eBay Inc (EBAY) 2005 Q3 法說會逐字稿

Good day, everyone.

And welcome to eBay's third quarter 2005 earnings results conference call.

This call is being recorded.

With us today from the Company is the President and Chief Executive Officer, Ms. Meg Whitman; and the Chief Financial Officer, Mr. Rajiv Dutta.

At this time I would like to turn the call over to Ms. Lydia Ventura, Senior Director of Investor Relations.

Please go ahead ma'am.

Good afternoon.

Thank you and welcome to eBay's earnings release conference call for the 2005 third quarter.

And I'm Lydia Ventura and I'm the new Senior Director of Investor Relations for eBay.

While new to Investor Relations I've been with eBay for almost seven years in various finance roles most recently as head of Financial Planning and Analysis.

I look forward to working with all of you.

Joining me today 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 reconciliations 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 businesses, user base, and user activity.

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 of varying degrees of maturity.

The Company's need to increasingly achieve growth from its existing users as well as from new users in its more established markets.

The Company's ability to deal with the increasingly competitive e-commerce environment, including competition for its sellers from other trading sites and other means of selling and competition for its buyers from other merchants online and offline.

The need to integrate, manage, and profitably expand the newly acquired Skype business, the regulatory and competitive risks specific to Skype, the Litigation Regulatory Credit Card Association and other risks specific to PayPal as it continues to expand geographically.

The Company's need to manage other regulatory tax and litigation risks, even as its product offerings expand and its services are offered in more jurisdictions.

The Company's ability to upgrade and develop its systems, infrastructure and customer service capabilities to accommodate growth at a reasonable cost.

The Company's ability to maintain site stability and performance on all of its sites while adding new products and features in a timely fashion, fluctuations in foreign exchange rates, the Company's ability to profitably expand its model to new types of merchandising sellers.

And the Company's ability to profitably integrate and manage recent and future acquisitions and other transactions.

More information about factors that could affect our operating results is included under the captions "risk factors that may affect results of operations and financial condition" and "management's discussion and analysis of financial condition and results of operations" which are 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.

Now, over to Meg.

Thank you, Lydia.

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

On the heels of a great Q2, the Company delivered excellent results in Q3.

The strategies we put in place at the beginning of the year delivered handsomely building on the momentum from our very strong Q2.

As a result we saw strong growth across every part of the business around the world in what is typically a slower period for our business.

The Company generated record net revenues of 1.1 billion in Q3, a jump of 37% year-over-year.

And pro forma net operating income grew 44% year-over-year, with a pro forma operating margin of 36%.

While we saw growth in each of our markets, it was especially strong in our two largest eBay marketplaces, U.S. and Germany which both showed accelerating growth in Q3.

Globally, eBay added 11 million new users and generated gross merchandise volume of $10.8 billion.

PayPal continued its strong trajectory in Q3, with accelerating growth from merchant services in addition to continued expansion on the eBay platform.

In Q3, PayPal added 8 million new accounts and delivered nearly $6.7 billion in total payment volume.

And our newer venture, Skype, shopping.com, rent.com, Kijiji, and our other classified websites also showed strong traction across the board.

Our performance in Q3 validates the strength of our business model, our short-term strategies for growth, and our long-term plans for investment. eBay and PayPal remain the most powerful e-commerce franchises in the world and the cornerstone of our growing portfolio of online businesses.

As a result, we are well positioned for future growth both in the Q4 holiday shopping season and beyond.

Rajiv will discuss our financial outlook for Q4 and for the full year 2006 in a few moments, but now let me spend a few minutes talking about our achievements in Q3.

At our analyst day conference in February, we laid out our strategy for driving growth in the eBay business.

We have consistently focused on increasing the value of the eBay marketplace for our users by investing in highly efficient marketing initiatives, and product innovation.

And reaching out to connect with our community of users.

These efforts fueled the continuing momentum we saw in Q3.

In the U.S., we deployed smart marketing tactics to bring buyers to our site and further optimize seller's listings for natural search.

These and other marketing efforts helped spur demand on the site and our sellers saw more bids, higher ASPs, and strong conversion rates in Q3.

GMV across categories remained strong especially in collectibles, home and garden, and business and industrial which all exhibited accelerating GMV growth year-over-year for the second consecutive quarter.

And the growth of eBay Stores also contributed to increased trade on the site.

We exited Q3 with a record 193,000 Stores in the U.S., a 35% increase from a year ago quarter.

We now have 336,000 Stores worldwide.

This same focus on higher return activities also benefited eBay's international business. eBay Germany maintained the momentum it build in Q2 and delivered strong results across the board, despite typical summer seasonality.

Like the U.S., the German team has been concentrating on increasing trade through efficient marketing, natural search optimization, increasing buyer protection, and community outreach.

Which has driven an increase in listings and bidding activity and contributed to accelerating GMV growth.

With its renewed growth eBay Germany is well positioned to take advantage of the coming holiday shopping season.

Our other international markets also delivered strong growth across a variety of measures. eBay UK demonstrated impressive growth in GMV and transaction revenues. eBay France and eBay Italy again delivered triple digit year-over-year GMV growth for the second consecutive quarter.

Our business in Korea which now has more than 14 million users continued to generate strong GMV growth, and eBay Australia surpassed the 3 million user milestone.

Now, one in five Australian adults is a registered eBay user.

eBay's business in China also had an excellent Q3 delivering accelerating GMV and transaction revenues.

Our Chinese marketplace is more vibrant than ever, providing sellers with strong ASPs and conversion rates.

And we added nearly 2 million new users in Q3, bringing the total to 15.1 million.

By far, the largest online trading community in China.

A power seller on eBay EachNet recently told me that eBay is the only marketplace in China on which Chinese sellers can build a serious long-term business.

I'm extremely pleased by the progress we've made in China and by the thriving e-commerce environment we're creating for a whole new generation of Internet users.

As a result of our growth around the world, eBay international delivered remarkable year-over-year GMV growth of 40%. eBay's international business now accounts for 53% of eBay's user base and 50% of its global GMV.

Our newer ventures are also demonstrating strong growth.

Rent.com ended the quarter with more than 20,000 apartment properties listed on its site, making it the number one Internet rental listing service on the web.

Shopping.com remains the number one shopping comparison site covering all kinds of products from shoes and iPods to hotels and mortgages.

And Kijiji continues to gain traction, now serving more than 150 cities and regions around the world.

PayPal also had an excellent quarter, growing its business on eBay and expanding its merchant services business.

In Q3 PayPal reached a record 87 million accounts, processed more than $6.7 billion in total payment volume and generated revenues of 247 million, an impressive 44% jump from the year-ago quarter.

PayPal is also growing around the world.

PayPal's penetration of addressable GMV in Canada, for example, is now greater than that of the U.S.

And after only a year, PayPal is used to settle nearly one quarter of the addressable GMV on eBay France.

PayPal launched its newest international service in China in July which is already seeing healthy adoption among online consumers.

Our merchant services business continues to deliver accelerating growth as well.

In Q3, a number of popular websites began offering PayPal as a payment option, including petsmart.com, petco.com, cooking.com, starbuckstores.com, Esurance, Equifax, and Hot Wire.

And Website Payments Pro, our product suite for small businesses off the eBay platform which launched in June is gaining traction.

As a result, TPV for merchant services showed accelerating year-over-year growth of 49%.

And as we announced last week, we are extending the merchant services business with our acquisition of VeriSign's Payment Gateway business.

With the gateway business which processed more than $40 billion in total payment volume in 2004, we can expand our customer base by tens of thousands of new small and medium size business customers.

And combining the gateway with our existing services will allow us to provide merchants with multiple processing choices from a single trusted provider.

In addition to growing our core businesses, we've also completed some strategic acquisitions this year.

Our portfolio of businesses has become much broader but there is a common thread that runs through these businesses.

Each of these websites brings communities of people together to meet, talk, buy, and sell.

And each empowers people in ways that were inconceivable just a few years ago.

As the Internet evolves our vision of e-commerce has also evolved and at the same time we have expanded our addressable market and our opportunity for future growth.

Investing for the future is a key part of our long-term strategy.

In the early days, we expanded the eBay platform by introducing new trading formats such as fixed price and eBay Stores.

We also made key acquisitions such as the purchase of PayPal in 2002.

This was a watershed moment in our history, because with PayPal, we were able to remove friction from the online payment process, which led to a large and successful new business for the Company.

Last week, we completed another acquisition that we believe will be just as transformational to our business as PayPal was.

And that's the acquisition of Skype, the global online communications company.

Much like the eBay and PayPal businesses, Skype takes unique advantage of the Internet to deliver a powerful new way for people to communicate online.

And while the Skype of today is largely focused on communications, we see incredible potential for its use in e-commerce.

Combining Skype with eBay and PayPal will create an unparalleled e-commerce engine for merchants and consumers around the world.

Integrating Skype into the eBay marketplace, as well as into shopping.com, rent.com and Kijiji will reduce communications friction between buyers and sellers and increase the velocity of trade.

Skype could also help expand eBay and PayPal internationally, especially in emerging markets where a more personal way to communicate online can make e-commerce more familiar.

And creating a PayPal wallet associated with each Skype account can make it even easier for users to pay for Skype's fee based services while at the same time increasing PayPal's payment volume.

The acquisition allows eBay and Skype to pursue new lines of business based on lead generation through paper call, services, travel, new cars, and real estate are just a few of the categories that we believe can benefit from Skype.

And on its own, Skype is a powerful business model.

Skype ended Q3 with more than 57 million registered users and as we have said, it's expected to generate an estimated 60 million in revenues in 2005, and more than 200 million in 2006.

With eBay behind it, Skype can advance its leadership in Internet voice communications and offer people worldwide new ways to connect online.

We're incredibly excited about the acquisition of Skype and the other acquisitions we've made over the past year.

They allow us to expand our vision of e-commerce and complement our existing growth businesses of eBay and PayPal.

In short, we are evolving the Company and broadening our definition of future growth and success.

These ambitious steps towards our future would not be possible without the powerful combination of our core businesses. eBay and PayPal are unparalleled growth engines that speed the ongoing development of their own platforms while allowing the Company to expand in new strategic directions.

And as you can see from this quarter's results, these are young, very responsive businesses, with considerable room to grow.

Now, before Rajiv presents the financials, I would like to take a moment to announce a future change in our management team.

I have asked Rajiv to take on the newly created role of President of Skype.

Rajiv will augment the already strong management team we have there, working closely with Skype's CEO, Niklas Zennstrom and with me.

He will also remain on eBay's executive management team.

Skype is a huge opportunity for the Company and I'm thrilled that Rajiv can become more deeply involved with this exciting new part of our business.

Rajiv will remain fully engaged as CFO working with me to find the right replacement and make a smooth transition before he moves to London.

Rajiv has made tremendous contributions to eBay as CFO over the past five years and I'm personally very excited to see what he will accomplish with the team at Skype.

Now I will turn it over to Rajiv for a closer look at our financials.

Thanks, Meg.

Before I get into the financials let me just say that I'm delighted to have the opportunity to build an exciting new business for eBay, working closely with Meg and the Skype management team.

However I would also like to make certain that my transition out of the CFO role is a smooth and orderly one.

As such I will continue as CFO until we find a replacement.

In the meantime, it is great to be able to announce yet another great quarter.

As Meg described, Q3 was an outstanding quarter that positions the Company for continued success.

First, these strong business trends that we saw in Q2 have continued into Q3.

Q3 revenues exceeded the high end of our guidance by approximately $35 million, which includes $10 million from shopping.com for the first time.

These strong top line results were driven by acceleration in the U.S. and Germany, as well as continued momentum in PayPal and the rest of our international markets.

Second, this strong revenue performance together with continuing efficiency gains resulted in pro forma operating income which is more than $40 million higher than our guidance implied.

Pro forma EPS of $0.20 was $0.01 higher than our guidance notwithstanding a $17 million one-time tax-related charge which impacted EPS by $0.01.

And finally, the business momentum remains strong across the board.

As a result, we are raising our guidance for Q4, and looking forward to another year of strong growth in 2006.

So let's discuss each of these in a bit more detail starting with the top line.

Q3 reflected very strong volume metrics across all of our key metrics. eBay confirmed registered users grew to more than 168 million worldwide, PayPal added record new accounts bringing our total to more than 86 million worldwide, and active eBay users reached a record 68 million in Q3.

This user growth drove a record 459 million eBay listings representing 32% year-over-year growth consistent with Q2.

We are particularly pleased with Store's inventory format listings which have more than doubled in the past 12 months and continue to grow at triple digit rates.

These strong volume metrics translated into eBay GMV of $10.8 billion representing 30% year-over-year growth.

Once again, this growth was very broad-based both geographically and across product categories.

GMV per active user increased $5 quarter over quarter to $575, reflecting significant increases across all of our major markets.

At PayPal, excellent account growth, combined with with very strong addressable GMV growth, continuing penetration gains in key markets, and accelerating growth in license services, led to total payment volume of $6.7 billion, up 44% year-over-year.

And collectively, these trends powered consolidated net revenues for eBay of $1.106 billion, up 37% year-over-year.

Excluding revenues from acquisitions in the past 12 months the Company's organic year-over-year revenue growth in Q3 was 33%.

And further, excluding acquisitions and the impact of foreign currency translation, year-over-year growth was 32%.

So let's take a closer look at the business units.

In the U.S. marketplace, average daily unique visitors in Q3 to eBay.com grew 27% year-over-year versus 14% in Q2.

And when these visitors reach the site, they were very active.

Bids for Q3 also boasted accelerating year-over-year growth rates resulting in strong conversion rates and a $16 sequential increase in GMV per active user.

In addition, accelerating listings growth combined with strong average sales price increases and robust conversion rates led to a 21% year-over-year GMV growth, resulting in record U.S. transaction revenues of 435 million.

Even excluding the impact of shopping.com, transaction revenues accelerated to 29% year-over-year, growth in what has historically been one of our seasonally slowest quarters.

From a category perspective, we experienced accelerating growth rates in collectibles, home and garden, books, movies, music, and business and industrial.

Motor vehicles also saw accelerating growth in Q3.

Benefiting from industry-wide new car discounts and it is now on a $6 billion annualized GMV run rate.

In our newer businesses, rent.com had a strong quarter, boasting more than a 90% year-over-year increase in unique visitors in September and further extending its lead over its nearest competitor.

Shopping.com, which we acquired in August 30, had revenues of $29 million, 10 million of which is included in our Q3 results.

And also accelerated its year-over-year growth of unique visitors in September.

In our international marketplace, notwithstanding the negative impact of foreign currency fluctuations, we continue to see impressive rates of growth.

In total, eBay international ended Q3 with over 89 million registered users who had generated GMV growth of 40% year-over-year, which in turn drove transaction revenues of $402 million, up 42% over Q3 of last year.

Germany in particular continues the outstanding trends that we saw in Q2.

On a U.S. dollar basis, growth was strong and on a local currency basis, both transaction revenue and GMV growth accelerated in Q3.

Listings growth accelerated and ASPs and conversion rates remained very strong, driving accelerating GMV growth in most major categories, including business and industrial, computers, consumer electronics, and entertainment.

In motors, Mobile Adopt EE posted an outstanding quarter with accelerating year-over-year transaction revenue growth driven by both strong volume from both the dealer and for sale by owner channels.

And all of our other European marketplace businesses continued to deliver strong performance notwithstanding our typical Q3 seasonality. eBay UK continues to deliver impressive results with strong GMV growth rates driving record levels of GMV for active users, eBay France and eBay Italy once again posted triple digit GMV and revenue growth in this quarter.

And turning to Asia.

Internet Auction Company in Korea, once again produced great results turning in 62% year-over-year transaction revenue growth, and in China, strong listings growth and increasing conversion rates drove acceleration in year-over-year growth rates for both GMV and revenue.

Our efforts to drive continuing strong user acquisition and activation as well as to fortify our position as the most trusted place to trade with other Chinese users have led to outstanding local growth metrics.

With both its thriving local business and a rapidly growing export business, we are excited about our position in China.

Next, let's turn to the payments business.

Q3 was an outstanding quarter.

Better than expected addressable GMV, combined with strong penetration gains in North America and Europe led to record eBay generated total payment volume.

Penetration rates reached 77% in the U.S., 81% in Canada, and 66% in the U.K.

And in the U.K., we reached another key milestone in Q3, PayPal acquired its 10 millionth account.

PayPal's Global Merchant Services business also had a very good quarter, generating $2.1 billion in TPV up 49% year-over-year, reflecting the second consecutive quarter of accelerating growth.

This growth was fueled by an expansion of our merchant acquisition efforts, as well as the launch of Website Payments Pro at the end of Q2.

To further build on this business, just last week, we announced the planned acquisition of VeriSign's Payment Gateway business and as Meg told you earlier, this is a key part of our strategy, to expand our portfolio of small and medium-sized business customers.

Accelerating growth in merchant services combined with strong growth in on-eBay volume drove record PayPal TPV in Q3 of $6.7 billion, a 44% year on year growth rate.

And PayPal is now on track to finish 2005 with over $1 billion of revenue.

Representing a 62% compounded annual growth rate since our acquisition in 2002.

Now, let's look at how these revenues translated to profits and cash flows.

Revenues that were $35 million above the high end of our guidance, together with continued operational efficiencies, led to more than $40 million outperformance on the pro forma operating income line versus our previous guidance.

Taking a walk down the P&L in a little more detail, eBay's gross margins were sequentially flat at 82%.

We continued to be very pleased with the cost reduction initiatives and payment processing, and favorable funding mix trends.

Sales and marketing expense in Q3 was 26.5% of net revenues, about even with Q2.

In the U.S., marketing programs spend was 17% in Q3, compared with 19.4% in Q2, reflecting continued marketing efficiency.

This sequential decline in U.S. marketing was offset by the inclusion of shopping.com, and increased investment in our developing international markets.

Product development spending in Q3 represented 7% of revenues, up slightly from Q2, primarily reflecting the ramp in our product capacity at PayPal, as we grow our merchant services business and continue our geographic expansion.

Looking forward, we will remain committed to investing in product innovation on eBay's sites around the world.

General and administrative expenses in Q3 represented 13% of revenues up from 12% in Q2 but in line with the 13% in Q3 of last year.

The sequential increase was primarily driven by increasing purchase protection expenses at PayPal, as we expanded our protection coverage globally.

As a result of the strong revenue growth and operational efficiencies, pro forma operating income grew 44% year-over-year to $394 million, representing a pro forma operating margin of 36%.

Consolidated pro forma net income in Q3 totaled $280 million, or $0.20 per diluted share, $0.01 above our guidance.

The strong pro forma operating income results were offset on the bottom line by a $17 million one-time tax related charge, which impacted our EPS by $0.01.

This one-time charge related to the final application of tax regulations, requiring the inclusion of stock option expense in inter-company cost-sharing arrangements.

These regulations will not have a material impact on future taxes.

Operating cash flows of $492 million, and net capital expenditures of $42 million drove record free cash flows of $450 million in the quarter, representing a 123% year-over-year growth. eBay exited Q3 with almost $10 billion in total assets, including nearly $4 billion in cash and investments.

Also last week, we announced the completion of our acquisition of Skype.

We are very excited about the current trajectory of Skype's business.

Skype is adding new users at a record pace at more than 166,000 per day and finished Q3 with more than 57 million users.

And just today Skype reached another milestone when the service peaked with more than 4 million concurrent online users.

Driven by these new users and strong growth in active users Skype is on its way to delivering an estimated $60 million of revenue in 2005.

In sum, we could not be more pleased with our Q3 performance, and the momentum in all of our businesses.

Growth in our two largest marketplaces, the U.S. and Germany, accelerated.

Our other international businesses continued their momentum, and PayPal delivered another outstanding quarter.

In addition, our new initiatives rent.com, shopping.com, PayPal Merchant Services, and now Skype had impressive results this quarter and are on a strong trajectory.

With that, let's turn to our guidance.

First, discussing the remainder of 2005, and then providing you with an outlook for 2006.

Before we get into the details of our expectations, let me briefly mention a few factors that today's guidance takes into account.

First, this guidance assumes a U.S. dollar-euro exchange rate of $1.20 for the remainder of the year as well as the full year 2006.

Second, the GAAP guidance we have provided does not take into account the impact of the new stock option expensing rules which take effect January 1, 2006.

And finally, this guidance includes the effect of Skype, which closed on October 14, and the assumed impact of the announced acquisition of VeriSign's Payment Gateway, which is expected to close in Q4, 2005.

Considering these factors, we now expect full-year 2005 net revenues to approximate $4.5 billion, including approximately $45 million from shopping.com, and up to $20 million from Skype.

On an apples-to-apples basis, that is excluding the revenue from shopping and Skype, this guidance represents a $10 million increase to our previous Q4, '05 guidance.

On the bottom line, pro forma EPS could be as high as $0.83 reflecting $0.84 from our core marketplaces and payments businesses, and a $0.01 dilution from Skype.

On a GAAP basis total company GAAP EPS including Skype could be as high as $0.74 which includes a $0.04 dilution from Skype.

This guidance implies that we are well on track to achieve a 35% pro forma operating margin in 2005.

With that, let me turn to 2006.

We are very excited about the future, and expect the current momentum to continue.

We have a young and responsive company, and believe that our portfolio of businesses positions us well for the opportunities before us.

In the coming year, we will work hard on integrating our new acquisitions, while continuing to drive innovation in our core marketplace, and PayPal businesses.

We will also continue to make the required investments to ensure that we realize the full opportunity before us.

These include first, continued investment against opportunities in our core eBay and PayPal businesses, including development of our marketplace businesses in China and India, as well as PayPal's geographic expansion.

Second, a big focus on our new initiatives including PayPal Merchant Services, development of our new marketplace sites, and other product innovations.

And third, integration of the newest member of the eBay family, Skype, and in particular, buildout of the Pay Per Call business.

As a result we expect 2006 consolidated net revenue could be as high as $5.7 billion to $5.9 billion.

Which includes approximately $200 million for Skype.

This implies a revenue growth rate of 26% to 32% over where we expect to end 2005.

On the bottom line, we expect consolidated 2006 pro forma diluted EPS to range from $0.96 to $1.01, including a $0.04 dilution for Skype.

We expect consolidated GAAP diluted EPS to approximate $0.81 to $0.86 which includes a $0.12 dilution for Skype.

Excluding the impact of Skype, the guidance provided today implies that eBay's consolidated pro forma operating margin in 2006 will be roughly flat with 2005 at 35%, implying expansion of our core marketplace's operating margin to offset the structurally lower margins in PayPal and shopping.com, and the investment in our new initiative.

In summary, as we head toward the close of the year, I could not be more pleased with the overall health of the business and the opportunities ahead.

A strong Q1 was followed by an outstanding Q2 and Q3 with powerful momentum heading into Q4.

Looking forward, eBay is positioned for years of strong growth with a clear leadership position in worldwide e-commerce, global online payments, and now communications on the net.

We are committed to executing against these opportunities with focus and consistency, creating value for both our shareholders and our community of users.

And now, we would be pleased to answer your questions.

Operator?

Thank you. [OPERATOR INSTRUCTIONS].

Our first question comes from Scott Devitt from Legg Mason.

Thanks.

I had two questions.

One around the core business, and then Skype.

The first question regarding the relationship between core listings, gross merchandise value, and revenue, last quarter, I think the growth of those three metrics year-over-year was 32, 36, and 40%, and this quarter, it was 32, 30, and 37.

So the spread between listings and revenue actually tightened.

I was wondering if that was just generally ASPs converging or something else?

And then secondly on Skype, wondering the opportunity with that product to actually further improve your competitive position in China, and possibly maybe even re-enter Japan with the core business, and maybe finally, wondering the percentage of Skype accounts that actually are funded with PayPal currently today?

Thanks.

Okay.

So let me take the first part of that question, which relates to the relative relationship between the growth rates of listings and GMVs, and revenue.

So when you look at the overall revenue growth that we saw accelerating particularly in the U.S. business, this is, just to be very clear, driven by volume.

It is driven by listings.

We had more users come to eBay and more of these users listed more items, which in fact is what really drove the revenue acceleration.

But you are correct, we have seen increases in average selling prices actually now for a number of quarters and we saw that again in Q3, and we have also seen some very robust conversion rates.

Typically in Q3, we would expect to see that to drop a little bit.

And we actually saw robust conversion rates in the quarter in the U.S. business.

So that is what is accounting for the sort of slightly shifting relationships between these relative metrics.

With regard to Skype, Scott.

In China, we actually think that the combination of eBay, PayPal, Kijiji, and Skype gives us a tremendous set of assets with which to really grow our business in China.

And as you know, Skype -- one of Skype's strongest markets is in fact China, so we do think that there is going to be some very interesting integration points, and -- with all three of our businesses.

As you know -- you may know that Skype has a joint venture in China with Tom online, a very powerful mobile portal in China.

So there are some very interesting opportunities there.

And stay tuned for more details there.

With regard to re-entering Japan, Japan is a tough market for us, but Japan is one -- again a very strong market for Skype, and it may provide actually a nearer term opportunity for PayPal, because if we fulfill the vision of every Skype account comes with a PayPal account, that's a great way for PayPal to enter Japan.

So there might be an opportunity to enter with a new marketplace model that's more on a lead generation basis than a transaction revenue model, but that's probably a little bit longer term.

With regard to the percentage of Skype accounts that are funded by PayPal, it is about 25% of the -- of Skype accounts, mostly in the U.K., that are in fact funded by PayPal.

But again, it is not a wallet.

It is that they top up their Skype account by paying with PayPal.

And the vision of course is actually to have a wallet so that you don't need any more top-up, you simply draw down out of your PayPal account as you pay for the Skype fees.

Okay.

Thanks a lot.

Great.

Next question?

We go next to Mark Rowen with Prudential.

Thanks.

Good afternoon.

Before I ask my questions, first of all, Rajiv, I want to wish you luck in your new position.

And I think whoever fills your shoes is going to have some big shoes to fill.

So you might be with us for a while.

My questions are -- I have two questions.

One is, on Store listings economics.

Store listings have been growing significantly faster than the auction listings, and the fixed price listing, you buy it now listings, but the economics per listing have been improving for the last couple of quarters.

So can you give us a sense of what is happening with the economics of the Store listings?

Is the velocity increasing?

Is the ASP increasing?

Are the success rates improving on those?

Sure, Mark.

Thank you.

First of all thanks for your comments and just to be really clear, Mark, I am going to be here for a while, so you won't be getting rid of me that quickly.

To your point about what is happening with Store's inventory listings, what we call SIF listings, Stores inventory format, you're correct they have been growing much faster than the auction listings on eBay.

And the economics, as you recall, we've changed some of the pricing with regard to Stores inventory format, earlier this year, and part of the reason for doing that was to balance the relative economics between Stores and the rest of the auction format.

So as a result of some of the changes we've made, and then what our buyers and sellers -- what our sellers have been experiencing, is in fact very, very good conversion rates.

And good ASPs.

And that has absolutely been impacting the overall economics as far as listings, not just for our sellers but then also by consequence for eBay.

So it remains a very successful product integration, much like many years ago, this is really driving incremental growth and so we're really pleased with what is sort of the overall trend lines for SIF listings.

It is clearly driving a significant part of the growth in the U.S. business.

And obviously, these two formats really work together.

What we know is our sellers who combine their core eBay listings with a Store, actually do more business on eBay.

Their repeat business is stronger.

They're able to increase their average ticket price if you will, that if you buy a camera, you get a camera case, and so from a marketing perspective, I think we're seeing the power of these two formats work together to the advantage of the marketplace, to the advantage of our sellers, and then derivatively to the advantage of eBay.

So it is the ASP and the success rates, though, that are improving and not necessarily the velocity of those listings?

The velocity of the listings are improving, but what is -- the velocity is a slightly tougher measure to capture because most of these listings are either good till canceled, they're on 30 day cycle, so it is very difficult to keep track of exactly whether the same items are being relisted or are they new items, but when you look at the overall SIF listing, there is no question that ASPs and conversion rates are driving some of the improvement.

Okay.

And then Meg, you said that the U.S. and Germany both accelerated in the quarter.

Is there anything specifically that you're doing that has caused those rates to accelerate, or are the markets just improving, the economy is improving, at all?

Are they external factors or something you're doing specifically?

No, the result of the improvement in Germany and the U.S. is very specifically driven by actions that are taken by the team in these markets.

And let me categorize them for you, because they're quite similar, I think, between the U.S. and Germany.

The first, I think, is that first of all we are capitalizing on the great franchises in both markets.

But we are actually improving the efficiency of our marketing efforts including natural search optimization as well as more of our Internet marketing.

Secondarily, some of the product features and functionality that we have introduced, we just talked about some of it in terms of Stores and Store inventory format is also increasing the value proposition for both our buyers, for our seller, and therefore, they're bringing more good goods to market for the buyers.

And also trust and safety, particularly in Germany, we have actually just introduced Pay with PayPal and you're covered.

And we believe that is actually having a really nice effect on buyers confidence on buying on the German marketplace.

So what we're seeing is accelerating bids, and accelerating average weekly unique visitors.

The GMV per active user grew $16 in the U.S. and we're seeing improved average selling prices and improved conversion rates.

So it is directly a result of the actions that we've taken.

And I think what it underscores for us is these are very young businesses, they are very responsive, when one takes deliberate action, and goes deep in customer insights, that you can actually move the needle here pretty fast.

And I think our -- particularly in Germany, the renewed growth has happened faster than we anticipated.

Okay.

Great.

Thank you.

Next question?

We go next to Christa Quarles with Thomas Weisel Partners.

Hi, a couple questions.

First, just housekeeping.

Rajiv, does the guidance next year include or exclude the 100 million from VeriSign?

So short answer to that is includes the VeriSign revenue.

Perfect.

I wasn't clear on that.

Second, we've seen some deceleration in the U.K. in our own listings accounts and I was wondering if you could comment on that more specifically?

And whether you could portend a similar sort of deceleration at least out in southern Germany, what's your thoughts there?

And then finally, just on Skype, my understanding is that you do not have Pay Per Call capability today.

Would you have a preference to buy or build that as you try to build out that functionality next year?

Thanks.

So, let me take the question with regard to the U.K.

One of the interesting things is that obviously growth remains very strong, but we are a learning organization.

And the lessons that have been learned in the U.S. and Germany are already being applied to the U.K.

And we have I think the best ever sort of cross-functional and cross-business unit teams that we've ever had.

So rest assured that the learnings from the U.K. and Germany are rapidly being applied to the U.K., so we hope to -- we hope to mitigate what would obviously otherwise be a more natural decline in that marketplace.

With regard to Pay Per Call, our instinct is to build that functionality in house.

We have some plans under way in that regard.

And so that will be part of the Skype effort over the next bit of time.

And is that included in the 200 million of revenue next year?

Or is it going to be a longer term development than that?

So the 200 million largely is the Skype in and Skype out revenues.

There is a very small component of Pay Per Call.

We see this as a longer term buildout, Christa, particularly as it reflects in revenues.

Great.

Thanks so much, guys.

Thank you.

Next question?

We go to Anthony Noto with Goldman Sachs.

Thank you very much.

First, Rajiv congratulations.

Well deserved.

Thank you.

My questions really revolve around the holiday season and sort of the business trends that you see coming into the third quarter.

First, Meg, I was wondering if you could comment specifically on what you'll do differently this year going into the holiday season based on lessons learned from last year?

And then if you could incorporate in that any benefits from integrating the structured search technology from shopping.com, where are you in that process?

And then Rajiv, the second question relates to the sequential growth.

I think if I back out all the anomalies of acquisitions, et cetera, your original fourth quarter versus third quarter growth rate was around 13 to 14% in your old guidance and now it looks like it's about 9 to 10% which seems very conservative to me given that the U.S. business just accelerated, Germany accelerated, and what is going on with PayPal.

So I was wondering if you're seeing something differently or you're just being conservative and I figured I would give you a hard time since this may be your last time doing this.

Thanks.

Good for you, Anthony.

Let me talk a little bit about what we have planned for the holidays in a couple of our biggest markets.

Let me start with the United States.

We are really excited about our new brand campaign.

It is a fully integrated marketing campaign that covers TV, print, Internet marketing, direct marketing, and on-site.

And simply put, we want people to check eBay first no matter what you're looking for and the message is reinforced in the official tag line, whatever it is, you can get it on eBay.

And the ads break tomorrow, or the next day, you can actually go to the Investor Relations section of the eBay website and see the ads right now before they actually go live.

And we're really pretty excited about it.

I think it is a more inclusive message than last year.

There is more of a call to action than there was last year.

So we're pretty excited about it.

With regard to Germany, they are also embarking on an integrated marketing campaign that will in fact include -- include, it will be the third year of 3,2,1 minds, and we're really excited about it.

I think that they're off to a very good start there, and again, speaks to, and builds on the leadership position in Germany.

The U.K. also has a great holiday campaign underway.

They had very good results this year.

They've got a great marketing team there.

So we have some -- a good deal of confidence there.

And actually, a fun one is going to be in China.

We are actually going on television, in print, outdoor, and in a major marketing push for China in Q4.

The commercials go live in seven days.

And we're really looking forward to a great holiday season in China.

So I think we've got it right this year.

The proof will be in the pudding.

But we feel real good about the campaigns in our four largest markets.

And Anthony, with respect to the second part of your question, I appreciate the consistency of the question.

So I would say that when we look at the Q4, this is very robust year-over-year growth.

And we are excited about the momentum in the business.

And what I would say to you is the same thing I've said before, which is this is a transparent business.

You're going to view how it progresses, just as we do, and as we look out on the -- on Q4, from this vantage point, we are expecting a strong Q4, which is reflected in our guidance.

Anthony, I forgot your question about shopping.com.

Whether eBay will benefit directly this holiday shopping season from the catalog capabilities of shopping.com.

As you know before we bought shopping.com, we were improving the findability on eBay around the world and that will continue, I think the findability will be the best ever in Q4.

There was some value add from shopping.com technology, but you recall it only closed on August 30.

So we will not see the full benefit of that.

Separately, we expect shopping.com to have a good holiday season as well.

So I think that was the answer to your shopping.com question.

Great.

Thank you.

Great.

Next question?

We go next to Heath Terry with CSFB.

Great.

Thank you.

I was wondering, with the introduction of reserve pricing, and the autos business in Germany, back in May, have you seen any reaction there, in that business, since the introduction there?

And also, if you could just talk a little bit, Rajiv, and you may have said this during the numbers, but can you talk about to what level the acquisitions contributed in Q3?

So on a -- if we're looking at this on a year-over-year basis, trying to get to kind of an organic number, is there a way to get to that?

So let me answer the question about Germany autos.

Reserve pricing absolutely had the desired effect in the German auto business.

Before reserve pricing we saw a very low average selling price for used cars, and that has continued to actually improve because people can now set a floor by which they don't want to sell below, so that was completely the right strategic move.

The other really fun thing about the autos business in Germany is the synergy between Mobile Adopt EE and the eBay Germany motors business, that it has been really -- a really nice synergy.

Today, when you go on Mobile, if you don't find what you're looking for, you see Germany, eBay Germany autos listings and vice versa, as a result the conversion rate is up and the GMV rate is up in the autos business.

I think there is a lot more running room in autos in Germany.

It was a underpenetrated sort of underexploited category that we're, I think finding -- sort of unlocking the secret sauce there.

So I think you can look for continued growth in the German motors business, across both the auction format as well as the classified format.

And with respect to the second part of your question and let me answer both pieces, for Germany, there really is no acquisition in the year-ago comparison that would impact the year on year growth rates because Mobile as you recall was acquired Q2 of 2004, so when you look at the numbers, that business accelerated on a organic basis.

And again, to reiterate a point I made earlier, this is volume acceleration.

This is primarily driven by listings.

Many of the other metrics, the fundamental metrics improved very strongly, but the primary driver has been volume, both the U.S. and Germany.

And with respect to sort of eBay overall, in my prepared remarks, that actually talked about excluding the acquisitions from the year-over-year comparison, and the acquisitions that fall under the sort of less than 12-month sort of mark are MarketPlus in the Netherlands, rent.com and shopping.com.

And if you exclude all of these, year-over-year growth on an overall eBay basis, was 33%.

Great.

Thank you.

Next question?

We go next to Mary Meeker with Morgan Stanley.

Ms. Meeker?

Sorry about that.

A question about PayPal.

You took a more concerted effort to managing the business last December, you focused more on eBay or PayPal off of eBay, Meg, you talked a little bit about some of the wins of -- off eBay vendors you had this quarter.

Could you give us a sense of how we should think about the PayPal milestones for the next three, six, nine months?

How we should think about more large vendors coming on as PayPal customers?

How we should think about the growth in digital content?

Thanks.

So you're right, we actually put a concerted effort against the Merchant Services business.

You remember year one after acquisition with eBay.com then eBay International and 2004 was our first year of really focused effort around Merchant Services.

I'm sorry, 2005.

So we're pleased with the results.

We have targeted the top merchants on the net to go after.

Some of these sales cycles are quite long, so we are well in process with many, many of the very largest merchants.

The next milestone will be -- obviously, we want to get more than our fair share of those.

The next thing we've got to do is of course integrate VeriSign.

The key aspect of the VeriSign Payment Gateway business is to capture all of these thousands of merchants and make sure that they have an opportunity to purchase the entire suite of payments products from PayPal.

It is still going to be a small business focus with them.

But as I said, we're still also focused on the large merchants.

Digital still needs to emerge.

We are ready with a payment solve, we are talking to a number of different players in the marketplace, and we are all over it.

We do have a very nice micro payment solve that is ready to be brought to market.

Thanks.

Thank you.

Next question?

We go next to Safa Rashtchy from Piper Jaffray.

Good afternoon.

A couple of questions, Meg, you talked about some impressive wins, new merchant wins on the PayPal platform, could you give us a sense of the adoption rate of PayPal as a payment mechanism among those merchants?

Since you seem to have some new data now.

And second, could you talk about some time lines that we should be considering over the next 12 to 24 months in which we could see integration of shopping.com, rent.com, and Pay Per Call from Skype, within the eBay platform?

Thanks.

Sure.

Let me talk about the adoption rate.

Usually in the first three to six months when we go live with a site like Petco or PetSmart or the ones I mentioned, you will see anywhere from a 3 to 8% penetration in terms of the number of payments that go through PayPal in a merchant like that.

And then in the second year, we don't have a lot of experience yet in the second year you begin to see that pick up.

Obviously, when we are the sole source provider for on SMV 100% goes through PayPal.

So that is usually the starting point is that 3 to 8% penetration rate.

With respect to the second part of your question as to the integration of shopping, rent, and now Skype in terms of the Pay Per Call, this is -- these acquisitions, particularly shopping has just closed, Skype has closed literally two days ago.

So work is continuing apace as we speak.

We will be absolutely working on shopping.com and the way we are going to look at this is sort of what are the quick things that we can do and try to get them done as soon as possible.

Things like Pay Per Call will take more time.

Pay Per Call is something that we had indicated when we acquired Skype as something that will be built out over the next several quarters, and so sometime next year is when you should start seeing some of that roll-out.

Next question?

We go to Steve Weinstein from Pacific Crest.

Thank you.

Just a couple of questions.

First, can you tell us just how much of the organic growth, if any, was in the international revenue?

And then looking at the PayPal metrics for, I guess transaction loss rate, it seems to me that it's kind of moved back to a normal rate from abnormally low last quarter, but I'm wondering if you think this is an appropriate rate to use for modeling going forward?

Sorry, Steve, could you repeat the second part of your question again?

Sure.

The transaction loss rate for PayPal, that you report, it was abnormally low in the June quarter.

Correct.

And it seems to be normalized now but I just want to make sure of that.

Sure.

Let me give you a little bit of -- sort of input to both of those.

So I think in regards to your first question, as far as the international business is going, yes, it is growing very fast and it is absolutely contributing to the overall growth rate of the business, but then so is PayPal, and so is the U.S. business.

So if you look at the overall organic growth rate in the business, which as I pointed out is about 33% in response to an earlier question, the sort of main components of this business are the marketplace business, including the U.S., which by the way is the single largest marketplace business that we have, followed closely by Germany.

Between the U.S. and Germany, these are our two largest businesses in the marketplace.

PayPal is a very big component of that, and obviously the largest business that PayPal has is in fact the U.S. business, and then third is the international.

So each of them contributing, all of them growing very, very well.

And I would actually say the organic growth rate for international as a percentage of the total is actually higher, because virtually none of the acquisitions were international in nature this year.

Each net is over a year old so that would be included in the international -- that would be included in the organic growth rate.

Shopping.com is largely domestic, rent.com is largely domestic, so virtually all of the international growth was organic.

Yes.

And with respect to the loss rate at PayPal, what we mentioned the last time is, PayPal is really very, very advanced in its fraud capability, in terms of its modeling and its understanding.

And frankly, prevention of that behavior, which results in loss reserves.

And so that number has been coming down pretty significantly.

And in June, we had seen, as you correctly pointed out, very low rates of the loss reserves that we had accrued for.

In Q3, what we had pointed out last quarter is that we were substantially upping the purchase protection that we were offering.

Not just in the United States but also in other places such as Germany, and so part of what has -- what you see over here is in fact the effect of that increased purchase protection that we're now offering to our buyers in multiple sites around the world.

Thank you.

And I think the other thing to know about that loss rate, Steve, is while we want to keep that number down low, there is -- the objective is not to drive it to zero, because if you drive it to zero, you actually drive trial away from PayPal.

So it is a finely tuned number that moves with decisions we make about buyer protection and about the number of new users and the ease with which they can get a PayPal account.

So I think this is probably a decent number to model going forward, but I will tell you it could be up or down based on what we decide to do around the screens of letting people in, and the buyer protection levels that we deploy in countries around the world.

We optimize it relative to overall volume growth.

Exactly.

Okay.

Thanks.

Thanks.

I think would he have time for maybe one more question.

And our last question comes from Imran Kahn from J.P. Morgan.

Yes, hi, Rajiv, a couple of questions.

First, I was wondering if you could talk, what is your foreign currency impact sequentially in the eBay international business?

And secondly, I was wondering, Meg, if you could talk about a couple of concerns that investors have in terms of Skype acquisitions that your planned revenue per minute will decline, and as the number of P to P users at Skype increases, it will decrease the usage level.

So I was wondering if those are true, if that is true, how do you try to drive the revenue growth, and if it is not true, why do you think it is not true?

Thanks.

Okay.

So let me take the foreign currency impact first.

We have actually -- this is a number that we keep a close eye on.

On a year-over-year basis, foreign countries really didn't have much of an effect this time around.

But on a -- on a foreign country basis, if you look at it for sequentially, it impacted our revenues by 15.5 million, on the revenue line.

And on the bottom line, negatively impacted us.

And on the bottom line, it impacted us by about $10 million.

With regard to Skype, so let me make a couple of comments.

One is, it is very clear that voice communications is moving on to the Internet.

And the marginal cost of voice transmission of the Internet actually is zero which I believe means that in the end, the price that anyone can provide for voice transmission on the net will trend towards zero.

Now, by the way I don't think that is going to happen in the next year or two years or even three years, but I do believe that your statement that actually the revenue per minute will go down over time.

And of course, as the P to P usage, as Skype users to Skype users go up, the percentage of users that you actually can charge for will also go down.

So I actually agree with that and we understood that during the -- when we looked at Skype.

Our belief is that the winner in this space will be those that have the largest ecosystem, and what I mean by that is, the largest number of registered users, the largest number of voice minutes, the largest number of developers who develop against the platform, the best product, and the best array of value-added services that users of a certain network are willing and want to pay for.

And we think that this -- that the way ultimately four or five, six years from now, maybe it will be a little sooner, is that the value-added services will be the way that Skype and many other of these providers are monetized.

And we think we have a huge lead in that regard.

One of the things we understand now better than ever is how far ahead Skype is in users, in usage minutes, and in the product capability that Skype brings to market, and the size of the ecosystem.

The hardware ecosystem, the developer ecosystem, the buildout of the APIs.

So we subscribe to your thesis.

I don't think it is this year or next year, but I believe the ultimate monetization method of voice communications on the net changes from a revenue per minute to -- based on the size of the ecosystem.

Thank you.

Thank you.

Thank you for joining us today.

And we'll look forward to seeing you soon.

That does conclude today's conference.

Everyone have a great day.