eBay Inc (EBAY) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the eBay Q22003 earnings conference call.

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

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, July 24, 2003.

I would now like to turn the conference over to Mark Rubash, VP of Finance for eBay.

Please go ahead, sir.

Good afternoon.

Thank you and welcome to eBay's earning release conference call for the 2003 conference call.

Joining me are Meg Whitman, our President and CEO, and Rajeev Deta, our CFO.

This conference call is also being broadcast on the Internet and is available through the investor relations section of the eBay Web site.

Before we begin I would like to take this opportunity to remind you that during the course of this conference call we may discuss some nonGAAP 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.

Actual financial 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 large company with a broad range of businesses, our ability to deal with the increasingly competitive environment for online training, both in specific vertical categories and generally, our ability to manage the integration of PayPal and the litigation, regulatory, credit card association and other risks specific to PayPal, our need to manage our other regulatory tax and other litigation risks even as our product offerings expands and our services are offered in more jurisdictions, including most recently China, our ability to upgrade and develop our systems infrastructure and customer service capabilities, to accommodate growth at a reasonable cost, our ability to maintain site stability on all of our sites, our ability to continue to expand our model to new types of merchandise and sellers, our ability to continue to expand outside of the U.S., fluctuations in foreign exchange rates, the success of our 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 affect eBay's business and financial results is included in eBay's annual report on Form 10(K) for the year ended December 31, 2002 and quarterly reports on Form 10(Q).

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

Following Rajeev's discussion we will happy to respond to your questions.

Meg?

Thank you, Mark, and we will coming everyone to today's conference call.

Q2 was another great quarter for eBay.

First, of course, we delivered the results.

In Q2 we saw record levels of registered users, listings and gross merchandise sales for eBay and record total payment volume for PayPal, along with record transaction revenues, net revenues and net income.

Now, let me highlight the three results that really underscore the strength of our business.

Gross merchandise sales or GMS which most of you know is the total value of goods and services traded three through us by our community of users grew 66% year over year.

Total payment volume grew 76% year over year and company transaction revenues grew 111% year over year.

These results validate the strength of the business model and our long-term strategy for managing the marketplace.

In fact, our confidence in the vibrancy of the marketplace and our ability to manage the business has never been stronger.

As a result today we announced a two-for-one stock split that should make the stock acceptable to more investors.

Perhaps the biggest highlight of Q2 was the success of eBay Live.

EBay Live demonstrated that our community of users, the people who have built and nurtured eBay is alive and well and thriving.

Just a few minutes among the thousands of participants at eBay Live in Orlando confirmed for me that eBay is a way of life for an ever-growing number of people.

And every day those people are evangelizing eBay, spreading the word that eBay is a great place to trade, build a business, make friends and have fun.

It's so exciting to think about what the power of the community means for the future of eBay as the marketplace expands around the world.

Some 10,000 people registered for eBay Live, nearly double the number of last year.

They came from all 50 states and 19 foreign countries and the attendees included every kind of eBay user from newbees to veterans and collectors to entrepreneurs.

They came to meet and learn more about eBay.

Attendance at some of the most popular classes such as advanced selling tips, finding products and merchandising to build your business, shows that participants came to learn how to get more out of the marketplace and build their own businesses.

More than 600 eBay employees were on hand to meet our users, help them learn about eBay, listen to their ideas, challenges and successes.

It's clear that the eBay marketplace is creating new opportunities for millions of people around the world.

Let me share a few of the stories that I heard at eBay Live.

Delaware-based Style Bug began selling antiques and collectives during college.

After taking fashion merchandising and graphic design courses, she turned that knowhow into selling designer clothing and accessories at discounts on eBay.

She now has a thriving business with seven full-time and part-time employees and designers now come to her directly to help move merchandise.

Richards Discounts Books, otherwise known as Richard 1968, began selling in 1999 from their Toronto area home.

Their business has grown to the point where they currently have an inventory of around 10,000 books which they keep in their basement, employ one full time and seven part-time helpers and sell more than a thousand books a month on eBay.

Dishville was a stay-at-home mom who's husband sold industrial cutting tools locally in Westfield,Illinois.

Hoping to move some of her husband's surplus industry she began selling on eBay to customers outside their state.

Today she has a full-time job selling a variety tools for other companies as well as for her husband.

It's impossible to come away from eBay live and not feel inspired and reenergized by our amazing community.

They are dedicated to their business, vocal about their needs and very confident in the opportunity that lies ahead. eBay employees came away from eBay live with a lot of great ideas for improving the marketplace and helping our users to become even more successful.

Our interaction with the community at eBay live emphasized the importance of managing the marketplace for their success.

We do this by focusing on four areas of activity that affect our users most, technology, site features and functionality, trust and safety and marketing.

And I'd like briefly to touch on each of these areas today.

The first, technology, is by design invisible to the outside world and therefore sometimes overlooked.

But over the past several years, we have built a world class technology platform that provides a stable, reliable home for all of our users.

And we continue to invest in this area.

In Q2, for example, we added servers and networking equipment to support our new product initiatives and scale to meet the ever growing demand.

One of the busiest web sites in the world, [inaudible] eBay reported in one day 580m [inaudible], 88m searches and 7.1m bids.

During the highest traffic week, there were more than 19m live listings on the site, greater than the peak we saw during our busy holiday season.

Our second area of focus is the features and functions we create to enhance trading on the site.

Listing in more than 35,000 categories around the world our users trade almost every kind of product on the market today.

Our job is to make it as easy to buy as a stroll through the mall and as easy to sell as giving something away.

In Q2, we rolled dozens of enhancements for the platform, ranging from the ability to pay eBay fees via Paypal and the new shipping calculator, to the ability for sellers to purchase key word banner adds on eBay.

Increasing the usability of our site also contributes to GMS growth.

Several months, ago, for example, we rolled out key word landing pages to help users more easily find what they want when searching for very popular items.

Now, a simple search for Harry Potter will no longer yield a list of 12,000 live listings.

Instead, the user sees a category index page that organizes the listings into the 45 categories that contain Harry Potter items, from action figures to DVDs.

Early results have shown increases in new users and [inaudible] decrease in [inaudible].

As a result, two weeks ago, we rolled out 1,000 new key word landing pages.

Some of our biggest features have changed the dynamics of the marketplace altogether.

Our portfolio of fixed price trading option for example, has become an integral part of the business.

In Q2 fixed price contributed a record 27% of global GMS and we continued to see enormous benefit from the acquisition of Paypal.

Paypal showed strong growth in Q2, both on eBay and off, ending the quarter with $2.8b in total payment volume, a 76% rise from Q2 of last year, despite exiting the on-line gambling business.

There is no doubt the Paypal’s integration with eBay has boosted business for both companies.

Our third area of focus is trust and safety.

As many of you know, one of eBay’s core values states that people are basically good, but we recognize that in a community of 75m users worldwide, which would put eBay 15th on a list of the most popular [inaudible], there are bound to be some bad apples as well.

And that's why we're doing everything we can to fight fraud on the site.

We continually innovate in this area, and our ability to tap into Paypal’s expertise and online safety has helped us immensely.

Much of our progress must remain by necessity, behind the scenes, but sharing tools and experience has allowed both teams to track and prevent fraud more effectively than ever.

As a result of our combined expertise, we're increasing the amount of buyer protection available on eBay.

We announced at eBay live, in addition to the $200 currently available on eBay, which covers almost all transactions, Paypal will launch a new fire protection program in the fall.

Underwritten by the company, the new program will allow sellers with a proven track record to offer buyers $500 in coverage with no deductible.

Sellers will be able to merchandise this production to buyer given them even greater confidence in the transaction.

Now, while the first three areas I mentioned deal with the aspects of eBay and Paypal trading platforms, the fourth area, marketing, is our lever for influencing supply and demand.

Our integrated marketing campaigns allow us to accessibly target audiences through a variety of tactics.

National [inaudible] like TV and print ads bring the masses while [inaudible] events such as trade shows, eBay university and eBay live give us a more personal appeal.

And once consumers land on the home page, our on-line merchandising kicks in to help them quickly find the items they want.

We continue to see strong results from our marketing efforts in category's large and small.

In Q2, almost every category demonstrated double digit year over year GMS growth in this quarter.

For example, Global GMS in the consumer electronics category grew 63% year over year while jewelry increased 70%, motors grew 93% and business and industrial jumped 103%.

Now, category marketing can take many forms.

In Q2, the home and garden category for example, focused often boosting awareness.

Building on the home design boom in the U.S., eBay unveiled its first ever designer show house in June. 7 of the nation's top interior designers transformed an empty penthouse in New York City into a center piece of cutting edge style with items purchased exclusively on eBay.

The show house was featured on the site and garnered significant national publicity for the category.

As a result, eBay attracted more unique visitors in June than any other home related site in the US, including those of Home Depot, Lowe's and HGTV.

Targeted marketing is also used to reach out to sellers or buyers in a specific category.

For example, to help members sell more effectively the clothing and accessories category held a fashion summit for 300 sellers on eBay line Touching on topics which ranged from listing strategies to how to source new products.

On the buyer side, targeted print ads helped bring our fashion message to consumer while the newly launched browse by brand page made buying easier.

This kind of targeted outreach keep the category dynamic and is part of the reason global GMS in the clothing ands accessories category grew 103% year over year.

As a result of this marketplace vibrancy, sellers are building their own brand on the site in record numbers.

At the end of Q2, this were more than 110,000 eBay stores worldwide, slightly more outside of the US than on eBay.com.

It's clear that these sellers understand the value of merchandising and branding themselves through their own eBay stores.

As eBay has grown in the U.S., we've learned a great deal about the tactics and techniques that serve our marketplace best.

The playbook we've created is being rolled out around the world and is helping to fuel the dramatic growth of our international site.

I just returned from a tour of our newly expanded international headquarters in [inaudible], Switzerland and some of our other European offices.

In every market, we're seeing more and more people discover the fun and opportunity of trading on eBay.

Even our youngest sites, France, eBay Italy and eBay Spain each showed year-over-year GMS growth rates in Q2 greater than 90%.

As a result, our international segment now accounts for a record 38% of the company's GMS and 31% of its net revenues.

As we grow our current international communities, we continue to look for new opportunities in up and coming markets.

Last week, we closed a deal that allowed us to increase our investment in EachNet (ph).

We first partner with EachNet last year and have been very impressed with the work that CEO Bo Shall (ph) and his team are doing to bring on line trading into the Chinese market.

While it’s still early stage in China’s e-commerce development, we see a great deal of opportunity there and look forward to working with the EachNet team to accelerate the local business.

Every quarter the power of the eBay marketplace and our careful management of the platform delivers strong results.

The power of the marketplace, however, does not belong to us, but lives among our community members.

As we were so vividly reminded at eBay live, the creativity, commitment and hard work of our users are what drive the growth of this company.

I'm happy to report that these enterprising men and women are enthusiastically optimistic about eBay and their own feature as part of the eBay marketplace.

We're excited about the unique and ongoing partnership we have with our community and together I know we can achieve even greater success in the future.

And now I'll turn it over to Rajiv for more detail on our financial results.

Thanks, Meg.

I'm very pleased to announce that Q2 was another strong quarter for eBay with the business setting new records for net revenue, net income and operating cash flows.

Even more impressive from my perspective was the fact that we were able to deliver these operating results while making several planned investments in support of our long-term growth.

Before I go into the Q2 details, I would like to briefly discuss the progress we've made on our 2003 investment plan.

As you may recall from our Q1 conference call, I described how 2003 would be a year of investment in several key areas, including product development, [inaudible] support, marketing and [inaudible] business.

Let me give you an update on where we are today.

In product development, we focused on building development capacity, enabling the acceleration of our V3 architecture program and the ability to deliver new features and functionality to the platform.

During Q2, these investments included increases in our internal development team, combined with the use of both domestic and off shore development contractors.

This development approach is providing the speed to market capacity essential to support our expanding marketplace, together with an appropriate long term financial accessibility.

For the quarter, product development expenses totaled $51m,which included $12.3m of capitalized cost.

In customer support, our investment goal is to build on one of our core competencies by making support even more accessible, allowing us to further increase user attention, activity and satisfaction.

During Q2, we made investments to increase the size of our team, expand live chat and phone support, enhance our [inaudible] safety program and support various direct marketing programs.

In Q3, we make additional progress with the expansion of our European customer support infrastructure for both eBay and Paypal.

And [inaudible] marketing, we continued our balanced focus on user growth and activation through a variety of initiatives that are delivering both near term return while delivering a long-term brand.

During Q2, we increased our sequential spending by $11m, reflecting an expansion of our integrated marketing program, as well as the very successful eBay live event.

The returns from these investments were immediately apparent with total sales and marketing costs per active user, declining to $3.94 while also producing solid new user growth.

And lastly, we continued to invest in the Paypal technology infrastructure, improving site scalability, redundancy and customer support.

While we clearly understand the long-term value of these types of investments, we've already seen returns in the form of improved fraud loss rates, credit card mix and GMS penetration both on eBay and off.

We also understand the importance of building infrastructure in front of future growth, and as a result, we will deliberately lower Paypal's operating margin in the near term as we continue to strengthen the platform and distribute the service to international markets.

All of these strategic investments we've been making this year, including these examples, underscore the confidence we have in the long-term future of our business.

To us, these are the early years for eBay and we are laying the foundation that will support the community and the marketplace for many years to come.

Now, let me turn to a more in-depth review of the quarter and key metrics.

While showing expected patterns of seasonality, Q2 was yet another very strong quarter.

Registered users continue to accelerate reaching 75.3m, up 51% year over year.

Listings reached 225m, up 55%year over year and GMS was 5.6b, up 66% over the prior year.

Active users, which we define as users who have bid, bought or listed during the trailing 12 months increased to 34.1m representing 57% year over year growth.

And these users continue to increase their spending on eBay with GMS per active user increasing from $524 in Q1 to $539 in Q2, reflecting the tenth consecutive quarterly increase.

Our results were equally strong across all parts of the business, the US, international and Paypal.

In the U.S. business, we saw our media efforts pay off in the form of improved user activation.

During Q2, U.S. users generated $3.5b in GMS, a 44% year over year increase.

This GMS volume drove a 45% year over year increase in U.S. on line transaction revenues to $242m.

Drilling down a little deeper, we saw particular strength in entertainment, sports, clothing and accessories, and technology related categories, such as computers, consumer electronics and networking.

Our global motors business also delivered strong results in Q2 with 93% year over year growth in GMS.

In the U.S., eBay motors continued to exhibit double digit sequential growth, however, the year on year growth rates were lower than our expectations.

While demand remains extremely strong, we believe that the shortfall is largely due to a supply constraint caused by several macro economic issues affecting the industry.

Moving on to the international business.

Our users generated $2.2b in gross merchandise sales, a 120% increase over the prior year.

This performance was sealed by continued triple digit growth rates in Germany and the U.K. and accelerating rates in Australia and Korea.

Not with standing the traffic growth, however, as expected, we also saw clear evidence of seasonality throughout Europe and Canada and expect to see continued effect for a substantial portion of Q3.

This strong Q2 GMS volume international net transaction revenues totaled $155m, $146% year over year increase.

I would also like to note that included in this revenue total is the foreign exchange benefit of approximately $6.9m sequentially, which reflects primarily the strength of the Euro throughout Q2 as compared to the prior quarter.

And finally, the payments business had an exceptionally strong quarter with eBay GMS penetration increasing to 58%and [inaudible] payment volume increasing 45% year over year, despite Paypal's exit from the gambling business.

In total, for Q2, Paypal's payment volume increased 76% year over year to $2.8b, reflecting the strong performance of the Paypal model, strengthened by continued integration with the eBay platform.

Paypal net transaction revenue totaled $99.4m, a 90%year over year increase.

These strong performances from each segment of our business led to another quarter of better than expected top line results.

When combined with the number of sufficient investments and the inherent leverage in our business model, the result is record bottom line profits and record operating cash flows.

On a consolidated basis, eBay reported net revenues of $509m, up 91% year over year, and that transaction revenues of $497m up 111% year over year.

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

Transaction revenues excluding payments totaled $398m, up 72% year over year.

Q2 pro forma operating profits totaled $169m, producing a 33% consolidated pro forma operating margin.

Consolidated pro forma net income was a record $121m, $0.37 per diluted share.

This pro forma EPS level represents a 95% year over year increase.

Consolidated GAAP net income excluding about $11m in net pro forma items totaled a record $110m or $0.33 per diluted share. this EPS level represents a 76% year over year increase.

And almost by definition, record earnings, once again, led to record cash flows, with Q2 operating cash flows increasing 125% year over year, to $209m.

As expected, capital expenditures increased to approximately $186m, up from $44m in Q1.

This increase was largely due to the purchase of new facilities in San Jose.

As a result, free cash flows declined to $23m in Q2 versus the $146mreported in Q1.

eBay saw its strength in the balance sheet to continue, exiting the quarter with $5b in assets, including almost $2.5b in cash and investments.

I would now like to move on to our financial guidance for the remainder of 2003.

But before I get into specific detail, I would like to remind you of some important considerations that impact our revenue outlook.

First, with vacations, holidays and other outdoor activities, the summer months tend to have lower levels of on-line activity.

As a result we have traditionally experienced lower levels of growth during this period.

With our business fast becoming mainstream and increasingly international, we expect that the seasonality pattern will be more pronounced.

Second, we introduced Value Added [inaudible] across many of our European sites on July 1.

You may recall that VAT requires us to collect and remit taxes and fees we charge certain sellers.

While it appears that [inaudible] VAT taxes have had only a nominal impact in business volume, we believe it is too early to determine the potential long-term impact VAT could have on seller activity.

Just as in Q1 of this year, our Q2 net revenues benefited significantly from strong international currencies.

In Q2, approximately $23.2m of the year over year growth in our consolidated international net revenues was derived from favorable exchange rates, primarily the Euro.

On a year over year basis, the Euro strengthened approximately 23% against the dollar.

Recently, we have observed both the Euro and the British pound weaken against the dollars, and we obviously can't predict the rates that might prevail in future periods.

As a result, we believe that fluctuations in foreign currency exchange rates could cause significant variability between our expected and actual operating results.

Please note that the guidance I provide today assumes that the actual weighted average exchange rate in Q3 and Q4 will approximately $1.14 per Euro.

Factoring in these considerations and with strong business momentum, we now expect 2003 consolidated net revenues to approximately $2.75b or $25m more than [inaudible] guidance.

We expect that 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 $515m in Q3, versus our prior guidance of $510m, and $575m in Q4, versus our prior guidance of $564m.

Turning to EPS, we now expect eBay’s 2003 pro forma diluted EPS which excludes certain charges to be as high as $1.47, $0.06 higher than our previous guidance.

Please note that this guidance incorporates a $0.03 per share decrease in pro forma net income related to the acquisition of EachNet which was completed July 16th.

On a quarterly basis we expect pro forma diluted EPS approximately $0.34 in Q3 and $0.40 in Q4.

These amounts include the decrease in pro forma income from EachNet of $0.02 and $0.01 per diluted share for Q3 and Q4 respectively.

I would also like to note that the investments that we plan to make in Q3 are expected to lower our quarterly pro forma operating margin to about 31% for the full year, however, we expect pro forma operating margin of 33%, an increase from the 32% margin implied by previous guidance.

Taking into account various GAAP adjustments which we estimate will approximate $13m to $18m per quarter for the remainder of 2003, net of tax.

We expect GAAP earnings per diluted share to be as high as $1.31.

From a quarterly perspective, we expect GAAP earnings per diluted share to be $0.29 in Q3 and $0.36 in Q4.

Lastly, I'd like to express a few thoughts about our announced stock split.

In October of last year, we provided full year 2003 net revenue guidance in the range of $1.77b to $1.83b.

And $1.12 to $1.15 in pro forma EPS.

Today we expect 2003 net revenue to be as much as $245m higher than the top end of our guidance, and that 2003 pro forma EPS will exceed our original estimates by as much as $0.32 per diluted share.

Clearly eBay’s business remains strong.

We also remain committed to making our stock more accessible to a broad range of investors who share this belief and take a long-term view of the company's growth opportunities.

After careful consideration of eBay’s current stock price, long-term business expectations and a lengthy discussion with our Board of Directors, we concluded that a stock split was appropriate.

As a result today we are announcing that eBay’s Board of Directors has approved a two for one split of our common shares in the form of a stock dividend.

Shareholders of record as of August 4th, 2003 will receive one additional common share for every share held.

The split will take effect as of August 28th, 2003.

In summary, 2003 remains a year of strategic investment, and we continue to see tremendous momentum in the business with increased revenue and profit expectations for the year.

As the company grows and develops, it continues to validate the tremendous potential that exists in every part of our business.

Thanks for joining us today.

We would now be pleased to take your questions.

Thank you.

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One moment, please, for the first question.

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

Please proceed with your question.

Thank you very much.

A couple of questions, Rajiv, I noticed your increased guidance on capital spending.

I was wondering if you could give us a sense in a ballpark range of what you think the capital needs of the business are over the next several years.

You guys have talked about operating margins, you know, long-term plan.

Do you think capex as a percent of cost of good sold or revenue trends down significantly from where it is and how can we think about that, because when I compare eBay to a couple of other companies, similar companies like Yahoo and Amazon, the absolute dollar amount is much greater here even with excluding the building purchase and as a percent of cost of goods sold is much higher so I want to get a sense of that.

Secondly, Meg, I was wondering if you could comment a little bit on the quarter, if there was anything disappointing specifically Germany, the sequential change was actually lower than US by our calculations which was still strong triple digit growth and I was wondering if that was all due to the VAT tax.

Historically, you guys have been beating your out look on the street by 8% to 10% in each quarter.

This quarter there was less upside than you've had relative to your plan in the past.

Was there anything in the quarter that was disappointing or are you getting better at giving guidance?

Thank you.

Okay.

On capex, Anthony, yes, so I think the first point is that this business is very, very much -- this is not dependent on a lot of capital expenditures.

Nothing has changed our view with regards to that.

In fact, the cash flow [inaudible] really underlie that.

The other thing I would sort of point out is particularly when you are doing a comparison to other companies, the relevant comparison is GMS, not revenue, because that is really the volume of activity that's taking place on the site.

Longer term, what do we see happening with capex, you are correct, this year, particularly this quarter, a big part of it was the building, which is $125m for additional facilities here in San Jose.

For the full year in our last 10-Q, we indicated capex for the year of about $374m.

Longer term, I think an appropriate range is to continue to see capex as a percentage of revenue continue to decline, so around 10%, continuing to decline down below that, I think is completely appropriate.

And remember, in 2003, we're making a lot of lumpy investments here, whether that is what we're doing in PD, whether we are expanding facilities and customer support and of course, Paypal technology where we are really looking to scale infrastructure ahead of what we expect for rapid growth.

With regard to the quarter Anthony, we actually were -- this was right on target with what we thought would happen.

We were accurate in forecasting the seasonality.

We really saw strong growth across all countries, all categories and all businesses.

With regard to Germany, Germany still grew at 133% year over year.

We were pleased with that.

There was expected seasonality in Q2.

Summer came very early to Germany, and we saw the effects of that in our business.

That wasn't actually a big surprise to us.

The question you raise is why in the past have we exceeded by so much.

I think the, you know, Q4 and Q1 were exceptionally strong quarters and we now are back being able to forecast this business with a little more accuracy than we were able to do in Q4 and Q1.

Let me make one more point about Germany.

The post master general of Deutsche Post said in a speech a couple of days ago that 17% of all private packages shipped in Germany in Q4, 2002 were eBay Germany packages.

So we're a big part of the private package markets in Germany and that business is still on a roll doing great.

Great, thank you very much.

Next question.

Our next question comes from the line of Jeetil Patel with DB Alex Brown, please proceed with your question.

I never heard that type of pronunciation but I'll go with it.

Can you talk about marketing campaign, you know, you were running the marketing campaign [inaudible] second quarter.

Can you talk about, I guess the purchasing activity.

It looks like by my calculation it was up 3% year over year in terms of the number of items purchased per active user.

And you know, by your forecast, it looks like it's coming down.

Do you plan to continue the marketing campaign, and can you talk about, I guess you've been doing it for a couple of quarters now.

How effective is it today relative to, say, the third or fourth quarter, last year when you started the campaign.

And then on the payment side, can you talk about initiatives such as the InstaPay (ph) capability in the media category.

I believe you are rolling that out this holiday season, and the higher insurance coverage via Paypal.

What kind of impact do you think that'll have on the business from a buyer behavior standpoint?

Do you think it drives the conversion rate higher, ASPs?

How would we try to look at that as, you know, in our assumptions going into the second half of this year?

In terms of marketing, this continues to be a very successful integrated marketing campaign.

One of the key metrics that we look at, Jeetil, is GMS per active user.

That continues to go in the right direction.

It was $539 this quarter versus $524 the quarter before, increase in active registered users was very healthy.

So look to continue TV, print, Internet marketing, PR, along with very effective on-site merchandising and direct marketing.

When I think about marketing at eBay, I don't think about the silver bullet.

There is one particular thing we do, it is the way we do it across the board on an integrated basis.

So we're going to continue to do what we've done in Q3 and Q4.

In terms of payments, actually InstaPay, you know, where the -- as the auction ends, the buyers card is debited right away actually live to site.

It is live to site in both the media categories as well as the ticket categories, and it really improved sellers efficiency, particularly in perishable product like tickets.

Nonpaying bidders is down in those categories, and been very well received.

So it's been live to site for three or four weeks.

We're excited by early results.

In terms of the insurance coverage, the buyer protection plan, one of the things we know is new buyers on eBay are not completely sure of how their transaction is going to work and we think that this $500 buyer protection plan is going to increase certainty and assurance for new buyers, and we think it will increase velocity of trade on eBay.

So we're pretty bullish about it.

We also think sort of a derivative will be that it will increases Paypal adoption which is great for Paypal and the eBay marketplace.

So I can't give you specific numbers, but much as a lot of features and functionality we've introduced in the last couple of years have increased the velocity of trade, we think this is an increase in velocity of trade move.

So do you think -- one follow-up.

Just the making of ease of use from the buyer standpoint, do you think that will have a positive impact on conversion of listings to transactions?

Yeah, I think so.

I mean, whenever we make things easier for buyers and particularly easier for sellers and give sellers more assurance, we see conversion rates impacted positively.

Thanks.

Good.

Our next question comes from the line of Heath Terry with CSFB.

Please proceed with your question.

Great.

I was wondering if you could give us an idea of your plan around the autos business.

You've mentioned that it seems to be more of an issue with supply and demand and so what you are planning on doing to get supply up there and then if you could also talk to us a little bit, if you could give us an idea of where you are along the progression of the integration of Paypal, how much further you feel like there is to go before Paypal is as tied into the eBay site as you want it to be.

Let me start with the auto business.

I think you characterized it correctly, that, you know, the U.S. motors business is strong, demand is even stronger than supply, which is actually a good thing in the long run.

You might note that we really doubled down on motors marketing this second quarter.

It's possible that the demand outstrips supply in the near term.

Our experience is that supply always follows demand.

That said, we're going to step up our communications efforts and our marketing efforts to make sure that dealers, individuals, understand the value proposition that is represented by eBay motors.

It's far better to have a supply problem than a demand problem.

But we have a team against it, and we are really going to figure out what the levers are that we can drive up the supply of [inaudible].

In terms of Paypal integration, you know, we've done a lot of the very obvious early stuff, particularly on dotcom, however there are more things that we can do, probably the most important of which are the two that I was just talking to Jeetil about which was InstaPay as well as the buyer protection program.

We've cleared 58% of eBay.com GMS through Paypal and that number will continue to inch up over time.

We've got quite a ways to go before we're tapped out on eBay.com.

Then what you have to think about is eBay international.

The only country that has localized product outside the US is eBay.co.uk, doing great.

And what we want to do is follow the eBay global footprint with Paypal as the markets reach maturity and they get a chance to, you know, Paypal becomes a good thing for each of those markets.

So I would say net, net, net, we're at the earliest stages of Paypal’s growth on the eBay community.

Thirdly is off eBay which is where Paypal is the mechanism for [inaudible] on the net to accept payment.

That business continues to grow fast.

I would say we are at the one yard line on the off eBay business in terms of where that business can go.

Great, thanks.

Next question, please.

Our next question comes from the line of Shawn Milne with SoundView.

Please proceed with your question.

Thanks a lot.

I just want to follow-up on the eBay motors question. eBay live, the folks there were pushing on car ad technology pretty hard.

Is that an effort to boost supply and should we -- is there a sense should that business actually decline sequentially into the September quarter, and then just a quick question Rajiv, can you talk a little bit about operating income flow-through rates?

Obviously '03 is a big investment year.

How do you feel about '04, should we start to see the flow through expand and if you could add a little quantification behind that, that would be great.

Thanks.

Yeah, car ad is absolutely a vehicle by which we can increase supply.

It increases productivity of dealers.

It helps them manage inventory, give them more information about selling prices and things like that.

We think the expansion of car ad is a factor in bringing more supply to the site.

We don't actually see a decrease at all sequentially in GMS in the motors business.

I should say the parts business is doing great.

So, the parts business combined with the vehicle business where demand is very strong sequentially, we will not see a decline in either of the parts business or motors business on a standalone basis.

You know, with respect, Shawn, to the second part of your question on margins.

Way too early to talk about 2004 margins yet.

We're not at that point and we'll be able to give you an update later in the year.

I'll step back and give you philosophically where we stand.

You know, 2003 could be characterized as a year of investment.

The reason for that is this is a business with enormous opportunity.

What we really wanted to make certain of is that we didn't short change the long-term business that is ahead of us.

And we really felt it's important, this is the business that's still generating 20 plus percent margin, 33% this year, and that's no [inaudible] feat, with tremendous cash flow and this is despite the fact that we have included Paypal in 2003.

So the dilution that came from absorbing lower margin business of Paypal could have completely -- we sort of ran right past that.

So for 2004, I think what you're going to see from us is sort of the constant balance between investments for the future, while at the same time trying to make sure that we're delivering appropriate shareholder value with a real focus on long term shareholder value.

Thanks, Rajiv.

Thanks.

Next question.

Our next question comes from the line of Daryl Smith with JP Morgan.

Please proceed with your question.

Great, good afternoon.

Can you give us an impact of the value-added tax in the European sales and where you are envisioning penetration rates relative to total European opportunity.

And then [inaudible], what has been the impact on conversion rates on average selling prices relative to that VAT?

It's very early to draw too many conclusions about VAT, because it just rolled live to site on July 1st.

We're three weeks in.

And you know, thus far, we haven't seen any impact on our European business, but I will tell you that the users have not seen their first invoice since VAT went into effect.

Until they get their first invoice and they understand what has gone on here, it's a little early to say what it's going to mean for number of sellers, number of items, conversion rates, all of the key metrics that we follow.

Good news is that communication went smoothly.

We think virtually all of our sellers understand what's going on.

I've been around the community long enough to know that until they get their first invoice, it's way too early to draw conclusions.

We'll give you an update, certainly at the end of Q3 about what we've learned.

In terms of where the business is, obviously, the largest country outside the United States is Germany.

The rest of Europe is in its most nascent stages.

France, Italy, Spain, Netherlands, Belgium are early stages businesses.

The U.K. is coming along nicely, but we are in the earliest stages of growth in Europe.

Second question, with [inaudible] out of business, can you comment on trends and the cost of sales associated with that business and how successful your efforts have been in getting new users to switch from using the more expensive credit card transactions to a more internally initiatives?

So a couple of things.

You know, as far as cost per transactions, part of it -- it went up a few basis points because of the increase cost of processing associated with a couple of our providers.

But very, very marginal.

I think what we were very pleased to see when you look at the mix is actually the mix improved from 56% credit card last quarter to 55% this quarter.

So a lot of the metrics on Paypal are doing extremely well.

The one other I would point out to you is the fraud loss reserve, which actually clicked down to 32 basis points, and a lot of that is coming from the focus on fraud, the fact that we are now integrating both the eBay and the Paypal fraud analytics, combined with just better learning and technology.

Great, thank you.

Thanks, next question.

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

Please proceed with your question.

Yes, good afternoon.

Could you talk about the growth pattern that we can expect for the Paypal, given that there are several components as Meg alluded to both increased penetration within eBay possibly auto services, as well as just outside eBay, the growth, there is simply not enough [inaudible] for us to see how it has been growing and projected.

You obviously had a huge growth in Q1 and much more subdued this quarter.

Going forward, should we see that revenue line to be growing in line with the overall eBay possibly above that, or not?

And secondly, if I may, could you talk about the overall performance this quarter that you mentioned was more in line with the guidance and what you expected as opposed to previous quarters which you had some quarters beyond expectations.

What has caused -- I know it's kind of going backward but it helps understand, why do you think you had well above expectation performance last quarter and you are getting back to more within the expectations?

Thank you.

In terms of the growth pattern for Paypal, the thing you have to remember is we are lapping Paypal when they included the on-line gambling business.

That got as high as 11%, 12%, 15% of their total revenues.

When we acquired the company we lopped that business off, in addition we exited the adult business.

When you look at a 45% year over year growth for eBay, you might say that looks low for a new business.

It's actually much higher when you can normalize apples to apples.

As we begin to round the corner on the business that is a more apples to apples comparison, you will see that growth rate go up to more normal fast eBay growth levels.

We've got a lot of way to go on U.S. penetration.

I would say Safa look for couple of points of penetration per quarter.

We're not going to go from 58% to 68% in the quarter.

Every quarter we'll chunk up another couple of points.

That is how the community adopts this program.

As we enter new markets, we'll see the same very rapid growth curve that we see when we enter eBay in new markets.

I think we're going to see very, very healthy growth rates for Paypal.

We're bullish about the business.

The profit characteristics of that business are better than we had thought.

In fact, that's one of the reasons why we have decided to deliberately deleverage that business because we absolutely have to invest in what I think could be a business that is absolutely huge.

So we're taking the right steps to invest in what will be a very, very big business.

So you'll see great growth rates as we lap that exit of the gambling business.

I'll let Rajiv comment on the overall performance-- I took a pass at it before, I'll let him.

So my sense of this is that, you know, Q -- the proponents of the quarter in terms of revenue is actually quite terrific.

One of the things that I would actually point out is you know, back in Q4, at the beginning late in Q3 and Q4 of last year, we saw this business really pick up speed, you know for many of the quarters last year we had seen accelerating growth rates.

You can't sustain accelerating growth rates forever.

What we have seen is several quarters of acceleration, part of that is really because this is becoming more mainstream as a destination.

Part of it is because the international business is also more seasonal.

And one of the things that is pretty obvious to me, sort of taking a step back is back in October when I had given guidance for the full year 2003, you know, compared to those numbers, we're up $245m for the full year.

So, you know, our expectations keep jumping up.

As we get closer and as we gain visibility and of course we share that with you.

So, very pleased with the overall trajectory of the business and where we are headed and I think that's reflected in the guidance.

All right, thank you.

Next question

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

Please proceed with your question.

I had two questions that kind of go back to what you were just talking about Rajiv, and that's the seasonality in the business.

You know, as this becomes a bigger factor in understanding sequential growth of the company, it might be helpful for you to -- if you could provide any additional color beyond just the fourth quarter and first quarter are the two big quarters.

I mean specific months that -- where things get a lot slower?

How much slower do they get?

You know, I know you are just moving into this, but if you could lay out any more context around seasonality, that would be helpful, and then I have a follow-up.

Yeah, Lanny, I think let me see if I can shed a little more light on this.

A couple of things.

One is there is no question that for the northern hemisphere countries, what I would characterize as Europe, more particularly northern Europe and Canada, the seasonality effects are bigger.

You know that Europe pretty much shuts down in August.

At the same time, in the U.S., we see a pretty strong -- pretty slow, May and June.

When you look at the overall summer months where we actually see some of the slowest levels of on-line activity, that is May, June, July and August with typically a comeback with back to school in September.

This is not unlike what happens in general retail.

And I think that those patterns are definitely evident on eBay.

We expected them this year.

They certainly took place, and I think that this is going to be and it is a part of the overall relative growth rate trajectory on eBay.

I think it's important to make that point.

Seasonality on eBay is not about declines, it's about relative growth rates.

So I hope that helps.

Yeah, it does.

Did you -- were there any discernible war-related impacts across the course of the second quarter for you and then, one other kind of last question is, the rate -- sort of the capitalized development expenditures to the expensed has shifted -- should it -- where does that run kind of long term?

Yeah, so, on the war, there is no question that we had seen some effect from the war.

In fact, what I told you last quarter, it's less than we had expected but it was there nonetheless.

And typically what happens, if you recall for those of you that were following the company back at 9/11, when you have any kind of macro economic hiccup, it takes a while for the overall business to recapture its original trajectory.

I think we're on a pattern to do that.

There was a bit of a hiccup from the war, but I don't wand to overstate that.

On the second point which relates to capitalized R&D, capitalized development.

What this is, is capitalized software.

And we are required on any longer term capitalized software that we develop to actually capitalize it for a period, and typically, this number has been pretty small, last quarter it was about $4m.

This quarter it was $12m.

It's really going to be a function of how many large projects we're doing.

You know, we haven't really guided as to what is capitalized software, but I think I can give you an overall direction and that is that we approximately expect it to be in this range in the next couple of quarters, longer term, I think it would be premature for me to comment.

And last point is, this is very mechanical.

This is required by the FASB rules.

We don't have a choice in the matter, and any time we are working on and developing software that is going to be with eBay for a while, such as the large billing project that is under way or selling tools or catalog functionality, we are required to capitalize that.

Thanks a lot.

Thanks.

Our next question comes from the line of Christa Sober with Thomas Weisel Partners.

Please proceed with your question.

Hi, couple of questions.

First, on the take rate side it looked like your domestic take rate dipped down from 7% to 6.9% this quarter.

I was wondering if most of that was related to autos, obviously that garners a lower take rate, but some of the other ancillary features, are they just not experiencing the type of pickup that you would think like gallery features, et cetera?

And then second, two questions related to costs, as you experience upside in the coming quarters, how fungible is your marketing spend?

Is it something that would be likely to increase if you experience some upside during the quarter, and then the third question relates to bonus accruals.

I was wondering if the pace of that has stepped up in the second quarter, giving your general performance thus far this year.

Thanks.

So on take rate, I think in the U.S. business, if you actually look at revenues as a percentage of GMS revenues -- transaction revenues as a percent of GMS, that rate has improved.

Where that is coming from is the fact that we've made available a lot more merchandising options to our sellers and there has been greater pick up on that.

So a lot of our [inaudible] and the take up on that has gone up.

I think that the overall number that you are referring to may be a function, and I would spend a little more time with you on this, but I think that may be an overall function of what's happening with advertising, which has absolutely declined quarter on quarter.

In terms of marketing spend, you know, we decide, obviously, at the beginning of every year and the beginning of every quarter how much we want to spend on marketing, and how we think it is best to deploy that.

We have some inter quarter flexibility, but if we're going to buy television time efficiently or print ads efficiently, there is not a ton of flexibility on the big mainstream vehicles.

On line marketing, we have the ability to dial up or dial down, and if the quarter begins to, you know, show some strength and we feel like we can get a good return on incremental advertising or marketing investment, we will, but we don't do it just as a matter of [inaudible], we want to make sure we get a good ROI on that investment.

And what is the question on bonus accruals again?

I was wondering if that had stepped up at all during the second quarter related to the pace previous and or if that tends to be sort of an even accrual all year long.

No, it pretty much is an even accrual all year around.

The actual expense is based upon actual company performance.

And then one quick follow-up, if I may, actually, totally separate.

Can you give us a sense as to what percentage of Paypal revenues generated internationally, and if -- could you give us a sense if the majority of that is still in the UK?

Yeah, it's about 20%, the majority is in the U.K. as well as cross border transaction.

When the buyer and seller are in a different country, we have [inaudible] Paypal adoption there because it's easier cost effective than money orders are trying to clear a check internationally, so 20% is plus cross border transactions.

Great, thanks so much

I think we're down to our last question, if there is one more question.

Actually, I'm showing no further questions at this time.

Excellent.

Thanks you very much for joining us.

We appreciate it.

Thank you.

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

We thank you for your participation and ask that you please disconnect your lines.