eBay Inc (EBAY) 2007 Q4 法說會逐字稿

Good day everyone and welcome to eBay's fourth-quarter 2007 earnings results conference call.

Today's call is being recorded.

With us today from the Company is the President and Chief Executive Officer, Ms.

Meg Whitman; the Future CEO, Mr.

John Donahoe; the Chief Financial Officer, Mr.

Bob Swan; and the Vice President of Investor Relations, Mr.

Mark Rowen.

Now at this time, I would like to turn the call over to Mr.

Mark Rowen.

Thank you, operator.

Good afternoon everyone, thank you for joining us and welcome to eBay's earnings release conference call for the fourth quarter and full year 2007.

Joining me today on the call are Meg Whitman, our President and Chief Executive Officer; John Donahoe, our Future CEO and Bob Swan, our Chief Financial Officer.

We are providing a slide presentation to accompany Bob's commentary during the call.

This conference call is also being broadcast on the Internet and both the presentation and call are available through the investor relations section of the eBay website at investor.ebay.com.

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

You can find the reconciliation of those measures to the nearest comparable GAAP measures in the slide presentation accompanying the call.

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 results may differ materially from those discussed in this call for a variety of reasons including our increasing need to grow revenues from existing users in established markets, an increasingly competitive environment for our businesses, the complexity of managing a growing company with a broad range of businesses, regulatory tax as well as IP and other litigation risks, including risks specific to PayPal and the financial industry and risks specific to Skype's technology and to the VoIP industry; our need to upgrade our technology and customer service infrastructure to accommodate growth at reasonable cost while adding new features and maintaining site stability; foreign exchange rate fluctuations; changes in political, business and economic conditions and the impact and integration of recent and future acquisitions.

You can find more information about factors that could affect our results in our annual report on Form 10-K and our quarterly reports on Form 10-Q.

You should not unduly rely on any forward-looking statements and we assume no obligation to update them.

And now, let me turn the call over to Meg.

Thanks, Mark, and welcome everyone to today's conference call.

In conjunction with announcing our quarterly and annual financial results, we also made another big announcement today.

On March 31, 2008, I will step down as eBay's President and CEO.

Our current head of eBay Marketplaces, John Donahoe, will succeed me in my role and will join the board.

Rajiv Dutta, our current President of PayPal and former CFO for many years, will replace John as the President of Marketplaces and will also take a seat on our Board of Directors.

I too will remain on eBay's Board.

I've always believed that planning for succession and ensuring a seamless transition whenever I decided to leave my post was part of my role as President and CEO of this Company.

I'm very confident that we have successfully executed this with the new appointments of John and Rajiv.

I was given a remarkable opportunity when Pierre Omidyar, eBay's founder, asked me to join eBay in January of 1998 and I couldn't be more in awe of what our employees and our communities of users have achieved together.

Working at eBay has exceeded all my expectations and it is with great pride and a strong sense of accomplishment that I turn over the leadership of the Company.

Many of you know I have repeatedly said that 10 years was about the right amount of time for any CEO to stay at the helm of a Company.

Not that I've reached that milestone, I have decided that it's time for eBay to have new leadership, a new perspective and a new vision.

I've known John for many years and have believed for a long time that he would be the ideal person to succeed me at the right time.

We have worked really closely over the last three years to get to this point and I'm enormously confident in John's ability to steer eBay.

He is a fantastic leader who connects with and inspires our employees and both his inside and outside eBay work experiences will serve our users around the world very well.

So now let me talk about some of the highlights for the fourth quarter and the full year.

I will then turn it over to John, who will talk about what you can expect to see from the Company in the future.

Bob will then give you more context on the quarterly and annual results as well as our outlook for 2008.

Driven by another successful online holiday shopping season for eBay and PayPal, in Q4 we generated record net revenues of $2.2 billion, a 27% increase over last year.

The Company also generated operating income of $755 million, a 31% year-over-year increase, and EPS for the quarter was $0.45 representing a 45% increase over last year.

We are very pleased by these very strong financial results.

Let me quickly give you a few operating highlights for each of our three business units for the quarter, starting with Marketplaces.

Revenue for our Marketplaces business unit was $1.5 billion, up 21% from the fourth quarter of 2006.

Based on unique visits, eBay was again the number one e-commerce site in the U.S., Germany and the UK according to Nielsen Net Ratings.

Nearly 80 million shoppers came to eBay to make their holiday purchases.

In the quarter, eBay around the world drove more than $16 billion of GMV and saw record volumes of traffic, number of listings and velocity of trade.

We are clearly the online leader when it comes to delivering value and selection to millions of online shoppers.

Our PayPal business delivered another excellent quarter.

PayPal now represents nearly 8% of all global online transactions and is the e-commerce leader in payments.

For the first time since PayPal was acquired by eBay in 2002 PayPal has delivered three consecutive quarters of accelerating revenue growth.

Our remarkable Merchant Services business continues to grow rapidly, attracting thousands of new customers and merchants each and every week.

On the Communications side, Skype had a strong quarter delivering a total of $115 million in revenue, up 76% year-over-year.

We also reached a total of 276 million Skype users while SkypeOut minutes also increased to 1.6 billion.

Among the successes for the quarter, the Skypephone launched with Skype's partner 3, continued to sell briskly in the UK, Italy and Australia, and our recent deal with MySpace has already helped bring millions of new users to Skype.

The fourth quarter capped off a strong 2007.

For the full-year the Company delivered revenues of $7.7 billion which represents 29% growth.

We also delivered more than $2.5 billion in non-GAAP operating income and closed out the year with $5 billion in cash and investments even as we repurchased $1.5 billion worth of eBay shares.

EPS grew 46% while operating margins remained at 33%.

It was clearly a record year for us financially, but it was also an important year for us strategically.

In our eBay business we made substantial progress on meeting the growing expectations of buyers and sellers.

In fact, we took a look at every aspect of the site, from trust and safety to user flows, to see where we could do better.

We also tested various pricing strategies to learn what might work best for our sellers.

But with all these efforts, we know we have a lot more work to do, particularly in our three biggest markets.

John will talk in more detail about what we intend to do in 2008 to accelerate growth on eBay.

Another strategic thrust for us during the year was to focus on growing some of our newer businesses.

Our classifieds business, for example, continues to be profitable and is growing rapidly.

We're now the number one or number two C-to-C classified site in over 450 cities and in 20 countries.

Our Dutch and English classified sites are on fire.

Also worth noting is the steadily increasing popularity of our classifieds brand Kijiji here in the United States.

This site has now more than 3 million monthly unique visitors and we're seeing very strong levels of user activity on the site.

StubHub, our online tickets marketplace, ended a very successful 2007 on a high note having exited the year selling more than 5.5 million tickets to more than 36,000 events.

And last but not least, our advertising partnerships with Yahoo!

and Google continued to deliver revenue that has exceeded our expectations.

2007 was the year PayPal was firmly established as the pre-eminent leader in online payments, both on eBay and off eBay.

PayPal delivered a total of $1.9 billion in revenue this year and continues to impress with its strong growth rates, innovative product launches and expanding presence across the Web.

In short, PayPal is a gem of a business and we couldn't be more pleased by its performance and trajectory in 2007.

As for Skype, while we were disappointed in the writedown we announced in October, it's important to remember that Skype is an extremely successful four-year-old.

Skype ended 2007 with $382 million in revenue and 276 million users, up significantly from 2006.

And SkypeOut minutes reached 5.6 billion, up 38% from last year, another indicator of the strength of the Skype business.

During the last two months of the year, the new leadership team at Skype has done a fantastic job.

Skype is exiting 2007 much stronger than it was even this summer and the team is excited about the year ahead.

I am extremely proud of eBay's performance in 2007, but more than that, I'm very confident about our future.

eBay has always been at the forefront of innovation.

By listening to our users, we've pioneered almost every aspect of e-commerce and by continuing to listen to our users, I'm certain that eBay's new management team will take eBay and our community to places we never dreamed we could go.

And with that, let me turn it over to John, eBay's next President and CEO.

Thank you, Meg.

Before I spend time talking to you about our future plans, I want to take a minute to acknowledge Meg.

What Meg has built is truly remarkable and deserves a bit of pause and reflection.

When Meg joined eBay 10 years ago, eBay was a small online auction site with only 30 employees and revenues of just $4 million.

In September 1998, just six months after she joined eBay, she took the Company public, resulting in a valuation of about $2 billion.

And here we stand today a decade later and eBay is worth approximately $39 billion, employs 15,000 talented people and has an unrivaled portfolio of brands that generated $7.7 billion in revenue in 2007.

Along the way, Meg has built outstanding relationships with our users, our investors and our employees and our partners.

But I know that Meg is most proud of the fact that 1.3 million people use eBay to earn all or some of their livelihoods.

This Company has had an enormous social impact, a very positive impact that many people cherish.

What I'm inheriting from Meg is a well-managed and well-positioned organization whose best days are ahead of it.

I could not be more excited about the opportunity to lead eBay and I'm grateful that Meg will remain on our Board and has agreed to provide advice whenever I need it.

Let me tell you why I think eBay's best days are ahead.

Most importantly, we have three tremendous businesses.

eBay, of course, is the number one commerce platform in the world.

eBay's users traded nearly $60 billion of gross merchandise volume in 2007 and listed 637 million items in Q4 alone.

While eBay is not growing as rapidly as I would like, the brand, the traffic and the work we did in 2007 positions us well and gives us strong advantages as we move into 2008.

Then, there is PayPal.

PayPal is a fabulous business.

It's growing fast and has the kind of accelerating momentum you love to see.

The opportunities for PayPal are unlimited.

Finally, there is Skype.

When you reach 276 million users in just four years and achieve $382 million in revenue, you have a strong business.

Skype is still a young company on a great trajectory that is revolutionizing communications on the net.

With these three great assets in place, eBay has a leg up on the future and our future is going to be all about delighting our customers and mining new areas of growth.

Here is what you can expect.

First, we're going to get very aggressive about making eBay easier and safer to use.

The net has evolved dramatically in recent years.

Buyers have become accustomed to streamlined purchasing experiences that put a premium on speed, convenience and reliability.

While we have made strides in these areas, I am clear that we need to do much more.

So we have taken a close, hard look at the entire eBay buying and selling experience and we're going to make breaks from the past where necessary to deliver the experience our users tell us they want.

Watch for us to make some exciting announcements about feedback, new user protection programs, customer support and pricing over the next week.

Second, I believe eBay's next wave of growth is going to come from weaving the strengths of auctions with our fixed price offering in a uniquely eBay way.

Auctions attract enormous value, selection and fun to eBay, but for many sellers and buyers and for many products, auctions are just not the optimal format.

So what we need to do it is marry the value, selection and fun created by auctions with the convenience and opportunities inherent in fixed-price.

Only eBay can do this successfully and we believe this ability is a true competitive advantage.

The potential here is already evident.

Our global fixed-price business already accounts for more than 40% of our GMV, a clear indication that our users are embracing this format.

In fact, the growth of our fixed-price business is outstripping the growth of e-commerce.

So we are confident that evolving to better balance auctions and fixed-price for eBay's millions of buyers will accelerate growth in our business.

And we understand in order to capture this opportunity, we need to aggressively change our product, our customer approach and business model.

Bob will talk in a minute about how we have architected our 2008 budget to give ourselves the freedom we need to act and win in our ongoing quest to revolutionize e-commerce.

Third, PayPal is an incredibly important part of our go-forward strategy.

With 57 million active users, PayPal is the leader in online payments and we intend to extend that lead even further.

We have more opportunities to make paying with PayPal on eBay easier and faster and the growth prospects for our early-stage off-eBay merchant service businesses is stellar.

I believe 2008 will be PayPal's best year yet.

This Company has a fantastic portfolio of businesses, a team of motivated employees and a passionate following of users.

These are the building blocks for our future.

My commitment is to build from these strengths and make the changes that are necessary in today's competitive environment.

I am confident that we can accelerate eBay's leadership position in the years to come, and that's why I truly believe that eBay's best days lay ahead.

And now I will turn it over to Bob for a closer look at the numbers.

Thanks, John.

First, let me both acknowledge and thank Meg for all of her accomplishments over the last 10 years and the opportunity to work with her over the last 20 months or so, and secondly, congratulate John on his new role.

I would also like to reiterate John's comment that eBay's best days are ahead of us.

As the competitive landscape intensifies and consumer expectations for online shopping experience increase, we have the leading position in e-commerce, online payments and online communications.

And by listening to our community of users, we will take the necessary actions to extend our leadership position.

Now let me turn to the business at hand.

First I will review our Q4 and full-year '07 financial performance in some detail, and then I will give you some color around our 2008 guidance.

During my discussion, I will reference our earnings slide presentation which accompanies the webcast.

Overall, we're extremely pleased with our Q4 results.

We generated strong top-line growth, even stronger non-GAAP earnings growth and excellent free cash flow.

Additionally, we purchased more than $300 million worth of eBay shares during the quarter.

These results cap off a great finish to a very strong year for our Company.

In total, our combined businesses generated record net revenues of $2.2 billion, a 27% increase over last year.

This was a milestone quarter for us as we achieved $2 billion in quarterly revenue for the first time ever.

Organic revenue growth, excluding acquisitions and foreign exchange, was 18%.

Growth was turbocharged by PayPal and its merchant services business and by some of our non-GMV businesses, such as Shopping.com, advertising and classifieds where we continued to gain traction.

Non-GAAP EPS was $0.45, a 45% increase from last year and $0.04 above the high end of our guidance range.

The EPS growth was primarily driven by strong operational performance across most of our businesses.

In addition, we also benefited from a weaker U.S.

dollar, a lower tax rate and a reduced share count when compared to last year.

Operating margins came in at 34.6% in the quarter, 120 basis points higher than last year.

We generated $665 million of free cash flow in the quarter, an increase of 26% above last year's level primarily driven by earnings expansion.

Now let's take a closer look at our segment results for the quarter.

Overall, our Marketplaces business segment achieved net revenues of $1.5 billion, an increase of 21% over a year ago.

Global GMV was $16.2 billion in the quarter, a 12% increase.

Now, let's walk through some of the key operating metrics.

eBay had 83 million active users at the end of December, up 7% over last year, excluding China and Taiwan.

New listings totaled 637 million in the quarter, representing growth of 4% versus Q4 '06 and marking the first time in three quarters that listings have increased on a year-over-year basis.

U.S.

GMV was $7.3 billion in the quarter, an increase of 8% year-over-year.

International GMV grew by 16% year-over-year to $8.9 billion, accounting for 55% of global GMV.

Excluding benefits from foreign exchange, international GMV grew by 8% and international listings growth was up 10%, again excluding China and Taiwan.

In Europe, revenues in Germany and the UK grew in the midteens while France continues to grow at stronger rates helped by successful category-specific pricing promos during the quarter.

We're also seeing positive early results from our Best Match relevant space search in France, which rolled out mid-quarter in certain categories.

In Asia, GMV in Korea grew 33% year-over-year in the quarter, excluding vehicles where we no longer captured GMV due to a format shift.

We're pleased with our performance in Korea where we believe we've significantly narrowed the gap with our main competitor over the last three or four quarters and have gained significant share in the overall Korean e-commerce market in the process.

Elsewhere in Asia, we continue to experience robust growth in Australia and our cross-border trade out of Asia is becoming increasingly important for us as a Company as well-priced merchandise from China and Hong Kong finds its ways onto our U.S.

and European sites.

In Q4 as in previous quarters, we continued to see a wide gap between year-over-year growth in listings and growth in Marketplaces revenue.

The 8-point gap between listings at 4% and GMV growth at 12% is primarily explained by three factors.

First, we no longer include listings from China and Taiwan; second, our acquisition of StubHub in Q1 '07; and third, benefits from foreign exchange.

The 9-point gap between GMV and revenue is primarily driven by continued strength in our non-GMV businesses, such as Shopping.com, classifieds and advertising, and the inclusion of StubHub which has a higher than average take rate.

We continued to make great progress in diversifying our revenue streams in 2007 and we expect continued progress in 2008 and beyond.

Both our advertising and classifieds businesses were in hypergrowth mode this quarter, growing at 182% and 104%, respectively.

And Shopping.com, our online comparison shopping business, continued on its strong growth trajectory with 26% growth over the prior year.

In summary, our Marketplaces business posted a solid quarter with excellent financial results.

However, the key operating metrics and resulting GMV growth in our big three eBay markets are still not where we want them to be.

So as John said, we will need to accelerate the pace of change in 2008.

During 2008, we'll focus on retaining and strengthening our leadership position in e-commerce by taking bold steps to meet the expectations of our community in the areas of product innovation, trust and safety, end-to-end customer experience and pricing.

We have made significant strides in '07 and we will double down on our efforts as we head into '08.

We're making a number of changes in '08, but one area which I know you have a lot of questions on is pricing.

We have spent a significant amount of time and effort over the past couple of quarters studying our fee structure in relation to the elasticity of supply and demand on our sites.

We have learned a great deal from the pricing tests we ran in the back half of 2007 and we'll announce specific changes to our seller community in the coming weeks.

In essence, we believe that sellers would be willing to list more high-quality inventory on eBay if we were to change the risk/reward ratio in their favor, namely by reducing upfront listing fees and increasing final value fees.

We also believe that listings with gallery photos improve the buyer experience and increase the conversion of browsers to buyers.

As a result, in the U.S., we'll make it more attractive for sellers to incorporate the gallery feature with their listings.

All in all, we believe that these upcoming pricing changes will help deliver to sellers the best economics on the Web and thereby help stimulate velocity of trade on our largest marketplaces as buyers find the widest product selection at great low prices.

As I've said, we anticipate the pricing changes we plan to announce next week will shift some of the conversion rate risk from sellers to us, and it is also likely to reduce our take rate modestly in 2008.

However, we believe the modest take rate reduction will more than pay for itself over time as we stimulate long-term growth in our marketplaces.

Now let's turn to our Payments business.

PayPal posted another stellar quarter with total revenue coming in at $563 million, a 35% increase versus the same period last year.

This strong growth rate is a reflection of the tremendous progress we're making in our efforts to achieve ubiquity for PayPal on the Web through increased penetration on eBay and an expanded global footprint beyond eBay.

Net total payment volume in the quarter was $14 billion, an increase of 35% year-over-year, making a third straight quarter of accelerating growth.

TPV grew by 30% in the U.S.

and 43% internationally.

PayPal accounted for 12% of U.S.

and 8% of global e-commerce in the quarter.

In terms of key operating metrics, PayPal had over 57 million active accounts in the quarter on a 12-month trailing basis, an increase of 16% over the same period last year.

On the eBay platform, PayPal's global net TPV grew by 17% year-over-year.

TPV growth was fueled by increases in GMV coupled with an increase in the global penetration rate on eBay to 54% of addressable GMV, up from 51.6% last year.

Beyond the eBay platform, PayPal's global merchant services business recorded another phenomenal quarter, generating $6.1 billion of TPV, a 66% year-over-year growth and also marking a third straight quarter of acceleration.

We continue to attract top online retailers to our platform and consumers increasingly turn to PayPal as the preferred way to pay on the Web.

PayPal's Q4 transaction expense was 118 basis points as transaction loss rate was 27 basis points this quarter as its segment margins improved sequentially.

In summary, PayPal notched another great quarter and our global payments business continues to be one of the key pillars of our companywide growth strategy.

Now let's turn to our Communications business.

Skype posted total revenue of $115 million in the quarter, an increase that's 76% over last year while delivering a fourth consecutive quarter of segment profitability.

Skype's total registered users grew to an impressive 276 million representing an increase of 61% over last year.

On key user metrics, Skype-to-Skype minutes were up 26% versus last year at 11.9 billion and SkypeOut minutes increased 10% versus last year at 1.6 billion.

Now, let me touch briefly on Inc.

level operating expense and cash position before I discuss our 2008 guidance.

We recorded $755 million of non-GAAP operating income, up 31% on a year-over-year basis and non-GAAP net income of $611 million, up 42%.

Sales and marketing improved 260 basis points from a year-ago period, product development was up 40 basis points and G&A was down 150 basis points.

We ended the fourth quarter with more than $5 billion in cash, cash equivalents and investments, an increase of approximately $600 million from the end of last quarter, and we utilized $312 million to repurchase approximately 9.2 million eBay shares.

We have repurchased $3.2 billion worth of eBay shares since we launched our first repurchase program 18 months ago, and today we have announced that our Board of Directors authorized an additional $2 billion of share repurchases.

Coupled with the outstanding balance on our previous authorization, this gives us the flexibility to opportunistically purchase approximately $2.8 billion worth of eBay shares over time.

The fourth quarter results capped off a strong year.

Net revenues were up 29%, non-GAAP EPS was up 46% and free cash flow was up 26% over the prior year.

Organic revenue growth excluding acquisitions and FX was up 21%.

Our operating margin was up 30 basis points from the prior year attributable to continued productivity and leverage as well as foreign exchange benefits which more than offset the impact of negative mix and investments we made in product development and marketing.

With that, let me turn to our non-GAAP guidance for full year 2008 and for the first quarter.

For full year 2008, we expect to generate revenue of 8.5 to $8.75 billion, non-GAAP EPS of $1.63 to $1.67 and generate free cash flow of 2.3 to $2.4 billion.

The expected revenue represents year-over-year growth in the range of 11% to 14%.

Our guidance reflects some of the momentum we carry from 2007 and some of the challenges we face in 2008.

First, we expect continued momentum in our PayPal, advertising and classifieds businesses.

Each of these businesses grew rapidly in 2007 and while we feel great about the progress, we expect the growth will come off these '07 levels.

Second, our GMV-based business in our three largest markets will be challenged and John discussed this series of bold actions we would take.

As part of these moves, we plan to implement pricing actions which moderately reduce our take rate and customer loyalty programs which are reported as contra revenue.

These factors will contribute to growth slowing a bit.

Third, e-commerce is expected to decelerate in 2008 and we have taken a cautious outlook for consumer spending in our major markets.

Finally, our guidance excludes any significant impact from M&A activity in the year.

We expect our operating margin for full year 2008 to be approximately 32%, around one point lower than 2007.

While productivity and leverage will offset our increased investment in the impact of pricing actions, they will not be able to offset business mix working against us as our lower margin businesses, PayPal and Skype, grow significantly faster than Marketplaces.

Non-GAAP EPS growth is expected to be in the range of 7% to 9%.

Excluding the onetime tax benefit in the third quarter of 2007, non-GAAP EPS growth is expected to be in the range of 9% to 12%.

GAAP EPS is expected to be in the range of $1.27 to $1.31 with the difference primarily being stock-based compensation expense and amortization of intangibles.

We anticipate we'll generate 2.3 to $2.4 billion of free cash flow in 2008.

Our strong cash position at the end of last year coupled with strong expected cash flow generation will give us the flexibility to pursue strategic acquisitions and continue with opportunistic share repurchases.

In the first quarter, we expect to generate revenue of $2 billion to $2.05 billion and non-GAAP EPS of $0.37 to $0.39.

GAAP EPS is expected to be in the range of $0.28 to $0.30.

In summary, we are pleased with our Q4 and full year 2007 performance and we'll carry that momentum into 2008.

As John said, we're clear about the challenges we have in front of us, we're clear on what needs to be done in order to accelerate future growth in our eBay business and I believe we have the best people in place and focus on our most difficult challenges.

Our focus will be on executing our strategy to extend our leadership position in e-commerce and in addition we will continue our efforts to diversify our revenue streams.

We believe the financial architecture of the plan will allow us to invest in and make necessary changes to our business while still delivering top line, bottom line and free cash flow growth to our shareholders.

And now we would be happy to answer your questions.

Operator?

(OPERATOR INSTRUCTIONS) Scott Devitt, Stifel Nicolaus.

First, could you talk a little bit about eBay Express?

Some of the recent search integration of Express on core eBay, and how you may be able to segment the marketplace between core eBay and Express over time?

And then separately on the coming pricing adjustments, if you exclude gallery initiatives, could you talk a little bit about whether the focus on shifting risk from listings to success is going to be exclusively on fixed-price listings or whether you plan to shift risk toward the back end in auctions as well?

Thank you.

Why don't I take eBay Express, and maybe you take the pricing, John?

Sure.

So eBay Express, interestingly enough, has had quite a successful year in the U.S.

And I think what it demonstrates is that a seamless, very convenient fixed-price shopping experience is good for our buyers, and they like it.

What we're going to do in 2008 and beyond is actually more deeply integrate our fixed-price offering into what we call the river of traffic, the 80 million eBay users that come to the site, so that they have a chance to see those listings.

So eBay Express was the right strategy.

Not showing it to all 80 million users is something that we need to fix in 2008.

And I think you're going to see John and the team really roll out a more integrated fixed-price auction offering that uniquely displays those two formats in a uniquely eBay way.

Do you want to talk about pricing?

Just to add to that, the way I'd say it is eBay Express has been a fantastic learning laboratory and we're going to take those learnings and pull them into core eBay's fixed-price experience.

On pricing, Scott, the rebalancing of pricing will apply to both fixed-price and auctions.

Imran Khan, JPMorgan.

Meg, best wishes in your new venture, and John congratulations on your new role.

Two questions.

First, I think it seems to us that some of your competitors are doing some of the -- to reduce the use of consumer friction, buying friction, by introducing prime shipping or free shipping or one-click shipping.

In your business model, how do you think you can improve the user or buyer's experience or reduce friction?

And I think, John, you talked about some the initiatives; can you give some color?

And secondly, the second question is for Bob.

Bob, you talked about that, in terms of your guidance you have been conservative and take into consideration consumer spending slowdown.

If I look at the last three years, you have exceeded on your high-end guidance by an average 5 percentage points.

Can you give us some maybe color like what kind of conservatism you're baking into in terms of consumer spending slowdown?

Thank you.

Why don't I take to your first question, Imran.

With respect to reducing friction and shipping, obviously we run a marketplace and so we don't control shipping, our sellers do.

The good news is we have millions of sellers that provide reasonable fast shipping.

What we intend to do in 2008 is alter our policies such that we will incent and reward those sellers that provide the best shipping, cost and speed.

The reason we can do that is the change we made in 2007 around feedback with detailed seller ratings created user-generated feedback for the sellers on shipping timing and shipping cost.

And we now have the database, if you will, to be able to use that information in search and in other areas so that those sellers that provide reasonable fast shipping will show up higher in search results and be rewarded and provide a better buyer experience.

So we've tried to address this in a very eBay way.

On the top-line guidance for 2008, our guidance is about 11% to 14% top-line growth.

As it relates to the economy, as our business becomes more and more diversified, we believe we are increasingly sensitive to economic conditions.

So when we put our guidance together, the words I would use is we're cautious in terms of looking at what's happening, particularly here in the U.S., in developing what we thought was the best case plan based on what we know today.

I hope that 12 months from now that we will outperform our guidance again.

That being said, we think the current guidance best reflects all the information we have as we know it today.

Doug Anmuth, Lehman Brothers.

Two questions.

The first one is what gives you confidence that the new [Fine] technology is strong enough to handle the likely increase in listings you will likely see with the lower listings fees?

That's number one.

Second, I think Bob alluded to customer loyalty programs going forward.

If you could potentially elaborate on that.

Thank you.

Sure.

Should I take the first, and then Bob take the second?

On the [fine] technology, as I said earlier, we have learned a lot around relevance-based search from our work in eBay Express, from our work in Korea.

We have actually rolled out Best Match, which is really our version of relevance-based search in France.

And so we feel confident that we're going to be able to handle both the increase in fixed-price listings as well as the ability to serve them to buyers in a way that brings the best value and highest service right to the top.

It's interesting, Rajiv is going to be taking over the Marketplaces business and he's already talking about the race to the top of the highest value, best service fixed-price listing for our buyers.

And so we learned from our experiences in 2006 that you can't get one side of the equation right without the other.

I think we have got the ingredients in place so that in 2007 we feel like we can make substantive progress in improving the fixed-price experience and do that alongside of the auctions experience.

We still have this fantastic auction experience where the core search will continue to be Time: ending soonest.

So we feel like it's the best of both which is uniquely eBay.

In terms of the question on customer loyalty, we have this massive user base and our focus is on getting our existing users to be more active and more frequent in their shopping.

And we believe one of the best ways to do that is with a loyalty program to reward and motivate our top buyers and we're going to be rolling that out during the course of 2008.

The implications in terms of how we account for that typically as it relates to couponing, will be a contra revenue that all else equal would the lower top-line growth.

Bob, let me just build on that, because I think our plans around customer loyalty go beyond just the couponing.

That's the one that's going to hit the revenue figures.

But we absolutely -- our top buyers believe, they're deeply loyal to eBay, they want to do more business with eBay and we need to make it easier for them to do that.

And so that's where you will see some changes to our feedback system, that's where we're providing better customer support for our top buyers, that's where PayPal can come in and provide them complete guarantees.

So we have a number of things in store that I think really take advantage of cementing our relationship with our most loyal buyers.

Are you able to quantify that at all, the customer loyalty, in terms of how that's factored into your current guidance?

All I can say is it's factored into our current guidance.

Heath Terry, Credit Suisse.

I was wondering if you could give us an idea, you talked about what you have learned in the form of relevance-based search in France as you've introduced Best Match.

You have also introduced Best Match in a few categories here.

Can you talk about the early metrics on what you're seeing for those categories where Best Match has been applied?

And then to the extent that you have done testing beyond that, where you can give us an idea of what kind of early results you are seeing, I would certainly appreciate that.

Sure.

Let me just say up front that relevance-based search at Best Match is not going to be a silver bullet.

This is not something that we're going to sort of turn on overnight into this gigantic eBay ecosystem and it be a silver bullet.

We have rolled out relevance-based search in Korea in a fixed-price market and seen a real reacceleration of growth in that particular market.

In France, we are seeing Best Match increase the ability of buyers to find what they would like either in the auction format or in the fixed-price format and we have seen an increase on successful items in GMV.

So we're encouraged by the results.

As we roll this out in 2008, we're going to both be I think aggressive, but also balanced and thoughtful about how we do it because we are conscious that we have the world's largest e-commerce platform with $60 billion of growth merchandise volume going through it and search as a core functionality.

So we are learning aggressively.

We're going to be more aggressive in '08 than we have in '07.

We're encouraged by the early results and we think as Bob said by the end of the year that we're going to be in a much stronger position to bring both a great auction experience with a great fixed-price experience to our millions of buyers.

Brian Pitz, Banc of America Securities.

With respect to listing fee reductions, can you talk about the potential for a total elimination of listing fees or specifically in certain categories, especially given that competing sites that are out there do not charge listing fees upfront?

And second unrelated, can you talk about the acceleration of advertising during the quarter?

Any color on specific initiatives here?

That would be quite helpful to us.

And just, Meg and John, congratulations and good luck on your move.

Thank you, Brian.

So maybe I will take the listing fees and then (MULTIPLE SPEAKERS) advertising.

So, Brian I will remind you, on listing fees are, the pricing that we will announce early in the year will as Bob said shift the balance, but there will still be insertion fees because we think in our core format, insertion fees is still important to motivate sellers to price items well.

I will remind you, we have a storage inventory format which is a way where sellers can list items at a significantly lower price, that the insertion fees of today in the storage item format in the U.S.

for instance are $0.05 for a month.

So we have a format that allows sellers to upload large numbers of listings and do that in a way that has lower up-front fees and higher final value fees.

I think as we evolve and go through the year, you will see us build on this learning and begin to bring these products together in a way that we balance the finding, insertion fees and the right format.

Brian, on the second question on the advertising and other related performance in the quarter, you know it has been a continuation of what we've demonstrated throughout the course of the year where we're essentially our advertising business has doubled year over year each quarter and has demonstrated continued momentum throughout the course of the year.

And it's primarily driven by the relationships with Yahoo for both text-based and graphical ads here in the U.S.

and Google internationally with text base.

So this is one that you will remember a year ago we were talking about testing a year later really good performance.

On advertising, we expect that to be a source of revenue growth as we go through the course of this year as well.

Robert Peck, Bear Stearns.

Just a couple of quick follow-ups here.

First of all, for the changes in the fee structure, have you said that's going to be site-wide, or it's going to be category specific?

And I was wondering if you could also maybe quantify for us a little bit more on what you are seeing as far as impact to conversion rate, ASPs and listings?

We will be announcing the fee structures for both U.S., Germany and UK next week.

So there will be site-wide changes.

In some countries, there will be some category dimensions to it; in others, that will be less so.

So what we have tried to do is take the testing we did last year in Germany, UK and U.S.

and while there will be some similar principles across all three, we've tried to customize the actual pricing to what we learned in each country and to how users, both buyers and sellers, responded.

(technical difficulty) the second component of your question on -- I'd kind of characterize what we saw in the aggregate across all of our different pricing tests around the globe.

Essentially it was a modest increase in listings.

The fourth quarter you saw for the first time in four quarters a growth in listings, and part of that was attributed to the pricing tests we have done.

Secondly, a modest improvement in conversion rate as well.

So as John referred to improvements in successful listings, the successful items that was a function of both modest listings growth and modest improvement in conversion as well.

And then ASPs, because some of the pricing -- what we're trying to do in the pricing is also incent listings at the lower price levels as well as higher price levels.

We saw ASPs come down a little bit, thus GMV, while up, came down a little bit less.

So part of our goal here is to build real marketplace vibrance at all price levels, and we think our tests show us that we have the ability to do that.

And, John, how do you assure its quality listings?

I think one of the concerns is that as the listing fee comes down, you get flooded with a bunch of stuff that maybe consumers don't want to see.

How do you control that you actually get increased quality on the site?

I think it's very good question that gets to the -- that's why we're keeping the insertion fee in the first part of the year and as we implement more finding changes, inventory that is not well priced will never get exposure.

So just as in the fixed-price format, inventory that is not well priced will get less and less exposure.

And so auctions obviously are guaranteed exposure because Time: ending soonest, and that by definition allows the best value to rise to the top in the fixed price format.

What we did not do in '06 but what we will do in '08 is ensure create the -- the motivation through Best Match where only the best priced items with the highest service levels rise to the top of exposure.

Jeffrey Lindsay, Sanford Bernstein.

I wanted to ask, the step down from -- in revenue growth from 29% down to 13% growth is starting to look less like a growth play for the Company overall and more like a value play.

Could you comment on -- is the company likely to accelerate plans that it discussed in earlier quarters to restructure the balance sheet and take on debt and become more of a value play, and basically using the debt to buy back stock?

And then a second question is, is eBay considering any new initiatives to stimulate growth of its third-party business?

Let me take the first part of it.

First, just maybe a point of clarification on growth rates.

'07's 29% growth rate on an FX organic -- kind of FX neutral organic basis, which I think is the appropriate compare, was 21% in 2007.

So the differential growth rate may be not as wide as you suggested.

Secondly, we end 2007 with a great balance sheet -- $4.3 billion in cash, essentially zero debt.

And over the last several quarters, we've bought back a significant number of shares and taken steps to ensure that despite the fact that our strong cash position isn't all in the right places, to ensure that we have the flexibility to continue the buyback program.

Today we announced an increase in the overall buyback program by another couple of billion dollars.

So our intentions are to continue to be opportunistic.

As it relates to further moves in balance sheet or levering up, we are not -- we have got a great cash position, we'll use it to invest and grow the business and we'll also use it to opportunistically buy back stock.

Jeffrey, on your second question, I want to make sure I understand.

When you say stimulate our third-party business, could you be more specific on what you're referring to?

Yes, really the people who -- basically the store sellers.

Could you comment on where sort of picking up a migration basically of some business to Amazon's third-party sales -- could you comment on that and what steps you might take to stimulate that business in the year?

Yes.

Our stores business is experiencing strong growth and our sellers like that format, particularly to list as we talked earlier those SIF items that have very low insertion fee and longer duration.

And so what we have begun to do in Q4, and we will also do in 2008, is where it's appropriate, increase the exposure of the store inventory.

So for instance, if you do a search for -- I grew up in Chicago, so I was a big fan of Ernie Banks in the '60s.

So for an Ernie Banks baseball card and our core format only has 10 items, yet we have 30 of them in the stores format, we will show the stores format in core search.

And so we are increasing the exposure of our stores inventory in those places that makes sense and we will continue to do so in 2008 and we're coming down that learning curve on I think finding the right search approach so that we can give the best of both, both core and stores.

Mary Meeker, Morgan Stanley.

David I have a couple of questions, and John the question is not -- who is Ernie Banks?

But Meg, thanks for building such a great business.

It has been really inspiring to watch.

And the question for you is -- why change now?

Question for Bob -- obviously, revenue growth forecasts for '08 are below consensus but the operating margin percentage is the same as we think people are forecasting.

You talked about productivity improvements.

How should we think about that?

What are they?

And three, John, you talked about the growth opportunities for PayPal, Skype, advertising, StubHub, etc.

And the key issue for '08 will be determining the eBay core growth rates.

And you talked about the pricing changes, etc.

But is it your expectation that we could potentially get to double-digit listing growth, which would be a nice acceleration from where we are today, which could obviously bode well for financial results in the second half of this year and into next year?

Thanks, Mary.

It has been an incredible journey for me and I have been honored to be able to lead eBay and serve our community for 10 years.

But as I've said almost since I came to eBay that I thought 10 years was about the right amount of time for a CEO to serve in this industry.

With the remarkable underlying technology change, competitive change, I think it's important that new perspective and new eyes come to the Company.

And I think it's tough to stay fresh after 10 years no matter who you are.

And so I've been thinking about this for some time.

Three years ago, I brought John into the Company and we have worked very closely over the last three years.

He's done a great job leading the biggest part of our business and bringing a new process and a new thought process to eBay.

And I thought John was ready, the Board thought John was ready and I felt like it was the right time to turn over the reins.

And I think as you can see, we're in very good hands.

Mary, in terms of operating margin, our guidance reflects roughly 32% operating margin which is down about a point from last year.

The way our plan is built is we will generate significant productivity and leverage.

However, our intentions are to reinvest that back into our customers, whether it's through pricing actions, whether it's through improved loyalty and buying experience, it's generating productivity, reinvest back into our customers.

Where our margins will go down in 2008 is primarily a function of mix.

PayPal will continue to give us strong growth, Skype will exhibit strong growth both faster than the Marketplaces.

And as result, margins purely from mix will decline on a year-over-year basis.

In terms of where the productivity will come from, you know two things, things that you've seen during the course of 2007.

G&A leverage, we'll continue to get good momentum on G&A leverage.

We'll be more and more efficient with our sourcing buys, investments in technology to improve our risk models and bring down fraud losses are three of the key components that will drive efficiencies during the course of the year.

And Mary, to your third question in this trifecta, we couldn't agree more that the core eBay business and reaccelerating growth in core eBay business is critical.

It's my number one priority.

It's the Company's number one priority.

That's why Rajiv and Lorrie Norrington, we're putting our all-star team on it.

With respect to listings growth, listings growth will be one indication.

I'm not sure it's going to be the best indication, because over time we envision in the fixed price format that multi-item listings may be more prevalent.

And so we're going to be focusing on sold items because sold items shows the real velocity of trade on the site.

So we're confident we're going to make progress in 2008 and we intend to be in a stronger position coming out of the year than we are going in.

John, it's Dave Joseph.

One quick follow-up.

Obviously, we love the changes that you're making to the site and improving the product and leveraging technology to govern quality, but one overriding issue remains to be -- continues to be demand.

And it looks like active users decelerated again to about 2% year-over-year in the fourth quarter despite actually having launched a new marketing campaign in mid-September.

Wondering if you can give us a little bit of color on how the marketing campaign went, but also, that seems like a fairly big issue for 2008 and how you might be able to address that.

We know coupons is one, but what else might you be able to do?

I will remind you that in the fourth quarter we had 80 million online shoppers come to our site, so the scale of our traffic is still significant and I believe excluding -- 83 million and excluding Taiwan and China, it was up 7%.

What we're really focusing on, this is why we're focusing on the buyer experience because continuing to improve our buyer experience is going to allow us to retain our current users more effectively and we have got some strong and loyal users, and to attract new users, people who may be new to eBay, are more familiar with more standard e-commerce formats and have trouble getting started in our site.

We think we can improve the ease and safety of shopping on eBay and that that's going to allow those new users to convert to ongoing users.

So as -- with respect to our marketing dollars, we're going to continue to allocate our marketing dollars between online marketing which is sort of our biggest investment, investing more in more loyalty oriented and then we will do some off-line in Q4 of '08.

Ben Schachter, UBS.

Just wondering, given the amount of changes that the site is going to be going through in Q1 and probably throughout the year, why not give yourself a wider range in terms of the guidance?

What gives you confidence that you can accurately predict how these changes are really going to impact the site?

And maybe answer that in the context of how well you predicted the big changes that happened in Q4.

Thanks.

In terms of the guidance we gave, we've tried to take into account the momentum we have seen in some of our non-GMV businesses.

In our GMV business, try to take into account the actions that we're going to take, both early -- the actions we took in the fourth quarter, the lessons we learned from them and how we incorporated them in our 2008 plan.

So you know we're trying to take the best of what we know, what we have learned and give you a range of guidance that we feel that we can deliver on in the course of 2008.

Justin Post, Merrill Lynch.

I will go over to PayPal because there has not been a lot of questions about that.

When you look at the mix, clearly merchant services is growing faster.

Could you compare the difference between the funding expense as well as the take rates between merchant services and on eBay?

And then obviously PayPal is a big asset for the Company.

Can you give us any thoughts on where your margins are today and where you think they can be over time in that business just to help us get an understanding of what this part of your business could be worth long-term?

Justin, thanks.

Yes, PayPal, great quarter and great year with merchant services growing even faster than the core business.

In terms of funding mix or funding expense, not dramatically different between eBay versus non-eBay.

It's more a function of the products in which we offer, and we see some distinctions in terms of product funding mix.

What we know is over time, time is a key metric.

The more PayPal is offered by a merchant and used by a consumer, the better the funding mix gets over time.

In terms of your second portion of your question.

The take rate difference.

We indicated a couple of years ago I think now that we believe the long-term margins for PayPal were in the 20% to 25% range.

And during the course of '07 we have made substantial investments to accelerate the growth of PayPal, and in particular merchant services.

And we have seen, as I indicated earlier, we have seen some pretty good improvement in sequential margin growth from Q3 to Q4 and we expect that to continue during the course of 2008.

Christa Quarles, Thomas Weisel.

The first question I guess is on the conversion rates and ASPs.

In Q4, the list was a lot smaller than the last three quarters.

It was I think 0.4%.

I was just wondering, it sounded like John you made some comment about improving the robustness of the lower ASP items.

I was just wondering if you could maybe finer slice the conversion rate versus the ASP and the impact in the quarter there.

And then the second question was just also on PayPal.

You guys did a fair amount of promotional activity in the fourth quarter.

I was just wondering if you could be more specific as to whether you felt that that enabled you to gain share for example against Bill Me Later and how that is likely to be positioning yourself going forward.

On the first question, the primary difference in the fourth quarter on conversion rate and ASP was really comps.

Last year in the fourth quarter, we had a fantastic improvement on conversion rate and ASPs, particularly driven by hot consumer electronics in the fourth quarter of last year.

So this year's fourth quarter was just a much tougher comp.

So we feel pretty good in light of that, that even though listings went up, conversion rates still held and marginally improved.

In terms of PayPal, generally, again, 66% growth in merchant services during the fourth quarter as we continued to invest both in merchant adoption and consumer adoption, and we believe that bodes well as we go into 2008.

And as I indicated, PayPal will be a big part of the growth story in 2008 and we'll continue to expand not just PayPal on eBay and off eBay with merchant services, but also leverage that huge user base to add new products and features like PayPal later that we just introduced several months ago.

One quick follow-up just on the conversion rate comment.

If you have kind of comped over I guess some of the low-hanging fruit, where do you see additional I guess growth expansion there on the conversion rate?

We will go back a few years and say conversion rates several years ago used to be much higher than they are today.

And we believe as we make the appropriate steps on the user experience and the actions John talked about in terms of engaging our buyers more effectively, that we still have more headroom to improve conversion rates as we go forward.

Thank you very much for listening today and I'm delighted to turn over the leadership to John.

So thanks for coming today.

That does conclude today's conference call.

We again thank you for your participation.

You may disconnect at this time.