eBay Inc (EBAY) 2003 Q3 法說會逐字稿

Ladies and Gentlemen, thank you for standing by.

Welcome to the eBay Q3 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.

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, October 16, 2003.

I would like to now turn it over to Mark Rubash, vice president of finance for eBay.

Please go ahead, sir.

Good afternoon.

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

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

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

Before we begin, I would like to take the opportunity to remind you that during the course of this conference call we may discuss some nonGAAP measures when 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 uncertainties, including those relating to the company's ability to grow its business and user base.

Our actual financial results could differ materially from those discussed during this 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 trading including competition from our sellers, from other trading sites and other means of selling; and competition for our buyers from other merchants, online and offline; litigation, regulatory, credit card association and other risks specific to PayPal; our need to manage our other regulatory tax and litigation risk even as our product offerings expand 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 our 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; and the cost and benefits of current and prospective acquisitions and other commercial transactions.

More information about factors that could affect our operating results is included under the caption "Risk Factors That May Affect Results in Operations and Financial Condition" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on form 10-K and quarterly reports on form 10-Q, copies of which can be obtained by visiting our investor relations website at investor.ebay.com.

Finally, we've had a few questions regarding the first call consensus estimates that requires some clarification.

We believe that several analysts that cover the company have not adjusted their Q2 '03 pro forma EPS numbers to reflect our $30 million pretax charge relating to the [INAUDIBLE] exchange matter.

I would like to confirm at this time that our actual reported results for Q2 '03 were 16 cents per diluted share.

We'll begin today's conference 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 to respond to your questions.

Now over to Meg.

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

Q3 was another very strong quarter for eBay, delivering great results across the board.

In Q3 we saw record levels of registered users, listings and gross merchandise sales for eBay and record total payment volume for PayPal.

We saw transaction revenues jump a remarkable 96% year-over-year, while consolidated net revenues grew 84% from the prior year.

These results were fueled by strong growth in every part of the business, eBay U.S., eBay international and PayPal aided by consistent execution companywide.

This momentum enabled us to exceed our revenue projections by nearly $16 million and operating margin projections by a full percentage point.

As a result, we're raising our guidance for Q4, and on today's call we'll also provide 2004 guidance.

Rajiv will go into detail in a moment.

At the highest level, our Q3 results reaffirm the strength and resilience of the eBay business model. eBay's business is powered by three powerful forces.

First, eBay is at the forefront of the Internet in actionable growth.

According to eMarketer, online shoppers in the U.S. alone are expected to reach 121 million in 2005, and those users will be spending $928 per person, up 37% from today.

Without question, the Internet is quickly becoming the first place where people go to shop, and shopping on the net is linked more and more to the eBay experience.

All facets of the net's upwards trajectory are benefitting eBay.

Second, consistent execution is turning challenges into opportunities and making it possible for eBay's businesses to yield better and better results every quarter.

Finally, our community of users realizes that eBay's consumer proposition is second to none.

For sellers, eBay maximizes profits, giving merchants a strong, competitive advantage.

For buyers, eBay is an attractive fun shopping designation offering unparalleled value.

As the eBay marketplace grows, it becomes ever more efficient and the consumer proposition only gets stronger.

Just as it has in the U.S., this pattern of success is repeating itself in our markets around the world.

As we enter this quarter and look out on next year, we couldn't be more excited and more confident in the business.

With 86 million registered users who now trade items worth $23 billion on an annualized basis, we're a much bigger company than we were at the start of this year.

Through the hard work of the entrepreneurial community of users, eBay becomes a more powerful consumer proposition day-by-day as the breadth and depth of the marketplace grows with every listing.

Just in the past few weeks, we've expanded the ebay.com category structure to include a few fun new categories.

Antiquarian books on medicine this morning has 446 listings, collectible cow-shaped creamers had 123 listings, ergonomic keyboards had 104 listings, custom costume-making services had 229 listings, neon signs for restaurants had 69 listings, and industrial diamond saw blades had 30 listings.

The evolution of our category structure helped meet the vast and varied needs of our trading community and ultimately helped spur the business.

While the marketplace evolves from day-to-day, our pledge to our community of users never changes.

Our mission is to manage the marketplace for the success of our buyers and sellers.

In Q3 we continued to do this by focusing on four areas of activity that affect our users most: technology, site features and functionality, trust and safety, and marketing.

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

The first, technology makes it all happen.

Supporting the needs of our community, we have created what's arguably the most sophisticated website in the world, and we continue to innovate and invest in this area.

In Q3, for example, we continued the roll out of our proprietary search technology, which we think is one of the best in the business.

The new system allows near realtime indexing and updating and faster, more accurate search results.

As a result, we've been able to improve the velocity of listing and in fact offer new options to users, such as the newly announced One Day Auction.

We are also one of the busiest websites in the world.

At peak usage in Q3, eBay reached in a day 718 million page views, 120 million searches and 7.4 million bids.

Live listings hit an all-time high in Q3, peaking at 21.5 million listings in one day, nearly 20% higher than our busiest day in our Q4 holiday season last year.

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

While the underlying technology is complex, we strive to make the website easy and convenient to use.

In Q3 we rolled dozens of enhancements for the platform, ranging from new tools for sellers to features that benefit buyers.

Increasing the usability of our site not only provides our users with greater convenience; it also boosts activity and consequently GMS.

Some of our site enhancements have changed the dynamics of the marketplace altogether.

Fixed price trading, for example, continues to be popular in the U.S. and around the world.

In fact, in Q3 our portfolio of fixed price options contribute 28% of global GMS.

And, the acquisition of PayPal continues to deliver enormous benefits to our users as well to for the company overall.

PayPal showed healthy growth in Q3, ending the quarter with a record $3 billion in total payment volume, a 70% rise from Q3 results last year.

While a majority of the payment volume came from trading on eBay, the off eBay segment continues to grow nicely, despite our exit from the online gambling business.

PayPal has also begun to expand internationally.

Two weeks ago we launched a new localized payment service for the U.K., making it easier for British users to use PayPal and offering features such as seller protections against charge backs that weren't previously available.

A full year after PayPal's integration with eBay, it's clear that PayPal's continuing success is boosting the growth of both businesses.

Our third area of focus is trust and safety.

Ever since the launch of a feedback forum in 1996, we've helped our community of users trade safer and smarter.

The acquisition of PayPal has contributed to our ability to fight fraud.

PayPal, in fact, has developed some of the most advanced techniques on the Internet for stopping online fraud.

We're so confident of the growing ability in this area that we've increased protection for buyers on the site.

Two days ago we launched PayPal buyer protection in the U.S. and Canada.

As we announced at eBay Live, in addition to eBay's current buyer protection program which covers almost all transactions, PayPal's 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 protection to buyers, giving them greater confidence in trading on the site.

The first three areas I mentioned deal with aspects of the eBay and PayPal platforms.

Enhancing trading through those means are only part of our job as the marketplace manager.

The fourth area, marketing, is how we increase supply and demand throughout the site.

We've had great success in the U.S. using mainstream vehicles like TV and print ads to raise awareness of eBay as a shopping destination and to bring users to the site.

As a result, we've just launched our second television campaign, giving a new twist to our tag line, "Do It eBay."

The campaign includes three TV spots that will run through Q4 along with print ads in national magazines and daily newspapers.

We're already seeing an increase in unique visitors to the site from the spots, and we're confident that the campaign will help boost holiday shopping on eBay.

To further help our users during the holiday season, we've just launched eBay gift certificates.

Shoppers can now give their friends and families gift certificates in denominations from $5 to $200.

They can be used to buy any item on eBay where PayPal is accepted.

Long-requested by our community and now possible with PayPal, we think this will be extremely popular among our users.

In addition to our broad based marketing in Q3, eBay categories also reached out to relevant users through targeted efforts, from direct mail and online merchandising to trade events and public relations.

Tactics vary by category but they all contributed to the same result: continuing growth across the board.

For example, global GMS in the sports category grew 47% year-over-year while photo increased 75% and clothing and accessories jumped 87%.

Newer categories such as business and industrial and home and garden showed triple digit growth year-over-year.

With 74% year-over-year global GMS growth, eBay Motors had a strong Q3.

The site continues to be the largest and most popular used car site in the world, with more monthly unique visitors than the next two websites combined.

Listings on eBay Motors enjoy high bidding and conversion rates.

Clearly buyers like eBay Motors.

The site has helped to redefine how used automobiles and car parts are sold, creating the first national used car marketplace. eBay Motors is the natural home for independent dealers and individuals who find the efficiency and reach of our site hard to match anywhere else.

In recent months, we've seen a supply/demand imbalance in several of the upper categories on eBay Motors in the U.S.

We believe this imbalance is caused by the structural and economic forces affecting the car industry, the rapid acceleration in buyers flocking to the site for a great deal, and our sellers learning how to manage a new and very different sales channel.

Over the next several quarters, we'll be working closely with dealers to help supply meet the high demand.

Our confidence in the future of eBay Motors couldn't be stronger.

As eBay grows in the U.S., we learn a great deal about the features and programs that serve the marketplace best.

This on going innovation is part of a collective body of knowledge that every eBay team around the world uses to grow local growth.

No matter the country, our focus is always on fostering and supporting the local community of users.

Q3 saw a record number of international community events as excitement about eBay continues to spread around the world. eBay Germany hosted it's first-ever eBay Live Community Conference in Berlin that drew a crowd of 2300 users.

At International eBay University events from Taipei to Winnipeg to Marseilles and Milan taught more than 4,300 people how to trade successfully on eBay.

It's no surprise, then, that in Q3 international GMS grew 83% year-over-year despite strong seasonality effect in Europe.

Year-over-year GMS at eBay France grew 58% in Q3, eBay Italy rose 63%, eBay Spain increased 105%, and eBay U.K. jumped 155%.

In the opposite hemisphere, eBay Australia experienced 128% GMS growth year-over-year.

eBay Germany also showed strong GMS growth of 72% year-over-year.

With online reach in Germany now more than 50% as recorded by Nielson Net Ratings, the team there is taking a page from the U.S. web play book and focusing on user activation in addition to new user acquisition.

As part of this marketing approach, eBay Germany launched its first television campaign last week.

The campaign focuses on the thrill and fun of buying on eBay, and judging by the loud ovation it received from users from eBay Live in Berlin, we think it will strike a chord with German consumers.

Each quarter the eBay marketplace 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 gain while significantly investing in the long term growth of the business.

The true promise of the marketplace, however, is our community of users.

They are building a lasting and robust business with us one transaction at a time.

The unbeatable combination of commerce and passionate interest fuel eBay's success.

We're extremely proud of the unique partnership we have with our users and look forward to creating even greater success in the months and years ahead.

And now we'll turn it over to Rajiv for our financial results.

Thanks, meg.

As you just heard, Q3 was another excellent quarter for eBay, with continued rapid growth in both our core and emerging businesses combined with our improved operating leverage.

The eBay model continues to deliver outstanding profits and cash returns, while at the same time allowing us to make important investments to capture the opportunity we see ahead of us.

The investments we made this year leave us very well positioned for a strong holiday season and a very promising 2004.

As I described in our call last quarter, we're extremely confident in the long term future of our business and truly believe these are the early years for eBay.

Investing in the foundation that supports our community and the marketplace while continually improving our financial return is at the heart of our business strategy.

The increasing success of our company, and more importantly, our community, is confirmation that the course we've chosen in the right one.

To begin today's discussion, I'll spend some time with a few key metrics, summarize our operating results, and the finish my remarks with our financial guidance for the fourth quarter 2003 and full year 2004.

If you evaluate our quarterly metrics, it's important to note the number of factors contribute to eBay's continued strong GMS and revenue growth.

First, while GMS is heavily influenced by listings growth, a metric we make available on the near realtime basis, there are also other important metrics, including conversion rates and average selling prices that factor into the results.

Drilling even further down, user acquisition, user retention, and user activity are becoming increasingly important measures.

With respect to PayPal, the same factors that drive growth in eBay's GMS also drive growth in total payment volume, total accounts and payment activity.

As a result of these synergies, our investment to drive increased eBay market-based activity are more leveraged and profitable than ever before.

Now let me provide some color on how these metrics trended in Q3.

First, in eBay.

We saw new listings continue on an upward trajectory, growing 47% year-over-year to 235 million.

At the same time, consolidated ASPs trended up 7% year-over-year, while overall conversion rates continue to move in the same 4% [INAUDIBLE] that they had moved in for over the past two years.

The combined result of solid listing growth, increases in ASP and a stable conversion rate was a 53% year-over-year increase in GMS to $5.8 billion.

Also in Q3, the eBay value proposition continued to attract new users with CRUs growing 56% year-over-year to 86 million.

These results reflect the first time inclusion of 3.2 million visits of users from our EachNet market base in China.

Perhaps even more importantly, our user activation programs delivered solid results again this quarter, with active users increasing 55% year-over-year to 37.4 million.

And this robust activity on the eBay platform translated into strong metrics in our payments business, with total accounts growing 79% year-over-year to 35.2 million and the number of payments growing 83% year-over-year to 57.4 million.

Moving on to our operating results.

Our Q3 consolidated net revenue totalled nearly $16 million more than the guidance we provided on July 24.

At the same time, our Q3 pro forma operating margin came in at 32%, reflecting strong year-over-year leverage in the core eBay business, offset by the consolidation of the PayPal business.

On the bottom line, eBay's Q3 pro forma diluted EPS came in at 18 cents, a penny above our 17 cent per share guidance.

Adjusting for our two-for-one stock split in August, our results would have exceeded our guidance by 2 cents.

On the top line, eBay reported a record $531 million in consolidated net revenues, an 84% increase over Q3, 2002.

This year-over-year growth was driven by transaction revenues of $517 million, up 96% year-over-year, reflecting a 7.1% [INAUDIBLE] in eBay GMS and a 3.5% [INAUDIBLE] on PayPal's total payment volume.

I call out these take rates here because they're also key elements of the eBay model.

We are continually striving to support the needs of our community by offering new features and functionality that contribute to each seller's success. eBay's take rate, which reflects increasing adoption of these optional features validates an extending seller value proposition.

In the U.S. business, GMS increase of $3.6 billion, up 40% year-over-year, generating 41% year-over-year growth in net transaction revenues to $256 million.

In addition, Q3 yielded another strong quarter of new user acquisition and retention, as active users increased 34% year-over-year, consistent with Q2 and accelerating from our seasonally stronger first quarter.

As a result of this increased user activity, every major U.S. category reported double digit year-over-year revenue and GMS growth.

Moving on to the international business.

Our users generated $2.2 billion in GMS, representing 83% year-over-year growth driving transaction revenues up 105% year-over-year to $155 million.

Contributing to this outstanding performance was continued triple digit year-over-year GMS growth in the U.K. and Australia and high double digit growth in Germany and Korea.

Our European businesses experienced clear patterns of seasonality in July and August, with September showing improved activities in all markets.

And finally, the payments business had another exceptionally strong quarter, with total payment volume growing 70% year-over-year to $3 billion and net transaction revenues growing 83% year-over-year to $106 million.

During Q3, PayPal penetration of addressable GMS increased to 61% in the U.S., and 37% in the U.K.

In addition, off eBay payment volume increased 36% year-over-year despite PayPal's exit from the gambling business.

These strong financial results clearly reflect an outstanding business model, rapid international market acceptance, and the effective integration of PayPal into eBay's global marketplace.

On the cost side for PayPal [INAUDIBLE] funding mix remain constant with Q2 at 55%; however, the sequential transaction loss rate declined by 10 basis points to 0.22%.

This notable decline in the transaction loss rate reflects the success of the advanced fraud detection systems in place at PayPal and the improved synergies with eBay.

As we move into the Q4 holiday season and with the recent launch of the PayPal buyer protection program, we expect that our transaction loss rate will trend up from these Q3 levels.

Also, as we have noted in the past, our long term goal is to optimize the loss rate, balancing fraud prevention with revenue growth.

Continuing with the Q3 operating results.

Our gross margin was 79%, down approximately 110 basis points from the prior quarter.

While the sequential decline reflects recent investments in our site structure and our expansion of the international customer support teams, it's important to understand that the core eBay business is delivering gross margins that are at the high end of our stated long term forecast.

This gross margin level is a force offset by rapidly growing PayPal business.

As has been the case of the past couple of years, record net revenues combined with the unmatched leverage of the eBay business model resulted in strong Q3 operating margins, profits and cash flows.

Q3 pro forma operating profit grew 87% year-over-year to a record $172 million, producing a 32% consolidated pro forma operating margin, despite the consolidation of the PayPal business.

Consolidated pro forma net income was a record $118 million or 18 cents per diluted share representing 89% year-over-year growth.

Consolidated GAAP net income totalled $103 million or 16 cents per diluted share.

This EPS level represents a 47% year-over-year increase.

And as you would expect, these earnings translated into significant Q3 operating cash flows which increased 86% year-over-year to $208 million.

Capital expenditures approximated $40 million or about 7.5% of net revenues.

As a result, we are pleased to report record free cash flows of $168 million, up 84% from the $92 million reported in Q3 of last year.

And finally, eBay continues to strengthen it's balance sheet in Q3, exiting the quarter with $5.5 billion in total assets, including almost $2.6 billion in cash and investments.

I'd like to conclude my discussion with our financial guidance, first discussing the remainder of the 2003 and then providing you with the outlook for 2004.

For Q4 2003, based on stronger than expected business performance in Q3, we now expect net revenues to approximate $590 million, $15 million above our prior guidance of $575 million.

This means that full year 2003 consolidated net revenues could total $2.1 billion.

In terms of earnings per share, we now expect Q4 pro forma diluted EPS to approximate 21 cents, 1 cent higher than the previous guidance.

We expect the Q4 pro forma items will approximate $12 million net of tax.

As a result for the full year 2003, consolidated pro forma diluted EPS could be as high as 72 cents.

We estimate that Q4 and full year 2003 GAAP earnings per diluted share could be as high as 19 cents and 65 cents respectively.

And, now, on to 2004.

Before I get into the specific details, I would like to convey some of my thoughts about our business and the enormous potential we have in front of us.

As this quarter's financial and business performance confirms, our fundamental business remains very strong, with vibrant underlying metrics and significant growth opportunities in every market.

As an aside, during our recent annual strategic review, we were struck by the number of extremely attractive opportunities that lie ahead.

To maximize the long term value of this marketplace, we believe it's critical that we capture these huge opportunities.

We intend to finance these investments by driving sustainable operating leverage in the business, reinvest a portion of those returns for the future and at the same time, deliver increased profits.

This financial strategy has served us very well to date and is the right path for the future.

Now, from a more tactical perspective, I'd like to point out the guidance we are providing today takes into account a number of additional factors.

First, as our business continues to become more mainstream and increasingly international, we've seen increases in seasonal patterns in 2003, and we expect these patterns to continue throughout 2004 and beyond.

Second, foreign currency exchange rates and other factors associated with our growing international presence.

While foreign exchange rates in Q3 had a minimal sequential impact, approximately $15 million of the Q3 reported year-over-year international revenue growth was attributed to strong foreign currencies, primary the Euro.

Accordingly, we believe that fluctuations in foreign exchange rates will remain a risk going forward, and the guidance provided today assumes the actual weighted average exchange rate in Q4 2003 and full year 2004 will be $1.14 per Euro.

And lastly, though eBay's Q4,2003 effective tax rate guidance of 32% remains unchanged, we expect to see additional tax benefits associated with the international expansion and profitability in 2004.

As a result, our 2004 guidance assumes 30% and 31% effective tax rate for GAAP and pro forma EPS measures respectively.

Considering these factors, we expect 2004 consolidated net revenues of approximately $2.9 billion, reflecting approximately $800 million in organic growth from our existing businesses.

On the bottom line, we expect consolidated 2004 pro forma diluted EPS to approximate 98 cents and consolidated GAAP diluted EPS to approximate 91 cents.

Our ability to provide guidance at this performance level clearly reflects the inherent strength, diversity and leverage in the eBay and PayPal business models and illustrates the confidence we have for the future.

We'll have more details of our guidance at our analyst day later this month, and additional quarterly information is available in today's press release.

In summary, eBay had an outstanding Q3, even with some pretty significant manmade and natural challenges confronting us in the quarter, such as new taxes, hurricanes, black outs and record heat waves, the business model powered through.

This performance speaks to the resiliency of eBay's community entrepreneurs and the first class execution on the part of our talented employees.

But it also speaks to a continually diversifying business model.

As our largest businesses maintain strong rates of growth, new categories and international markets continue to emerge as new growth drivers.

Each decreasing our exposure to any one business or market in the process.

In short, eBay continues to evolve into a dynamic business, with a huge global opportunity and a promising future ahead of it.

Thanks for joining us today.

We'd now be happy to take your questions.

Thank you.

Ladies and Gentlemen, if you would like to register a question, please press the one followed by the four on your telephone.

You will hear a three-tone prompt to acknowledge your request.

If your question has been answered, and you would like to withdraw your registration please press the 1 followed by the 3 and if you're using a speaker phone lift your handset before entering your request.

One moment please for the first question.

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

Please go ahead.

Good afternoon, couple of questions.

Number one, Rajiv, your guidance for 2004 is about 38% revenue growth, and the same thing on EPS growth.

So, do you not see any room next year for operating margin improvement or is there something else going on there?

Number two, I'm curious about a couple of ratios.

When I look at active users, they were up 55% year-over-year, listings were up 47% year-over-year, I was wondering why the listings growth hasn't been keeping up with the user growth?

I would have expected that.

And, then, second, GMS was up 53%, transaction revenue up 56%, despite the fact that you had a price increase in Germany and the U.K.

So I wonder if you could address those two things, and finally a broader question, on eBay Germany, we saw some -- some rapid deceleration this quarter in the year-over-year growth rates and you pointed end of last quarter to seasonality.

In hindsight, now that you've been through the quarter I wonder if you could talk about how much the VAT price increase may have affected that and how much may be the law of large numbers?

Thank you.

Okay.

Mark, I'm going to try to keep track of the several questions that you asked.

Let me kind of go through each one of them.

You know, on the first point, regarding guidance for 2004, actually, the $2.9 billion on the guidance for 2003, of 2.1, does represent 38%.

On the margin basis, actually, the implied margin is actually going up 1% and the, as we sort of look forward to at 2004, as I'd indicated in terms of the overall business international strategy what we want to do to make sure, yes, we do deliver increasing margins and capture the opportunities.

And don't forget that we're completely going to be picking up and consolidating PayPals which is rapidly growing business and growing faster than the rest of eBay.

Those two affects combined with the investments, actually I feel very good about the overall margin and revenue growth in 2004.

On your second point.

Where you spoke about active users and the fact that active users gone up 55%, could you repeat your concerns?

Active users up 55%, listings up 47%.

I was wondering why listings and in other words a number of things sellers are putting up on the site, the growth isn't keeping up with the demand or the users?

Yes.

So you have to normalize for the number of users we included for the first time from China 3.2 million from China for the first time.

And, if you actually adjust to that,s it actually you'll see the global numbers actually continuing to grow in a healthy fashion.

Also, as continued to happen on the site, the mix play the part.

You know, depending upon which category and which items are growing, the two will not always grow lockstep and tandem.

I think the last question was GMS and transaction revenue?

Right.

And the relative relationship between two?

Right.

That GMS grew 53% and transaction revenues grew 56, despite the fact you had a price increase in both Germany and the U.K.

Yeah.

And over here, what I think is happening that the price increase, remember inmost countries, we actually, you know, we did absorb that and that's a pass through, it doesn't reflect in our revenues.

And, again, this is driven by mix and driven, you know, eBay is becoming rapidly the sum of many parts over here, whether countries or categories, these metrics will not move lockstep, in tandem.

That's the overall take away when you actually look at each the details, underlying this, the listings growth, the GMS growth, the user growth, the ESPs, the conversion rate, all of them are actually very, very positive and feel good about these metrics are.

I'm going to have Meg comment on Germany.

Germany is the strongest eBay franchise in the world and the number one eCommerce site in Germany by far.

It has a reach of over 50% and it's uniquely positioned, I think, to leverage that strength as we move into the next stage of growth in Germany.

No question Germany saw more pronounced seasonality than we saw in the past, began in June and continued in July and August and the good news is we saw a pick up in September and more seasonality than we had anticipated.

That said we're deploying the U.S. play book in Germany which is evolving from a primarily user acquisition strategy to also adding activation as well as activity per user and that's why you see us doing TV in Germany.

You might remember two years ago we saw a little bit of a slow down in the U.S. business and adjusted our sort of marketing and strategy mix and augmented Internet marketing with TV and saw a number of quarters of accelerating growth.

So we're deploying the same play book.

But there's no question we saw more pronounced seasonality than we had anticipated and we're confident about the German business and really excited about the overall position in Germany eCommerce and feeling pretty good about it.

Okay, thank you.

Thank you.

Next question.

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

Please go ahead.

Meg, could you address inseason retail.

Do you see the opportunity for inseason retail greater or less than you saw a year ago?

I know this is an area of the retail life cycle you'd previously not identified as a growth opportunity and if it is, how do you adjust that?

Do you have to change the user interface and supply relationships?

Secondly, Rajiv, historically looking back at online revenue for eBay excluding PayPal and advertising the sequential change in the business from Q3 to Q4 has averaged 14 to 19% and the guidance suggests about 11% and given the comment about increased seasonality in the summer, that should bode better in the holiday season, especially with PayPal for a year and advertising and merchandising focus.

Could you comment on the trend going to the fourth quarter, will you see more pronounced seasonality, is your guidance just conservative in that regard?

Thanks.

Anthony, in regard to inseason retail, as people see our fixed price percentage of GMS go up, the automatic assumption is there's more inseason retail on eBay and that's not completely true.

The core of eBay is very much the tail end of the bell curve.

New and hard to find and that's true this holiday season and overstocked, obsolete, return and vintage that's the core of eBay.

There's been a slight pick up of new inseason the curve is the sale ends of the bell curve.

The only market that's different is Korea and that's been true from the beginning.

Korea has a much high personal of new inseason and moving towards the eBay model which we think is a sustainable place to be.

Great.

With regards to Q4, you know, anyone that's looking at the guidance for Q4 and comparing sequential growth rates quarter to quarter to 2002, what I caution them to do is make sure they adjust for the fact that we acquired PayPal towards the end of Q3 so we included in our transaction revenue for the first time the acquisition of PayPal.

But notwithstanding that, if you look at the overall growth rate that we have projected for the eBay transaction revenues, actually we feel very good about the numbers.

I think they reflect very healthy growth over a business that's become very, very large.

Thank you.

Next question?

Our next question from the line of Jeetil Patel with Deutsche Banc Securities.

Go ahead.

Couple questions.

First of all, can you give us an update how EachNet is going in terms of monetization.

I don't think you charged anything except final values fees, but could you give us an update are you at the critical mass or level of scale ready to implement fees.

Second, if you look at the '04 assumptions I guess you're looking at 38% revenue growth as you talked about, can you give us a sense of, you know, going back to Anthony's question, how much of the business is going to come from consumer versus small business, versus enterprise flavor.

I think, given the comment about inseason retail enterprise is smaller can you give us a sense of consumer opportunity, sellers versus businesses.

And, then, finally, it seems like this year you're advertising in two markets U.S. and Germany.

Given the guidance that you've given for next year there seems like there's going to and separate up in marketing.

Is the plan to continue to roll out an ad campaign and can you talk about how the marketing plan may change going forward on the U.S. side?

Sure, Jeetil.

Let's start with EachNet.

We're pretty pleased with the progress in Each Net.

As you saw when they announced that deal they had under a million users and now have 3.2 million users.

We are seeing new user growth there faster than we had anticipated.

We actually had health EachNet advertise the site before we acquired 100% interest and the monetization rate is under 3%, about 2.8.

Then there's insertion fee and final value fee fully implemented but at roughly half the levels of a more mature eBay marketplace.

It will move up as it did in Germany, Italy and France.

The good news is the conversion rates are in line with what you would expect a good eBay marketplace to be because the site is, at least at the beginning stage of monetization.

It's the early stages of China and we main bullish.

You have to think about it longer term but we're excite by the early results.

In terms of where the growth is coming from, you know, certainly from a consumer point of view, the people who are buying on eBay are still largely consumers.

We're seeing an emerging small business buyer who buys furniture or buys a whole host of products on eBay, but it is still largely a consumer buying site.

The emergence of the business and industrial category has been a fun one to watch.

It's growing very rapidly and obviously more a more business buyer.

But that said, it is still consumer buyers.

And in terms of sellers, it is now not so much individual consumers selling items.

Yes, there is, obviously, people that sell their, you know, individual, personal items but eBay is largely the home of small to medium businesses.

Employees less than 50, less than 100 is the core of our business.

And we do have some big guys who are growing on the site and good success with the large merchants but I think as we forecasted it's the largest percentage the growth will continue to come from the people who have always made eBay effective and eBay has been effective for them the small business.

Advertising, we actually have three markets we're doing TV advertising.

One is United States and Germany as we said and Taiwan.

We're in a battle with our friends at Yahoo and we're committed to Taiwan and spending disproportionally to that market because we really want to stay in the game there.

We have three television markets and we may, as we go to 2004, add another one, but it doesn't mean that the actual personal of sales and marketing goes up.

It represent as mix change and, also as this business begins to scale, or not begins, as this business scales, you don't need as much sales and marketing to cover the entire water front of what you like to do and we continue to rely on Internet marketing, print and television as well as of course, PR.

Next question?

Your question comes from the line of Derek Brown from Pacific Growth.

Go ahead.

Actually three questions, could you give us a sense for ASPs excluding motors and how those have trended over time?

Also, in terms of the investments that you plan to make through '04, could you maybe give us a, just a handful of the projects and kind of priority in your mind?

And, then, lastly, could you help us walk through some of the supply constraints in motors and understand, really, what efforts you're taking to bring those, I guess, eliminate those and how long you think it might take before you work through those?

Okay.

First let me take the first two questions and then Meg will address the motors issue.

So, on ASP, overall, as I indicated actually trended up, even the ASPs excluding motors have trended up.

It's a continuing evolution of the site as we have moved into more mainstream product categories, these have tended to be higher ASP categories.

With respect to investments in 2004, a lot more detail that we'll share with you at analysts day but, you know, the headline is really along the lines of what of much of we have been doing.

This is yes, continued investment as we build out the businesses over seas which includes, obviously, China and many of the European markets We'll continue to invest in product development as we focus on features and functionality and expanding the bandwidth we have to provide those and continue to out the global customer support team and that's are the primary areas and, you know, more to come and remember on PayPal, PayPal we are looking at a business, and the best way to think about this, think about eBay in 1999.

You know, this is a big business, with a large opportunity ahead of it, but, with not the infrastructure to match it.

And so one of the things that we're focused on is making sure that we scale ahead of demand, not just PayPal in the U.S., but also building out PayPal international.

In terms of motors, Derek, we have a three-part program.

The first is reaching out to our independent dealers, and we are reaching out to them in terms of education, customer support and basically, teaching them how to use the site more effectively.

That takes more hand holding than it has in our traditional categories but early returns are very good.

We're continuing to work on the site features and functionality to make eBay motors and listing and managing your listings on eBay motors even more intuitive and we've got work to do there and we're rolling out changes in the next quarter or two that I think will help.

We've also dialed up the involvement of the acquisition that we made about six months ago of a company called Car-Ad that has software that helps the dealers manage their business on eBay and we've involved them much more with new dealers and in the dealer education program.

We're also dialing up for sale by owners.

It is an important part of the business but we've been actually telling our existing set of eBay users to sell their car in eBay in a much more obviously way than in the past and finally, we've turned the marketing dollars to be more balanced.

It was strictly before buyer oriented buyer dollars and now it's a bit more of a mix to be seller oriented market dollars as well as buyer oriented market dollars.

And I think you asked the question how long does it take before it all kicks in.

I don't know the exact answer to that question but we saw more strength in Q3 than in Q2 and I think you're going to see particularly as we head into the spring and car-buying season we ought to be better position to bring more cars to the site to keep up with the demand.

Okay.

Thank you.

Okay, next question?

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

Please go ahead.

Thanks, could you talk about PayPal, you mentioned you feel PayPal is in very early stages, much like other eBays categories and invest, could you talk about what kind of opportunity has PayPal captured so far outside eBay and if that is really what you focusing on to go beyond the current kind of user base which appears to be mostly small businesses to more individuals and, if you could give us a broad idea of the size of the opportunity.

And, also, you mentioned the gross margins or operating margins for eBay core is approaching the high end of the goal that you had set.

Does it mean that there would be some room to remove that goal higher or you feel that you are kind of at the optimal operating level for eBay?

Thanks.

Yes.

Let me chime in on PayPal.

As you recall, we've owned PayPal actually for just about a year and closed the deal October 30 a year ago and had a focused integration.

Job one was integration on to eBay and that's gone extraordinary well and frankly given us money to invest in the other areas.

Second, eBay international.

We have a localized product now in one market, with more scheduled to come in 2004.

And, the reason why eBay international is prioritized ahead of off eBay it has a double effect, the effect of the growing the PayPal and the other really desirous effect of accelerating eBay and improving trust and safety on the eBay marketplace.

And third where we'll now turn our attention since we have number one and two under way the off eBay marketplace that continues to grow naturally on its own and we'll begin to see how we can accelerate that about business.

As you know, most of that business is derived from eBay sellers.

They met PayPal first and took it off eBay.

We have some other ideas on what we should be doing and could be doing off eBay look for 2004 for more news on off eBay initiatives.

With respect to the margins questions, my comments today related to gross margins and my point was the gross margins on the eBay conformance to the business is consistent with the high-end of the long-term stated goals that we had laid out of 82, 85% gross margins.

On the operating margins the good news is we continue to make progress, but I think we have a long way to go.

You know, the overall margin that we had indicated for eBay was 35-40% and PayPal 20 to 25%.

We're making steady progress, 2004 is going to reflect increased progress against both of these measures, but we still have a way to go.

I think the other thing to think about, Safa, is the growth rate was slowing dramatically here and the operating margin would rise faster than we're allowing it to rise, if you will.

We're making investments in China and investments in other international countries and investments in new categories in the U.S. and importantly making a ton of investments in PayPal and we are balancing how much operating margin we want to bring to the bottom line versus how much growth we think is left in the business, which we think is a lot.

Thank you.

Thank you.

Next question?

Greg Smith with Merrill Lynch please proceed with your questions.

On PayPal, could we just get the percentage of funding that's being done with credit cards verses HCH the quarter as well as the personal of addressable GMS used with PayPal?

So let me just make sure I heard your question.

You're question was regarding the funding mix that on credit card versus HCH?

Exactly.

55% as we've indicated and we've actually had a separate metrics page in PayPal where we detail a lot of the metrics on PayPal and part of the press release on page 15.

Okay.

Sorry I missed that.

And, then, one other question.

The consumer electronics category looks like it's down a couple of quarters sequentially a little bit.

Is that seasonality or is there anything else going on?

There's couple of things going on, one is a bit of seasonality, but interestingly, volume units is going up.

Average selling price is going down and that's actually sort of, I think, typical of the entire consumer electronics business right now the prices are falling pretty fast on a lot of new hot products, we're not concerned about the underlying health it's what most consumer electronics and manufacturers are seeing and I think that will stabilize in the fourth quarter and fact of life doing business in consumer electronics.

Okay, great.

Thank you.

Thank you.

Next question.

Our next question from Christa Sober with Thomas Weisel, please go ahead.

Couple of questions.

First, can you just discuss what you're new plans are for PayPal deployment beyond the U.K. market internationally and given Germany makings up 2/3 of your international revenues, and what's the likelihood getting to Germany given it has a well-established payment system now and the second question relates to the velocity of the average listing have you noticed a decernible, one day, buy it now, et cetera, in terms of the accelerations of the velocity there, and the velocity and the third question, what was the employee head count at the end of the quarter and the year-over-year growth there, thanks.

Let me take the PayPal question obviously we want to roll out PayPal to as many as international markets as we can.

For regulatory competitive reasons we don't want to announce a specific roll out plan.

So, stay tuned when we're ready to enter a country we'll announce it.

You know, on.

Couple of questions, regarding the velocity, and head count.

On the velocity, it is actually true that velocity on the site has been increasing.

This is driven by a number of factors.

Certainly, one-day auctions is very recent and hasn't really impacted velocity in Q3 but what's happening overall that velocity has trended down and we expect it to trend down even further in Q4 and there's some seasonality impact because of more holiday shopping and PayPal.

You know, PayPal is absolutely having an impact on the fact that people can close the auctions, fixed price offerings that's the overall trend is down.

And, with respect to head count, we have roughly about just--

5, 670 in the end of Q3 up from 2,980 at end of the Q3 '02 and in large part, remember that includes a portion of all of the PayPal folks.

And EachNet.

EachNet.

Both of which are higher in density, if you will of people to revenues in the core eBay business.

Particularly PayPal is higher in customer support than the eBay model.

So, that will normalize out over time but that explains the big jump in headcount.

I think we have time for one more question.

From the line of Shawn Milne from SoundView.

Please go ahead.

Thanks a lot.

Rajiv, if we could dive in the P&L on the third quarter, the revenues better than expected and you indicated that gross margins were impacted by the PayPal investments, if you look at that line, if you could give a little bit more color on the impact versus mix in business, versus, you know, real investments and PayPal infrastructure, that should be leveraged going forward and if you look down, if I got it right, interest income was fair amount lower than what it was sequentially and I'm not sure I understand that, and just so I get it right it, looks like a penny of dilution from EachNet in the quarter?

Let me just go ahead and try to go through some of questions that you had.

You know, overall, as I'd indicated at the opening notes before we went into Q3 last quarter earnings call we had indicated that there's going to be several investments we're going to make and you correct me, we pointed out the consolidation of EachNet which we said is a couple of pennies off additional losses we would incorporating into the structure two pennies coming there and making investments in PayPal in customer support and PD.

Here's the good news we did all of that.

The numbers that you have in P&L reflect that.

And they affect different line items on the P&L16 million higher relative to what we had indicated on revenues and 12 million of the incremental revenues dropped to the bottom line with respect to some of the more specific to whats happening in gross margins and some of the other line items, gross margins is largely driven by infrastructure investments that we have made.

This is not going to continue to scale up in volume because these do tend to lumpy investments and Q4 happened to be where we had made some of these.

Some of other investments will scale and increase in volume, such as, you know, what we're doing with PayPal in terms of site operations and in terms of customer support we think those are important to continue to carry on into the future.

So, overall, the P&L is showing very nice leverage.

We're very happy when what the eBay business is delivering, very pleased with the profitability coming from PayPal.

In fact, the transaction loss rates for PayPal very nice number, like to see, you know, that trend, like the overall profitability that coming from many of the eBay businesses and for 2004, as we pointed out we're going to balance that.

The amount that we will let come down to the bottom line, to some degree this is something that we really think about and manage and control.

To balance investment with overall revenue growth.

And just lastly, did you put, I'm not sure if I caught it, Rajiv, could you have the Cap Ex and free cash flow targets for '04 out.

No, not yet.

I guess we'll see in a couple of weeks.

Great.

Listen, thank you very much.

Thanks for joining us.

Thanks.

Ladies and Gentlemen, that does conclude your conference call for today we thank you for your participation and ask that you please disconnect your line