eBay Inc (EBAY) 2005 Q4 法說會逐字稿

Good day, everyone, and welcome to eBay's fourth 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, the Chief Financial Officer, Mr. Rajiv Dutta, and the Investor Relations Director, Ms. Lydia Ventura.

At this time, I would like to turn the call over to Ms. Lydia Ventura.

Please go ahead, ma'am.

Good afternoon.

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

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 reconciliation of these measures to GAAP measures in the tables of our earnings press 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 enterprise 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 off-line; the need to integrate, manage, and profitably expand newly acquired businesses, including Skype, the payment gateway business acquired from VeriSign, and shopping.com; the regulatory and competitive risks specific to Skype; the litigation regulatory credit card association and other risks specific to PayPal, especially 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 an 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 merchandise and sellers; assumptions and methods used to value and expense stock options provided to employees; 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 conditions," 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.

And now over to Meg.

Thank you, Lydia.

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

Q4 was an outstanding quarter for eBay, with strong growth and excellent momentum across the board. eBay added 12.5 million new users and generated record growth merchandise volume of $12 billion.

PayPal added nearly 10 million new accounts, and delivered a record 8.1 billion in total payment volume.

Skype and Shopping.com, the newest additions to our Company, also had record growth this quarter.

As a result, the Company delivered record net revenues of 1.3 billion in Q4, up 20% sequentially and 42% year-over-year.

These results capped off a truly remarkable year for the Company.

At our analyst conference in February, we laid out strategies for growing each of our businesses, and those strategies worked.

We achieved accelerating growth in our 2 largest eBay marketplaces, the U.S. and Germany, and in many of our other international sites as well.

We grew PayPal's eBay business around the world, and expanded its business off eBay.

And we broadened our vision for bringing people together to meet, talk, buy and sell, which led to the acquisition of new businesses, such as Skype.

These efforts allowed us to deliver outstanding results for the full year.

In 2005, the eBay community generated $44.3 billion in GMV, up 30% from the full year 2004.

PayPal added 32 million new accounts, an increase of 51% from the prior year, and the Company's net revenue for 2005 jumped 39% from the full year 2004.

2005 was eBay's 10th anniversary, and our eighth year as a public company.

In just a few short years, eBay has become an important part of people's lives.

Millions of people have turned to eBay, changing the way goods are bought and sold around the world.

And hundreds of thousands of entrepreneurs have discovered economic opportunity on eBay.

Online payments have revolutionized e-commerce, and now voice on the net is bringing people closer together.

These trends have fueled the growth of our business, allowing us to consistently generate strong results for our shareholders.

In fact, on a compound annual growth rate since 1998, our revenues have grown 76%, while our pro forma EPS has jumped 75%.

Few 10-year-old companies have delivered these kinds of results.

eBay's success has been a journey of discovery and innovation.

In the beginning, our business consisted only of the eBay marketplace. 4 years ago, we added PayPal which has been extraordinary successful.

And last year we launched Kajiji, our international classifieds platform, and acquired several new companies, including Skype, Shopping.com, and Rent.com.

Today, I believe we have the best e-commerce portfolio in the world.

Our journey has paid off in ways no one could have imagined 10 years ago.

Now, before Rajiv discusses our financial results for Q4, I'd like to spend a few minutes talking about the achievements of the 3 key businesses in our portfolio, the eBay marketplaces, PayPal, and Skype. eBay continues to be our largest growth engine, in Q4 delivering accelerating transaction revenue book growth, on both a sequential and a year-over-year basis.

As I mentioned earlier, in February we laid out our strategy for driving eBay's growth through 2005.

We consistently focused on increasing the value of the marketplace for our users by investing in marketing and product innovation and connecting with our community of users.

These efforts fueled the continuing momentum we saw in Q4, especially in the U.S. and Germany.

In the U.S., holiday shopping on eBay.com was strong, powered by marketing that brought more buyers to the site, and encouraged them to shop in more categories.

Our humorous "it" television campaign was very popular.

Early data shows that the ads achieved high awareness and boosted purchase intent among online shoppers.

In fact, holiday traffic on eBay.com was at an all-time high in Q4.

At peak daily usage, the site enabled more than a billion page views, and 660 million searches.

According to Nielsen/NetRatings, eBay.com was once again the most visited e-commerce website during the holiday season.

We saw particular strength in the entertainment, sports, and toy categories, each of which demonstrated accelerating year-over-year GMV growth, reflecting larger holiday shopping trends.

And as in past years, the scarcity of hot items, this year the Xbox 360 and the iPod, helped drive traffic and bids on the site.

We also saw accelerating GMV growth in categories not typically associated with the holiday shopping season, such as collectibles, health and beauty, and event tickets.

And fixed price trading reached record levels, accounting for 34% of GMV in Q4, up from 31% in the quarter a year ago.

And product innovation helped make it easier for sellers to sell, and buyers to shop.

For example, in November we launched eBay marketplace research, a tool that helps sellers analyze sales in categories across the site.

And the enhancements we made to eBay's store throughout the year, gave sellers more flexibility in managing and marketing their listings.

As a result, we exited the year with a record 212,000 stores in the United States, a 34% increase from Q4 of last year.

We now have 383,000 stores worldwide.

For buyers, we launched Reviews and Guides to help shoppers make more informed choices.

And currently in the works, is eBay Express, a new feature that will give shoppers a quick and easy way to find items at a fixed price for convenience oriented buying.

As trade on the site evolves, we will continue to innovate to help our buyers and sellers become even more successful.

Trends were similarly strong for eBay sites around the world. eBay Germany, in particular, had a great Q4, delivering another quarter of accelerating GMV and transaction revenue growth on a local currency basis.

This growth resulted from higher return efforts begun earlier in the year, especially strong integrated marketing campaigns.

Through a smart mix of online and off-line marketing, plus creative merchandising and promotions, we were able to bring more buyers to our German sellers throughout Q4.

In the UK, we added more than a million new users, and those users were more active than ever, contributing to strong conversion rates and GMV growth. eBay France also had a strong quarter, with record new users and GMV.

And eBay Italy, which now has nearly 3 million users, again delivered triple-digit year-over-year GMV growth in Q4.

While holiday shopping is not as strong in Asia Pacific, our marketplaces there also showed healthy growth in Q4.

Internet Auction Company, our business in Korea, continues to grow faster than e-commerce, delivering strong GMV and revenue growth in Q4.

And eBay Australia delivered 78% year-over-year GMV growth in the quarter, with record new users and listings.

Despite the competitive landscape in China, eBay Eachnet added a record 2.8 million new users in Q4, bringing the total to 17.9 million users.

Listings and bids also grew sequentially, and conversion rates remained strong, driving accelerating year-over-year GMV growth. eBay continues to be the online marketplace for serious buyers and sellers in China.

With superior trust and safety systems, we are uniquely positioned to capture China's evolving e-commerce users.

Over the past 6 months, we have been experimenting with product and pricing changes to attract these users.

For example, last week we began integrating Skype into the eBay platform, enhancing online communication, which is such an important element of trading there.

Because Skype is so popular in China, now adding 39,000 new users a day, we have received incredibly positive feedback from the Chinese user community.

Tomorrow we will be requiring all sellers on eBay Eachnet to offer safe payment options on their listings.

The 2 options, PayPal and our local escrow service, have been very popular to date. 85% of listings in China offer 1 or both.

Given our deep expertise in safe trading, one of our competitive advantages, we can help buyers and sellers build a truly trusted online marketplace in China.

In return, we will waive all final value fees on eBay Eachnet.

We've tested this formula over the past few months with great success.

We're excited about these changes and the benefits they'll bring in building our business in China for the long-term.

In addition, our international classifieds business, Kajiji, continues to grow.

In the 10 months since its launch, Kajiji has become the number 1 global sea to sea classifieds platform, now serving more than 40 countries and 300 cities and regions around the world.

And finally, the strong holiday shopping season online was also good for Shopping.com, which had its busiest holiday season ever.

In November and December, Shopping.com experienced close to a 30% increase in traffic compared to the same period last year.

And shoppers purchased a wider range of products, adding home furnishings and clothing to the more traditional consumer electronics items.

Shopping.com's websites in the UK and France also did well, and in November we launched a new site in Germany, which has already nearly 3 million offerings.

The second business in our portfolio is PayPal.

When we acquired PayPal in 2001, we laid out a 3-phase strategy for growth.

First, PayPal focused on expanding its service among eBay users in the U.S.

Second, we began expanding PayPal to eBay's international sites.

And third, we started to build PayPal's business off eBay.

As a result of this very broad, addressable market, PayPal delivered outstanding results this quarter.

In Q4, total accounts (inaudible) percent year-over-year, and TPV by 45%.

And for the first time ever, PayPal's annual revenues surpassed $1 billion.

PayPal's international business also continues to see strong growth, demonstrating that its benefits translate well around the world.

By the end of Q4, PayPal's penetration of addressable GMV on eBay France had grown threefold since the launch of its local service 4 short quarters ago.

And its penetration on eBay Australia has grown at a similar rate.

Overall, global TPV on EBay grew 40% year-over-year.

And PayPal's Merchant Services business, that's payments off the EBay platform, continues its rapid expansion.

TPV for merchant services grew 56% year-over-year, its third consecutive quarter of acceleration, and we continue to sign new merchants every week.

In Q4, Dell, Tower Records, Sharper Image, ESPN, and the United Way, to name just a few, began offering PayPal on their websites.

And our new payment gateway business, which we acquired from VeriSign in November, is off to a great start.

We've already begun to jointly market our products to small and medium size merchants.

The newest business in our portfolio is, of course, Skype.

In Q4, Skype continued to roll out new product innovations to expand its service and add new users.

On December 1st, we launched Skype 2.0, which features integrated video calling and greater personalization.

In addition, we expanded the Skype ecosystem, working with some of the top names in consumer technology to create new ways to use the service, such as the world's first Skype-enabled wireless mobile telephone.

And Radio Shack became the first U.S. retailer to offer Skype products and software in its 3,500 stores nationwide.

Consumer response to all of this activity has been tremendous.

In Q4, Skype added an average of 190,000 new users a day, and exited the year with a total of 75 million users, up 38% since we announced the acquisition in September.

There are now more than 4.9 million concurrent users at peak periods on Skype.

We're also excited about the synergies between Skype and our other businesses.

You will see deeper integration of Skype with eBay and PayPal this year.

Already we are promoting Skype to users across all of our sites, and beginning integration with several of our eBay marketplaces, such as China, Taiwan, and Belgium.

As well as Marktplaats.nl, our classified website in the Netherlands.

We're gratified by the response we've got from our users, especially sellers, who have been very positive about Skype, and our planned pay-per-call offering.

Our plans for Skype are right on track, and we are more certain than ever that the combination of Skype, eBay, and PayPal will help define the future of e-commerce for merchants and consumers the world over.

Closing out our tenth year, we're at an exciting point in the Company's evolution.

Our portfolio of businesses is humming, and the synergies between eBay, PayPal and Skype are just beginning to take hold.

Not since Pierre Omidyar first coded the site 10 years ago, has there been so much promise in our future.

Working closely with our user communities, we are truly changing the way the world meets, talks, buys, and sells.

It's wonderful to be part of that.

I'm more confident than ever that the investments we've made will ensure a bright future for the Company and Internet users around the world.

The first 10 years were only the beginning.

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

Thanks, Meg.

Q4 was a very impressive holiday quarter for eBay, as the business performed strongly in all fronts, capping a resurgent 2005.

The strength of the quarter was underscored by accelerating year-over-year revenue growth rates on both a reported and organic basis. eBay's revenue growth accelerated in Q4, exceeding the top end of our guidance by $44 million on a reported basis, and $55 million on a foreign exchange neutral basis.

This revenue was driven by outstanding performance in our 2 largest markets, the U.S. and Germany, a great quarter from Shopping.com, accelerating payment volume growth in PayPal, and tremendous performance from Skype.

In short, every eBay business contributed to this quarter's spectacular results.

The strong revenue performance and continued operational efficiencies in our core businesses generated record pro forma operating profits and operating cash flows.

Pro forma operating income was approximately $43 million higher than our guidance had implied, and the pro forma EPS of $0.24 was $0.03 higher than our guidance.

Operating cash flow reached a record $526 million in the quarter.

These results made 2005 a truly remarkable year.

We demonstrated strong growth across all of our businesses, significantly strengthened our strategic positioning, and delivered outstanding financial performance.

We entered 2006 with an incredible portfolio of assets and significant momentum.

So let's discuss this quarter's financial performance in a bit more detail starting with the top line.

By all indications, the 2005 holiday season was very strong for e-commerce.

At eBay, integrated marketing campaigns, key business initiatives, and product innovations over the course of 2005, amplified this megatrend across each of our businesses.

As a result, the quarter saw terrific consumer engagement the across the board.

In the eBay marketplaces, shoppers flocked to eBay sites, delivering record visitors in our largest markets, U.S., Germany, and the UK. eBay confirmed registered users grew to 181 million worldwide, and active eBay users reached a record 72 million in Q4.

PayPal added a record number of new accounts in the quarter and ended the year with 96 million accounts worldwide, driven by very strong growth across all of our key markets.

And Skype added an average of over 190,000 new users per day, to end the year with a record 75 million registered users worldwide, representing 280% year-over-year growth.

This spectacular user growth in turn fueled record activity.

Collectively, these trends drove consolidated net revenues for eBay up $1,329,000,000, up 42% over the prior year, reflecting an acceleration from 37% in the prior quarter.

Excluding revenue from acquisitions within the past 12 months and normalizing for the impact of foreign currency translation, year-over-year growth accelerated to 34% from 32% last quarter.

Now taking a look at our 3 business units, eBay marketplaces, PayPal, and Skype.

First, with respect to the eBay marketplaces.

As Meg mentioned earlier, the business had a remarkably strong holiday shopping season. eBay listings reached a record 546 million listings in the quarter, representing an accelerating 35% year-over-year growth rate, which in turn drove eBay GMV up $12 billion.

Normalizing for the impact of foreign currency translation, GMV grew 26% over the year ago quarter.

On a local currency basis, GMV per active user increased in most of our key markets, further underscoring these trends at the holiday season.

In the U.S. marketplace, average daily unique visitors to eBay.com grew 32% year-over-year versus 27% in Q3.

And sellers in the U.S. posted over 261 million new listings, accounting for 25% year-over-year growth, an acceleration of 4 points versus last quarter.

As a result of the accelerating listings growth and higher ASPs, core year-over-year GMV growth, excluding motor vehicles, also accelerated.

On a category basis, we saw accelerating GMV growth rates in health and beauty, sports, toys, entertainment and tickets.

Motor vehicles sales, as expected, grew slower in Q4 due to normal seasonality, which was further accentuated by the timing of OEM incentives in the summer.

In the international marketplace, we saw strong growth across our key markets, notwithstanding the negative impact of foreign currency translation.

Once again, our German business put in a remarkable performance on several fronts.

Both buyer and seller activity levels were very strong through the holiday season, and listings topped the 100 million mark for the first time, driving another quarter of accelerating revenue and GMV growth rates on a local currency basis.

The UK achieved record reach and also posted very strong buyer and seller activation levels, which drove a significant lift in activity during the first 2 weeks of December, the peak holiday season.

On a local currency basis, France and Italy once again generated triple-digit GMV growth rates, and in fact, just this quarter, France passed the 5 million registered user mark.

Korea, now with more than 15 million users, continued to generate strong GMV growth, and in China GMV year-over-year growth rates accelerated for the third consecutive quarter.

In 2006 we will continue to execute against the 3 drivers of our Q4 success: marketing, business initiative, and product innovation.

Earlier today, we announced the modification of the U.S. fee structure, with a number of insertion fee decreases and feature discounts, all with a focus on ensuring the vibrancy of the marketplace and the success of eBay's community of buyers and sellers.

At the same time, we laid out some of the exciting new business initiatives and product innovations that will be launched in the next few months, including sustained investment in both online and off-line marketing, product enhancements in eBay stores, and the launch of eBay Express.

In addition, we will be increasing the exposures of sellers store inventory listings and core search at no additional cost.

Cumulatively, we expect that these changes will significantly enhance the eBay value proposition and do not expect any change to overall take rates.

We are very excited about the impact that these initiatives will have in 2006.

Shopping.com also had an outstanding Q4, remaining the leading online comparison shopping site with 50 million unique visitors worldwide in December, and it was a top destination for shoppers seeking the season's hot products.

As a result of the strong holiday season, Shopping.com generated over $51 million of revenue, outperformed our Q4 guidance by over $16 million, and exceeded the top end of the full year guidance range that Shopping.com management had provided at the beginning of 2005.

Turning to our payments business, PayPal delivered excellent results once again.

Strong account growth, combined with record levels of addressable GMV, strong penetration gains in our key markets, and another quarter of accelerating growth in merchant services, drove total payment volume of $8.1 billion.

This represented accelerating year-over-year growth of 45%.

The tremendous holiday performance in our eBay markets drove record addressable GMV.

Penetration rates increased to 77.5% in the U.S., up almost 1 point sequentially, and to 68.9% in the UK, up over 2 points sequentially.

Globally, 111 million eBay transactions were completed with PayPal in Q4.

In the UK alone, nearly 3 of every 4 items sold was settled with PayPal in Q4.

Merchant services continues its impressive growth trajectory, posting its third consecutive quarter of accelerating total payment volume growth, with $2.5 billion in Q4, or 56 percent year-over-year growth.

Our merchant services business was further strengthened by the acquisition of VeriSign's payment gateway business on November 18th, which contributed $6 million of revenue in Q4.

Together these trends drove record net revenues of $304 million, a 48% increase from the year ago period, and a 4 point acceleration from last quarter.

PayPal finished 2005 with over $1 billion of revenue, representing 47% growth versus 2004.

Last our newest business, Skype, had a very strong Q4, continuing its rapid growth.

User acquisitions remained incredibly strong, and these new users continue to find the service engaging, which led to record peak concurrent users of 4.9 million earlier this week.

In q4, Skype delivered $25 million of revenue, or $5 million higher than our guidance.

As a result, Skype handily exceeded its 2005 revenue goal of $60 million for the full year that we had indicated when we announced the acquisition.

As we work on our product road map, and the opportunities for integration with eBay and PayPal, our enthusiasm and confidence in Skype's potential has only increased.

Turning back to the P&L, now let's take a look at how these revenues translate into profits and cash flows.

Revenues, that were $44 million above the high end of our guidance, together with continued operational efficiencies, led to a $43 million outperformance on the pro forma operating income line versus our previous guidance.

Looking at each of the components of the pro forma P&L in a little more detail, eBay's gross margin in Q4 was 82%, consistent with Q3, reflecting operational efficiencies in the eBay platform, offset by the mixed impact of PayPal and now for the first time, Skype.

Sales and marketing expense in Q4 was 28% of revenue, up from 27% in Q3, due to the launch of our holiday television campaign, and the first full quarter of Shopping.com results, but down 1 percentage point from Q4 2004, driven by optimization of our marketing mix and increased focus on online marketing efficiency.

Product development spending in Q4 represented 7% of revenue, consistent with Q3, reflecting continued investment in product development capacity in both PayPal and the eBay marketplaces.

General and administrative expenses in Q4 represented 13% of revenues, also consistent with Q3, reflecting efficient scaling of our administrative expenses, offset by continued investment in consumer protection programs and seasonal increases in PayPal's transaction loss rates.

As a result, pro forma operating income grew 43% year-over-year to $448 million, representing a pro forma operating margin of 34%.

Consolidated pro forma net income in Q4 totaled $340 million, representing 50% year-over-year growth, and pro forma EPS with $0.24 per share, approximately $0.03 above our guidance.

Excluding the impact of Skype, Q4 pro forma EPS grew 52% over the prior year.

Operating cash flows in Q4 reached a record $526 million.

For the full year 2005, eBay generated an impressive $2 billion of operating cash flow, representing 56% year-over-year growth, and almost $1.6 billion of free cash flow, 59% growth versus last year.

In sum, Q4 was an outstanding quarter for eBay and a successful end to another great year.

We finished 2005 with strong performances from every eBay business, and strong momentum going into 2006.

Now let me turn to our guidance.

The earlier results for Q1 indicate strength across every eBay business.

The momentum from 2005 has continued.

The business is on track to achieve our internal targets and we are excited about the new initiatives and investments being launched this quarter.

For the full year 2006, we continue to expect consolidated net revenue to range from 5.7 billion to $5.9 billion, which includes approximately $200 million for Skype.

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.

Consolidated GAAP diluted EPS is expected to range from $0.65 to $0.71, which includes a $0.12 dilution for Skype and a $0.16 to $0.17 dilution from the impact of the new stock option expensing rules which took effect on January 1, 2006.

This guidance assumes a U.S. dollar-Euro exchange rate of $1.20 for the full year.

With respect to Q1, we expect net revenues to be in the range of $1,365,000,000 to 1.38 billion.

Furthermore, we expect consolidated Q1 pro forma diluted EPS to range from $0.22 to $0.23 and GAAP diluted EPS to range from $0.14 to $0.15, once again reflecting the impact of both Skype and the new stock option expensing rules.

To understand this guidance on the heels of a very strong Q4, it is important to understand that, as we have expanded our portfolio of assets with new businesses such as Shopping.com and PayPal Merchant Services, and as online consumer shopping becomes more mainstream, we have seen a shift in our traditional seasonal pattern.

While our guidance reflects a strong Q1, we do not expect the same sequential growth in the first quarter as we have seen historically.

Our full year guidance similarly implies strong sequential growth in the second half of this year to reflect the shifting seasonality.

For the full year 2006, we continue to expect a 35% pro forma operating margin excluding Skype, roughly flat for 2005.

This reflects strong investment in the first half of the year, related to the integration of our new businesses and continued expansion in PayPal Merchant Services, leveraging VeriSign's gateway business.

In addition, this guidance reflects changes in the Company's overall business mix, with significantly faster growth coming from Skype, PayPal, and new businesses that account for key investments in 2006.

Including Skype, pro forma operating margin is expected to be 33%.

As we reflect back over the last 12 months, we are extremely proud of our accomplishments.

We took actions that led to accelerating growth rates in our 2 largest marketplaces, the U.S. and Germany, delivered over $1 billion of revenue at PayPal, and significantly strengthened our business portfolio with the acquisitions of Skype and Shopping.com and the launch of our classified business.

Today, we are the leader in e-commerce, online payments, and online communications.

We end 2005 even stronger than we started, and enter the new year with significant momentum across all of our businesses for a sustained long-term growth.

Thanks, and now we'd be pleased to answer your questions.

Operator?

Thank you. [OPERATOR INSTRUCTIONS] Mary Meeker, Morgan Stanley.

It's Brian Pitz for Mary.

How are you guys?

Great quarter.

Can you quantify what was fundamentally different this holiday season versus last holiday season?

I know you had clearly some issues in the back half of the quarter.

What did you learn from last year?

Was it driven by the investments?

And then maybe as a second part to that, you could talk in a little more detail about the investments in the U.S. and Germany.

What was specifically working to drive growth for you?

Thanks.

Sure.

I'll take that.

I mean, I would broadly characterize our initiatives into 3 buckets.

More effective marketing, excellent business initiatives, and product innovation.

This is a very young and responsive business.

We make small changes, and what we have learned is that we can generate significant changes in trajectory.

So if I sat this on eBay U.S. and eBay Germany, I would say that largely the formula was the same.

That, first of all, we changed the balance between off-line and online marketing, and improved our ability to optimize natural search and optimize paid search.

We also did, I think, a better job in both countries of an integrated marketing campaign.

And in the United States with a particularly effective message in the "it" campaign.

And then we also did initiatives in trust and safety, in customer support, in seller on-ramps, as well as product innovation.

Small changes that basically made it easier for buyers to buy and sellers to sell.

So it was a whole host of things, but if I had to point to 1 thing I would say, a better balance of off-line and online marketing and integrated marketing.

Great.

Thanks.

Thank you.

Next question?

Mark Rowan, Prudential.

Thank you, and congratulations.

My first question is to Rajiv.

And it basically is the relationship between listings, gross merchandise volume and transaction revenue.

And the relationship between those seems to have been moving around a lot for the last few quarters.

So if I look at your listings, which were up 35%, and even if I X out stores, it was up 28%, it only generated gross merchandise volume of 22%.

And I know you said FX was a part of that.

But on gross merchandise, volume per listing was down 9% year-over-year.

And yet, despite that, you got 37% transaction revenue growth or even, if I X out Shopping.com, 30%.

So I was wondering if you could comment about the relationship between the 2.

I mean, is the reason gross merchandise volume so much lower than listings growth because ASP and success rate are falling?

Sure.

Mark, let me take that question.

So, as I said in my prepared comments, the underlying metrics of the business in the U.S., and actually around the world, was very, very strong and robust.

The GMV growth rate, as I pointed out, was lower than the revenue growth rate, and this is in part due to 2 things.

One -- and this accounts for almost 4 or 5 percentage points of differential in growth rate, is foreign exchange.

So particularly when you look at our currency translation on a year-over-year basis, the GMV is impacted by the fact that currency worked against us.

The second major component that accounts for almost an equal impact to foreign exchange, is motor vehicles.

Motor vehicles always has a seasonal down tick in Q4.

This quarter, we believe that this was actually further accentuated by the fact that there was some very strong OEM incentives in the middle part of this year, that may have actually pulled up some sales.

When you look at the GMV growth rates -- actually when you look at the GMV excluding motor vehicles, and normalizing for foreign exchange, there is no difference in the relative patterns between GMV growth rates and the rest of the business, including listings.

Now, I'll just add a couple of more points with respect to some of the things that influences the relative metrics.

One is Q4 seasonally is a period of greater promotional activity, so we definitely do see greater listings activity in Q4.

This is true in Germany, and this is true around the world in Q4.

This quarter was not that different.

And the 1 other thing I'd point to, if you're looking at overall revenue, don't forget that revenue now includes Shopping.com, which was $50 million, so you have to normalize for Shopping.com as well.

Okay.

And to your particular point -- I'm sorry, if I may add, ASPs actually were very strong and robust, conversion rates very strong and robust, and also be mindful of stores versus nonstore listings.

Okay.

Second, the fee changes you announced today, can you give us a sense on the final value fees, of how much that changes your take rate going forward, once those are instituted?

Sure, Mark.

So, let me just anchor pricing discussions in what we always have said and remains true, which is we try to manage the health and vibrancy of the market.

And the pricing changes that we make always have a first eye on how is this helping conversion rates and the health and vibrancy of the overall market?

So we had a number of decreases.

We decreased insertion fees.

These are all U.S. change rates changes by the way.

We will be announcing some international changes later on in the quarter.

But in the U.S., we decreased insertion fees in the first traunch from $0.25 down to $0.20.

And then did some bundling of feature fees, like gallery, subtitles, listing designers.

You can get all 3 for $0.65, which is actually a 32 % discount.

Picture show is now for free.

Sales report plus is for free.

And we discounted pricing on picture manager and actually increased the storage limits.

The 1, and only 1 price increase we took, was at the back end.

We increased the final value fee in the middle traunch from 2.75% to 3%.

And then added some value in terms of putting SIF into general search, Stores Inventory Format into general search, as well as offering eBay Express for no incremental cost.

And we also believe we're going to be able to continue to drive record levels of traffic to eBay, even as the complexity of buying keywords continues to increase.

So net, net, net, we think we're increasing the value proposition for sellers, and when you add it altogether, at least right now, we don't see the take rate will be influenced really one way or another.

At the end of the year on the eBay marketplace, when you take our revenues divided by GMV, we think the take rate will be roughly the same, given all these different changes.

We would add that we do expect this to be accretive, broadly speaking, to revenue.

Because what we expect it to be, is driven by increased volume as our sellers get greater success, as they utilize features that we know are incredibly successful in conversion rates -- in helping conversion rates.

Okay.

Great.

Thank you.

Imran Kahn, JPMorgan.

Hi, Meg and Rajiv, good quarter.

A couple of questions.

First, Meg, during the Skype acquisition, you talked about pay-per-call model.

I was wondering if you could share what kind of -- if you have any update in terms of integrating Skype with your classified listing, or with the main platform listing?

And secondly, moving on to Rajiv.

Rajiv, I know you talked about that you have different kind of businesses and they have different kind of seasonality.

But if we just purely look at the listing growth sequential from Q4 to Q1, should we expect to see same kind of seasonality that we saw over the last 2 to 3 years from Q4 to Q1?

Thanks.

So, let me take the first question on Skype integration.

So we did the first thing, which was heavy cross marketing with both the eBay marketplaces as well as PayPal.

We had on-site marketing on most eBay property home pages, PayPal, classifieds.

We have a Skype hub page on both eBay and PayPal.

And did a fun thing where we distributed Skype headsets to all eBay power sellers and Shopping.com merchants with a tremendous response.

We now move on to the next section, which is deep integration into the marketplaces and the development of the pay-per-call model.

So those projects are on the product road map.

We anticipate through 2006 you will see those integrated, pay-per-call, as well as integrated into our classified section, and stay tuned.

We typically won't announce it until right before we launch it.

With respect to your question on listings.

As I've said many times in answer to questions on listings, I don't particularly track listings.

There's a number of things that we would be doing no different from previous quarters.

As you're looking at overall sequential growth rates for the business, be mindful of obviously the fact that shopping has a sequential down tick in Q1, which is the norm for Shopping.com.

PayPal Merchant Services is also now much more holiday season dependent, as is the overall eBay business, because it's sort of really driven by holiday seasonal shopping, sort of as more mainstream consumers come online.

Looking at sort of just listings, if you look from either the U.S. business or the international business, I don't expect to see a significantly different trajectory.

That said, listings, as I've said numerous times, is not a perfect measure for understanding what's happening to our line revenue.

1 last housekeeping questions.

Did you break down the GMV numbers between U.S. and international?

Thank you.

No, we did not.

Okay.

Will you share that or -- ?

Yes, I mean, the GMV growth rates for international very closely track the revenue growth rates.

So if you think about sort of how that would break down between revenue and GMV growth rates, it's very consistent.

Keep in mind that all of the foreign exchange effect obviously related to the international GMV growth.

Great.

Thank you very much for the time.

Appreciate that.

Scott Devitt, Stifel Nicolaus.

Hi, Meg and Rajiv.

Thank you. 2 questions.

First related to autos, what should we look for in terms of reacceleration of that?

Is it solely OEM incentives, or would there be any other driver there?

And then separately, free cash flow in 2005 was 145% of net income.

I'm wondering if you could give some guidance as to how we should think about that ratio going forward, either as a percentage of net income or as a percentage of operating income.

And finally, what your CapEx estimate is for '06.

Thanks.

With regard to autos.

First of all, in Q2 and Q3, that is historically the stronger period for autos, so we would expect a reacceleration, especially in the United States and Germany and the UK in those 2 quarters.

And we also have a number of product innovations that you'll see hit the site in the summertime.

So, I'm not worried about autos.

We had anticipated a slowdown, and we anticipate a reacceleration in Q2, Q3 on the heels of the product innovation, and seasonally a bit stronger.

With respect to cash flow and free cash flow, there's nothing in the business model that is fundamentally changing.

The cash flow generation capability of the business.

So I'd expect it to, in many ways, mirror the profitability of the business, as it has in years and quarters previous.

The CapEx we expect to be as a percent of revenue, broadly consistent with what we had in 2005, which was right at about 7% revenue.

So that would make our CapEx range for 2006 somewhere between 400 and $420 million.

But this is a very strong cash producing business, and we expect it to continue to be that way.

And the other thing, Scott, that you might remember about Skype, is Skype is even less capital intensive than eBay.

And the total CapEx budget for Skype in 2006 is 2 to $3 million.

Thank you.

So Skype is not going to drive our CapEx expenditure.

Mark Mahaney, Citigroup.

Thank you. 2 quick questions. 1, any update on the CFO search?

And secondly, just to pin down on guidance a little bit.

You clearly had outperformance in the quarter, I think, versus the midpoint of your revenue guidance.

You're up something like 64 million, 65 million.

Yet you're not changing your revenue guidance for '06.

Is there something you're seeing that makes you incrementally more cautious about '06, given the outperformance in the December quarter?

Thank you.

With regard to the CFO search, we have interviewed a number of candidates.

And I must say, Rajiv's shoes are hard to fill.

But we are down to a very short list of finalist candidates, and we are really feeling good about the short list and should bring that to closure in the next several weeks.

And, Mark, I ask Meg that same question every day.

But I am very much sort of focused on being here, through getting the next CFO onboard, and making sure that we have an appropriate transition.

So I think with respect to your second question in terms of guidance, I was waiting how long into the Q&A before that question comes up.

So here's the couple of headline points I'd make.

We have a very bullish outlook on the business.

This business is doing very strong, and in fact I made particular note to point out that, as we look at the first couple of weeks of January, we are seeing some very good and very strong trends.

Really confirming to us that the momentum we've seen in Q4 and in 2005, is continuing into 2006.

There is the caveat that I had pointed out which relates to the seasonality of the business, because we now have some fairly large components in terms of the mix, that are more Q4 dependent.

So to the question as to how does this translate into 2006, the way we are looking at this is that we have a number of new businesses, and a number of new business initiatives, that are critical to success in 2006.

And what we'd like to do is to get some more visibility into how those are performing before we update guidance for you again.

It's a pretty transparent business.

As we go through the quarters, we will share this with you.

Great.

Thank you very much.

Robert Peck, Bear Stearns.

Hey, guys.

Congratulations.

I just wanted to touch on a couple quick points. 1, Meg, could you give us your thoughts on the GMV effect going forward?

Not in the near term, but maybe the long-term on Google Base and Freemont?

And number 2, could you also touch base on maybe some more specifics of PayPal and Eachnet in China?

Number of CRUs, active users, GMV, that type of stuff?

Sure.

So let me talk a little bit about Google Base and Freemont, which I guess is called something else now other than Freemont, but it's the Microsoft product.

We are focused -- and I'm very glad we started this initiative well over a year ago, because we have staked out the leading sea to sea local classified business as I mentioned in 40 countries and over 300 cities.

And we believe that this does have increasing returns on a local basis.

So we're really pleased with where we are, and we're really excited about the fundamental underlying technology platform.

That said, we're going to keep an eye on Google Base.

We're going to keep an eye on Microsoft's classified efforts.

And the thing you also have to remember is we have the ability to leverage the eBay platform in every major country.

We have a leading position across the world, and we can leverage eBay traffic.

And focus actually matters.

We are number 1 in e-commerce.

I think we know more about these businesses than anyone else, and we really hope that's going to stand us in good stead.

So, with regard to the GMV effect, I don't think -- it's hard for us to predict.

And we hope our classified business is going to grow fast.

And of course that doesn't have a GMV component to it.

Exactly.

The GMV is going to be a slightly over time, a less relevant metric, because we have lot of businesses where there is no GMV number.

For example, Shopping.com, classifieds, Rent.com, et cetera.

With regard to China, we are excited about China.

We have just had our third quarter of accelerating GMV growth rate.

We've seen some very positive impact of some previous price changes.

Skype was received with huge enthusiasm by our Chinese community, and the mandatory safe pay, I think leads to greatly enhanced trust and safety, which is a critical decision point for Chinese users.

So the business is strengthening.

We have a great team there.

And actually, on the eBay side, we just hired a new country manager by the name of Martin Wu, who's up and running and off to a good start.

PayPal has good penetration on eBay.

Kajiji is doing very, very well in China.

And then of course, we now have Skype in China in a joint venture with TOM Online.

So, we've got 4 businesses in China, all of which have synergy with one another.

So, you know what?

We are here for the long haul.

This is a long-term perspective, as we've said, for a long time.

And we're really excited about the momentum we've seen in the last 3 quarters.

Thanks, Meg.

Congratulations.

Thank you.

Anthony Noto, Goldman Sachs.

Rajiv, given your comments about guidance and your covert comment that we can see the business is pretty transparent, which I interpret as conservative, I just wanted to nail down some of the organic growth rates for the fourth quarter so we can really assess how conservative this is.

By my estimates, fourth quarter domestic organic revenue growth was roughly 26 to 28% and international organic growth rate excluding FX, was roughly 46 to 48%.

I was wondering if you could confirm those numbers just so we can back out some of these seasonal businesses that you're pointing to, given that listings were up 10% sequentially quarter to date already.

And then Meg, you had mentioned pay-per-call.

I was wondering if you could comment on, will we see in 2006 pay-per-call integrated into eBay U.S. from the standpoint of sponsored listings against keyword searches, as well as potentially a launch of 1 or 2 categories that are just pay-per-call, not a listing fee or final value fee?

Do you have any early testing on the vibrancy of that opportunity?

Thanks.

So, Anthony, with respect to your first several set of questions that all speak to sort of your estimates on growth rates.

Looking at organic growth rates, domestic 26 to 28, international 46 to 48, those are broadly speaking, accurate.

That is very consistent with what the growth rates were when you normalize for foreign exchange and when you normalize for the acquisitions.

And just sorry, those both were faster than Q3, was the other thing I forgot to ask.

Yes.

Absolutely.

The thing that I think gave us particular pleasure and sort of looking at the Q4 results is organic acceleration.

Whether we are looking at the eBay businesses or we're looking at the PayPal business or we're looking at some of the newer acquisitions, that all performed really well.

Thanks, Rajiv.

Anthony, with regard to your question around pay-per-call and whether it to be integrated into eBay U.S., and whether we will launch new categories that are only pay-per-lead, you'll recall when we announced the Skype acquisition, we laid out those plans.

We're committed to those plans.

The timing in the markets in which we launch, we haven't announced yet, but we remain committed to those plans.

So stay tuned.

We can't really say more about it right this very minute.

Meg, how about just sponsored listings on keyword searches within the core business today?

In the U.S.

Is that something we could see in '06?

Stay tuned.

We will keep you appraised.

This is a very competitive market, Anthony, and I just want to make sure we don't get out ahead of ourselves.

Got you.

Thank you very much.

Jeetil Patel, Deutsche Bank.

Couple of questions, kind of looking at the PayPal business.

I guess the search business seems to be rather intriguing out there in the world.

And I guess you look at the payment systems being used on the retail or merchant side on those clicks being generated.

Is there an opportunity to maybe partner with some of the search companies, or 1 of them, to basically integrate your payment system, known as PayPal, with their marketing and distribution capabilities?

And then secondly, on just the overall GMV growth rates, can you just characterize, as you look at the 22%, 26% foreign exchange adjusted GMV growth for the fourth quarter, how do you think you stacked up in some of the bigger regions like Germany, UK, and the U.S. on a GMV growth basis relative to the broader industry growth rates?

Do you think you grew with the market?

Faster, in line, below?

Can you just give us characterization there?

Thank you.

With regard to PayPal, let me step back a little bit, and remind you that the vision for PayPal is to become the global online payment standard.

And that can mean me buying something from you or from a large business.

It can mean people paying each other on a person to person basis.

And it can also mean payments that are buying micropayments, content on the web, as well as enhancing the ability of keyword buyers to pay big search engines.

So, we are open to partnering with anyone, as long as it furthers the strategic objective of PayPal and continues to build the PayPal brand.

So, we're open to it.

There's a number of discussions that happen from time to time, but again we are very serious about making sure that PayPal fulfills its destiny of being the online global standard.

Sure.

And with respect to the second part of your question, that related to GMV growth rate for eBay versus the overall industry.

I think the first thing I'd point to is the statement that Meg made earlier, which is the eBay business is now composed of more than just GMV growth.

So when you look at things such as Shopping.com and our classifieds business, it's a little difficult to characterize how those are doing, relative to what's happening to the overall industry.

But as we look at the quarter in Q4 in particular, we look at the same data that you do.

We have not seen much industry specific data for Q4 in the U.S., Germany, and the UK.

I can tell you that just from our experience looking at these businesses and how they have done, we are very pleased with our growth in each of these markets.

We wait and see how that stacks up relative to e-commerce growth.

And I think across the board, these businesses actually continue to accelerate and do really well.

And as we told our analysts at analyst day in February, our objective is to grow our marketplaces faster than e-commerce.

Will that happen every quarter in every market?

I can't stay definitely yes or definitely no.

But the long-term objective is to continue to grow faster than e-commerce in every market in the world in which we do business.

Paul Keung, CIBC.

Thanks for taking my questions.

First question, I know you talked a little before, but more detail on PayPal.

What was the growth of PayPal if we take out the VeriSign acquisition?

What's the organic growth of your merchant services?

Should we expect acceleration in merchant services as part of of your '06 outlook?

VeriSign as we actually called out, only accounted for about $6 million of revenue in Q4.

So if you strip that out, I think merchant services is just over 50, 51% growth on a year-over-year basis and still accelerating.

And PayPal overall, accelerating even excluding the VeriSign gateway business.

So the gateway business actually did not add that much to PayPal's growth rate in Q4.

It was $6 million.

And so how should we think about that in '06, then is really more my question?

I see.

You should continue to look for very strong growth rates in merchant services.

We're at the beginning, I believe, of the merchant services growth rate.

And that is continuing expansion internationally.

We have just begun the merchant services program outside the United States, and it's really only begun in the UK.

So we've got international there.

We've got monetization opportunities there.

Website Payments Pro, which is our new small merchant, off eBay product, again is really largely a U.S. product today.

We have lots of opportunity to expand that internationally.

And then the VeriSign payments gateway business and our ability to integrate that and actually take all those small merchants, and encourage them to go to an all in one solution on PayPal, that is actually the huge objective for 2006.

And it's one of the reasons that we haven't taken up guidance, is we really want to see how that works.

We want to see what the upside is in that.

And we'll give you an update at the end of Q1 and the end of Q2 about how that's going.

But for PayPal, that's one of the bigger swing factors, is what the take-up is of the VeriSign payments gateway.

Okay.

That makes sense.

The second question was on Skype.

This is an easy question.

Both your businesses obviously exceeded expectation in the quarter.

I understand the desire you mentioned earlier, to be conservative.

I know that business has sort of come along before you take a look again at your outlook.

But is it safe to say, given that what these businesses are, that you actually have exceeded your forecast from where you thought they would be doing 90 days ago?

Absolutely.

I mean, as I think I pointed out, Skype has exceeded our expectations.

Both on revenues and users per day.

Okay.

So that's a trend for '06.

So if we were to make a different assumption on that, then you have obviously estimates above that given what we saw in the fourth quarter.

Correct?

You know, that I will leave to you, as its sort of forward looking.

Just trying to make sense of it.

Thanks a lot.

Terrific.

I think we have time for just 1 more question, please.

Heath Terry, Credit Suisse.

Great.

Thank you.

I was wondering if you'd just talk a little about the impact of the eBay Express launch on your plans for Shopping.com.

Should we expect at some point for Shopping.com to be more integrated into eBay Express in much the same way that you've done with half over the years?

And then when PayPal merchant services was in beta, you talked about the percentage of PayPal transactions that were going over the site, having passed some level that put you past American Express in terms of the percentage of transactions.

Is there anything like that that you can talk about with the new partners like Dell, that you've had in the fourth quarter?

Okay.

So let me take the question about eBay Express and Shopping.com.

We don't actually foresee -- at least in the next couple of years, an integration of the Shopping.com site and the eBay.com site and eBay Express. eBay Express is actually a new way to shop on eBay.

It leverages Shopping.com technology in terms of the catalogs, and it's really the first implementation of our new enhanced searching and finding technology, which we refer to Magellan, as in the past, and it has some really fun features, like a shopping cart for multiple sellers.

So I could buy items from 4 sellers, put them all in the cart, and check out all at once.

But fundamentally, the inventory is inventory on eBay that has been aggregated for convenience-oriented occasions.

And that is all fixed price, largely new and in season, with the ability to check out really fast using PayPal.

Shopping.com of course, is a shopping comparison site that's primarily used by large retailers to drive new customers to their products.

So the similarities are fixed price and new in season, and -- but the rest of the site is really quite different.

And we like having these 2 assets in our portfolio because we think they target different customers and different customer shopping occasions.

So don't look for an integration, at least in the next several years.

And with respect to the second part of your question on PayPal, and it's takeup with larger merchants and in particular Dell.

We are really pleased.

This is very early, but we have had very good takeup of PayPal, in terms of the number of transactions being processed by Dell.

It's growing very fast.

When you look at merchant services more broadly, this is now the third consecutive quarter of accelerating growth in merchant services.

So, as Meg pointed out, sort of taking a bigger step when we acquired PayPal, we talked about sort of the vision of PayPal, which is building on dot-coms in the U.S., taking PayPal global with the eBay properties, and then taking it across outside eBay to merchant services.

That's what we're focused on.

And early returns, we are very pleased.

But in number of new initiatives that are on the cog for the year.

Thank you very much for joining us everyone.

We appreciate your attention.

And we'll talk to you soon.

Thank you.

That concludes today's conference everyone.

Have a great day.