eBay Inc (EBAY) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the eBay Q2, 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, July 21st, 2004.

I would now like to turn the conference over to Mr. David Joseph, Director of Investor Relations with eBay.

Please go ahead, sir.

Good afternoon.

Thank you and welcome to eBay's earnings release conference call for the 2004 second quarter.

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

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

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

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

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

Our actual financial results could differ materially 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 on-line trading, including competition for its sellers from other trading sites and other means of selling and competition for its buyers from other merchants both online and off line, 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 develop and upgrade its systems to accommodate growth at a reasonable cost; the company's ability to maintain site stability and performance 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; the need to manage the integration of announced and prospective acquisitions; and the costs and benefits of announced and prospective acquisitions and other commercial transactions.

For more information about factors that could affect our operating results is included under the options -- I'm sorry, 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 in our annual report on Form 10-K and quarterly reports on Form 10-Q, copies of which may be obtained by visiting the investor relations section of our website.

Lastly, please note that we have replaced the term gross merchandise sales or GMS with the new term gross merchandise volume or GMV.

While the definition of GMV is the same as GMS, we believe the new name is more consistent with other metrics we use and increases the clarity of our reported financial information.

We will 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 will be happy to respond to your questions.

Now over to Meg.

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

Q2 was a great quarter for eBay.

An active community of the users worldwide, consistent internal execution and momentum from Q1 helped us deliver strong results across the board.

Let me highlight some of the key results: Gross merchandise volume or GMV which is the value of all items sold on the site and our new term for gross merchandise total 8 billion in Q2.

Despite [INAUDIBLE--DISTORTED AUDIO] seasonality, these represents a 42% increase over the same period last year.

In Q2, even our largest categories, those that have annualized billion dollar run rates saw double digit GMV growth year-over-year.

Registered users grew to 114 million around the world, a jump of 9.2 million in organic user growth on a sequential basis.

Total payment volume at PayPal was 4.4 billion in Q2, an increase of 53% over the same quarter last year.

The number of PayPal accounts increased 62% year-over-year to more than 50 million.

Net revenues totalled 773 million in Q2, representing strong year-over-year growth of 52% and 13 million higher than expected.

There is no question that seasonal trends are becoming more pronounced as eBay becomes more mainstream.

In light of this expected seasonal shift, our Q2 results were strong and consistent with the overall momentum in the business.

We are more confident than ever in our business model, our business strategies and our growth trajectory for 2004 and beyond.

As we often say, our business is being built by our dedicated community of users one transaction at a time.

Perhaps the biggest highlights of the quarter were two events that centered on our community of users.

In May we held our first United States of eBay small business summit in Washington, D.C. eBay saw business owners from all 50 states from the District of Columbia gathered together to share information and speak to their government representatives about issues impacting their livelihoods.

The event underscored eBay's increasing importance to entrepreneurs around the country.

We estimate that 430,000 men and women in the United States make most if not all of their living from selling on eBay.

Let me just mention a few of the remarkable people I met at the summit.

Gary NEWBERT of Tampa, Florida, who is the owner of Gator Pack, sells shipping and packing supplies on eBay.

Gary started selling on eBay in 1999 and today has six employees and a 70,000 square-foot warehouse.

As he is proud of pointing out, Gary's eBay business successfully supports three families.

Paul Dell of Milford, New Hampshire, owns SportStop.com, which sells all kinds of sports equipment from lacrosse sticks to snowboards.

EBay has helped him double his sales every year for the past three years, and Paul estimates that 60% of his sales now come through eBay.

And Terry KOPACHEK, an insurance agent from Hopewell, New Jersey, known on eBay as sneaker99, is one of a growing number of small businesses using eBay to source office supplies.

Terry has used eBay to buy everything from a new copy machine to office supplies that she needs to operate successfully.

So clearly, eBay has become an attractive home for entrepreneurs.

An ideal place to incubate new business ideas.

In fact, eBay may be the best place in the world to start a new business today.

And the entrepreneurs of today are the small business people of tomorrow.

We take great pride in the roles of eBay and PayPal play in enabling entrepreneurs to follow their dreams.

And no where with our community's entrepreneurial spirit is more evident than at our third and annual eBay Law in New Orleans last month.

EBay Law confirmed for me that eBay is a way of life for an ever growing number of people.

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

The power of the community is truly inspiring and I believe we've only seen the beginning.

More than 700 employees were in New Orleans to meet our users, help them learn about eBay and PayPal and listen to their ideas, challenges and successes.

Our interaction with these dedicated eBay users emphasized for all of us the importance of managing the marketplace for their success while investing in the future growth of the company.

As we have mentioned before, we focused on four main areas of investment.

The U.S. business, the international business, PayPal, and our internal operations.

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

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

Acquisition, activation, and activity.

To boost its supply and demand and accelerate trade.

Through a strategic mix of on-line marketing, traditional offline advertising and onset merchandising we can support growth trends that emerge on the site.

We also provide our sellers with similar tools to boost their own triple A strategies.

One example of this is eBay stores where we have launched a number of improvements to put sellers more in control of their stores.

As a result, the number of new eBay stores in the U.S. grew to 121,000 in Q2.

The second key area is international.

Investing in our growing network of international marketplaces creates new opportunities for growth.

Following the eBay playbook, our international teams are adapting the triple A strategy in their local markets with great success.

As a result, 46% of our transaction revenues, excluding payments, now comes from our international operations.

Our team in China in particular is taking advantage of global best-practice sharing.

They are keenly focused on benefitting from the best of eBay's knowledge and resources to bring the local community a better trading experience.

And our investments in China are already delivering strong results.

With more than $250 million in annualized GMV, EACH NET is by far the number one e-commerce player in China and is in fact widening its lead among local competitors.

We also look to expand our footprint around the globe among emerging Internet market.

Most of you know that last month we announced an agreement to acquire [INAUDIBLE].com, India's number one trading website.

Founded in 2000, [INAUDIBLE] has introduced on-line trading to the Indian market, and successfully built a thriving local marketplace of 1 million registered users.

It's still early days for e-commerce in India but we are very excited about working with the BAZI team.

The third area of investment is PayPal.

As we consistently have seen, growing the payments business helps both PayPal and eBay.

The convenience and safety of PayPal speeds trade on eBay, while more trade on eBay translates into more payment volume for PayPal.

In Q2, PayPal delivered transaction revenues of more than $168 million, a 60% increase year-over-year.

Much of the PayPal investment made in Q2 was focused on product development in the U.S. and around the world.

Following the success of its launch in the UK, PayPal expanded into five new eBay markets, Germany, Austria, Switzerland, Belgium and the Netherlands and the UK business continues to grow.

At the end of Q2, 85% of the addressable listings on eBay UK offered PayPal, compared to the 91% penetration on eBay.com.

Bringing PayPal to more of eBay's international websites can bring a similar boost to both businesses around the world.

And last we are investing in the departments that work behind the scenes to accelerate trade or improve internal operations.

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

In product development, for example, we launched a feature called comparison shopping, which allows buyers to compare selected items side by side without repeatedly clicking in and out of listings.

For sellers we launched the eBay solutions directory, which provides a one-stop on-line resource for software applications designed to make selling easier.

Technology improvements were also made in our internal operations, from new tools that optimize onset merchandising or fight fraud to the completion of our billing system conversion.

By continuously striving to innovate, we contribute to the ongoing vibrancy and momentum of the eBay marketplace overall.

As we have mentioned before, 2004 is a year of investment.

Our growth in Q1 and Q2 already shows the results of our ongoing investments in these four key areas.

We will continue to focus on growing the business in the short term while laying the groundwork for future growth as well.

Much of our investment is geared toward helping our community of users.

As we saw so vividly in the past few months our marketplace enables men and women around the world to pursue their passions and create new lives.

Their hard work, impressive innovation and steadfast dedication have shown us what eBay can be.

And the opportunity they see for themselves on eBay inspires all of us to become more successful.

And now I'll turn it over to Rajiv for a closer look at Q2.

Thanks, Meg.

Building on the exceptional sequential growth that we saw in Q4 last year, and again in Q1 this year, the eBay business delivered another strong quarter.

This trend was evident in both our financial results as well as our key under underlying metrics.

Reflecting both the continuing momentum of the business and our increasing confidence in our ability to capture the long-term opportunity ahead of us, we are once again raising our revenue and profit guidance for the year.

To begin, let me provide you with additional detail on eBay's operational metrics followed by a more detailed business unit review and finally our outlook for the future.

In Q2, eBay and PayPal metrics reflected anticipated seasonal patterns that are becoming more pronounced each year.

As eBay becomes increasingly mainstream in the U.S. and around the world, consumer activity patterns in eBay increasingly mirrored general consumer patterns on-line and off.

This gradual development has translated into periods of increasingly stronger growth for eBay in Q4 and Q1 followed by periods of weaker growth in Q2 and Q3.

Now let me talk to the specific trends that we saw in the quarter.

First, new listings continued on their upward trajectory in Q2 growing 48% year-over-year to 332 million.

This metric includes 16.4 million new listings generated from eBay stores inventory during the quarter versus 3.4 million new stores inventory listings in Q2, 2003.

Gross merchandise volume in Q2 was $8 billion, roughly even with eBay's seasonally strong Q1 and up 42% year-over-year.

To pause here for a moment, you may have noticed that we have replaced the term gross merchandise sales or GMS with the term gross merchandise volume or GMV.

To be clear, GMV equals GMS.

However, we have elected to make this change because it is more consistent with our other metrics such as total payment volume and provides for better clarity.

Moving on, eBay's consolidated net revenue grew a strong 52% year-over-year to 773 million, including net revenue from MOBILA DOT EE for the first time.

Also the year-over-year revenue growth in Q2 benefited from fluctuations in foreign exchange rates by about 26 million.

But on a sequential basis, revenue was negatively impacted by foreign exchange rates by approximately $11 million.

In terms of user acquisition, eBay added 9.2 million new confirmed registered users in Q2, pushing our global community to 114 million.

Active users grew 41% year-over-year to 48 million, and then terms of activity, gross merchandise volume on the eBay platform over the trailing 12 months increased to $561 for active user, represent representing a new record once again.

We're looking across categories, growth on a global basis continued to be broad-based as several of our largest categories demonstrated year-over-year GMV growth in the mid-to high double-digit range.

In payments, high-level metrics continued on their upward trajectories in Q2, total PayPal accounts increased to 50.4 million, up 62% year-over-year, powering total payment volume of $4.4 billion, up 53% year-over-year.

Looking at the business units.

In the U.S., our users generated 4.4 billion in gross merchandise volume in Q2, a 26% year-over-year increase.

This GMV drove a 32% increase in U.S. transaction revenue to $319 million.

Though seasonality was clearly visible in the U.S. and reflected in the sequential downtick in GMV, strong sequential trends were evident across user acquisition, activation, and activity metrics.

GMV for active users was particularly strong, increasing by $12 sequentially.

These [INAUDIBLE] trends in U.S. motors was certainly at work here but so were our continued efforts in category management, marketing and merchandising and in delivering the tools like enhanced eBay stores that enable the community's success.

In terms of categories in the U.S., clothing and accessories, home and garden, business and industrial, tickets, health and beauty and motors all saw year-over-year GMV growth in the mid-to high double-digit range.

In motor specifically, improved volume and ASPs drove year-over-year GMV growth of 44%.

In our international business, our users generated $3.6 billion in gross merchandise volume, up 67% over the prior year.

This volume powered a 76% year-over-year increase in international transaction revenue to $274 million.

As expected, amplified seasonal patterns and volatility in foreign exchange rates were even more evident in our European businesses.

This is particularly notable in Germany where GMV grew 35% year-over-year on a U.S.-dollar basis.

In the UK, eBay continued its rapid ramp, which GMV growth of 140% year-over-year, in particular, eBay motors in the UK reached a $1 billion run rate in GMV for the first time ever.

Elsewhere in Europe, France, Italy, Belgium, Austria, and Switzerland all saw gross merchandise volume growth rate in the triple digits.

Turning to Asia.

Korea continued to accelerate in Q2, as the year-over-year GMV growth reached 74% driven mainly by strong new user and listings growth.

In Taiwan, confirmed registered users broke the 1 million mark for the first time ever and GMV growth accelerated significantly.

And in China, Each Net added 1.4 million new users reaching almost 7 million total users and grew GMV by 28% sequentially to $63 million, further widening its lead and demonstrating its number 1 position in that market.

In payments, transaction revenue reached $159 million, up 60% year-over-year.

This growth was driven primarily by strong results on a PayPal's international operation, especially in the UK, and increased cross-water trade which accounted for 18% of total payment volume in Q2.

Also, PayPal's penetration of tractable GMV on eBay in the U.S. and the UK increased to 70% and 50% respectively, and total payment volume in merchant services grew 40% year-over-year.

Looking at PayPal's costs during the quarter, PayPal's transaction expense rate increased by 9 basis points sequentially due to the strong performance internationally where processing costs are generally higher as well as to a full quarter of debit card interchange rate increases.

Credit cards as a percentage of PayPal's funding mix was 54%, the same level as in Q1 and the transaction loss rate declined sequentially by 2 basis points to 25 basis points.

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The strong operational performance I've just described combined with disciplined investments, resulted in excellent profit growth.

As Meg mentioned earlier in Q2 we continued to invest significantly in China, the international expansion of PayPal, product development, and our internal infrastructure.

EBay's gross margin in Q2 was 81.1%, slightly higher than the year ago quarter, notwithstanding increased investment and the rapid growth of the lower margin payments business.

More importantly, pro forma operating profit almost doubled year-over-year to a record $276 million reflecting a 36% pro forma operating margin.

Consolidated GAAP net income totalled $190 million, or 28 cents per diluted share, and consolidated pro forma net income was $198 million, or 29 cents per diluted share, three cents above the guidance we provided on our last earnings call.

The significant leverage in eBay business model led to operating cash flows of $263.1 million, which were up 26% year-over-year, but down sequentially, primarily due to timing differences associated with the accounts payable processing.

Capital expenditures during the quarter was $65.7 million, resulting in free cash flows of $197.4 million.

EBay further strengthened its balance sheet in Q2, exiting the quarter with more than $6.8 billion in total assets, including almost 3.3 billion in cash and investments.

Now let's turn to our outlook 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, you have heard me speak of the amplified seasonality we saw in Q2.

We expect a similar pattern in Q3.

It is also possible that changes in foreign currency exchange rates could continue to negatively impact sequential net revenue growth.

The guidance we are providing today assumes that the weighted average exchange rate in Q3 '04 and for the remainder of 2004 will be $1.20 per euro.

And lastly we expect Q3 to exhibit lower operating margins sequentially as we continue to maintain our investment strategy in a seasonally slow period.

For the third quarter 2004, we now expect consolidated net revenue to be approximately $770 million, roughly even with Q2 and up $5 million from our prior guidance.

For the full year 2004, we now expect consolidated net revenue to be as high as $3,185 million, up $35 million from our prior guidance.

On the bottom line, we now expect consolidated 2004 pro forma diluted EPS to approximately $1.17, 19 cents above the original guidance we first provided in October of last year.

And consolidated GAAP diluted EPS to approximate $1.10.

This guidance implies a full-year pro forma operating margin of 35%, 1 percentage point above that implied by our prior guidance and 3 percentage points above eBay's pro forma operating margin in 2003.

In summary, eBay's momentum continues, and it's reflected in our strong Q2 performance, our steady commitment to a long-term investment path and in our ability to increase our 2004 net revenue and profit guidance.

In short, we are more confident than ever that we have the right strategy, the right team, and the right community partnership to deliver continued business success.

Thank you for joining us today, we'd now be pleased to take your questions.

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

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

Your line will then be accessed to obtain information.

If your question has been answered and you 'd like to withdraw your registration, please press the one followed by the three.

If you're using a speaker phone, please lift your handset before entering your request.

One moment, please, for the first question.

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

Please proceed with your question.

Yes, thanks, Brian.

I had a couple of questions.

You talked about the amplified seasonality in Q2 and Q3.

Could you also provide a little color on what may be some amplified seasonality on the upside in the fourth quarter.

We're pretty optimistic about the fourth quarter generally for e-commerce, I think you guys have a new ad campaign coming out and some new strategies, will you give us a little color on that that would be great.

And the second question relates to, uh, the cross-border trade ramped nicely in the June quarter, when we were at eBay live we certainly heard a lot of focus and a lot of desire by that -- by the users and sellers to get PayPal ramped up as quickly as you can on a global basis, if you can give us any color on some timelines there and what you're working on with PayPal outside the U.S., that would be great.

Thanks.

Uh, yeah.

Let me take the amplified seasonality.

Um, we actually know that eBay has become more mainstream and we saw a great Q4 and a great Q1 and we are looking forward to a really strong holiday season.

We have a lot of the same plans in place that worked so well for us last year, we do have a new ad campaign in the United States.

And so we are -- we have a really positive outlook for the holiday season so we're feeling pretty good about that.

I think we're very well positioned.

In terms of cross-border trade it actually has grown quite a bit.

PayPal is actually already accepted in 38 countries with new local sites in Germany, Austria, Switzerland and the Netherlands and we are going to build out that footprint following as fast as we can behind the eBay footprint globally.

But if you've heard me say before that we make an efficient market sufficient, global trade is fundamentally inefficient so we think it actually is a pretty big opportunity for us longer term.

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

Please proceed with your question.

Thank you very much.

My first question relates to ASP and the mix of your business.

If I look at listings or auctions reported in the quarter, they are up sequentially 1% and in your year-over-year growth rate was 48% essentially in line with the year-over-year growth rate in the first quarter of 49% but GMS was down slightly and GMS per auction was down slightly.

Was this due to ASP and mix, or was it due to currency?

And then my second question is: As you had given guidance after the first quarter, you had called for a sequential increase in the third quarter, a modest relative to the second quarter in revenue and then about a 13% sequential increase in the fourth quarter the third, now you're calling for essentially flat to down in the third quarter and a greater sequential increase in the fourth quarter of about 15% versus 13 before.

Is this due to international being a greater mix of the total business and that's more seasonal or some other factor?

And then my last question is more strategically focused.

If you think about the ongoing invasion that's going on with auction dropped types of companies and the initiatives that are taking place with partnerships with UPS, et cetera, what type of benefit can we see from that in the fourth quarter and have you incorporated that into your plan?

Thanks.

Anthony, let me try and take the first two questions.

I will try to remember them.

The first with respect to what's happening to, um, the ASPs and how does that relate to the metrics that you are watching on listings, I think in fact on an overall basis, as we pointed out we do see fluctuations in various metrics in a quarter to quarter basis.

That said, generally speaking, what we have seen in the second quarter is strong ASPs, that is consistent with historical patterns.

Now, remember, that the metrics that you are observing are absolutely changed because of the impact of stores new inventory listings.

So that is the only thing to keep in mind as you are sort of watching these numbers because stores inventory listings as I pointed out on the call were 16.3 million in the quarter, up significantly from prior periods.

With respect to the sequential growth rates, you are absolutely correct.

Uh, we are feeling really good about the momentum in the business.

You know, we had an exceptional Q4 last year, a very strong Q1 and we are pleased by the level of growth in Q2.

For Q3, the guidance that we are providing is essentially a flat quarter.

You know, the kind of precision to be able to get this within the nearest million is difficult when you're approaching the 700 plus million dollar mark and for Q4 there is no question, given the anticipation of seasonality, as eBay becomes even more mainstream, we are expecting strong growth in Q4 as reflected in our guidance and of course given the transparency of eBay's business, as the quarter unfolds, you will watch it with us.

Let me talk a little bit about innovation because innovation is coming from lots of areas today at eBay and at PayPal.

It's coming from the U.S. team, it's also now increasingly coming from the international teams, but also our developer programs.

We now have over 8,000 partners in the developer program who are inventing new aps every day that make the platform more robust.

And then there is the businesses that grow up around the platform, like the one that you mentioned, which is auction drop and their deal with UPS.

We are enthusiastic about all those sources of innovation.

In particular we're enthusiastic about these trading posts.

Option drop is one of the most well known but it is by no means the only one.

I probably know of 20 or 25 of these that have sprung up in the last 12 months.

So early to tell how much of an impact they have, conceptually it should be a -- a very positive impact because it accesses a new customer base that may not even use eBay.

Um; in other words, that may not even have a computer.

It was interesting, um, when I went and visited one of these trading posts they told me that 18% of their users did not even have an e-mail address.

So that's a whole new customer segment that could never have actually, um, accessed eBay.

So we're excited about it, too early to give you a specific number, but all this kind of innovation just simply helps the platform.

Great, thank you.

Great.

Next question.

Our next question comes from the line of Jeetil Patel with DB Alex Brown.

Please proceed with your question.

Hi, guys, a couple of questions.

Can you talk about eBay stores, obviously it's been growing quite well on the platform and I think this quarter probably a pretty significant step up in new listings, uh, you know, placed on eBay.

I know you're doing the half.com conversion, but trying to get a sense of what types of -- kind of conversion rates are you seeing there, or items for listing, can you give us a better sense of, you know, kind of how we should be looking at it as it ramps up, um, and then secondly, can you just talk about eBay stores, is it to really go after large volume sellers that couldn't find places to sell inventory, kind of how do you think about it structurally inside the business, uh, in terms of where the -- the model goes?

And then finally, you know, just curious on the monetization rate that game in at close to $1.84 up from $1.78 and transaction revenue per listing, what do you think was the bigger driver there, was it, you know, basically pricing primarily or was it conversion or a combination?

I'll take the stores question.

Um, you might recall that stores was first launched in June of 2001.

And the objective then is the same objective now, which is to help sellers grow their business.

And what we know is that sellers who have a store do more GMS or now GMV on eBay.

And we have over time steadily evolved the product.

You know, some of the new features and functionality give the sellers more control of the layout, you know, including new templates and customizable pages, some additional tools and some enhanced reporting, including traffic reporting to their store.

So the objective is the same.

How do we help sellers become more successful on eBay, how do we increase their loyalty to eBay and stores is an important piece of that overall strategy.

Yep.

And from a -- from a specific metric standpoint, too, you know, as stores inventory, uh, becomes a meaningful measure, particularly impacting our listings number, yes, it will impact those relationships over time.

To your point about monetization, uh, and, yes, it was an increase in the overall rate of monetization, frankly both on eBay as well as on the PayPal platform in Q2.

And, uh, quickly touch on this.

So for eBay, I think the thing to note over here is that the take rate actually fluctuates on a quarter to quarter basis.

We have seen fluctuations in the take rate, in fact Q2 last year also saw an in increase in the take rate over its -- over Q1 of last year.

That said, there's a couple of particular things that happened this year.

One, and perhaps most importantly, we had pricing changes that we affected in February and we had a full quarter effect of those in Q2 and then secondly to a much smaller extent we had revenues from [INAUDIBLE] which included in our numbers, but obviously they don't contribute to, uh, gross margin itself.

So that impacted take rate in the eBay model.

As far as PayPal is concerned, this was largely driven by mix.

And this was driven by the fact that the international component of revenues in crease increased, as did cross-border transactions both of which we actually have a higher monetization rate.

Okay?

Great, thank you.

Okay.

Thanks.

Next question.

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

Please proceed with your question.

Sure.

I just kind of have a little bit of a follow-up question to the stores conversation.

Um, can you give us an idea what stores does to velocity on the -- the site?

We've seen so much from the -- the one-day auctions to PayPal that have been bringing velocity down.

Is it -- is it -- is there a chance that as stores starts to grow like this, that we see velocity start to stretch out again and then, um, if you could talk a little, uh, bit specifically about the experience that you had with the recent rollout of PayPal in the Netherlands and what take-aways that might be able to give you for your plans to roll out for the rest of Europe?

So let me take the first question on what impact is stores inventory listings having on velocity.

You know, there's no question that what we have been seeing on a macro level over the last several years is that, uh, as we have introduced newer and newer selling, uh, formats, that things have been turning faster on the site.

And the average auction duration has in fact continued to shorten.

I think with respect to stores, it's still early days.

I think we will continue to watch how this plays out.

Right now, I mean, by almost definition, uh, stores listings remain on the site for a longer time.

That said, store listings are helping sellers sell more.

Uh, and I think, you know, what -- most of this inventory is made up of, uh, ancillary items, accessory items, and what we do know is that sellers that open the store actually increase their gross merchandise volume on the site.

So with respect to the metric, I think it's something that we will continue to watch and we will share our experience with you, but overall a very positive development for eBay.

Let me talk a little bit about PayPal more broadly.

I will mention the Netherlands.

But here's the interesting thing about PayPal when we expand internationally.

In every country there is already an installed base of PayPal users, because they have used it to do cross-border trade on eBay.com and other sites.

So, for example, in Germany, there were 400,000 PayPal accounts in Germany before we launched the local site.

And obviously a smaller number in the Netherlands and others.

But, um, that nucleus of existing users helps jump-start the business.

Already there's people ready to put PayPal on their local listings, they understand how it works, they understand the trust and safety benefits and the buyer protection benefits.

So it's a huge advantage for us.

In countries like the Netherlands, which is largely an export and import market.

Actually, the volume of trade that is exported from the Netherlands and then bought by Netherlands buyers is greater than the Netherland to Netherland trade.

Of course PayPal is hugely useful to those customers because it simplifies one piece of friction in doing cross-border trade.

So PayPal will I think be quite successful in Europe.

And particularly helpful to those countries that export or import a lot more volume than is the local trade.

Great.

Thank you.

Thank you.

Next question.

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

Please proceed with your question.

Thanks.

A couple of questions.

Um, one, if I could follow up on stores.

I was just wondering if you could give us some detail on the transition from half.com to eBay stores, um, are the economics of store listings still pretty similar to what you had on half.com, or, um, changing them over to stores, did that change the success rates, the duration of the listings, uh, make them any better?

Um, and then I have a couple of detail questions.

First, Rajiv, you gave out the second-quarter and last year's listings from stores but I was wondering if you could give us the first quarter.

And then secondly, what was the revenue from Mobile dot DE.

Thanks.

Sorry about that.

Um, let me talk a little bit about the half migration and the economics of stores listings.

The half migration -- the half -- what we learned from half, actually influenced the creation of stores and store listings.

And so we have actually prepared the site, uh, for the half migration.

Now, there's a couple of issues there.

The economics, um, are a little bit different in that half, as you know, only has a final value fee, when we move to eBay there will be a listing fee in the store format, which is less than any regular, um, site format and there is a final value fee.

So we will see when we make the migration what the relative economics are.

They are designed to be roughly the same.

And, uh, overall, stores are -- you know, eBay is slightly more efficient for sellers than half based on the higher conversion rates of their items on eBay.

So we will give you more details once we make this migration.

It is designed to largely be revenue and profit neutral.

Okay.

Uh, with respect to detailed questions, Mark, on, uh, stores, um, listings in Q1, we actually have not provided that information, we are providing the year-ago comparison, but we did see a significant spike in stores new inventory listings, which of course are the listings that we count in our listings number.

But there was a big jump that came from not only adoption of stores, but also to a lesser degree from, uh, some of the half users migrating onto stores.

With respect to the revenue contribution of MOVILA Dot EE, at the time that we acquired MOVILA, we had indicated that on an overall basis the revenue was largely material to eBay's revenues.

We are very excited about the integration, how it's proceeding, uh, you know, I think that this addresses a unique opportunity in Germany and allows us to really capture the mode us market in Germany.

We are not breaking the revenues out separately.

Okay.

Um, thank you.

Okay.

Thanks.

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

You may go ahead with your question.

I had two questions.

If I look at the GMS spike category, it looks like, um, the -- all of the -- if you segregate it into the top-five category and everything else, the top-five categories continue to grow sequentially and really the seasonality showed up in all other categories, at least -- I think that's the right numbers.

Um, is there some, uh, real different, uh, seasonality in those other categories outside of your biggest ones, or are you doing something special in the big categories to drive the business that you're not doing any others so that we're not seeing quite the same seasonality.

It seems that there's an interesting split there between the two.

And then my second question is on capital expenditures this looks like it's the fifth year in a row where you run 10% of revenue in cap ex.

Should we look for that number to come down, or are you finding more growth opportunities and them looking a little bit more capital intensive so that you -- you continue to run kind of a 10% range going forward, or -- or what are your long-range expectations spread over a couple of years do you think on cap ex?

Okay.

Let me take that.

Uh, you know, with respect to the categories, um, actually, as we have noted on the call, both on a worldwide basis, it's sellers more specifically for the U.S. business, all of our large categories actually saw strong double-digit growth from the mid-to the high double digits.

Interest's no question that we saw -- there's no question that we saw relatively lower rates of growth, perhaps in some of the practical categories, which you would expect given the, uh, sort of seasonality associated with consumer activity in those segments.

But we did not really see any market distinction between one group of categories versus the other, this pretty much across the board in the U.S. as well as internationally, worked very much in the same way.

Uh, so the deal that we have -- data that we have quite clearly indicates that.

Moving on to your second question with respect to capital expenditures.

So capital expenditures, the guidance that we provided is to, uh, have approximately 10% of revenues would be in capital expenditures for the year.

Now, this is up slightly.

In fact, in Q2 it's about 8.5 %, which is down from about 12.5% a year ago.

Longer term, let me be very clear, this is not a capital intensive business.

It is the timing associated with return facilities, certain data centers, etc., that are coming on-line that impact the numbers this year.

Longer term, I clearly expect the capital expenditures of this company to continue to be as we have said previously in the single-digit range as a per cent of revenue.

Okay.

Thanks.

Great.

Next question.

Our next question comes from the line from Bob Peck with Bear Stearns.

Please proceed.

Hi, guys, just a couple quick questions here.

One, it looks like the sales and marketing was down sequentially, could you give us a little color on what's going on with sales and marketing.

Number two it looked like [INAUDIBLE] also declined from about 28% to 27%.

Use a little clarity where you think that will go over time.

And number three, could you tell us what your net income would have been for the quarter, uh, had you -- how you expensed options?

Thanks.

Now, let me take the sales and marketing question.

We are always focused on optimizing our marketing spend.

I think we are among the industry's best in terms of our optimized marketing spend.

And one thing that you should know is that increasingly, eBay is a destination in and of itself.

Most of our, um, new users come through word of mouth, but increasingly we are a destination that is bookmarked by our folks.

So we were able to gain some efficiencies particularly in the United States in, um, Q2 through optimizing our Internet marketing spend.

So we're going to continue to invest in marketing on a global basis but we are getting smarter about how we spend the money and getting better even at how we measure the return on investment.

You know, with respect to fixed price, um, a couple points.

One is that many of these metrics have seasonal patterns and fluctuations and you will actually see these numbers fluctuate on a quarter-to-quarter basis and completely consistent with the summer seasonality.

In fact, we would expect as we head into the holiday period that fixed price is likely to go up.

And longer term, we really do believe that fixed price as a percentage of overall volume on the site will actually trend up.

Um, with respect to net income and what it would have been had we expensed options, we provide an enormous amount of detail and disclosure on this in our quarterly filings, the 10Q, that will be coming out in a few short days.

And, uh, that disclosure is going to be provided in our Q, so please wait for that.

Thank you very much.

Great.

Thanks.

Next question.

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

Please proceed with your question.

Good afternoon, Rajiv, Meg.

This quarter results had, uh , at least first -- first time that PayPal's GMS or, um, gross payment revenues, um, was down more flat and, of course, the U.S. listings.

I understand the effectively seasonality, but you have -- you have been talking about seasonality taking a stronger hold on eBay as it becomes more of a -- a mass consumer medium.

For some time now.

My question is, are we going to be seeing all of a sudden a much more accelerated impact from seasonality, or are we entering a much more, um, moderate growth rate for eBay given that you're approaching almost a billion dollars pretty soon in revenues.

And second if you could talk about your Chinese operation, for what we have been hearing there is a fairly strong competition, uh, that is shaping up in China and, uh, more is obviously expected to come from C-Net and Yahoo start their operation.

What level of investment or spending do you feel you have to do to maintain your current position in China?

Thanks.

Uh, so with respect to seasonality, um, and with -- you know, PayPal's total payment volume actually we did have a quarter that was relatively flat, but you remember that this is both coming off of accelerating growth and very rapid growth in Q4 and Q1.

And whether we look at the U.S. business or we look at PayPal's business, which of course is significantly, uh, write-off of the U.S. numbers, I think the pattern's actually very consistent.

The patterns of seasonality we are seeing on eBay are getting more amplified as eBay becomes an increasingly mainstream destination.

So what does that mean?

It means that the growth rates that we have seen in Q4 and Q1 will be stronger and the growth rates that we expect to see in Q2 and Q3 will be relatively less.

That was absolutely the case in the last year and if you actually trend this over the last several years you will see that this pattern is very clear and very consistent.

Looking forward, this is what is our expectation as well.

We expect to see strong growth in Q4 of this year as well as Q1 of this -- of, uh, of next year.

And this is reflected in our guidance -- our early guidance for Q4 and of course as we get closer to the event we will continue to watch how the site performs.

So nothing untoward other than frankly seasonality, reflecting the size of the eBay marketplace and reflecting the size of our user base.

Uh, let me take the question on -- on China, Safa.

We are certain that we are the number one e-commerce site in China and I think the thing you have to really look at is the most-important metric, which is gross merchandise volume formerly known as gross merchandise sales because that is a measure -- are the sellers' items selling and are the buyers actually seeing a refreshed item site -- you know, on the site every seven to 10 days.

So while the number of items is interesting, it is actually not the best measure of the vibrancy and, um, sort of critical mass of a marketplace.

So you should really look at the competitors, get them to tell you what their gross merchandise volume is, what their conversion rates are, how many users they actually have, and then you can look at reach and we are ahead on reach and we are ahead by a very large margin on those other metrics.

It's really important to dive deep on those metrics because we believe gross merchandise volume, conversion rates and users are the most important metrics.

If I may, Meg, I understand on that -- I don't think that's in dispute.

The question was: Do you need -- given the competition, do you need to have accelerated spending and investment in China to maintain that.

Ah, I see.

We don't necessarily think accelerated spending but we will roughly spend the same amount in China next year as we spent this year and it was a pretty big investment this year.

Our single-largest international investment.

And we will continue to spend at roughly that rate in terms of absolute dollars next year as we did this year.

And some of that is reflected an increased, uh, spend spending guidelines.

Uh, that were built into the guidance that we've provided for this year.

So definitely planning for very significant investment, uh, in Asia in general.

Great.

Thank you.

Good.

Why don't we take one more or two -- let's take two more questions.

I think we have time for two more.

Excellent.

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

Please proceed with your question.

A couple questions.

First on the international side.

It looks like your countries other than UK, Germany or Korea accelerated dramatically in the quarter can you give us a better sense to what maybe your top-five next burgeoning countries are and how much they contributed or if there's an 80/20 rule for some of these, um, countries that you don't necessarily specify exactly.

And then on the PayPal side, it looks like, um, both your take rate and your, um, costs per transaction went up and I assume that, um, deals with your international expansion but I was wondering if you could give us a little bit more color about how to think about those, um, metrics going forward?

Thank you.

Um, the smaller international countries continue to grow very rapidly, because they are growing off a small base.

And they are getting, we believe, close to hitting the knee of the curve.

That's sort of what we call after -- you know, several quarters of, you know, growth they really take off as the country gets critical mass.

So we're looking to France, Italy, Spain, the Netherlands and China as kind of the next very rapid substantial contributors to international growth.

Now, with the exception of China of course you have to remember the populations of these countries is somewhat smaller than our bigger countries, that said, we're -- you know, we're excited about where they are in the growth curve and obviously China is the one that, you know, could be very, very large over the longer period of time.

Uh, with respect to PayPal, and a little bit more color on PayPal's metrics both in the revenue side as well as the cost side, first on the -- on the Take rate and the monetization rate for PayPal, the -- as the international component of the business grows, what we have absolutely seen is that that is monetized at a slightly higher rate and that translates into a higher take rate for eBay overall.

Secondly, a component of that international revenue is actually cross-border transactions and even with respect to cross-border transactions while, you know, this is a very economic way to send money, uh, across a border, it is a higher take rate than PayPal overall and that also has contributed and we expect over time those to continue to grow faster than PayPal overall, that that will impact the longer term take rate.

And you guys said that, um, international was 28% of revenue, can you say what, um -- what percent of either transactions or TPV was, um, cross-border in nature at all?

We haven't broken that out specifically but we've indicated that of the total volume, 18% of total payment volume was actually, uh, international.

Uh, the -- the other point that I would make is that as Germany comes on-line, we have just started our German PayPal offering, and Germany has economics that are different by virtue of the local market conditions.

And in Germany, we actually have a product that is for an introductory period free for EFT transactions and we are charging a modest amount for credit card transactions and that will also have implications on the take rate so that may become a significant volume over time.

On the cost basis, uh, I think there's a couple of things.

One is that the costs for transaction processing overseas are generally higher.

So the consistent with what we've seen on -- on the -- the revenue take rate, but costs are also generally higher but here again because since Germany is more EFT oriented actually the transaction costs for Germany are somewhat lower.

So I hope that gives you some direction, uh, but longer term, I think that these trends will continue to play out as international does grow to be a part of PayPal's business.

Thank you.

Great.

So we have time for one more question.

Our final question will come from the line of Imran Khan with JP Morgan, you may proceed.

Yes, hi.

Going back to the eBay storefront.

I was wondering how much eBay store might impact your average selling price because our understanding is ASPs is a little lower on the storefront.

And secondly, last quarter I think you gave breakdown of GMS between U.S. versus international.

Could you give it again?

Yes.

In terms of the store listings, on average they are lower ASPs because the seller uses [INAUDIBLE-DISTORTED AUDIO] merchandising vehicle, so if you buy a camera, there's opportunity to buy a camera case, camera batteries, you know, camera accessories so I would say that they are lower average selling price and then many of our stores are people who are moving from half to eBay and by definition books, and music has a lower ASP as well.

Now, the only counterbalance to that is typically there are more purchases per shopping trip, if you will, in stores than there are when the -- a consumer has a single listing but you're right the average selling price is lower in the stores.

And with respect to GMV, um, Imran, the numbers were $4.4 billion for the U.S. and about $3.6 billion for international.

Thank you.

Okay.

Well, thank you very much.

Thank you very much for coming.

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

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