eBay Inc (EBAY) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the eBay fourth quarter 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, should you have a question, please press the 1 followed by the 4 on your telephone.

As a reminder, this conference is being recorded Wednesday January 21st, 2004.

I would now like to turn the conference over to Mr. Mark RUBASH, vice president of finance.

Please go ahead, sir.

Good afternoon.

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

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

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

Before we begin, would like to take this opportunity to remind you that during the course of this conference call we may discuss some non-GAAP measures in talking about our company's performance.

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

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

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

Factors that could cause or contribute to such differences include, but are not limited to, the company's need to manage an increasingly large company with a broad range of businesses; the company's ability to deal with the increasingly competitive environment for online trading, including competition for its sellers from other trading sites and other means of selling and competition for its buyers for other merchants, online and offline; the litigation, regulatory credit card association and other risks specific to PayPal; the company's need to manage other regulatory, tax and litigation risks, even as its product offerings expand and as the services are offered in more jurisdictions; the company's ability to upgrade and develop its systems, infrastructure, and customer service capabilities to accommodate growth at a reasonable cost; the company's ability to maintain site stability on all of its sites; the company's ability to continue to expand its model to new types of merchandise and sellers; the company's ability to continue to expand outside of the U.S.; fluctuations in foreign exchange rates and the cost and benefits of announced and perspective acquisitions and other commercial transactions.

More information about factors that could affect our operating results is included under the captions, "Risk factors that may affect results of operations and financial condition" and "Management's discussion and analysis of financial condition and results of operations" and our annual report on form 10 K and quarterly reports on form 10 Q, copies of which may be obtained by visiting our investor relations website at www.investors.ebay.com.

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

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

Now over to Meg.

Thank you, Mark.

Welcome everyone to today's conference call.

Q4 was another great quarter for eBay, rounding out an excellent 2003 and demonstrating yet again the tremendous momentum and enormous long-term potential of the eBay business model.

Let me highlight a few key results.

Gross merchandise sails, or GMS, which is the value of all items sold on the site totaled $23.8 billion for the full year 2003, a 60% increase over 2002.

Based on Q4 GMS of $7 billion, we are now on an annualized run rate of $28 billion.

Registered users grew to nearly 95 million during the year, an increase of 54% over the prior year, and those users listed more than 970 million items in 2003, a 52% increase from 2002.

Total payment volume at PayPal totaled $12.2 billion in 2003, an increase of 73% over 2002.

And for the first time in the company's history, net revenues surpassed $2 billion, totaling $2.2 billion for the full year 2003, representing 78% annual growth.

It took 8 years for eBay to reach $1 billion in annual net revenues.

Now, just one year later, we have hit the $2 billion mark, an extraordinary achievement in a company so young.

In fact, eBay's revenues are growing at a faster rate than those of other successful companies like Wal-Mart, Microsoft, Dell and Sisco at comparable ages.

The eBay marketplace is a power house.

We continue to enjoy ever bigger, ever faster cycles of success, fueled by the unlimited opportunity of our huge addressable market.

EBay's management executes against its unlimited opportunity on a daily basis, deploying people, marketing, or technology to maximum effect.

These efforts strengthen the global marketplace in real time; and as we achieve the next level of success, we redouble our efforts, leading to new growth and new opportunity.

Just listen to a few more examples of how this plays out. t took more than 3 years for PayPal to reach 20 million accounts.

Nearly that many were added in 2003 alone.

It took 4 years for EACH NET, our site in China, to reach 2 million registered users.

Two quarters later that number has doubled.

EACH NET now has more than 4 million registered users.

It took eBay.com 15 months to grow from 20 million to 30 million unique visitor a month.

In 10 months, we grew from 30 to 40 million, and in the past 6 months we've jumped from 40 million to 50 million unique visitors a month, the latest figures from December.

And a year after eBay achieved $1 billion in total net revenues in 2002, the U.S. business itself has now reached the same revenue milestone.

All of this has helped by two important trends that we mentioned last year.

These trends continue to spur activity throughout 2003 and there is every indication that they will fuel our growth in 2004 as well.

First, the mainstreaming of E-commerce continues.

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

According to the E-Spending Report jointly published by Goldman Sachs, Harris Interactive and Nielson Ratings, online spending in the U.S. this holiday season jumped more than 35% year over year.

This rising level of activity represents what we have seen happen all year long.

At eBay strong GMS growth throughout 2003 resulting in annual growth of 60% demonstrates that more consumers are turning to the Internet and to eBay for a wide range of shopping needs.

Second, eBay has become a primary shopping destination.

Our marketplace provides an unparalleled consumer proposition.

This was especially true in Q4, the biggest retail period of the year.

Thanks to our millions of entrepreneurial sellers, in Q4 buyers found greater selection and value on eBay than ever before.

These same dynamics also fueled our business throughout the year.

The rapid growth of new categories, business and industrial, for example, which show year over year growth of 93%, show us that buyers are turning to eBay for a broader and deeper array of items.

With more than 45,000 categories now, nearly every shopper visit to the site is a rewarding experience.

It's important to note that while larger trends are adding to our momentum, it's our job as marketplace manager to steer the business with a clear vision.

Every part of the company is cleanly -- keenly focused on delivering the best trading experience for our community of users.

The results we saw in 2003 validate our long-term strategy of making the site easier, faster and safer to help our users succeed.

With the internal levers we have at our disposal, we continue to create programs that benefit sellers, help buyers and accelerate trading on the marketplace.

For example, our work in marketing and category management contributed to annual transaction revenue growth, excluding payments, of 62% over the course of the year.

We continue to focus on user acquisition, activation, and activity in order to boost supply and demand and accelerate trade.

Building eBay marketplaces around the world also create new avenues for growth.

In 2003, 38% of our transaction revenues excluding payments came from our international operations.

We continue to roll out the eBay playbook to our growing international market, while at the same time identifying new opportunities overseas.

Our acquisition of PayPal boosted growth on eBay, which in turn expanded the PayPal business.

There are now more than 40 million PayPal accounts, 73% more than last year.

We continue to build on the synergies between eBay and PayPal to offer even more protection and convenience to users of both services.

And building our management team has brought new expertise to bear on our business around the world.

EBay and PayPal employees work every day to make the two services ever more productive for our users.

And Because of these efforts, eBay's performance in Q4 was simply phenomenal.

As a result of Q4's better than expected results, we are updating our guidance for 2004.

And Rajiv will discuss the quarter and that guidance in just a few minutes.

The eBay marketplace is built on community grounded in commerce.

Clearly, the commerce part of the equation is very successful.

I'm also proud to say that the community is as passionate and dedicated as ever; and as the marketplace grows larger, we strive to strengthen our bonds with this inspiring group of men and women.

Make no mistake about it, it is our community of users who make all this commerce happen.

Their loyalty, hard work, and creativity has helped build this marketplace, and the opportunity the see in eBay will continue to fuel our growth into 2004 and beyond.

2004 holds tremendous promise for eBay.

Our plan is to invest even more in the areas that made 2003 and Q4 in particular such a success.

In 2004, you'll see us focusing on marketing, technology, customer support and payments, both in the U.S. and around the world.

And we're going to do all of this with the same rigor and financial discipline we have always shown.

In short, our focus on growing the business with smart execution will be unwaivering in 2004.

Working together with our community, we will unlock even more of the opportunity we see ahead.

There isn't a moment when I'm not excited about eBay's business and with every passing quarter, I become even more excited about the growing power of the marketplace, the size of the opportunities before us, and our ability to deliver ever greater results.

Now, I'll turn it over to Rajiv for a closer look at Q4.

Thanks, Meg.

As you just heard, Q4 provided a strong finish to a year characterized by operational and financial excellence.

This time last year, we were reporting on a strong holiday season, as eBay became a primary destination for millions of first time online holiday shoppers.

This holiday season, those shoppers and many more returned to eBay and helped make the fourth quarter another enormous success.

Q4 is clearly becoming a powerful seasonal quarter for us.

Today, I'll start by discussing Q4 success in detail and then briefly review 2003 and conclude with our outlook for 2004.

On the top side, eBay's consolidated Q4 net revenue grew by 57% year over year to $648.4 million, $26.7 million of which was the result of a favorable foreign exchange rate versus the prior year.

Growth during the quarter was broad based as every major category experienced double digit year over year GMS growth worldwide.

Eight in particular demonstrated accelerating year over year growth from Q3, including consumer electronics, collectibles, toys, eBay motors and clothing and accessories.

Also in Q4, jewelry became eBay's 10th billion dollar category, reaching $1.3 billion in worldwide annualized GMS.

In Q4, we also saw dramatic improvement in eBay's user acquisition, activation and activity, or the triple A, a term we first introduced publicly at our analyst's meeting in October last year.

Confirmed registered users reached almost 95 million in Q4, reflecting an increase of over 9 million new users in just one quarter.

This organic sequential growth in new users represents an all time record for the company.

It is quite remarkable that eBay has reached new records in customer acquisition 4 out of the last 6 quarters.

Also in Q4, active users increased to 41.2 million; and once again, these users were more active than ever, generating $541 in GMS per active user.

This, too, represents the new record for the 11th time in the last 12 quarters.

Payments also extend to customer success in Q4.

Total PayPal account increased to 40.3 million, which powered total payment volume of $3.7 billion, up 74% year over year.

Looking a little more closely at the business units, our results were equally strong across all three, the U.S., international and payments.

First, in the U.S., our users generated $4.1 billion in Q4 gross merchandise sales, a 36% year over year increase.

This GMS volume drove a 38% year over year increase in U.S. transaction revenues to $291.6 million.

Drilling down a little deeper, the U.S. business saw clear seasonal patterns during Q4, with accelerating year over year GMS growth rates in the 3 weeks leading up to the Christmas holidays.

Also, contributing to the velocity of trade in the U.S. and even extending the holiday shopping season this year were the increased adoption of public features such as the auctions and Buy It Now and the further penetration of PayPal.

Looking at the categories in the U.S., growth was also broad based.

Some of the larger categories in the U.S. such as sports, collectibles, technology and entertainment all saw higher year over year GMS growth rates than in Q3, and the typically slower seasonal quarter, growth and demand was very strong in the U.S. motors business.

In the international business, our users generated $3 billion in gross merchandise sales, which was up 85% over the prior year.

This volume powered a 96% year over year increase in international transaction revenue to $210.5 million.

Strong results were evident worldwide.

Q4 results in Germany were powerful in particular, especially when compared to its seasonally slow Q3, as GMS grew 71% year over year and 37% sequentially.

The U.K., our second larger market, continued on its upward trend in Q4 with year over year GMS growth of over 150%, while France, Italy, Belgium, the Netherlands, Austria, Switzerland, Korea and Australia, all saw accelerating growth rates in the high double and triple digits.

And EACH NET in China, while in the very early stages of growth, added over 1 million new users during the quarter to reach 4.3 million total registered users.

In payment, PayPal delivered strong Q4 results once again.

The growth in total payment volume I mentioned earlier drove transaction revenue of $130.6 million, up 68% year over year.

These results were driven mainly by strength in the eBay core business, incremental penetration of eBay's addressable GMS, now at 65% in the U.S., and continued growth in PayPal's U.K. business.

In addition, PayPal's off eBay business grew a strong 49% year over year in terms of total payment volume.

Looking at PayPal's operating expenses, notwithstanding holiday seasonality, the credit card funding mix remained constant with Q3 at 55%.

Also and s expected, PayPal's transaction loss rate sequentially increased by 9 basis points to 31 basis points.

Though the transaction loss rate increased seasonally, it decreased year over year by 6 basis points and remains well below the average online loss rate of 110 basis points for the top 150 online merchants.

This impressive loss rate is despite the increase we've made to PayPal's buyer protection program during the quarter and is a testament to PayPal's unmatched fraud protection capabilities.

Once again, record revenue growth, coupled with eBay's highly efficient business model resulted in strong operating profit and cash flows in Q4.

Even in the face of the rapidly growing PayPal business and continued investments in our site infrastructure and customer support, eBay's gross margin still increased sequentially in Q4 by 3 percentage point to 82%.

This improvement was attributed primarily to the increase [INAUDIBLE] of the business.

In other words, as revenue grew significantly in Q4, our cost of revenue increased by a much lesser extent.

I should note here that included in our Q4 pro forma expenses of $10.6 million in costs associated with the resolution of several legal matters related mainly to PayPal.

Including the impact of these costs, record pro forma operating profits grew by 65% year over year, reaching $218.5 million and representing a 34% pro forma operating margin.

Consolidated pro forma net income was a record $157 million, up 24 cents per diluted share, 3 cents from the guidance we provided on our last earnings call, again including the effect of 1 penny in cost related to the resolution of legal matters.

Consolidated GAAP net income totalled $142.5 million or 21 cents per diluted share.

And these record earnings translated into significant operating cash and free cash flows in Q4.

Operating cash flows were $267.4 million, and with capital expenditures approximating $95.7 million, free cash flows reached a record, $171.7 million.

EBay also continued to strengthen its balance sheet in Q4, exiting the quarter with $5.8 billion in total assets, including almost $2.8 billion in cash and investments.

Before we move on to guidance for 2004, I would like to take a moment to briefly review the year.

It is now apparent to us that 2003 was an [INAUDIBLE] point for eBay, especially when compared to our original expectations.

You may recall that at our October 2002 analyst day, we first provided 2003 net revenue guidance of $1.77 to $1.83 billion and 56 to 58 cents in pro forma EPS.

As you can see, from the earnings release we just published, eBay's numbers came in well ahead of our expectations.

Over $330 million above the high end of our revenue guidance and as much as 17 cents above our EPS guidance.

The magnitude of eBay's performance in 2003 underscores the opportunity, leverage and sheer momentum this model continues to have as we head further into the new year.

Now let's turn to our outlook for 2004.

To put it simply, we are more confident than ever in the long-term trajectory of eBay's business and more specifically our prospects for the year.

EBay remains a business with vibrant underlying metrics and significant growth opportunities around the world; and as we discussed in our analyst day, we will continue to balance eBay's profit growth with the appropriate investments that will enable us to capitalize on these long-term opportunities.

Without repeating too much of the data I presented at analyst day, these investments will be in areas such as product development, where we will continue to strengthen and extend the eBay platform globally and increase the development capacity essential to supporting our community of users; our international business, where we will further build out our platforms in China, the rest of Asia and Europe to support long-term growth opportunities in those markets;

PayPal, where we will continue to focus on international expansion and product development and in safety, worldwide marketing and customer support.

From a more tactical perspective, I would also like to point out that the guidance we're providing today takes into account three key factors.

First, as we discussed on our last earnings call, as eBay becomes more mainstream and increasingly international, we expect the business to reflect more traditional retail patterns of seasonality.

As a result, we expect Q4 and Q1 to be our seasonally strongest quarters in the future, with Q2 and Q3 exhibiting slower sequential growth rates, resulting in compressed gross margins and operating margins in each of those quarters effectively.

Second, foreign currency exchange rates continue to be a factor associated with our growing international presence.

Going forward, we believe that fluctuations of foreign currency exchange rates will remain a risk.

The guidance provided today assumes that the weighted average exchange rate in Q1 '04 and the full year 2004 will be $1.20 per euro.

And finally, as you are probably aware, during the past month, we announced fee changes for 15 of our country sites around the world.

As we have stated in the past, we believe that careful management of eBay's fees insure the long-term balance and health of the marketplace and the success of our global community of users.

These changes have a long lead time from[INAUDIBLE] to implementation.

As a result, the very modest impact we expect from these changes was already incorporated into our prior guidance.

Having said all that, the continued strength we saw in Q4 has caused us to reevaluate our expectations for the year.

We now expect 2004 consolidated net revenue to approximate $3 billion, $100 million above our previously provided guidance.

While aided by the improved foreign exchange environment, this increase in guidance is primarily the result of the organic momentum we see in the business.

On the bottom line, we now expect consolidated 2004 pro forma diluted EPS to approximate $1.04, 6 cents above our prior guidance and consolidated GAAP diluted EPS to approximate 99 cents.

In summary, eBay had another outstanding year capped by a strong holiday season.

The success is a result of our commitment to business execution and financial discipline, the incredibly hard work of our talented employees, and perhaps most importantly, the fashion and entrepreneurial spirit of our community of millions of buyers and sellers worldwide.

Today we not only find ourselves with an outstanding track record, but we are also more confident than ever in the future of this business.

Thank you for joining us today.

We now would be pleased to take your questions.

Ladies and gentlemen, if you would like to register a question, please press the 1 followed by the 4 on your telephone.

You will hear a 3-tone prompt to acknowledge your request.

If your question has been answered and you would like to withdraw the registration, please press the 1 followed by the 3.

If you are using a speaker phone, please lift your hand set before entering your request.

One moment, please, for the first question.

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

Please go ahead with your question.

Thank you, and congratulations on a good quarter.

Couple of questions.

Meg, Rajiv, when I look at your active users which are up 49% year over year, that's about the same as listings, gross merchandise sales up 53 and transaction revenues up 58.

Can you talk about what causes the GM S and the transaction revenue rates to be higher?

Is that a higher success rate?

Is it higher average selling price in your platforms, or exactly could you just go into a little more detail about why those rates are significantly higher than the listings or active user rate.

Second, Rajiv, the 10.6 million you talked about in legal matters, what were those legal matters and is that a non-recurring expense in G&A?

Is that why G&A jumped so much this quarter?

Finally, did you have any currency benefit in the quarter?

Okay.

Mark, I'll take the first one, and then Rajiv will take the second one.

You're right.

The trends are moving in the right direction for us in terms of transaction growth rate and GMS growth rate growing faster than users.

That's actually been true for the last couple quarters.

I think it's a result of two things.

One it's seller scalability.

Sellers are actually doing more on the site, selling more items and we are seeing a modest increase in ASP.

That is what I think is driving that nice trend we've seen over the last couple of quarters.

You know, with respect to legal, not really in a position to give you detail as to what comprised the various legal matters that we reached resolution on in the quarter, but I think fundamentally what happened is we were in a position to take advantage of, in a resulting several legal matters and many of these were long-standing legal matters.

As we noted, many related to PayPal, and most predated our acquisition of PayPal.

So we evaluate these strictly on a case to case basis and we took advantage of the situation and sort of reached the optimum situation in Q4.

Are they recurring?

I think that is-- you know, to some extent what is happening in eBay really mimics what is happen the larger corporate environment where companies, particularly those that seem to have deep pockets are the subject of litigation.

So, you know, it is really difficult to predict where this is going to go from a case to case basis, but that was in our G&A expenses and that absolutely does account for the increase in G&A that you saw in the quarter.

With respect to currency, you know, we benefited from the euro's strengthening over the course of the quarter, and that accounted for about sequentially quarter-over-quarter, it was about $10 million in currency benefit and on a year over year basis, about $26.7 million.

Great.

Thank you very much.

Thanks.

We'll take another question.

Our next question comes from the line of Jeetil Patel from Deutsche Bank.

Please go ahead.

Hey, guys.

Couple questions.

You're continuing to make changes and continuing to reinvest in marketing, and making changes from a functionality standpoint.

What do you think the impact of all these changes will be on the business?

Will it be-- should we measure it against more customer acquisition and activation or should we look at it in terms of the activity levels of the existing active registry user base that you have today, and, you know, I guess if you look at those three levels of growth of the triple A's, what do you think the activity level per user looks, kind of increases on the year to year basis, you know, for 2004?

Secondly, can you talk about velocity in the business it, looks like you're averaging 6.1-6.3 days over the past couple of months.

Do you think that that trend will kind of play out, you know, remain intact as you look over the next several quarters, or do you think that was more of a seasonal effect?

I think that's about it.

Thanks.

The, the marketing and product development spend is deployed to all three of the triple A's, and depending on what country you are in, depending on which it is it deployed against most.

In the United States, we are working all three levers very actively.

We want to get more than our fair share of users and we did that successfully in Q4.

We want to make sure we're activating those new users.

In other words, when they come to the site, they are dog things, and then of course they are buying more things.

Marketing and product development pushed all three of those levers.

It reminds people about the product, functionality, make it easier, safer, faster so people come back more often.

PayPal has helped a lot and made it so much easier.

I would contrast that to a country like China where our number one goal is about user acquisition, as it was in the U.S. in 1998, so parse it by country and think about all three levers for our older markets.

In terms of the average auction life, which is what you were referring to, 6.1-6.3 days, that's been dropping over the years, as you know, and I think that will continue to decrease, maybe not at the rate it has in the past, but one-day auctions, buy it now, fixed price, all decrease the average auction length.

By the way, so does PayPal because the auctions close faster.

So I would say that look for that to go down, not, not in half, but look for it to continue to go down.

And-- quarters of the year which is kind of not seasonally affected in terms of traditional retail trends--

Say that again.

You would assume that's the case also in the first three quarters of the year which are, call it not seasonally driven, the holiday spending activity picking up, do you think that trend will remain in the 6.1-6.3 range over the next several quarters as well, including the 4th quarter?

We don't provide any forward-looking guidance on the days outstanding for auctions.

I think the key point here is that, you know, we have seen an improvement in the overall velocity because of so many changes being made to the site and product enhancement.

I think you will see seasonal fluctuations , but as we pick up the overall -- the rate of fixed price the site and some of the new products, I think this is a metric that will probably trend downwards.

Okay.

Thank you.

Thank you.

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

Please go ahead.

Thank you very much.

I was wondering if you could comment a little bit on the margins, both domestically and internationally, giving the expansion you are seeing and the declining tax rate, I was wondering if we could get a sense of international profitability in aggregate on an operating margin basis and then comment on how many countries now are profitability international.

Also, as you look through 2004, Meg, as you exit next year in the fourth quarter compared to this year, where do you see the mixture of business between international and domestic?

Lastly, if I actually parse through your segment geographic results, it looks like PayPal is actually starting to contribute on a faster growth rate internationally than domestically.

If you could tell us about the trends there as well.

Anthony, with respect to your first question, eBay profitability, we don't actually provide margins other than in our segment information that we provide in our 10 K on U.S. versus international basis.

You know, I think the key take away that you should probably have is that the overall business is very, is very profitable and I think this is demonstrated in Q4 notwithstanding the PayPal.

If you will recall from earlier presentations, it is a different lower margin structure fundamentally.

From a country perspective, here again, you know, our overall international portfolio is profitable.

It continues to be very profitable.

We have been very focused on making certain that we are making investments that are appropriate, so there are countries which are in an investment phase.

China is a particular example.

And we think that that is an appropriate balance and we'll continue to do that.

Anthony, in terms of the mix of international and domestic, I think international is going to continue to grow slightly faster than international, as it has in the past. 38% of revenues came from international excluding payments.

That number will be higher at the end of 2004, how much higher, I can't perfectly predict, but we remain, you know, really pleased with Germany, the U.K., France and Italy, the smaller countries.

They are coming along nicely.

Of course Korea is a power house.

It will be higher.

I can't say how much higher.

You are right.

PayPal international is also growing fast.

PayPal on the U.K. site is getting adoption faster than PayPal did on the U.S. site, probably because we're helping them and we didn't prior to the acquisition in the U.S.

So the team in the U.K. has done a marvelous job in helping PayPal get adopted there.

Also, as a percentage of cross border trade, PayPal now is the de facto standard for buyers and sellers when they are doing cross border trade.

PayPal has a very high share of transactions when a buyer and seller are in a different country, and that's obviously the objective.

Okay.

I'll ask a follow-up question.

I'll take a shot at it on the margins.

If I back out the $10.6 million in legal expense, your incremental mental margins without the expense were about 37%, with the expense they were about 36%.

Where do you see the incremental operating margin going throughout 2004?

Will that continue to rise?

The guidance we provided, Anthony, is $1.04, and revenue of $3 billion.

This is a very profitable business.

That said, we really do think we are faced with a historic opportunity and we feel it is incumbent upon us to make investments.

In the area we pointed out at analyst day and what I repeat order the call just a few minutes ago, we think that, you know, with the combination of PayPal growing faster and us making investments in PayPal, continuing to build out our international operations, product development, customer support, trust and safety, we think this is important to capture this opportunity we see ahead of us, even as the company clearly generates very strong in decree mental margins from in decree mental revenues.

Great.

Thanks very much.

Thank you.

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

Please go ahead with your question.

Something you could kind of give us a bit a road map for, PayPal internationally this year, what you're thinking, what the strategy is in terms of putting PayPal into countries beyond just the U.S. and the U.K. and what we should expect in terms of timing to the extent that you can talk about it.

Then also, if you could talk a little bit about China in more detail, with so many new users coming onto the site, when should we expect that to start becoming meaningful to revenue?

In terms of a road map, what we have said is that we will obviously try to roll out PayPal to the same ultimately, the same footprint as eBay.

The only site, of course we have fully customized site is the U.K.

And what we have said is that we're interested in Germany and interested in a couple of the European countries in 2004, but haven't made an announcement on timing.

We have certain regulatory hurdles that need to be clear and we really can't make an announcement until they are cleared.

Okay.

In terms of China, you know, we are really pleased with our position in China.

We are very well positioned and I think we have distinct advantage.

It's been in China for 4 years.

EBay has been in China for 3 years, so we're in a really good position there.

How soon it will be before it's material?

Hard to predict.

Of course as eBay continues to get bigger, materiality is a higher bar, but in 1998, eBay China would be material, but we will see.

We -- we want it to grow as fast as we can.

We're investing marketing dollars, product development dollars and investing heavily in the management team there, so stay tuned on China.

We're optimistic.

Great.

Thanks.

Thank you.

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

Please go ahead.

Thanks.

Brian, I have a couple questions, first Rajiv you indicated motors growth was especially strong.

There was concern about the growth in motors during the summer.

You put some new efforts to bear in that business in the July-August timeframe.

If you could give us a sense of how those efforts specifically are playing out, that would be great.

The second question, at your analyst day in October, you indicated you were going to take a more aggressive stance to integrating your web -- that the products and services on your site into the Google algorithmic search.

Could you give us an update on where you stand there and how that's impacting your business and your spending.

Thanks.

On the first one, on eBay motors, global motors, year over year GMS growth accelerated to 75%, despite Q4 being a seasonally slower quarter, so we were really pleased by that and the U.S. played their part in that I think the results of some of the steps we took in the summer are paying off.

First is improving dealer support, including customer support and dealer outreach.

Second is dealer education, and teaching big dealers how to use this very new, very unfamiliar platform.

Third is targeted marketing, shifted from a buyer focus to a seller focus because, as you know, we were short on supply, so we focused on trade magazines and conference ns and also continuing to improve the ease of use of the eBay motors site.

So we are-- we were very pleased by eBay motors performance especially in what's traditionally a low quarter.

We're well conditioned as we go into the good car buying season.

This is an unfair question, but if-- could you guesstimate that if you hadn't dedicated those efforts that growth would have been perhaps less than 50% to just try to gauge the impact?

I don't know.

That is harder to say.

You know, you just don't know.

What would it have been if we hadn't taken the actions?

I think it's safe to say that it would have been lower.

How much lower, I don't know.

We're really pleased with the eBay motors team in what they were able to accomplish.

Let me switch to search and natural search.

As you know, both natural search and paid search are really allies of eBay.

Because we have such a breadth of products, 48,000 categories, millions of items on the site, we ought to come up in all natural search queries, and we've undertaken a project to make the site more natural search friendly.

We are about halfway through that project and we just rolled some good code to the site in the beginning of January.

Like we saw the backside of that in Q4 in terms of eBay listings and eBay categories coming up more often in natural search.

So stay -- tuned, more to come.

We're about halfway through that program.

Thank you.

Next question?

Thank you.

Our next question comes from the line of Daryl Smith from J.P. Morgan.

Please go ahead.

Two questions.

Last year we saw the U.K. and the year before Germany power through seasonality.

What countries do you see as next growers and where does this position you with your comfort in the seasonality of the business heading into 2004?

Secondly, can you comment on the impact of the new credit interchange rate that's impact on pricing and PayPal in Q1?

Sure.

As our business becomes more international, I think you are going to see more Q3 seasonality, especially in Europe.

What we learned last summer is really in August there is not a lot of activity going on in our European site, so look for that again in Q3 of this year.

Next country up for significant growth is the U.K.

The U.K. grew over 150% Q4 this year over Q4 a year ago, and next up is France, Italy, Spain, Belgium and the Netherlands, so we think they are all on good growth trajectories.

When you look -- at the GMS of these countries, they are surprisingly on the same growth curve, so we're excited about that.

Asia, if you think of what we're doing in Asia, we've got Korea, is a power house.

We've just launched Singapore, Hong Kong.

We continue to battle in Taiwan and we are in Taiwan to stay and of course have a fabulous position in China.

With respect to the second part of your question on the debit card rates from Master Card and Visa which were announced they basically uped their rate after the Wal-Mart settlement last year, that will put pressure on PayPal transaction acceptance.

This was incorporated into our guidance and is fully captured in the numbers we've given you.

Great.

Thank you.

Thank you.

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

Please go ahead with your question.

Thanks.

Two questions.

Can we go back to the margin investment question, I know you've been over it many times, but I'm wondering do you have a specific investment number, dollar number in mind for 2004, or are you driving it as a percentage of revenue?

I guess I'm curious about as you have raised the revenue guidance, are you taking advantage of that and you certainly have a great quarter, are you taking real advantage, pulling things forward as a revenue comes in stronger, or is it more that you have long range plan coming up for the coming year with the number you stick to and so revenue upside from here would be dropped to the bottom line.

Second question is when I go back and look at the say you were anticipating fourth quarter flowing into the first quarter 90 days ago and the numbers that you have today, it looks like you have reduced the momentum from the fourth to the first quarter.

Is there anything specific that we should be thinking about there?

Okay.

So, you know, with respect to your first question in terms of how do we approach our overall investment, I think it's fair to say that as we think about the overall investments in the business, we really have targeted certain areas of the company that we think are going to be very important to build the company and to prevent the company from a long-term perspective, all of the areas that I've mentioned, and we don't have specific numbers in mind.

There is no question as we see that the momentum of the business is strong.

That's been actually in two counts: one, we clearly have a larger pool from o invest, but it also tells us that there is probably -- that the momentum is even stronger and that we can afford and justify greater investment, and that's how we approach this.

This is true for the international business.

This is true for PayPal.

This is true for marketing on a worldwide basis.

The other thing I would say is if history is any guide, as we go through the year, new opportunities present themselves.

Last year it was China.

The year before it was PayPal.

So I think we also are very used to seeing big opportunities appear mid year or three quarters of the way through the year and we want to be able to invest in those.

Okay.

In terms of reducing momentum, we're coming off a very strong holiday season and I know we said this last year, but this really was a tremendous holiday shopping seen for eBay.

One out of every three Internet users came to eBay.

We had a 51 million unique visitors came to the site in December, which is a record for eBay.

It makes us the number one shopping destination in the United States.

So it was a really great quarter for us, and I think if you look up what we're forecasting for Q1, we just want to make sure that we take into account what a terrific holiday season this really was and we'll see in Q1 where this pans out, but, you know, this was a disproportionately strong Q4.

Thank you.

Thank you.

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

Please go ahead.

Good afternoon.

Congratulations on a good quarter.

I wonder if you could talk a little bit about the competitive landscape.

In particular, with search Google or others as well as other competing platforms, you're growth has been so strong with the level of upside provided this quarter that it is at least theoretically possible that there are some undercurrents but your growth is masking them at the moment.

But of course you would be able to see some of those, so I wonder if you could share with us what you see in terms of the competitive platforms that are available your top sellers and to what degree do you see them going over there, and perhaps tied to that, a second question that I have is the level of marketing expense that you need to keep up.

It appears that it is pretty much staying at the 25-26% of the revenue.

At what point do you think we could see some leverage from your scale to see that number go down?

In terms of competitive landscape, I think eBay's very well positioned against a variety of competitors, and at $28 billion annualized GMS run rate, we are competing for consumer dollars far beyond, you know, a more narrowed traditional Internet space.

I think we're drawing customers from land-based competitors, other online retailers, so it is a very, very broad competitive step.

I would say that if we look across the landscape, we feel very good about our momentum and our position versus virtually all of those competitors.

Specifically, you asked about search.

As I mentioned earlier, we think about natural search and paid search as real allies for our business model.

As I said, natural search, eBay is the most relevant answer for virtually every product category and in the case of paid search, we can purchase key words far more cost efficiently than any one seller could do individually and by the way of that first page there, are only 8 slots to be purchased and we do really well in that, in that space.

So our view is that our platform for small to medium to large sellers is unparalleled .

We don't actually see any undercurrents or any erosion of our competitive position.

I think that the Q4 results underscore that.

The second part of your question about marketing expense, we really see very, very efficient customer acquisition on a cost per active user, we continue to be very pleased with our overall marketing efficiency, and that's the reason why the 2004 we expect to spend on a percentage of revenue basis approximately the same in marketing as we did in 2003.

All right.

Thank you.

Okay.

I think we have time for one more question, operator.

Perfect.

Our next question then is from the line of Christa Sober from Thomas Weisel Partners.

Please go ahead.

Hi.

Our first question centers on PayPal.

I noticed the revenue per transaction has increased in the fourth quarter.

I was just wondering if that was due to the average size of the transaction or more international and actually looking at the international piece, I was wondering if you could tell us at what point now, is that just cross border versus U.K. only based.

Then two other questions more on just the category side.

I was wondering if you could give us the specific growth rates for some of your smaller billion dollar categories, particularly clothing, home and garden, and then finally, within vehicle -- motors, rather, I was wondering if you could give us what parts grew versus vehicles.

Thanks.

Okay.

Let me take the first part of your question on PayPal, and if I heard correctly, your question is why did the transaction revenues grow faster than payment volume, or the PayPal, why did that it did 5 basis points, so this would actually be the introduction of new product, the money back guarantee.

It was also influenced by cross border payment volume, which is at a higher fee rate, which has grown as a total percentage of the payment volume.

Lastly, the fee bearing payment volumes a percent of the total actually grew in Q4 as a result of holiday seasonality.

So -- and the U.K. component, the international component of the total mix has grown faster, which is at a slightly higher rate.

So you put all that together and you actually do get the higher rate that we saw in PayPal.

With regard to the categories, you can actually calculate that.

In our press release, we give global GMS by category and we've done that for several press releases, so I don't have those numbers at my fingertips, but you can look back and look at those growth rates.

Then parts versus vehicles, we don't have that broken down, but both delivered very strong growth rates for Q4.

One was not disproportionate to the other.

One quick follow up, actually, if I may.

In terms of the marketing spend, I know there's been a lot of focus on it today, have you guys indicated specifically what your budget is expected to increase in '04 and what the mix of off line and online is currently is?

We have not.

We've really looked at this as an overall integrated approach and that is something that we modify tactically as the year progresses, so we have not actually put out very specific goals or targets as to what we intend to do between online and off line.

Thanks.

Okay.

Great.

Thanks very much.

We appreciate you joining us.

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

We thank you for your participation, and we ask that you please disconnect your line.