eBay Inc (EBAY) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome do the eBay third 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 1 followed by the 4 on your telephone.

As a reminder, this conference is being recorded Wednesday, October 20, 2004.

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

Please go ahead, sir.

Good afternoon.

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

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

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

Before we begin, I would like to take 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 in our earnings release.

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

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

Factors that could cause our contribute to such differences include, but are not limited to, the Company's ability to upgrade and develop systems, infrastructure, and customer service capabilities to accommodate growth at a reasonable cost; the Company's ability to maintain site stability and performance on all of its sites, such as PayPal, while adding new products and features in a timely fashion; the reaction of current and perspective customers and regulators to site stability issues; the Company's need to manage an increasingly large company with a broad range of businesses; the Company's ability to deal with the increasingly competitive environment for online trading, including competition for it's sellers from other trading sites and other means of selling and competition for its buyers from other merchants online and off-line; the litigation, regulatory and credit card association and other risks specific to PayPal; the company's need to manage other regulatory tax and litigation risks even as it's product offerings expand and its services are offered in more jurisdictions; 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 costs and benefits of recent and future acquisitions and other commercial transactions; and the need to manage the integration of recent and future acquisitions.

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 managements 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.

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 question.

Now over to Meg.

Thank you, David.

And welcome, everyone, to today's conference call.

Q3 was yet another outstanding quarter for eBay.

An active and innovative community of users worldwide, strong demand in online trading as we entered the fall shopping season and consistent execution from all parts of the Company helped us deliver robust results across the board in what is typically a slower period for our business.

Let me highlight some of the key results.

Gross merchandise volume or GMV, which is the value of all successfully closed listings on eBay totaled $8.3 billion in Q3.

Registered users grew to 125 million around the world.

Total payment volume or TPV at PayPal was 4.6 billion in Q3, and the number of PayPal accounts increased to nearly 57 million.

Net revenue totaled a record 806 million representing strong year-over-year growth of 52%.

But some of the metrics we are most proud of center around the community.

More than 430,000 men and women in the United States and thousands more around the world are making all or most of their livelihoods on eBay.

Empowering that trend, we've taught more than 122,000 people in 205 cities around the world how to use eBay through our eBay university program.

As we enter the Q4 holiday shopping season, the strength of the business model continues unabated and we remain very confident in the Company's long-term growth potential.

A key component of this growth is investment, as we plant the seeds today that will deliver tomorrow's results.

As you all know, we have invested in key areas throughout 2004 including product development, technology, China, PayPal's international expansion and marketing around the world.

This type of investment funded from further leverage in operations will continue through 2005.

Rajiv will discuss our plans for these investments as well as our guidance for Q4 and 2005 in a few minutes.

As a part of our business is a simple but unique formula for success: community grounded in commerce.

From the beginning, eBay was designed with both in mind.

People come to eBay to trade, but they stay with eBay to be a part of a community.

In fact one reinforces the other.

Trading gives the community a shared reason for communication, while the community makes trading more meaningful and exciting.

This powerful phenomena routed in every human being is the basis of our success and the basis of my confidence in the future.

Understanding this dynamic early on helped fuel our incredible growth.

In fact, the close interdependence we share with our users makes eBay peerless among consumer companies.

The daily success of our buyers and sellers and the passionate opinions we hear directly from them inform our decision making.

Our decisions in turn support their trading activity and enable their achievements.

It's this vibrant cycle of collaboration and success that guides our strategy and influences the way we execute across the 4 main areas of the Company.

Those include the U.S. business, the international business, PayPal and the internal operations that support these areas.

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

First, the U.S. business which is our largest market continues to grow.

Listening to our communities' needs, we have built a thriving one of a kind marketplace that enables a wide variety of individuals and businesses to trade in thousands of categories.

In large part, this ongoing growth can be attributed to our AAA strategy, acquisition, activation and activity which helps boost supply and demand and accelerate trade.

This strategy is successful in fact because it is based on the natural evolution of the site.

Through a carefully planned mix of on-site merchandising, online marketing and traditional off-line advertising, along with carefully listening to our buyers and sellers, we nurture the success of our users and the growth of our site.

What makes this an art as well as a science is the ability to identify the moment when a member experimentation becomes a marketplace trend.

Let me give you a recent example.

For many months we've been working to bring the eBay media category and half.com's business together on 1 platform.

Between May and September a record number of half.com sellers tried eBay for the first time and found a successful new channel for their items.

Interestingly enough, at the same time many of these sellers also found that their half.com businesses continued to thrive.

Both developments contributed to accelerating year-over-year GMV growth in the entertainment category in Q3.

Identifying this new trend with our users we chose not to close half.com as we had previously planned.

Encouraging experimentation, spotting trends and listening to our users is the way we build our business.

This same dynamic comes into play every holiday shopping season as we help our sellers prepare for what is often their most successful quarter.

We began our outreach to sellers in July, helping then understand general holiday retail trends and making sure sellers were knowledgeable about all the eBay features and functions that are geared to support them.

On the buyer side of the equation, we will begin a series of online holiday promotions in early November to help buyers find our sellers goods.

And on Monday we launched a new U.S. marketing campaign with the tag line, "The Power of All of Us."

Underscoring that community is at the heart of our business, the campaign celebrates the humanity and direct connections that happen on eBay every day. 4 TV spots will roll-out nationally over the next month on both broadcast and cable, while print ads are already appearing in national magazines.

The theme will also be integrated into online promotions that will appear throughout November and December.

And in addition we have created an interactive online area where the community can view the TV spots and submit their own stories.

Our second area of execution is international.

While the eBay concept was born in the U.S., this powerful cycle of collaboration and success translates well into markets around the world.

Our business in China, for example, continues to show great progress. eBay EachNet is far and away the number 1 e-commerce player in China.

With more than 8.6 million users, eBay EachNet now supports the third largest eBay population outside the United States, and those members traded a record 84.3 million in GMV in Q3.

Just a few weeks ago the China team completed the integration of the former EachNet website with the eBay global platform, paving the way for consumers in China to trade seamlessly with the rest of the world.

These are incredibly promising results for such a Nations's e-commerce market.

In fact, we saw strong results throughout Asia.

For example, in Q3 Internet Auction Company, our marketplace in Korea, showed year-over-year GMV growth of 65% and year-over-year revenue growth of 74%.

In an effort to further consolidate IAC's business with our own, we have increased our ownership space over the past several months.

Today we own 99.7% of the company and IAC's Board of Directors has approved a plan to voluntarily deregister the stock from the Korean Stock Exchange, KOSDAQ.

And even Taiwan where we are locked in a competitive battle, we've seen significant growth in new listings and GMV.

New listings in Q3 jumped more than 400% year-over-year, while GMV grew 111% and that's in a market where the site is not fully monatized.

Through its ongoing marketing efforts eBay Taiwan has created brand awareness as high as the local competitor.

We are in Taiwan to stay and we are making great progress.

On the other side of the world eBay's results were no less impressive. eBay Germany achieved accelerating GMV growth of 39% year-over-year.

This was the result of strong user activity driven in part buy online promotions at the beginning of the quarter, followed by a new TV campaign in September.

And with year-over-year GMV growth of 160%, eBay UK is on a spectacular role.

The website there has become a mainstream shopping destination for UK consumers and it shows.

Capitalizing on that success, we've just launched our first local TV campaign in the UK, well in time for the holiday season.

As you've just heard, following the eBay play book our international teams are adapting and sometimes improving on the AAA strategy in their own markets with great success.

As a result, 46% of our transaction revenues in Q3, excluding payments, came from our international operations for the second sequential quarter.

This is a remarkable achievement for a company that 5 years ago had no international operations.

The third area of execution is PayPal.

Perhaps the biggest symbol of how the community guides our strategy.

It was our buyers and sellers who made PayPal the payment standard on eBay and later encouraged the 2 companies to come together. 2 years after the acquisition, there is no doubt that the convenience of PayPal speeds trade on eBay, while more trade on eBay translates into more payment volume for PayPal.

This was certainly true Q3.

PayPal delivered transaction revenues of more than $166 million, a 56% year-over-year increase.

PayPal not only makes online payments efficient, it makes them safer too, and safer payments enhance trust on the eBay marketplace overall.

To this end, we announced a few weeks ago that we would double PayPal's buyer protection program coverage in the U.S. from $500 to $1,000 just in time for holiday shopping.

PayPal users in Canada and the UK will also benefit from an equivalent increase in those markets.

This is a fantastic improvement for our community.

Thanks to PayPal's advanced antifraud capability and the continuous innovation of our trusted safety teams around the world.

PayPal also brings efficiency and safety to eBay around the world.

In August PayPal launched services in France following its Q2 expansion in Germany, Austria, Switzerland, Belgium and the Netherlands.

While only available for 7 weeks, at the end of the quarter PayPal was already being offered on 30% of listings on eBay France.

PayPal's penetration of eBay listings in other international markets also continues to grow.

Validating once again the fact that enabling our users success boosts our own.

Now, I do want to take a couple of moments to talk about PayPal's recent technology problems.

As most of you know, last week PayPal was intermittently unavailable to many users for a number of days.

The cause was unforeseen problems created by the roll-out of new code designed to improve the scalability of PayPal's site infrastructure.

The design of our changes and PayPal's existing infrastructure made rolling back the code very difficult.

Frankly, this situation was unacceptable.

We let our community down and I want to apologize to our users who were affected by these issues.

We are currently working to make certain that PayPal is completely stable and robust going forward, particularly during the Q4 holiday shopping season.

The final area on which we focus are the operations that work behind the scenes to accelerate trade or improve internal operations, from customer support and trust and safety to technology.

It's no coincidence that these are the departments that work most closely with our community, listening and observing, innovating and enabling day after day.

Product development, for example, creates new features to meet the trading needs of our members and then refine seasonal ideas through repeated testing with a cross section of our community.

In Q3 this process deals with dozens of new developments from the enhancements of sellers tools, such as Turbo Lister and Picture Manager to a host of new buyer tools.

By listening to our community we are also observing their trading pattern.

We learn a great deal about how e-commerce is evolving on and off the eBay platform.

As a result, new trading formats come to our attention from time to time, such as classifieds.

In August we acquired a minority stake in Craigslist.

An online community that features classifieds and forms.

Our goal with this investment is to learn more about the classified trading format and how it might benefit eBay users in the future.

Obviously, maintaining an open dialogue with our community is central to our business and we invest in a variety of programs to keep the communication flowing both ways.

Many of the events we have created to educate members about the marketplace allows us to learn as much from them as they learn from us.

Our weekly online workshops, for example, allow members to meet experts for discussions on such wide-ranging topics as digital photography, cross border trade and even the care and cleaning of vintage linens.

And eBay radio, a weekly online call-in show hosted by eBay's Dean of Education, Jim Griffith, regularly gives voice to experts from the community itself.

As many of you have heard me say before, eBay is the digital equivalence of the mid-evil marketplace where people came together to trade and gossip, or big cities diamond district where generations of jewelers have congregated for customers and comradery.

Without question, our formula of community grounded in commerce is as old as mankind, yet no modern company has had as much success as eBay at harnessing this formula and its attributes.

On eBay the ubiquitous reach of the Internet, the power of the technology we've created, the talent of our employees, the strength of the community and the essential needs of people throughout our society have all aligned in a very special way.

This is why I believe eBay's long-term promise is simply extraordinary.

And to capture this potential, eBay's management team is focused on making decisions and investments that insure a bright future.

Make no mistake about it, eBay is being built to last.

Hand in hand with our dedicated community of users we are building our business to yield greater results today and for a very long time to come.

And now we will turn it over to Rajiv for a closer look at our financials.

Thanks, Meg.

As you have just heard, Q3 was an outstanding quarter that surpassed our expectations.

The successful back-to-school season in the U.S., a great performance in Europe and continued progress in PayPal's global expansion are just some of the factors that led to accelerating year-over-year GMV growth and very strong revenue and profit growth in Q3.

Our success during the quarter is indeed a testament to the awesome momentum of our business.

It is also a reflection of the tangible returns we have seen from the investments we have made over the past couple of years.

Together, these factors have positioned us well for the holiday season and new year, but more importantly, they reinforce our confidence in our strategic focus and the investments we continue to make in the future of our business.

Today I will begin by reviewing a few key operational metrics, then discuss our Q3 financial results in detail, and conclude with our guidance for the fourth quarter 2004 and full-year 2005.

First, new listings reached 348 million in Q3, reflecting strong year-over-year growth of 48%.

Total new listings in Q3 included 20.3 million new listings generated from eBay stores, versus 4.1 million a year ago.

This is strong lifting in Q3 helped drive accelerating year-over-year growth and gross merchandise volume of 44% to $8.3 billion.

Accelerating growth was also reflected across several of eBay's global categories, including eBay motors, computers, collectibles, toys, photo and electronics and coins and stamps.

In Q3 we continue to execute effectively across the AAAs.

In user acquisition, eBay added 11 million new confirmed users pushing our global user community to 125 million.

Adjusting for the 1.4 million new users we added from our acquisition of Baazee.com in India, this represents the second highest level of organic sequential user growth in eBay's history.

In terms of activation and activity, active users grew more than 38% year-over-year to a record 52 million, and GMV per active user reached a record $566.

The performance of payments during the quarter was equally impressive, as all high-level metrics for the segment continued on their upward trajectories.

Total PayPal accounts increased to 57 million in Q3, up 61% year-over-year which powered total payment volume of $4.6 billion up 52% over the prior year.

As a result of these strong trends, eBay's consolidated net revenues grew 52% year-over-year to a record $806 million.

This revenue growth was benefited from fluctuations in foreign exchange rates by about 22 million on a year-over-year basis and about $5 million quarter-over-quarter.

Now taking a closer look at the business units.

In the U.S. we saw upward trends in all of the AAAs.

With respect to the [inaudible] acquisition, our ongoing effort in on-site marking, search and our affiliates program helped eBay U.S. acquire almost 3.6 million new users during the quarter.

Active users also increased in the U.S. by 1.3 million, and with respect to activity, GMV per active user increased by $6 quarter-over-quarter.

Our community also continued to do rapidly adopt eBay stores with 21,000 new stores created in the U.S. in Q3 reaching a total of 143,000.

This in turn led to strong growth in new U.S. stores listings of 28% sequentially to 17.2 million.

The net result of these trends combined with a stronger than expected back-to-school season led to U.S.

GMV growth of 24% year-over-year in Q3 to $4.5 billion.

In turn, this drove a 29% year-over-year increase in U.S. transaction revenue to $331 million.

In our international business, though Q3 is typically a seasonally slower quarter in Europe. 8 countries experienced accelerating year-over-year gross merchandise volume growth.

While effective marketing, PR and improvements in product were key drivers of the success, these growth rates also benefited from an easier comparison created by last year's record heat wave and the introduction of value-added taxes.

In Germany, GMV growth accelerated to 39% driven by strong user activity.

While in the UK, GMV grew 160% year-over-year versus 140% in Q2.

France, Italy, Belgium, Austria, the Netherlands and Spain also saw accelerating GMV growth.

Turning to Asia, Internet Auction Company in Korea reached almost $1 billion in annualized GMV for the first time ever.

In Taiwan, we continue to see year-over-year GMV growth in the triple digits.

And, as Meg mentioned in China we added over 1 million new users for the fourth consecutive quarter with a record $84.3 million in GMV.

In total, eBay international generated gross merchandise volume of $3.9 billion, reflecting accelerating growth of 77% which powered transaction revenue of $282 million, up 82% over the prior year.

Turning to payments, total payment volume and transaction revenue growth was driven by strong results across geographies.

In both the U.S. and UK, PayPal not only benefit from eBay's growth but also increased its penetration of addressable GMV in those markets during the quarter to 72% and 54% respectively.

At the same time, PayPal also increased its global footprint in Q3 to a total of 8countries.

On the cost side, all of PayPal's metrics improved in Q3.

PayPal's transaction expense rate decreased sequentially by 4 basis points to 130 basis points.

Credit cards as a percentage of total PayPal transactions declined sequentially by 4 basis points to 53.6%, helped by the introduction of ACH in the UK.

And PayPal's transaction loss rate declined sequentially to 22 basis points from 25 basis points in Q2.

And as was the case last year, we expect the transaction loss rate to increase in Q4 as a result of the enhanced buyer protection program and seasonality as we move through the holiday period.

And once again, the phenomenal strength we saw in revenue in Q3 translated into strong profit growth and cash generation.

Further, eBay's gross margin was 80.5% in Q3 which was higher than the year-ago quarter despite the continued rapid growth of the lower margin payments business.

At the same time, pro forma operating income grew 58% year-over-year to $273 million reflecting a 33.8% pro forma operating margin.

Consolidated GAAP net income totaled $182 million, up 27 cents per diluted share, and consolidated pro forma net income was $195 million, up 28 cents per diluted share. 3 cents above the guidance we provided on our last earnings call.

The inherent leverage of eBay's business model led to operating cash flows of $275 million which were up 32% year-over-year.

Capital expenditures during the quarter were $73 million, resulting in free cash flows of $201 million.

And eBay further strengthened its balance sheet in Q3, exiting the quarter with more than $7.2 billion in total assets, including almost $3.1 billion in cash and investments.

Now I would like to conclude my discussion with our financial guidance.

First, discussing the remainder of 2004 and then providing you with an outlook for 2005.

For Q4, 2004, based on the stronger than expected business performance in Q3, we now expect net revenue to approximate $915 million, almost $30 million above our prior guidance of $886 million.

This means that full-year 2004 consolidated net revenue could total $3.25 billion.

At the same time, we are initiating a series of investments to drive long-term growth through each of our key businesses.

Many of these relate to our plans for 2005 that I will discuss shortly.

As a result, we are maintaining our guidance for Q4 pro forma and GAAP diluted EPS of 32 cents and 30 cents respectively.

For the full-year 2004, we now expect consolidated pro forma and GAAP diluted EPS could be $1.20 and $1.14 respectively.

As you can see, 2004 is shaping up to be another incredible year for eBay.

At this time last year we were guiding for revenue growth of 38% in 2004, and today we find ourselves possibly achieving growth of more than 50% for the year.

The community, execution and investment have once again been the themes of our success in 2004, and as you will see, these themes will continue to trail with us as we forge ahead into the holiday season and new year.

And with that, let me turn to 2005.

Let me first confirm that we couldn't be more confident in the long-term business trajectory.

To those of you who have followed us over the years, eBay and the opportunities we faced in 1998 probably seem very different than the Company and its outlook today.

A good fortune of this change is due simply to the nature of eBay's core product, the global marketplace and the positive impact it has had on industries, businesses, and most importantly, people around the world.

But investments have also played a key roll.

Without the investment in product development, international expansion, our investment in PayPal, marketing and brand building and the build out of our customer support and trust and safety capabilities, we would not have had the track record of profitable growth nor the significant market opportunity we enjoy today.

And we aren't done by long shot.

To insure that we maintain this track record and continue to drive growth, it is imperative that we continue to balance eBay's profit growth today with the appropriate investments for the future.

We are fortunate that we have a business where we can invest significantly in growth, while at the same time maintaining high-profit margins.

And as we wrap up our budget planning for 2005, we are intent on leveraging this advantage to create an incremental pool of more than $200 million or about 5 percentage points of operating margin to increase funding for key strategic investments.

In the eBay context, these investments refer to current period expenditures that will benefit the community in 2006 and beyond.

Let me give you some specifics on where we intend to invest these funds.

In China, we will invest aggressively in online and traditional marketing to build on our number 1 position in that market, build out customer support and leverage a new China development center in Shanghai to deliver advanced functionality that combines eBay's global expertise with the deep local knowledge of Chinese consumers.

In payments we will continue to invest in the international expansion of PayPal to further bolster the product and site infrastructure and further focus on PayPal's merchant service businesses.

For eBay U.S. we will continue to invest aggressively to drive increased activation and activity per user.

For eBay international, we will continue to expand our global footprint, integrate our newer sites onto the eBay platform and take our markets to the next level of activation and activity.

In technology and infrastructure, we will continue to focus in driving site dependency and stability for our sites around the world, strengthen our trust and safety programs and harness the power of our shopping trend data to help our users succeed.

And as before, we will continue to invest in our largest markets to insure that they achieve their full potential.

But before I get too far into the details of 2005 expectation, let me briefly mention 3 other factors that guidance I provide today takes into account.

First, as eBay becomes increasingly mainstream around the world, consumer activity patterns on eBay increasingly mirror general consumer online patterns, online and off.

This gradual development has translated into periods of increasingly stronger growth for eBay in Q4 and Q1 followed by periods of slower growth or no growth in Q2 and Q3.

This pattern of activity is not new and has been apparent in our larger businesses for the last few years.

As a result, in 2005, we anticipate a sequential decline in revenue in the second quarter versus the first quarter.

Second, it is always possible that changes in foreign currency exchange rates could effect revenue and profit materially.

The guidance we provide today assumes that the weighted-average exchange rates in Q4 '04 and the full-year 2005 will be $1.20 per Euro.

And, third, the GAAP guidance I'm providing today does not take into account the expensing of stock options pending final rules.

Considering the factors that I just described, we expect 2005 consolidated net revenue to approximate $4.2 billion, reflecting almost $1 billion in organic growth from our existing businesses, or approximately 30% growth over where we expect to end in 2004.

On the bottom line, we expect consolidated 2005 pro forma diluted EPS to approximate $1.50, and consolidated GAAP diluted EPS to approximate $1.42.

As a result, with the discretionary investments we plan for 2005, the guidance provided today implies that eBay's pro forma operating margin in 2005 will be roughly flat with 2004 at 35%.

So on one level you can sum up our comments today very simply, an excellent Q3 and bright prospects for the 2004 holiday season and the full-year 2005.

But it is much more than that.

We have spoken at length today about the investments we plan on making in the business because to us it is about what lies beyond 2005.

To be clear, we fully expect to reach new milestones in revenue and profit over the next year.

But the real goal is to build a company that will prosper over the long-term.

We believe we are on the right track to us achieving that goal.

Thank you for joining us today.

We would now been pleased to take your questions.

Thank you. (Operator Instructions).

Our first question is coming from the line of Anthony Noto, Goldman Sachs.

Please proceed with your question.

Thank you very much.

Hi, Meg and Rajiv.

A couple of questions.

The first question, I was wondering if you could update us on cross border trading, how much of your international business is being done cross border and how much that benefited the acceleration internationally?

And the second question is, PayPal off eBay, I didn't hear you mention that, how is that progressing, is that a key priority for 2005?

And then last, if you could tell us how many of your sellers -- how many of your buyers are actually sellers and is this a key opportunity?

Thank you.

Let me take the first one.

In terms of cross border trade, that continues as a percentage of our total GMV to continue to go up.

And interestingly enough, in some countries it is much more important than in others.

For example, in traditional trading countries -- in traditional trading countries we have like Netherlands, Belgium, Spain, some of those actually cross border trades, Canada is a much higher percentage, but it continues to go up.

It is above 12% for the total Company.

PayPal off eBay becomes a real priority in 2005.

You might remember the strategy was first, eBay.com, second eBay international, third, off eBay or what we call merchant services.

That jumps now to the top of the list for 2005 as we have finished the first 2 initiatives in many ways.

The third question was?

So, Anthony, most of our buyers when they first start out start out as buyers.

Most users come on as buyers and over time what we have seen is increasingly they migrate to being sellers as well.

That's a fathom that has actually been true since the very early days of eBay.

It is absolutely true today and we actually think that there is a huge opportunity over here as we can continue to find ways to invent more and more of our buyers to become sellers on eBay.

Thank you.

Thank you.

Our next question is from the line of Mark Rowen from Prudential.

Please proceed with your question.

Thank you.

A couple of quick questions.

First, on advertising revenues, either Meg or Rajiv, they came in a lot higher than what I was looking for.

And they seem to becoming a bigger portion of your revenue when you weren't really focusing on it over the last couple years.

Could you talk about what's driving the advertising revenue and do you expect that to continue to become a bigger portion of revenue going forward?

My second question is on PayPal.

Your international PayPal revenues, I guess is about 30% and your international transaction revenues are about 45.

Do you think you will be able to close that gap over the next 12 to 24 months?

And then related to that, it looks like your rate at PayPal came down despite the fact that international PayPal increased quite a bit?

So if you could just give us a sense of what's going on there.

Thanks.

Sure, Mark.

On ad revenues we have said for a long time that this is a transaction-based revenue model, that is still true.

That said, we have had quite some success with community-based advertising or partnership deals like shipping, like the credit card.

So when we can find advertising or partnership deals that reinforce the community, that don't detract from the buying and selling on the community in any meaningful way we want to pursue those.

And actually the sponsorship team has done a great job in finding those important niches.

With regard to PayPal, international revenues obviously is growing very fast.

That is a function of the UK, as well as cross border trade where most of cross border trade payments are in fact done with PayPal today, and then finally new countries like France, Italy, Belgium, the Netherlands, Switzerland, Austria and Germany.

Now the thing about Germany is, as you know, the seller and buyer proposition in Germany is not as strong as it is in other countries because so much of German payments is done by EFT.

And as a result, our take rate is less than Germany which is part of the reason why the overall PayPal take rate came down.

It's been free since launch, we've done a number of promotions so it is actually the German launch that has depressed PayPal's take rate.

There's a few other factors, but that's the majority factor.

Also, I would point out that consistent with the lower take rate even the cost structure for the German revenue is lower because it is mostly ACH.

Right.

Great.

Thank you.

Next question is coming from the line of Jeetil Patel from Deutsche Bank Securities.

Please proceed with your question.

A couple questions, a couple -- 1 near-term and a couple longer-term ones.

I guess can you gauge what kind of impact to PayPal a 1-day auction has in terms of extending your holiday selling season as you look at the current fourth quarter?

It seems like maybe these initiatives or these key, functionality allow yourselves to sell closer to the holiday season.

Can you characterize whether you are seeing that among yourselves or any sort of talk about that in the marketplace?

Second, as you look at the transaction growth of roughly 30%, can you give us a sense of how much you think what the growth looks like domestic versus international, kind of all in, when do you see the international become a bigger piece of the overall mix relative to the 46% today?

And if you look at the reinvestment in the business in '05, can you characterize in terms of R&D versus marketing, what kind of -- where do you think the biggest investment area will be as you lay that out among the different areas that you're looking at inside the business?

Hi, Jeetil.

With regard to extending the selling season, this has been a trend actually for a couple of years.

You might remember back in 2000, basically no one could sell much beyond the 15th or 16th because many of the auctions were 7-day auctions, we had no PayPal, we had no by it now.

So it's been an evolution and we have definitively tried to give our sellers more and more time to sell up until the very last minute.

And there's a number of things that have helped in that regard.

First is fixed price.

Second is shorter duration auctions like the 1-day auctions you mentioned.

Third is PayPal, because it speeds up the payment process and particularly immediate pay.

And then finally shipping integration also extends the selling season.

So we're really hoping our sellers will be able to really do much like -- almost a land-based retailer up until 1 or 2 days before the holidays when that gift is needed.

I think there's good buzz in the community around that.

They like a lot of the features that we've introduced, and I expect we will make even more progress than we did last year on that.

So we are optimistic.

Jeetil, with respect to your second and third question, the second related to the relative recent growth in 2005 between the domestic or the U.S. business and the international business.

I think there's no question that in 2005 we don't give out specific details between the different components, but clearly the international part of the business is at a much faster growth trajectory.

With that said, I don't want you to in any way underestimate the incredible power that's left behind in the U.S. business.

This is still a very young business and I would point to a couple of things.

If you look across category by category, we are still in the very earlier stages of penetration.

I think we have a long way to go against fully exploiting the total potential of the marketplace in the U.S. and frankly, even in Germany where we have very strong franchises.

As we look forward into 2005, I will tell you that from a dollar standpoint the majority of the growth is coming from a lot of businesses and as I look across them today these are very strong businesses.

Your other question with respect to investment and where is this going, is this going into R&D, or is this going into marketing.

R&D in eBay's context is product development.

And so a couple of things I would point out over here is as a percent of revenue, again, we don't give out guidance at that line item detail, but on a percentage of revenue basis we don't expect to see a significant increase in development.

A lot of our investments fall into the kind of expenditures that get categorized under sales and marketing, and these are things such as building out infrastructure in countries ahead of the curve, this constitutes building out capabilities as we are building out our markets both in the U.S. as well as people.

So I would expect that you would see a lot of this reflected in the marketing and other line items throughout the P&L.

Next question, please.

Thank you.

Our next question is coming from the line of Imran Khan from J.P. Morgan.

Please proceed with your question.

Thank you.

Hi, Rajiv and Meg. 2 questions.

It seems like if I look at your international take-up rate as a transaction revenue as a percentage of gross merchandise value declined slightly and I was wondering if you could comment on that.

And secondly, looking forward if I look at the take-up rate it's like down 7.4%, how much does it increase in terms of pricing power?

Where do you think it can go in the longer term and where do you think the opportunity might come from?

Thanks.

So let me take that, Imran.

I would say with respect to the take rate international versus the U.S., this is largely a mix determined.

I wouldn't read too much into it and one of the things that I would absolutely point out is the take rate varies by a variety of things.

It varies by seasonality.

It varies by mix and, of course, as you can have distances in the growth rates of certain categories, for example, higher ESP items have a lower take rate, motors have a much lower take rate.

So as these tend to grow at relatively different rates across the different seasons, you will see minor fluctuations of the overall take rate.

That said, longer term as we are looking at take rate, we really do think that 7.4% which is where it was in Q3, 7.38%, we would expect to it remain at this rate.

I don't think that you should be looking out over the next few years and modeling significant increases in that overall take rate, because our point of view is that this is still very early in the stage of business and we are really focused on building out on volume because that is where I think the greatest opportunity lies.

Okay.

Thanks.

Thanks.

We will take another question.

Thank you.

Our next question comes from Christa Sober from Thomas Weisel.

Please proceed with your question.

Hi, just a couple questions here.

One of the things I'm looking at your U.S. business it looks like it slowed down a lot in September and I was wondering if you could describe if there were any sort of 1-time items that would cause potentially reacceleration in the fourth quarter?

And then, Rajiv, if you could give us a sense of 2005 capital expenditure expectations?

And then the final question I guess is, you put out 2005 guidance.

As I look back to 2003 and 2004, you've over shot the revenue by 20 and 12%.

Obviously, it's difficult to budget in a hyper growth environment, but if you could give us a sense as to how you're thinking about where the penetration rates of your current businesses are, specifically PayPal.

What is the addressable market as you see it for PayPal in the next couple of years?

Thanks.

With regard to the U.S. business, Christa, we did see a little slow down in September due to 2 factors, we believe.

One was a late Labor Day, because what happens is people come back to the site with a vengeance after Labor Day and some bad weather, obviously the hurricanes in Florida hurt us a little bit.

That said, overall we had a terrific back-to-school season and that is evidenced by accelerating GMV in computers, as well as books, movies, music, video, particularly the books category did extraordinarily well in back to school.

So late Labor Day, some tough weather, would have been weaker if it hadn't been for a strong back-to-school season.

And as you're looking forward, Christa, into Q4, we are absolutely anticipating a very strong business in terms of the holiday season reflected in the guidance.

Moving on to your second question, which I believe was regards to CapEx, we had guided to about $315 million in total capital expenditures in 2004, which is as a percent of revenue just under 10%.

We are in the process of finalizing our capital expenditures budgeting for 2005.

So we are not, I'm not prepared to provide any guidance on this right this moment.

We will be including it as we regularly do with our 10-K filing in the early part of the year.

I can give you some color on the overall level.

I said a number of times and I repeat it again.

This is not a capital intensive business.

Over time we would expect to see a capital expenditures as a percent of revenue continue to decline and I expect 2005 to be completely consistent with that trend.

Go ahead.

Let me talk about the PayPal market side for a minute, the way we think about it is first PayPal follows eBay's global footprint around the world and to a greater or lesser degree, we think PayPal will be successful in every eBay market and we think that will take a period of years to roll-out.

So countries with payment systems similar to the U.S., like the U.K., like France, we think will ultimately mirror the U.S. which is about a 72% penetration.

Countries where EFT is a dominant payment will be less than that.

We just don't know how much less yet.

So whatever you believe the eBay business opportunity to be, I would sort of take 50 to 60% roughly is the PayPal opportunity across all the broad mix of countries.

Now the thing you have to remember is that eBay is about 15% of global e-commerce.

So ultimately the opportunity off eBay for PayPal may be larger than the opportunity on eBay, but we are at the earlier stages of that and it's very difficult for us to predict how big that could ultimately be.

I think 12 months from now we will have a lot more clarity onto our penetration into off eBay, sole proprietor, small to medium-size enterprises and even large businesses as well.

So harder to give you that estimation, but we think we are just beginning in the merchant services part of the business.

Great.

We will take another question.

Thank you.

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

Please proceed with your question.

Could you talk a little bit more about the, I think you said a little bit over $200 million of investments you are going to make this year in '05.

Can you talk about how you arrive at that number?

It looks like excluding that, or that amount works out to maybe 15% of your GAAP earnings, what would have otherwise been your GAAP earnings next year based on your guidance.

How did you build up to that being the right level of investment?

Can you talk about the time and the size of the returns that you're thinking about?

Can you also tell us what was the kind of comparable proactive investment dollars in the '04 year?

And then lastly, how does -- if this is really kind of a new thing where it's a big lump sum, this big pull you are creating kind of in the sideline way, does it have any implications for the likelihood of the Company doing acquisitions in some of the emerging markets like you've done?

Are you saying that this is going to be more like internally developed and do you think, I understand you don't have your CapEx plans done yet, does this approval of expense money have any impact on maybe accelerating the decline in the CapEx relative to revenue in '05?

Okay.

Lanny, let me try to capture some of those questions that you asked.

I think at the very highest level what we are really describing is for the longest time we have described to you a philosophy that says that we will take a certain amount of the incremental leverage that we are driving in the business and reinvest it back into the business.

And in of itself that's not a new philosophy, it is what we have been doing for many years.

As we look forward into 2005, we even today when we are generating a 35% operating margin for 2004 which is what we project, that number includes a fairly significant investment component where we are clearly spending money against the future, so even as we speak today, we are investing in China.

We are investing in PayPal.

We are investing in infrastructure.

All of these ahead of the curve.

For 2005 one of the decisions that we had was, we can continue to drive incremental leverage in the business.

And as a management team we sat around the table and said one of the things we would like to challenge the organization to do on a continual basis is to make sure that we are driving increased efficiencies.

And we set ourselves a goal of actually driving incremental 5% of profit.

What that would mean is all other thing being equal it would have meant an operating margin of 40% in 2005.

And what we decided is the appropriate thing to do is to take those incremental D&O dollars that we have created and actually invest them into other opportunities in the business, as well as some existing opportunities in the business.

So this is not capital expenditures, this is not accruals set aside for acquisitions, this is P&L dollars that we are investing against what we think are the highest value incremental opportunities ahead of us.

Now the process that we actually go through is as we are running up our budgets, as we are evaluating different alternatives, we have a very solid way of looking at various alternatives for this investment, whether it be incremental spending in China, what is the opportunity over there, what do we think the size of the e-commerce market, how fast is it growing, what are the opportunities for PayPal and so on, so forth and that is what we will be doing in order to make this investment in 2005.

Can you compare it to 2004, though?

Because it would seem like, although I understand, it's clear you guys have been making investments all the way along, it seems like you are saying that right now it's a little bit bigger of a set aside than sort of the set aside turned out to be in the past year, or else you are saying something else about the margin expansion that I didn't see?

I would say that it's a comparable amount.

On a percent of revenue basis, but obviously you are dealing with a much larger base against it.

So on an absolute basis you are talking about larger dollars.

There is nothing over here, all we are really signaling from the standpoint of looking forward in 2005, this is a business with tremendous opportunity ahead and everything that we are focused on doing is building this business for the long haul and that is really what this is intended to represent.

Thanks.

Thank you.

I think we will take 1 more question.

Thank you.

Our last question comes from Youssef Squali from Jeffries & Company.

Please proceed with your question.

Thanks a lot.

A couple of questions.

First, there were a number of rumblings from some of your online affiliate marketing partners about a change in payment methodology that you guys implemented at the beginning of the quarter, beginning of third quarter.

Can you just go over that and explain what happened there?

And second, Rajiv, I was wondering if you could just normalize or if you were to normalize the top-line growth for the acquisitions by the Internet auction, I was wondering if you could provide us with some numbers there?

Sure.

I think what you are referring to with respect to the affiliates, we actually are very disciplined about our key word purchases throughout the year.

So a lot of what we do is continue to focus against very high ROI and our methodology for determining how we are going to pay for those key words.

And if you actually take a big [inaudible] and say, what's really happening with respect to our affiliates, what's happening with respect to our key words search, actually the overall results have been very, very good because even as the cost for click and the cost of search acquisition has gone up, we have more than offset that by driving more and more users direct to eBay.

This has come about through incredible focus on the ROI and we actually have key word ROI as we use, by both direct from the big search partners, as well as through a large Army of affiliates.

I was just going to follow up, so on that topic, is affiliate marketing still one of the largest or probably the largest contributor to your --

Yeah.

If you look across our overall sales and marketing, approximately 60% of our programs are really directed against Internet marketing.

So if you look at our overall sales and marketing which is about 27.5%, approximately 50% of it, excuse me, about 60% of it is programs and various kinds of media and off that number about half of it is directly against Internet marketing.

Affiliates as a piece of that is big, it's growing and it's definitely very important.

But what we have been able to do overall is to continue to improve the overall efficiency from customer acquisition.

I think I would like to go on to the second part of your question, which is looking at revenue normalized for IAC and Mobila [ph].

So Internet option companies as you know was always included in our revenues even historically and we had a minority interest that we took out of the bottom of the P&L, which we will now no longer be doing since we now own close to 100% of it.

And with respect to Mobila, we haven't broken those numbers out, but we have said previously is that to the overall eBay P&L and revenue standpoint it would be completely immaterial.

So when we are looking at 2005, we are extremely bullish for the year up ahead and we are looking at a growth rate of 30% over where we expect to end this year and over $1 billion of revenue growth that is completely organic.

That's great.

Thanks a lot.

Thank you all for joining us today.

We appreciate it.

Thank you.

Thank you.

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.