 40%, and that's a number I think you increased in October..

We are now at 35%.

What would stop the business from getting to something around 50% and a little bit of logic here?

If I take your operating income that you reported in the quarter and divide your gross merchandise sales by that number to give an apples to apples comparison to say a traditional retailer, you come up with about 3.1%.

So a 50% margin sort of translates into a 5% operating income divided by gross merchandise sales equivalent.

It seems to me that your costs are much lower than traditional retailer, obviously, given the margin that you have today.

Are there any barriers or structural issues that would cause that margin over the long term to be able to not trend towards that level?

The last question is fixed price.

Is that being adopted quick ler internationally than domestically in helping drive international growth than you would have anticipated?

Thanks.

Let me take the first two questions.

The first one is really related.

I'm trying to keep track over here.

The first one related to the growth rate of the U.S. business.

You are correct to point out that the growth rate in Q1 of this year lapped price increase which went into effect in the end of January a year ago.

So when you look at the percentage growth rate, particularly in Q1, it is -- mentally you need to adjust for the fact there was a price increase last year.

So it's a more difficult comparison.

If you normalize for that and you normalize for the effects of the war, the U.S. growth rates, even though they were very strong were, in fact, as strong as the Q4 numbers.

So very pleased with the U.S. growth rates.

With regards to your question as to overall profitability at the U.S. business, I didn't keep track of all of your math, but I think the point that I would make is the consolidated eBay business, which includes PayPal, which we pointed out when we acquired the company, is a lower margin business, is 35% in Q1.

And that is a very strong number.

And frankly, one of the things that we have to think about as we go into the future is not so much how high can the number be, but what is appropriate for us to balance between the needs for today and the needs for tomorrow.

This is a big opportunity.

And we said that before.

This is just proving out to be every quarter the momentum, the metrics continue to validate that, and we want to make certain that we are investing now to really expand organizational capacity to take advantage of that in the future.

So how high could the number be?

It obviously is being financed by very strong U.S. profitability, very strong international profitability, but we also think it's appropriate to continue to make a balance between investment and profit.

I'll take the fixed price question, Anthony.

Fixed price has been adopted faster outside the United States than inside the United States.

Part of that is you might recall, we actually introduced pure fixed price first outside the United States, especially in Europe, and then actually after we understood the effect on the market place rolled it to the U.S.

The adoption is higher outside the United States but the U.S. is catching up fast and pure fixed price has been a hit.

Obviously, Buy it Now has been a long-term hit and stores which enable sellers to, you know, merchandise all of their listings on eBay has been really a nice take up in both territories.

Great.

Thank you very much.

Thanks.

Next question.

Next question comes from the line of Bob Maraski with Piper Jaffray.

Please go ahead.

Good afternoon.

Congratulations on a great quarter.

Couple of quick questions if I may.

Can you give us some color on the profit margins of international operations versus U.S.?

And also, could you talk about the strength from different categories that you saw in the U.S.?

I understand you have several, 1billion dollar plus GMS categories, but are you seeing a particular strength in any of the practical categories?

Thank you.

Thanks.

I think, let me answer the first part of the question regarding profit margins international versus the U.S.

So, you know, one thing I should point out is we have changed our segment disclosure, and we have moved from segments that were on line and off line to U.S., international and payments.

And we will be putting out this information at a segments level along with our next quarterly filing, which should be sometime in May.

So the way we are going to report this is the direct -- the revenues from each segment and the direct cost associated with those segments, and those direct costs are typically such as advertising, marketing, customer support, bank charges and some other expenses.

All other costs, such as site operations and product development, which are managed in totality, aren't allocated back to the segment.

So this is information we will be putting out along with the next quarterly filing.

Can you give us a preview now?

I'm sorry?

Can you give us a preview now?

No, I'm afraid I can't.

So to answer your question about how is the overall profitability for the U.S. versus international, I think the highlight is that the U.S. is performing extremely well.

It's clearly the fundamental engine of a lot of profitability in the eBay business.

International, while we are making some investments and continue to make some investments, particularly in the Asia Pacific region, it's performing extremely well as well.

So a lot more detail to follow.

But both parts of the business performing extremely well.

In terms of categories, it's interesting.

Categories, the top eight categories, performed pretty much equally well from Q4 to Q1.

We had anticipated, actually, a drop-off in consumer electronics and computers as we left the holiday season.

In fact, we saw accelerating growth rates in consumer electronics in Q1.

Fashion was strong in Q4, it remains strong in Q1.

Motors was surprisingly strong for what is in the industry a seasonably weaker Q4 and Q1.

So there wasn't really a pattern of holiday shopping goods versus non-holiday shopping goings.

All eight categories just powered right on through from Q4 to Q1.

Thank you.

Next question comes from the line of Jadeel Patel, with [INAUDIBLE], please go ahead with your questions.

Great quarter.

A couple of questions.

I guess in your guidance -- I guess first of all, user activity levels seem to remain flat or increased depending on how you look at it on average or just totality from Q4 to Q1.

I guess is it safe to assume that, in your guidance you are assuming that it comes down a bit in terms of the number of transactions generated per user here over the next several quarters?

And secondly, can you talk about, I guess total registered users versus active users about a 45% conversion rate.

And you are doing about 3.2 billion in GMS today -- excuse me 5.3 billion in GMS.

There's another 55% of the users that really haven't in the past year.

What are you doing to market to this audience?

It seems like a pretty sizeable untapped opportunity that's already, you know, user base that's already familiar with eBay.

How are you going about trying to get to these folks?

Is it just through pure marketing that you are doing today?

And I guess does that differ domestically versus internationally, in terms of how market to this audience in gerbil that hasn't bought in a while?

So Jadeel, let me take the first part of that question, which is around some of the GMS per user metrics.

And, actually we been very pleased with the growth trends in these metrics.

So, if you look at GMS per confirmed registered users, of the users that were there in the quarter, in Q1 2002, it was 67 -- excuse me in Q3 2002 it was 67.44 per user.

In Q4, it was 74.54 and in Q1 just reported $77.30.

Very steady progression over the last several quarters.

And then on the GMS per active user, it has actually grown from in Q4 $513 per active user to $524 per active use yes, sir.

So, and as we look at some of the fundamental metrics of activity, we could not be more pleased.

These are very, very strong results.

As you know, they have a tremendous leverage because a small increase in these activation metrics have a huge activity--huge impact on the top line.

With respect to Q2, Q3, there is -- will be some seasonality.

And typically, what we have seen and I don't expect a different pattern this year, is warmer weather, people spend less time on line and we have typically seen lower levels of activity in Q2 and Q3.

I don't expect this year to be any different.

While it starts picking up towards the end of Q3 and into Q4.

In terms of marketing to the installed base of users that is not active, we do a fair amount of that.

And have dialed it up in the last six to eight months, and I think that's some of the results you see.

That includes direct marketing, direct e-mail marketing, onsite merchandising and marketing.

Also our television campaign and written campaign, really increases daily consideration of eBay.

We want people when they are thinking about buying something that they check eBay first.

All of these efforts are actually seeing increased activation levels of relatively old users.

Now I will tell you, the users that have been registered on eBay for five years and four years and haven't done anything, if they come back, they may well come back as a new user, that's a little harder to know.

But, we are seeing at least registered users who haven't been active say in the past year to two years, our marketing efforts in the last six to months have actually changed that metric quite dramatically.

Great.

Thanks.

Next question.

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

Please go ahead.

Couple questions.

First, Meg, I think you may have just answered.

You answered the demand side of this question, but if you could focus on the supply side and any other demand related parts, that would be great.

You indicated at the beginning of the call the you increased your efforts to influence supply and demand.

If there's anything you want to expand on there, that can be great.

The second question, as you put out some goals recently about when you thought international would hit 50% of your total revenue.

Obviously, the trend continues to be very strong.

Do you half any updates there and are you willing to give us a sense of when international might hit 70% of revenue?

Thanks.

Yeah.

Um -- in terms of increased efforts to influence supply and demand, this is something we have done for quite some time and it starts with basic category structure management.

What are the sub categories, when do we have too many items per category, when do we have too few items per category, and that is a major effort of what category teams do.

Secondarily is demand generation, whether that be internet marketing, trade shows, print advertisements, certainly influence the demand.

And then influencing the supply on a very cost effective contained way, we certainly do go to community sellers, we give them productivity tools, we actually communicate the calendar of marketing events for the entire company so that when we're going to promote a certain category those sellers actually know it.

And our friends at [ INAUDIBLE ] and Channel Advisor and Auction Mart are also helping folks to more cost effectively manage their eBay business.

And then lastly, of course, CarAd was a big mechanism for us to help influence supply of cars on the site.

I think I've said before that car supply was constrained.

We needed more cars.

In fact, we still need more cars.

CarAd actually really helped dealers list on eBay, made it easier for them, so they did it more.

In terms of international as a percentage of revenues, not going to put out a goal today.

We are ahead of where we expected to be.

You know, 30% of revenues has come faster than we had anticipated.

So we look to international to continue to grow very rapidly, and I do think that international will ultimately be larger than the U.S.

On what time frame, I can't exactly say today.

Okay.

One last question.

And I think you addressed this in Mark Rowen's question, but should we assume that the conversion rate is flat sequentially?

The conversion rate, you know we don't put out that metric.

The conversion rate has been very strong.

There are periodic seasonal variations to that number.

And it moves around on basis points, you know, from week-to-week and certainly from season-to-season.

So we don't actually provide that information, but it is strong and healthy.

We haven't seen anything out of the ordinary in terms of conversion rates.

Thanks.

Operator?

Okay.

Why don't we take one more question.

Next question comes from the line of Steve Weinstein with Pacific Crest.

Please go ahead.

Thank you.

Just a couple more questions for you on PayPal.

When I look at the in transaction revenue rate, you know, that's going up and the trend in the expense rate, that's going down, I guess for the last couple quarters.

So things we like to see.

Just wondering if you could tell us, you know what should we be expecting for those going forward?

They are already looking better than I expected for '03.

And then the off eBay part of PayPal seems to be doing really well, even though you are exiting certain businesses.

Can you talk about where that growth is coming from and what that opportunity might look like?

Okay.

So let me answer some of the questions on the PayPal met .

Meg will speak to eBay.

The transaction revenue rate, you are correct, it has been improving quite nicely.

A couple of factors that have played into it.

One is a program that we launched called money back guarantee.

That is absolutely contributing to the increased transaction revenue rate.

It's been very good for us.

Then international.

You know, the bulk -- what's happening in the U.K. as well as cross water transactions, are absolutely benefiting the overall revenue rate that PayPal is able to generate from payment volume.

And in terms of the transactions cost actually headed the right way, which is down, that has really been a function of several factors, but probably most notably scale.

This is absolutely helping us, you know, as the overall volume of the business continues to grow.

Yeah.

And -- I'm sorry, the one thing I should probably point out, and it doesn't factor in the gross margin, is the fraud loss reserve which is continuing to go down because of both experience and synergies that we are getting through the combination of information sharing with eBay.

In terms of [ INAUDIBLE ], Steve, there's strict [INAUDIBLE].

The first target is very small merchants both in the United States as well as outside the United States for whom PayPal is a tremendous solution because they can't get a merchant account, or if they can get a merchant account, it is not cost effective for them relative to the cost of PayPal.

So small merchants are target number one.

Target number two would be more mid-sized merchants.

But I think you'll see us getting into that in 2004 end of 2004.

It sounds like there's actually one more person that is waiting to ask a question so let's go ahead with just one more.

Sounds good.

Our next question comes from the line of Chris Sobel with Thomas Weisel.

Hi.

Couple of sort of broad based questions first.

Given you have some -- the 2005 goals out there, I was wondering, given the performance you've continued to have, is there any notion of accelerating those goals?

You've got, also about $5 a share in net cash on the balance sheet.

Just wondering if you have any uses lined up potentially some of the JVs and then if you could give a little bit more detail into the sub billion dollar category the B-to-B and talk about what's been going on there, as well as ticketing.

I think that may be assumed in sports.

Obviously, you had a announcement with clear channel.

Just what kind of growth levels would be available there as well?

Thanks.

So, let me speak to the first couple of parts of your question.

With regards to the overall goals, you know, there is no question that as the business continues to develop, as we see really strong momentum across every part 69 business, if anything we have even more confidence than in our 2005 goals.

So, our goals that we had laid out, which is now as for back as I believe the year 2000, was $3 billion in revenues from the core eBay business.

To the extent there are incremental and the incremental business from PayPal is over and above that.

We are confident in that.

I don't think it's appropriate for us at this point to change that from where we are at.

In terms of the cash flows, and the sort of use of cash of the business.

I think there's a couple of areas where we are absolutely have used cash in the past, and probably expect to continue to do that.

You know, most notably, some acquisitions for cash and we have made a few small acquisitions in the past acquiring the balance of eBay Australia was made for cash internet auction company was made for cash.

Several small purchases have been for cash.

And we expect to continue to do that.

Also we have pointed out in the 10K we are in search of additional facilities.

In the event we do something that is related to expansion of facilities, that might well be for cash as well.

So, I think that, you know, we continue to be very mindful of the fact that this is a business, it's generating an enormous amount of cash and we do have some uses for cash that are planned out in the future.

Yeah.

Let me talk about some of our other up and coming categories of which you have identified two.

And let me speak a little bit about B-to-B.

It's a great category.

It's getting real attraction.

We continue to be really excited about it.

Every week we have new sellers coming on the site and new buyers.

They could not be more pleased with the market place.

So we have high hopes for that market place.

It's showing some attraction in Germany and the U.K. for the first time.

So that says it may well be extendable internationally.

Pickups, as you know, eBay is primarily secondary sale of tickets.

Strong growth.

Doing really well.

Key events, Superbowl, basketball, final four, things like that.

We are happy with that.

And we are pleased with our new relationship with clear channel.

We think that will accelerate the growth of our ticket business and be beneficial to clear channel.

Third is home.

Home is really doing well.

Catching on broadly [INAUDIBLE] the site as well as in some key European countries.

So keep a focus on that one as well.

Could you see any of those reaching the billion dollar mark on an annualized run rate basis by the end of this year?

Don't know about by the end of this year, but certainly we do see all three of those potentially as billion dollar categories.

All right, thank you.

Thank you for joining us today.

We appreciate the questions and we'll see you next time.

Thanks.

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

You may disconnect and thank you for participating.