eBay Inc (EBAY) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the eBay first-quarter 2004 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 Wednesday April 21st, 2004.

I would now like to turn the conference over to Mark Rubash, Vice President of Corporate Finance and Investor Relations.

Please go ahead.

Good afternoon, thank you and welcome to eBay's earnings release conference call for the 2004 first 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'd 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 a 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 have all risks and uncertainties including those relating to our company's ability to grow its business and user base.

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

Factors that could cause or contribute to such differences include but are not limited to the company's needs to manage an increasingly large company with a broad range of businesses, the company's ability to deal with the increasingly competitive environment for on-line trading including competition for its sellers from other trading sites, and other means of selling, and competition from its buyers, from other merchants on-line 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 its 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, the 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 costs and benefits of announced and prospective acquisitions and other commercial transactions.

More information about factors that could affect our operations results is included under the caption "risk factors that may effect results of operations and financial conditions", and management's discussion and analysis of financial conditions and results of operations and our annual report on Form 10-K and quarterly reports on Form 10Q, 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 our questions.

Now over to Meg.

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

Q1 was an outstanding quarter for eBay.

An active community of users worldwide, superb internal execution, and momentum from a strong Q4 helped us deliver record results across the board.

Let me highlight some of these key results.

Gross merchandise sales or GMS which is the value of all items sold on the site totaled $8 billion in Q1, nearly a billion higher than Q4 and a 51% increase over the same period last year.

This now puts us on annualized run rate of $32 billion of gross merchandise sales.

Registered users surpassed $100 million mark for the first time as we ended Q1 with 105 million users, a record jump of 9.9 million in organic user growth on a sequential basis.

Total payment volume at PayPal totaled $4.3 billion in Q1, an increase of 64% over the same quarter last year.

The number of accounts increased 68% year-over-year, to nearly 46 million.

And net revenue totaled $756 million in Q1, representing an acceleration in year-over-year growth to 59%.

To put these numbers in perspective, annualized GMS of $32 billion would place us roughly 17th on a list of the world's largest global retailers.

And, the size of our community would rank us at the 11th most popular nation behind Japan and ahead of Mexico.

As for PayPal we estimate that one out of every three U.S. on-line shoppers has a PayPal account.

The continuing momentum behind these results shows the unbounded enthusiasm of our community of users and the confidence they have in the future of eBay.

It also demonstrates the tremendous power of the business model and reinforces our own confidence in the long-term potential for growth in our business.

As we have mentioned before, there are two trends that are helping to drive interest in eBay and PayPal around the world.

E-commerce is becoming more mainstream every day.

And eBay has become a primary shopping destination for almost any kind of item.

Our job at eBay is to develop this ever expanding opportunity on a daily basis, deploying people, marketing or technology to best effect.

These efforts strengthen the global marketplace in retime.

And, as we achieve the next level of success, we redouble our efforts leading to new growth and new opportunity.

To fuel this cycle of success, eBay management focuses on two things: Execution and investment.

Execution brings near-term results as we create new ways for our community of users to be successful.

Investment fulfills our long-term vision opening up new opportunity and laying the groundwork for future execution.

At eBay the two go hand in hand as we strive to consistently deliver strong quarterly results while building a business to last.

At our analyst day event in October, we told you that 2004 would be the year of investment, setting the stage for future expansion.

Our growth in Q1 already shows the results of our recent investments.

In fact, our success allows us to accelerate some of our planned spending and to consider new investment opportunities for driving growth.

Let me take a moment to touch on four key areas of investment.

First, in the U.S. business we continue to invest in the triple A strategy.

Acquisition, activation and activity.

To boost the supply and demand and accelerate trade.

By artfully mixing on-line marketing, traditional offline advertising such as our popular TV spots and on set merchandising, we can supercharge those trends that emerge on the site.

As a result, in Q1 we saw an acceleration in year-over-year transaction revenues for the U.S. business.

Let me give you an example of how we fuel the specific trend in Q1.

Small business buying.

While eBay's known as a platform for small business creation we're seeing an increasing number of users make purchases on eBay to grow and operate their own businesses and they are buying across every category, from raw materials and machinery to office supplies and packing materials.

In fact, business buying across eBay totaled $2 billion in 2003, double the amount in 2002.

We kicked off an integrated marketing campaign in February called Dream Big, Save Big to reach out to small businesses nationwide.

Response has been great.

In the business and industrial category alone, we've seen a notable increase in GMS growth since the campaign began.

The second key area is international.

Investing in eBay marketplaces around the world continued to create new avenues for growth.

In fact, 44% of our transaction revenues, excluding payments, now come from our international operations.

Aided by the eBay playbook, our international teams are focused on adapting and executing the triple A strategy in their local markets.

Long-time U.S. practices for acquiring new users such as on-line marketing are just as successful around the world.

As a result, we saw year-over-year double-digit new user growth in every international market, from the largest, Germany, to the smallest, Hong Kong.

Australia and the UK achieved even greater results in Q1 with triple digit new-user growth year-over-year.

In fact, from the first time eBay UK added more than 1 million new users in a single quarter.

The third area is PayPal.

Investing in payment helps both the PayPal and eBay businesses.

The ease and convenience of PayPal speeds trade on eBay, while increasing trade on eBay inevitably translates into more payment volume for pickup.

In Q1, PayPal delivered transaction revenues of more than $155 million, a 69% increase year-over-year.

PayPal's inter national business continues to grow as its new service in the UK catches on and more eBay users turn to PayPal for cross-border trade.

Only six months after its local UK launch, PayPal penetration on eBay UK listings has jumped to 80% compared to 90% in the U.S., which has helped fuel total payment volume growth of more than 280% year-over-year in the UK.

Continuing to execute on PayPal's international rollout plans can bring a similar boost to other eBay markets around the world.

And last we are investing in a number of departments that work behind the scenes to accelerate trade.

From customer support and trust and safety to product development and infrastructure.

Incremental change in one of these areas can yield large results because of the tremendous volume of trade on the site.

For example, in product development we have made searching easier in select categories through item specific and catalog functions that allow shoppers to quickly zero in on the items they want.

In the music category, we saw GMS growth rate accelerate by more than 50% during the five months following the launch of these new features.

Innovation and execution like this across the company contributes to the ongoing vibrancy and momentum of the eBay marketplace.

Our dual efforts in execution and investment help fuel the company's phenomenal performance in Q1.

As a result of these better than expected results we are increasing our guidance for the year.

Rajiv will discuss the quarter and our guidance in juice a few minutes.

In the end this focus on execution and investment support one origin goal, to help our community of users become more successful.

It is these men and women who have made on-line trading such a success.

Their hard work, innovation and dedication have helped build this marketplace and the opportunity they see at eBay will continue to fuel our growth throughout 2004 and beyond.

Simply put, by investing in their future, we invest in our own.

And now I'll turn it over to Rajiv for a closer look at Q1.

Thanks, Meg.

Our results in Q1 surpassed even our highest expectations.

The performance not only highlights the inherent organic nature of the eBay business model but is also a direct result of our recent investment.

As you may recall, beginning in 2003, we significantly stepped up our efforts to drive increased user acquisitions, user activation, and user activity levels.

As reflected in both Q4 of last year, and Q1 this year, these investments are clearly paying off.

Today, we are more confident than ever in the company's strategy, the focus of our investment and the resulting momentum in the business.

As a result, we are increasing our revenue and profit guidance for Q2, Q3 and Q4 while maintaining our strategy of balancing profit growth with investing for the future.

In Q1, eBay's consolidated net revenue grew to $756 million, which reflected an acceleration in year-over-year growth to 59%.

The key drivers of this growth were user acquisition, activation and activity across each of our business units.

In addition, growth was also impacted by favorable foreign exchange rates and the fee changes we implemented in February.

In terms of user acquisition, eBay's new confirmed users in Q1 totaled 9.9 million, pushing our global user community to 105 million.

Q1 marks the fifth time in the last seven quarters that eBay has posted records of sequential organic growth.

Also in Q1, active users grew 25% year-over-year to 45 million and in terms of activity, GMS in the eBay platform over the trailing 12 months increased sharply to $550 per active user, representing a new record for the 12th time in the last 13 quarters.

Looking across categories, growth on a global basis of broad-based once again as every major category continued to experience double-digit year-over-year GMS growth.

Collectibles, books, movies and music, clothing and accessories, and toys in particular demonstrated accelerating year-over-year growth from Q4 while business and industrial and camera and photo became eBay's 11th and 12th billion categories reaching 1.1 billion and 1.2 billion in worldwide annualized GMS respectively.

Payments also continued to see upward trends across key metrics in Q1.

Total PayPal accounts increased to 45.6 million, up 67% year-over-year, powering total payment volume of $4.3 billion, up 64% year-over-year.

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

In the U.S., our community generated $4.5 billion in Q1 growth merchandise sales, up 35% year-over-year increase which resulted in accelerating transaction revenue growth of 39% to $326 million.

Behind the performance was solid improvement across each of the triple A.

First, acquisition, word of mouth as well as acceptable on-line and traditional marketing in the U.S. drove an increase in unique visitors which in turn drove accelerated growth in new confirmed registered users.

Activation and activity also continued on the upward trends in the U.S. as we continue today make eBay safer, faster and easier for our community.

For example, the rollout of the catalog, prefilled functionality originally pioneered by (inaudible) combined with the new item specific feature paid off in the form of accelerating Q1 year-over-year GMS growth of 25% in books, movies, and music.

Looking at other U.S. categories, year-over-year GMS growth also accelerated in collectibles, apparels, toys, and eBay motors.

And eBay motors specifically the accelerated growth rate reflects increased volume and industry wide improvements in average selling prices.

Also, if you may recall, we implemented key changes in the U.S. in February.

The primary goal of the changes was to ensure the long-term health of the marketplace for our community.

While early, we believe the key changes are already having a positive impact on the dynamics of the marketplace and as expected, they also contributed approximately $7 million to revenue in Q1.

In the international business, our users generated $3.5 billion in gross merchandise sales, which is up 79% over the prior year.

This volume powered an 87% year-over-year increase in international transaction revenue to $257 million.

Once again, strong results were evident worldwide.

In Germany, GMS growth of 57% year-over-year was driven by successful efforts in TV, on-line and on-site marketing, and strong category performance.

In the UK, our second-largest international market year-over-year GMS growth accelerated significantly in Q1 to 162% from 154% in Q4.

This phenomenal growth was driven by the record addition of more than 1 million registered users during the quarter and some of the strongest activation rates that we have seen in that market.

And once again, France, Italy, Belgium, the Netherlands, Austria, Switzerland and Korea all saw accelerating growth rates in the high double and triple digits, underscoring the very rapid growth we have seen in those geographies.

And in China, each one continued to demonstrate why it is the number one e-commerce player in that market.

In Q1 each net added 3 million new listings reached almost $200 million in annualized GMS and again adds more than 1 million new users to reach a total of 5.5 million confirmed register users.

In payments, PayPal again delivered strong Q1 results.

The growth in total payment volume drove transaction revenue up $156 million, up 69% year-over-year.

These results were driven by growth in the eBay core business and increased penetration of eBay.coms and eBay UK, GMS which are now at 67% and 45% respectively.

In addition, PayPal's merchant services or our eBay business grew 54% year-over-year in terms of total payment volume.

PayPal also saw improved operating metrics.

First, credit cards of a percentage of the overall funding mix declined seasonally in Q1 to 54% from 55% in Q4.

And at the same time, PayPal's transaction loss rate declined sequentially by 4 basis points to 27 basis points.

This loss rate is even more impressive when considering that over 60% of all listings in eBay.com now offer PayPal's buyer protection program, which is a valuable free service to our community.

The impressive financial performance I've just describe and are coupled with a highly efficient business model and financial discipline resulted in very strong operating profits and cash flows in Q1.

As expected, eBay's gross margin was consistent with Q4 of 82%, notwithstanding increase investment in technology and infrastructure during the quarter, and the continued growth of PayPal as a percentage of our business.

Pro forma operating profits grew to a record $286.4 million, up 73% year-over-year, representing a 38% pro forma operating margin.

Four full percentage points above the 34% level we saw in Q4.

This increase was primarily due to scale, as the upside to revenue we saw in Q1 simply outstripped our spending plans for the quarter and fell mostly to the bottom line.

Included in other income in Q1 is a one-time operational benefit of $14.8 million, due to the termination of certain contracts primarily related to facilities.

Consolidated pro forma net income was a record $210.8 million, up 31 cents per diluted share, 6 cents above the guidance we provided on our last earnings call, and consolidated GAAP net income totaled $200.1 million or 30 cents per diluted share.

And once again these record earnings translated into significant operating cash and free cash flows.

Operating cash flow in Q1 was $366.2 million, capital expenditures were $70.9 million, resulting in record free cash flows of $295.3 million.

EBay also continued to strengthen its balance sheet in Q1 exiting the quarter with more than $6.4 billion in total assets including almost $3.1 billion in cash and investments.

eBay's quarterly results were excellent but Q1 is only one data point in a consistent performance that spans more than five years since the company has been public.

This trend and the enormous opportunity that lie ahead continue to increase our confidence in the strategic investments we are in the business today.

Consistent with our strategy in Q1 we invested aggressively across the business.

For example, to deliver the features and functionality essential to the success of our community, we added over 200 people to our global product development team over the past two quarters.

Inside infrastructure we increased spending in Q1 by 70% year-over-year to further support expansion of the eBay platform into new markets.

And until the marketing, we increased our spending by 56%, with a focus on key markets which is China, Taiwan, Hong Kong, Singapore, Korea, Europe and the U.S. and we continue to invest significantly in the global expansion of PayPal.

We could not be more pleased by the returns we have seen on these as well as other investments we have made over the past year.

These results not only confirm the cost of our investment strategy, but also validate the significant opportunity that lies ahead.

Now let's turn to our outlooks for the remainder of 2004.

Before I get into the details I would like to first point out that the guidance we provide today takes into account a number of factors.

First, eBay has clear patterns of sea seasonality and we have seen these patterns accentuate over the past couple of years as eBay has become increasingly mainstream and international.

It is possible that these seasonal patterns will intensify in 2004.

Second, volatility and foreign exchange rates continues to be a factor for eBay, in fact approximately $47 million by year-over-year international revenue growth was attributed to favorable foreign exchange rates in Q1 primarily relate today euro.

The guidance we are providing today assumes that the weighted average exchange rates in Q2 '04 and for the remainder of 2004 will be at $1.20 per euro.

For prospective, if the weighted average exchange rate in Q1 had been $1.20 per euro, eBay's revenue would have been $745 million versus the $756 million we actually reported.

Third, as respect to both our Q4 and Q1 results we are very pleased with the returns we have seen on the strategic investments we have been making over the past year.

And as the trajectory of our business continues to increase, so does our needs to invest.

Therefore we have expanded and accelerated our plans to invest in 2004 in areas such as China, the international expansion of PayPal, product development across the site, sales and marketing in the U.S., Germany and the UK and site infrastructure and technology.

The result of all of these factors is that as we continue to invest aggressively in 2004 in the face of accentuated seasonality, we expect Q2 and Q3 not only to expect the flow of sequential growth rates and revenue but to exhibit compressed margins as well.

Keep in mind however that on a full-year basis we expect 2004 revenue to grow 45% year-over-year and pro forma operating profit to grow 54%.

As a result of my increased confidence we now expect 2004 consolidated net revenue to approximate $3.15 billion, $150 million above our previous guidance.

On the bottom line, we now expect consolidated 2004 pro forma diluted EPS to approximate $1.13, 9 cents above our prior guidance and consolidated GAAP diluted EPS to approximate $1.06.

This guidance implies a full-year pro forma operating margin of 34%.

In summary, the business performance to date has been very strong, this is reflected in the fact that our 2004 revenue guidance has increased by cumulative $250 million since October of last year.

Simply put, we could not be more confident and excited about the opportunity ahead of us.

And we remain more focused than ever on making the appropriate investments to ensure the long-term success of our community.

Thanks for joining us today, we would now be pleased 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.

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One moment please for the first question.

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

Thank you, good afternoon and congratulations on a great quarter.

A couple of questions.

Um, quick ones.

First, on some of the newer countries like France, Italy, Spain, Sweden.

Are you still very confident -- I know you talked about in some of those countries you're seeing high double digits, and even triple digit growth rates, but are you still as confident as you have been, that those will ultimately go on the same growth trajectory that the U.S. and Germany and now the UK has been on?

Second, your registered user growth was 52%, active user growth was lower than that at 45.

I was wondering if you could talk about the difference given your focus on activity?

And, um, and then finally, um, could you give us a sort of a broader sense about what's happening in Asia?

I know you talked about investing in countries like Taiwan and China, but given the fact that you're not operating in Japan now, can you give us a sense of how Asia is shaping up competitively.

Sure, Mark.

We remain very confident in those newer countries.

There is actually quite a predictable development curve with all the countries seem to be following.

So we've said the UK is a couple of years behind Germany, France is just a bit behind the UK followed by Italy, Spain, Belgium and the Netherlands.

So when you count for the size of the countries they are performing exactly as we would anticipate.

Um, with regard to the new user growth versus the active user growth.

I think there's a couple things -- a lot of user growth is coming from very undeveloped markets so you've got new users coming on who, you know, exhibit different characteristics than a new user who comes on to eBay.com today.

So that's probably the main reason for that differential.

What we know is that the activity efforts are working, um, in our more developed countries, so you are seeing higher activation rates when you get a new user.

And then finally with regard to Asia, we are very focused on Asia and the competitive position varies dramatically by country.

In fact, I just got back from a 10-day trip to Asia and the Korean business looks terrific, new launches in Hong Kong and Singapore, off to a very good start.

We're having fun in Taiwan right now as the momentum is shifting a bit there in our favor as Yahoo starts to charge.

And then China, each net is without a doubt the no. one e-commerce player in China doing great.

Great, thanks.

Our next question comes from the line of Jateel Natell of Deutsche Banc Securities.

Hey guys, a couple questions.

Can you talk about velocity and the impact it's had on the business.

It seems like the velocity has kind of remained in the low six-day range and, uh, it seems like your users are buying just as voraciously as they were in the fourth quarter.

Can you characterize how that is playing out so far this year and also contrasted against UK and Germany, are you seeing similar trends in the velocity side of the business?

Second, can you just talk about user growth in terms of new registered users, how does it look year over Asia?

Are you adding more in Europe or in Asia?

Thanks.

Can you repeat the last part of your question, on user growth?

Yeah, just trying to figure out user growth, are you adding more users in Asia Pack or Europe at this point in time given your marketing investments that you're making across both -- both regions.

Yeah.

So, you know, on the first question on velocity.

The velocity actually you're correct has remained consistent with what we saw in Q4.

And that is actually notwithstanding the seasonality that one would expect.

So it is absolutely true that we have seen the number of users and the rate at which moving on the site remaining very, very high.

And I think this is being helped by a number of things.

First and perhaps most notable is PayPal.

PayPal absolutely helped the velocity of items and this is true now not just in the U.S. but also increasingly for the UK where PayPal has become a big part of that business and velocity in the UK has absolutely picked up as a result.

And also there's been several product enhancements that have increased velocity.

You know, with respect to your question about the CRU growth and where is it coming from, well it is still primarily, the bulk of our CRU it's still coming from Europe though it's very clear that longer term Asia is going to contribute more users because it's on a much faster growth track and frankly a larger pool of available users from which to draw on.

Do you have any idea of when that will cut over to say Asia Pack becoming a bigger growth area from a user standpoint?

Really tough to predict that.

It has a lot to do with, you know, PC penetration, internet penetration, of course the sequencing of our expansion across the world.

And the biggest driver of that of course is the development of the China internet market, how fast does that market actually develop.

Next question?

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

Thanks, hi.

I was wondering if you could currency impact just for a second.

Was the $18 million benefit in sequentially in the first quarter, in line with the expectations that you had coming in the quarter?

And then as you -- I think your guidance says that you're looking at 120 exchange rate against the euro for the rest of the year.

Is that the same number 2Q, 3Q, 4Q?

Um, and then I was wondering also, is there any way that you can quantify, you know, strategy as your expense base versus international, how the currency benefit is impacting earnings as well as the revenue?

Okay.

Lanny, I think on the first -- you know, when we had given our guidance at the beginning of Q1, we indicated that the guidance was based on a $1.20 on an average basis, so -- and the euro being the primary currency really which we are talking about.

In fact, the weighted average exchange rate as it turned out to be in Q1 with about $1.25 per euro.

So that's -- and when we talk about the $18 million, that in fact is contrasting the euro in Q4 to what the euro was in Q1 and the weighted average in Q4 was $1.19, and that's how we derived the $18 million upside from the strength of the the euro.

Okay.

And, you know, so was it in line with expectations?

No.

The expectations were $1.20 as we indicated on the last earnings call.

Um, I think, you know, from -- from the other standpoint in terms of, you know, the $1.20 going forward, our expectations are based on the fact that the euro will be $1.20, because it can be volatile.

It is very difficult to predict where the exchange rates are headed.

In fact right now it's probably lower than $1.20, it's actually $1.18.

You know, a quick rule of thumb would be that for every sort of point in exchange rate, um, we had a delta from our guidance which was $1.20 to -- or translated to 1.25, so sort of five points, that translated to about $18 million in foreign exchange benefits.

And generally speaking you can apply that rate forward as well.

Okay.

What about the earnings impact?

Is there a way to quantify that?

You know, the earnings impact, it is -- it is not one for one, it doesn't absolutely drop through into earnings.

In previous quarters, we have actually given you in our quarterly schedule plenty detailed implication as to what happens with revenue and what happens with earnings.

I think roughly speaking you can say about a little less than half drops through to the bottom line.

Uh, and that should be broadly consistent in this quarter as well.

Okay one follow-up if I might.

You know, in the last couple times that you've provided your outlook across this year, um, the -- the difference between sort of the size of the first quarter revenues and the final -- and the fourth quarter was, you know, more than 20% progress from the start to the finish and now that's been dialed back to 15%.

I know you've talked about increased seasonality.

But my sense has been that you've really met sort of the summer is more seasonal rather than there's kind of a flattening from the start to the finish of the year.

Is there something else going on in there?

Or are you be conservative or what -- what -- the way that you've had the outlook in the last couple times you provided it.

You know, the business is -- is clearly getting very large.

And as I look sitting at this point in time, the further out we look, uh, frankly our view is that we will wait and see and we will have a very good sense as to how the business is progressing over the summer months and will be in a better position to update to you as to what our, you know, views in Q4 would be closer to the event.

Thanks a lot.

Okay.

Thanks.

Next question.

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

Thanks, there were a couple of initiatives that you talked about and I was wonder if you could give us a specific update of impact that had on your business.

You opened up a fair amount of the site I think the last time we talked, 50% of the site to the search.

I was wondering if you could talk specifically to the benefit you have seen there.

And then also, Rajiv, you allude today PayPal buyer protection and how many auction is that now included on.

What type of usage have you seen picked up that you could differentiate between that versus normal growth in PayPal.

And then last, um, PayPal international, could you give us a timeline and country rollout of what we'll see throughout the year?

Thanks.

Sure.

Um, the -- opening up natural search has absolutely been beneficial, Anthony.

Our sellers get more exposure and we are I think in a stronger position than we have ever been.

And as a result, we think that those searches -- continue to go allies of eBay.

I'll go to the last one on the PayPal timeline and then let Rajiv go to question number 2.

The long-term plan is to follow the eBay global foot print around the world with PayPal.

Right now we have a fully localized site obviously in the U.S. and in the UK.

Um, we have a translated, although not fully localized site in Germany and we, um, you know, have not announced when that site will become fully localized.

But the next area for focus is Europe, once we get Europe now we will move to Asia.

On your question on PayPal, buyer protection program, a little more detail on that.

So that program launched in the U.S. in October and in the UK in Canada in February of this year.

And, you know, we have clearly seen gains and revenue from the program and on the other hand there has been, you know, some offset in terms of costs, which are reflected in our last reserves.

I think the overall sort of headline on this is that this has been a really good thing for both eBay and PayPal businesses.

You know, it clearly helps PayPal because it drives adoptions, it has helped our mix, it clearly helps eBay because it drives confidence and increases confidence in trading on eBay.

At the end of the day, what this is really focused on is benefiting the community of users and that was what was the primary motivation and really could not be more pleased by some of earlier results we are seeing.

I noticed that you also recently announced that you'll be offering coupons that are available only to PayPal users, are there other types of incentives potentially higher interest rates that you could give to people to -- send them to use PayPal beyond this as well as to have them restore value?

Yeah, I think there's -- we are just at the beginning of the innovations that we can bring to the marketplace on PayPal.

You have to remember we've actually owned this company now for just over 16, 18 months.

And there is tremendous innovation opportunities.

We knew that when we acquired the company, it has been even more -- you know, even more useful than we thought it would be.

One fun innovation is of course the integrated on-line shipping where you can print out postage, put it on your package and send it out the door, you know, and pay for it with PayPal.

So we are really at the earliest stages and I think you'll see a lot of innovation roll out over the next 12 to 18 months.

Great.

Thank you very much.

Our next question comes from the line of Heath Terry of Credit Suisse First Boston.

Great.

I was wondering if you can -- when it comes to PayPal go into more detail on the European rollout that you've got planned and what maybe is in the numbers for the rest of this year and how we should kind of track the -- the development of the PayPal and the rest of Europe given that it's been so incredibly successful in the UK.

Great.

We have not yet released the rollout scheduled publicly.

And we -- you know, we will be pricing it very low as we enter markets, as we did in the UK, but our -- our rollout schedule as we see it today is based into the guidance and as soon as we, you know, have that rollout schedule ready for prime time, we will announce it.

Great.

And can you give us an idea of the impact that Mobile.D had on -- on the number -- on the guidance going forward?

Yes.

So, you know, it would be -- we just closed the acquisition of Mobil.D on the st of April and as we'd indicated in the announcement that accompanied it, we really expect this to have no material impact on our overall financials, this is relatively speaking a small business, but we think, you know, very exciting because of the complementary to our motives business in Germany.

Thanks a lot.

Thanks.

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

Thanks, I just have a couple quick questions.

One, you raised prices just a tad, not too long ago, if you could give us any color on the impact of that and any -- any insider conversion rates that would be great.

Essentially more importantly the business and industrial business was very strong this quarter, it beat the billion dollar annual revenue threshold.

Rajiv you talked about it, Meg you talked about it as well.

If you could give us any insight into your enthusiasm about -- or degree of enthusiasm about that business over the course of the next year, because arguably it could be one of your bigger categories over time and it certainly picked up traction faster than we thought it would.

Thanks .

Our next question comes from the line of Christa Sober.

No, hang on one second.

Hang on one second.

Um, Mary, let me start with the first question.

The primary goal of the key change as you identified was to ensure the vibrancy of the marketplace and the long-term success of eBay's community of buyers and sellers, that is always how we think about pricing.

And so the direct impact to the U.S. revenue in Q1 was not that significant, around $7 million.

And that was the majority of that was in, you know, incorporated in our previous guidance.

It is a little early to tell but we think it has had the desired effect object basically increasing the quality of the items that are brought to the site because the longer term effect of nudging up the conversion rate.

What we've said before is that conversion rates have moved in a 4.band over the last two and a half three years and when it starts to get to that bottom of the band then we decide maybe the -- the marketplace needs some pricing adjustments.

But we are real pleased with that -- with that pricing change.

In terms of B & I, it's doing very well.

And we noticed this trend in the middle part of last year, that many of this business and industrial categories have the same characteristics.

They were inefficient.

People did not know what was available and they did not have good insight into what there items or items that they were looking for were worth.

So we think this has all the classic signs of an eBay marketplace.

It's still early but we are really, really pleased with the momentum to date and the marketing campaign that we launched in Q1 has had absolutely the desired effect.

So we're cautiously optimistic this can be another very big category for eBay.

Thanks guys.

Thank you.

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

Hi two questions.

First if you could comment on the rate of deceleration in PayPal in the U.S., I am getting up 54%, which is a fairly market slowdown there.

And then, um, if you could just flush out a little bit some of the international growth, if you could comment on, um, you know, motors as a percentage or, you know, as a -- as it relates to the overall growth rate and, um, then if you could help me understand -- and if motors were a big chunk of that how -- if you could help me understand why international take rates climbed so substantially in the first quarter.

Thanks.

Let me take the international question.

Actually, international growth was very broad-based across all categories.

The only country that really has a very substantial motors business is Germany.

And the worldwide growth rate on motors was 65% year-over-year.

So motors is strong, but it did not explain the overall international growth.

So we continued to invest in motors, we really, you know, in the U.S. we focused on a program of improving dealer support, dealer education, targeted marketing and, uh, obviously continued to improve the site.

So it was a factor in international growth but not a driving one.

One question on PayPal.

I think one of the things that is important to keep in mind is that of course we acquired PayPal in the latter part of 2002.

And so for most of last year we were actually lapping payments revenues that were only from Bill point.

So now what you are seeing is actually comparable numbers from PayPal both this year and last year.

And on that basis, there's a couple of things.

There's that one we also lapped the integration quarter, which is the first quarter that we first came on to eBay, but actually in terms of the overall growth of PayPal business, it is very strong.

And, you know, as you pointed out on two counts.

One benefits from the eBay business continuing to grow and the penetration of PayPal in its two primary markets, that is the U.S. and the UK, is also increasing.

So actually very happy with the overall PayPal growth rate.

And just -- could you both comment on the international take rates going so much, was it increasing fees or just increasing, um, some of the payment structure.

Actually, the take rates for international have been very consistent over the last three quarters and while we did make a number of key changes in about 14 countries outside the U.S., the cumulative impact of all of those fee changes on a direct-revenue basis is actually immaterial.

It's -- it's less $1 million.

So it was definitely not a function of fee changes, and in fact the rate has been very consistent according to our metrics.

Great.

Thanks so much.

Thank you.

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

Good afternoon, congratulations on another stellar quarter.

Actually, let's start with that, Rajiv.

You had an upside of about $60 million in Q4 and about $56 million this quarter, so one basic question and I'm not trying to be funny here, but should we just take -- (inaudible) publish it or put in other words, what was driving this level of massive upside and should we expect the same or not and I'll just follow up with another question.

Okay.

So, you know, there's no question Safa as we had just exited Q4, and we were providing guidance for Q1, there's a couple of things that really relate to I think what has been a terrific quarter that completely surpasses our expectations.

The first is we were helped by foreign exchange.

The exchange rates were stronger than the numbers on which our guidance was based.

That said, also what happened is that, you know, coming off of Q4, when we were the number 1 holiday shopping destination in Q4, it absolutely impacted the kind of sequential growth rate that we were willing to commit to for Q1.

And quite frankly, as we were looking at Q1, and as we saw the quarter unfold, we saw a momentum in the business that was much stronger notwithstanding the very strong Q4.

And then last, and I think this is actually perhaps the most important, is that when you look at all the investments that we've been making over the last several quarters, beginning in early 2003, the ROI on these investments has actually been terrific.

Okay.

As we look at the international component of your business, it is by far the most important element and you would make -- (inaudible) would be -- it will exceed the U.S. business.

Within that context, could you give us some color as to how international revenues are concentrated by region?

I understand that you haven't really provided a lot of details that maybe we would like but maybe some broad color since UK and Germany I suspect are vast majority of revenues, and those two countries are fairly mature.

It would help if you had some sense of to what level revenues are concentrated within those regions.

Sure, sure.

The one point I would actually make is when you go back -- if you step back and look at the organic growth not including exchange rates, and just dollars from Q4 to Q1, actually, the increase was evenly split, one-third U.S., one third international and one third PayPal.

So the growth is very broad based and coming from every part of the business.

Looking at international, your question sort of more specifically as to the concentration, what's interesting is that, you know, just a short while ago Germany used to account for most of the inter national business.

That is no longer the case.

In fact, now when you look at the different markets around the world, it's Germany -- our second-largest market's the UK and of course Korea, which is a public company announced their results all of which have been growing very fast, and the early European markets are in fact picking up speed and as we indicated, you know, triple digit, double-digit growth rates are accelerating.

The other point that I would make is that you are thinking about growth rates and thinking about concentration, the UK and Germany and Korea are by no means, you know, markets where the growth is kept up.

We actually think there's a long opportunity ahead as we'd indicated on analyst day, the UK is not even close to where Germany is, and we think that long opportunity in Germany not to mention all the other markets.

And the -- the point that -- you know, to answer that question earlier.

When you normalize these countries for stage of growth -- stage of entry and, uh, for -- and G & B, actually our trend lines are very consistent across these markets.

So all in all thrilled with the progress for the international business, along with PayPal and the U.S.

Thank you.

Our next question comes from the line of Douglas Imas of Lehman Brothers.

Thank you.

Motors obviously came in with very strong GMS fourth quarter and then again in this past quarter.

As we're heading into the heavy seasonal car buying season, can you talk a little bit more about how you're doing on the supply side in terms of the progress and you touched on it earlier.

Also I note it's early in the process but are you able to gauge any impact from the shift in the fee structure in the motors business in the UK and Germany?

Thank you.

We are optimistic about motors as we go into the -- you know, uh, car buying season.

As I mentioned, we shifted our focus last year to bring more supplies to the site.

We were absolutely supply constrained.

So we focused on improving dealer support, including call support, we've got dealer education, eBay motors, university is rolling out throughout the United States.

We've got very targeted marketing in trade magazines and automotive conferences and as I said, we've improved the functionality to make it easier for people to list their cars and dealers in particular.

So we see good results from that strategy change, I think we'll know a little bit more as we hit the summer car buying season.

In terms of the -- the question in Germany, I think it's early to tell about how those price changes have actually influenced supply and demand in Germany and we can give you an update on that perhaps in another quarter.

Great.

Thank you.

Okay.

Why don't we take one more question.

Our next question comes from the line of Steve Weinstein of Pacific Crest.

Thank you.

Just sneak in a couple.

First with -- with the motors business, it sounds like you've done a lot of adjustments to it.

Do you think there will be enough strength in the U.S. business in the second quarter to continue the acceleration?

Even modestly that you saw in Q1?

And then can you tell us a bit about PayPal as it relates to Germany, were you competing against already installed payment solution?

Do you have to make any significant changes how you are going to run that business?

Uh, with respect to sort of the U.S. business, Steve we don't provide guidance that breaks out between the different components of the business.

You know, all of our businesses, we absolutely do see the summer slowdown as people spend more time outdoors than in front of their computers.

And that is reflected overall in the guidance we have provided for Q2, Q3 and Q4.

So I can't break out the U.S. in particular for you.

With regard to PayPal in Germany, there are a number of changes that we're going to make to PayPal because we have to adapt to local methods.

We think we do have a strong value proposition that's going to be a function of slightly lower prices, plus value-added services that we know our users in Germany want.

So stay tuned, we're excited about it and I think by the end of the year we'll have a good estimation on whether we've got the product exactly right.

Great.

Well, thank you very much.

And we will talk to you next quarter.