eBay Inc (EBAY) 2008 Q3 法說會逐字稿

Good day, everyone, welcome to the eBay third quarter 2008 earnings result conference call.

This call is being recorded.

At this time, I would like to turn the call over to Mark Rowen, Vice President of Investor Relations.

Please go ahead.

Thank you, operator.

Good afternoon, everyone, and thank you for joining us.

Welcome to eBay's earnings release conference call for the third quarter of 2008.

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

We're 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 the call are available through the investor relations section of the eBay website.

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

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

In addition, management may make forward-looking statements relating to our future performance that are based on our current expectations, forecasts, and assumptions and involve risks and uncertainties 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 but not limited to the impact of recent global economic events and a potential global economic downturn, foreign exchange rate fluctuations, changes in political, business, and economic conditions, our ability to profitably expand our business model to new types of merchandise and sellers, the impact and integration of recent and future acquisitions, our increasing need to grow revenues from existing users in established markets, and increasingly competitive environment for our businesses, the complexity of managing a growing company with a broad range of businesses, our need to manage regulatory tax, IP, and litigation risks including risks specific to PayPal and the financial industry and risks specific to Skype's technology and the VoIP industry, and our need upgrade our technology and customer service infrastructure at reasonable cost while adding new features and maintaining site stability.

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

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

All information in the presentation is as of October October 15, 2008, and we undertake no duty to update this presentation.

And now I'll turn the call over to John.

Thanks, Mark.

Good afternoon and welcome, everyone, to our Q3 earnings call.

I'll begin today by reviewing our financial performance and then provide an overview of our portfolio, and after a few closing thoughts I'll turn it over to Bob for more details on the quarter and on our outlook for the year.

Our Q3 results were in line with our guidance for the top line and exceeded our guidance on the bottom line.

Specifically, revenue was $2.1 billion, up 12% over last year, non-GAAP EPS was $0.46, up 11%.

We generated $543 million in free cash flow and our return on invested capital continued to improve at 28.8%.

We ended the quarter with $3.3 billion in cash and cash equivalents on our balance sheet with $2.9 billion of this outside the US.

And, as we announced last week, we are strengthening our position in online payments and online classified through acquisitions and we proactively streamlined our organization by reducing our headcount by about 10%.

Overall, we are pleased with the performance and strength of our company.

We delivered strong results in what is a very challenging external environment, an external environment we expect to continue in fourth quarter and beyond.

These are turbulent times for which no one has the perfect play book.

There is a high degree of economic uncertainty and turmoil in the financial markets and this is impacting consumer spending and e-commerce growth rates, and we're seeing an impact across all of our platforms.

In this environment we delivered a solid third quarter while also taking a number of steps to strengthen our company and better align our cost structure to invest and compete in the future.

Challenging times create opportunities for companies that are prepared to lead, and eBay has the global portfolio, the management discipline, and financial strength to take advantage of opportunities created by this period of challenge and uncertainty.

I'm confident that we'll manage through this period and emerge an even stronger company and more formidable competitor, and I believe this for three simple reasons.

First, we have a growing diversified portfolio of businesses led by eBay and PayPal.

We have multiple growth sources or growth engines in our Company.

We have leadership positions in e-commerce, online payments and communications each with a global brand and reach.

We serve hundreds of millions of users around the world and our proven business models generate solid revenue, healthy profits and cash flow with minimum capital requirements.

We have no inventory, no warehouses or other fixed cost that may impact many companies during a downturn.

Secondly, our portfolio offers consumers and merchants real value during difficult times.

On an unprecedented global scale, we bring people together to buy, sell, communicate, and be paid.

For consumers looking for value, we offer savings through access to the most deals and biggest selection on line.

For entrepreneurs or people feeling pinched by the economy, we offer a low-cost way to earn money and build a business, and for both consumers and merchants we provide piece of mind through a low cost safer way to pay and be paid.

And, third, our company has a strong balance sheet.

We have the financial flexibility to invest in growth, deliver in our financial commitments and weather an economic downturn.

The bottom line is that eBay is well positioned to compete and grow during a challenging and uncertain time.

This is when strong companies get stronger and we intend to do just that.

Now let's take a greater look at the four components of our portfolio.

I typically start with our eBay marketplace business, but today I'll start with PayPal then our [adjacencies], Skype, and then I'll end with eBay where I'll spend most of my time.

PayPal is a great business with terrific momentum.

Today, PayPal generates about 28% of our total revenues and is well on its way to becoming more than a third of what we do.

On eBay, PayPal's payment volume grew a healthy 12% in Q3 and PayPal's worldwide penetration on eBay grew faster in Q3 than in any quarter in recent years, reaching almost 60% worldwide.

PayPal continues to be the safest way to pay and be paid on eBay.

Off eBay, PayPal's growth is exploding.

Merchant services total payment volume grew 49% in Q3 and both on and off eBay, merchants love PayPal.

Why?

Because PayPal delivers three things all merchants need, new customers, incremental sales, and lower costs, and in tough economic times like this, merchants need PayPal more than ever and PayPal's growth shows that merchants worldwide understand this.

Today, more than a million merchants use PayPal, which is more than 65 million active user accounts.

PayPal's global user base generates incremental business for merchants and an unmatched experience for consumers.

What excites me about PayPal, however, is not just its performance but also its potential.

PayPal's opportunity is not just the 14% of e-commerce represented by the eBay marketplace, PayPal's target market goes well beyond that and it includes the other 86% of global e-commerce.

In fact, this quarter, for the first time, the total payment volume traded through PayPal actually exceeded total merchandise volume traded on eBay.

This simply reinforces the tremendous growth potential of this business.

And PayPal's growth potential is also why we're excited about our recently announced acquisition of Bill Me Later which is expected to further strengthen our position in online payments.

With this acquisition, we will have the number one and number two online oriented payment brands and, as I said last week, Bill Me Later brings complementary and reinforcing strength to our company.

The second growth engine in our portfolios is what we call our adjacencies or alternative e-commerce formats.

These include advertising, StubHub, and classifieds.

Together, these businesses represent about 11% of our total revenue and are growing faster than e-commerce.

Our overarching goal is to connect buyers and sellers worldwide regardless of format and our alternative e-commerce formats help us achieve that goal.

They enable us to offer buyers and sellers more choice about how they want to trade, where they want to trade, and when they want to trade, and they do so in a way that's complimentary to eBay.

Classified is just one example.

In just four years we have built classifieds in to a global business generating more than $0.25 billion in revenue with growth in Q3 at 59%.

And today we have the leading classified position in multiple markets around the world.

In our recent acquisition of Denmark's leading online classified sites, DBA in BilBasen, strengthens this position and gives us another market-leading position in Europe.

Advertising is another dynamic alternative format for us.

Advertising on eBay grew significantly in Q3 and this fall we're launching our eBay ad commerce beta program for sellers in the US and Germany.

Sellers will now be able to bid for search terms and get their ads placed directly in to existing ad space on eBay.

Sellers pay only when a buyer clicks on their ad and goes to their listing or eBay store.

This is another way we're helping sellers gain exposure and drive demand.

The next part of our portfolio is Skype, which continues to show strong momentum.

In the third quarter, registered users increased 51% over the prior year and Skype-to-Skype minutes increased 63% to 16 billion minutes, reflecting the power as a free voice product and a free video product in this challenging economy.

Skype-out minutes also increased 54% which drove revenue growth of 46% for the quarter, [Josh Silverman] and his team continue to do a great job there.

Now last but not least, I would like to turn to our core eBay transaction business which represents roughly half of our revenues.

Clearly, GMV in the third quarter was not what we would have liked, but we remain confident in our overall direction and believe we are on the right path.

eBay enjoys a global leadership position in e-commerce, but buyer and seller expectations have been rising and we have not kept up.

Thus, we need to drive both changes to continue our leadership position and this is exactly what we're doing.

At the beginning of the year I laid out two clear priorities for our eBay business.

One, make eBay safer and easier to use.

Two, increase selection by blending auctions and fixed price in a uniquely eBay way.

To achieve these goals, we have implemented two waves of changes this year.

Frankly, some of these changes were overdue and they demonstrate our commitment to better meeting the expectations of sellers and buyers, and we're doing this in a matter which is aggressive but responsible, recognizing that every change we make impacts the global ecosystem trading more than $60 billion of merchandise each year.

Let me recap what we have done thus far this year.

First, in March, we implemented a variety of changes geared to making eBay safer and easier to use.

Taken together, these changes introduced incentives and rewards for sellers to provide both great deals but also deliver a good shopping experience to buyers.

Are these changes working?

We believe that we're beginning to drive a better buyer experience, a safer and easier experience on eBay, and here is what we see.

Sellers, who are meeting or exceeding buyer expectations are growing their businesses on eBay and more and more buyers are reporting positive experiences.

Take this example.

During Q3, the highest rated sellers in the US saw their eBay businesses grow significantly.

These are the sellers who buyers rated 4.8 or above and who have been active on eBay for more than 12 months.

At a time when most retailers are struggling to stay even, these sellers saw their same-store sales on eBay grow 26% in Q3 and together they accounted for [16]% of our total GMV.

And this group included both large and smaller sellers, reinforcing the fact that sellers of all sizes can succeed on eBay.

Meanwhile, sellers with lower ratings are seeing their businesses decline.

So we're seeing a share shift within eBay where buyers are buying more from the highest-rated sellers and less from lower-rated sellers and, not surprisingly, the entrepreneurial eBay selling community is responding and the number of sellers earning ratings by buyers of 4.8 and above is up 20% since we made these changes six months ago.

Now as I said, these are early signs and we do see buyers moving toward sellers with higher ratings.

However, this has not yet translated in to buyers increasing their overall purchases on eBay.

This will take time, especially in light of the current economy which is a mitigating factor but not an overriding excuse.

Our current GMV trend is not where we would like it to be, but we remain confident that the improvements we're making will ultimately move the needle.

The second major change we have announced this year was implemented in late September when we significantly rebalanced fees for fixed price inventory.

Our goal is to create market place that optimizing for auctions and fixed price in a uniquely eBay way.

We have made it virtually free for sellers to put fixed price inventory on eBay and we have aligned our success with theirs.

Now I'm frequently asked if we're promoting fixed price at the expense of auctions and the answer is no.

What we are doing is building a marketplace that lets buyers and sellers choose the format they prefer.

Fixed price has been part of eBay for many years, and we're simply improving this format as more and more buyers choose to purchase that way.

Our fixed price fee changes will help improve selection and give buyers greater choice.

Fixed price represented 46% of GMV in Q3 and grew 11% for the quarter, which we believe is roughly in line with e-commerce growth rates globally.

So, overall, we're driving changes to make eBay a more competitive marketplace in today's environment, and we're making these changes in to a very challenging economic environment which makes our job more difficult and lengthens the time it will take for progress to flow through to the financials, but we remain committed to reinvigorating growth in our core business and we believe we're on the right path.

In the meantime, eBay remains the largest global market place with three times any GMV of our nearest competitor, and we have important strengths in these uncertain times with more users, more traffic, and more successful transactions than any other e-commerce site.

Now, I mentioned we anticipate a very challenging fourth quarter holiday season where consumers will be cautious with their spending.

We intend to fight aggressively for demand in the fourth quarter to support our sellers and driving demand to their great deals and great service?

In summary, we have a strong portfolio of businesses that generate growth and healthy returns and we believe we're well positioned to serve consumers globally in tough times.

We have a leading e-commerce marketplace and we're making the right changes to reinvigorate and strength eBay.

PayPal has strong momentum as the number one online payment brand, and this business will become even stronger following our acquisition of Bill Me Later.

Classifieds, advertising, StubHub, Skype and the rest of our portfolio are also strong and profitable and we will continue to drive leadership positions in each of these, and we will do this with our ongoing commitment to strong financial and operating discipline.

We have the right team, and we will deliver on our commitments while continuing to invest in the long-term growth of our company.

Simply put, eBay is a strong company and this environment we intend to get stronger.

Now let me turn it over to Bob for more details on our Q3 results.

Thanks, John.

Now I'll review our financial performance in some detail and during my discussion I'll reference our earnings slide presentation which accompanies the webcast.

Overall, our Q3 financial results were solid in an increasingly difficult environment.

Revenue came in slightly below the midpoint of our guidance we provided in July while EPS came in significantly above our expectations.

Revenue growth was up 12% year-over-year, non-GAAP earnings growth was up 11%, and we generated $543 million in free cash flow during the quarter.

We continued to execute on our stock buy back program, repurchasing $623 million worth of eBay shares.

Additionally, last week we announced two acquisitions that are intended to strengthen our faster growing businesses, and position us competitively for the future.

We also announced actions to simplify our organization in order to streamline decision making and reduce our cost structure.

This will result in a charge of approximately $70 to $40 million -- sorry, $70 to $80 million primarily in the fourth quarter, an annualized savings of approximately $150 million.

Our combined businesses generated net revenues of $2.1 billion in the third quarter, a 12% increase over last year.

Organic revenue growth, excluding acquisitions and FX, was 9%.

Overall revenue growth was enabled by high growth PayPal merchant services, classifieds, advertising, and Skype.

Our revenue growth was negatively impacted throughout the quarter by the broader economic environment as well as a strength in the US dollar.

We saw considerable slowdown across virtually all our businesses beginning in mid August.

Non-GAAP EPS was $0.46 in Q3, an 11% increase over last year and $0.05 above the high end of our guidance range.

Adjusted for a one-time tax gain in the third quarter of 2007, EPS growth would have been 24%.

The stronger than expected EPS performance was primarily driven by a lower tax rate and cost controls as we tightened discretionary spending in light of the slowing economy.

Our operating margin for the quarter was 31.8%, up 40 BIPS from last year even though our lower margin businesses, PayPal and Skype, grew faster.

Margins improved in all three of our business segments year-over-year.

We generated free cash flow of $543 million in the quarter, an increase of 6% from last year, primarily driven by earnings expansion while CapEx as a percentage of revenues came in at 7%.

Return on invested capital increased to 28.8% on a trailing 12-month basis.

This measure has shown continuous improvement over the course of the year as we have been able to generate higher earnings on roughly the same level of capital employed.

Overall, we delivered solid financial results in a very tough economic climate.

Externally, consumers are under significant pressure and appear to have reigned in their discretionary spending.

E-commerce growth rates fell dramatically from Q2 to Q3.

Similarly, merchants on PayPal's merchant services platform experienced a significant slowdown in average payment size.

Internally, we experienced economic weakness across our entire portfolio of businesses.

Vehicles GMV, which makes up 20% of GMV, decelerated by 12 points from Q2 to Q3 and got progressively worse throughout the quarter.

Our non-vehicles GMV growth performed solidly in the first part of the quarter but started to decelerate sharply in mid August.

Similarly, we saw significant slow down in StubHub during the second half of the quarter.

We haven't yet seen any changes to these trends in our business early in the fourth quarter which suggests we will be operating in a difficult environment this holiday season.

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

Overall, our market place business segment achieved net revenues of $1.4 billion, a 4% increase over the year-ago period.

Transaction revenue increased 1% and marketing services revenue increased 29% over last year.

Market place revenue growth decelerated by 9 points from Q2 primarily due to slower GMV growth and a stronger US dollar.

Our online comparison site, shopping.com, was significantly impacted by changes made by search engines that disrupted Shopping's traffic this quarter.

This business decelerated sharply in Q3, impacting market place's revenue growth by about a point.

We expect that shopping.com will continue to negatively impact our growth rate for the next three quarters.

Global GMV came in at $14.3 billion in the quarter, down 1% compared to last year with both the US and international geographies decelerating from last quarter.

Global GMV growth, excluding vehicles, was up 3%.

Active user growth came in at 3% on a trailing 12-month basis, excluding China and Taiwan where we are now part of joint ventures this metric remained at 6%.

We remain encouraged by strong rates of growth in our fixed price format which accounted for 46% of GMV in the quarter, and continues to grow much faster than the option style format.

Let me provide a deeper look in to our Q3 GMV performance.

Our revised fixed-price fee structure helped fuel a big surge in supply on our site with listing growth of 26%.

However, our converse rates dropped by a sharp 18% resulting in sold items growth of 6%, a 4 point deceleration from Q2.

We're in the early stages of improving our finding experience and there's still a bit of work to be done.

We rolled out our new finding platform in the US near the end of the third quarter which allows us to optimize our data and alga rhythms in order to better match up buyer demand with our vast selection of merchandise.

Average selling price continues to fall down 7% in Q3, primarily impacted by the economic downturn as consumers trade down and buy fewer large-ticket items.

The combined deceleration sold items and average selling price resulted in GMV growth of minus 2% on an FX neutral basis.

Obviously the current GMV trend is not where we would like it to be but, as John said, we remain confident that we're on the right path, and we believe the improvements we are make for our users will ultimately move the needle.

Clearly, the tough economy makes our job more difficult and lengthens the time it will take for progress to flow through to the financials, but we remain committed to reinvigorating growth in our core business.

As John said earlier, our adjacencies within market places are characterized by attractive, fast-growing businesses such as classifieds, advertising and StubHub.

Classifieds showed strong revenue growth at 59% over last year with our text and graphical advertising partnerships continuing to exhibit strong growth at 127%.

Despite slowing during the second half of the quarter, StubHub increased revenue by 46% helped by our partnership with Major League Baseball and improvements to buyer conversion.

Now let's turn to our payments business.

PayPal posted another strong quarter with total revenue coming in at $597 million, a 27% increase versus the same period last year.

Total payment volume was $14.8 billion a year-over-year increase of 28%.

TPV grew by 24% in the US and 37% internationally.

PayPal continues to achieve ubiquity on the web through increased penetration on eBay and an increasingly expanded footprint beyond eBay.

In terms of key operating metrics, global active accounts grew to $65 million for the trailing 12 months, an increase of 19% over last year.

On eBay, buyers are increasingly using PayPal as a safer way to pay online.

PayPal's global TPV on eBay grew by 12% year over year as global penetration rate of addressable GMV was 60%, a 6 point increase over Q3 '07 and a 3 point sequential increase.

Beyond the eBay platform, PayPal merchant services business posted another strong quarter despite the difficult economic environment.

Merchant services recorded $7.5 billion of global TPV in the quarter, representing 49% year-over-year growth and accounting for 51% of total TPV.

As John mentioned earlier, this marks the first quarter that PayPal's TPV was larger than eBay's GMV.

In addition, this is the first quarter that PayPal's off-eBay volume was larger than on-eBay volume.

PayPal has penetrated 35 of the top 100 online merchants in the US and accounts for 5.3% of US e-commerce, not including eBay.

PayPal's global take rate remained flat at 3.89% in Q3 while transaction margin improved modestly to 62% sequentially.

Last week, we announced our agreement to acquire Bill Me Later, a leading online transaction credit provider that is intended to strengthen and extend PayPal's leadership position in online payments.

We believe Bill Me Later will help PayPal achieve greater merchant in consumer adoption leading to benefits from network effects.

In addition, we believe we'll capture significant synergies between our businesses.

We expect this transaction will close mid fourth quarter.

Now let's turn to our communications business.

Skype posted total revenue of $143 million in the third quarter, an increase of 46% over last year.

Total registered users grew to an impressive 370 million, representing an increase of 51%.

Skype -to-Skype minutes for the quarter accelerated to 16 billion, accelerating to 63% growth.

Skype-out minutes increased to 2.2 billion, also an acceleration of growth from last quarter to 54%.

Skype continues to invest in the business while expanding its margins to 26% in the quarter.

Now let me touch briefly on ink level operating expense and cash position before I discuss guidance.

We recorded $674 million of non-GAAP operating income, up 14% from last year, and non-GAAP net income of $592 million, up 5%.

Sales and marketing as a percent of revenue improved by 400 basis points from a year-ago period due in part to a more efficient online marketing spend and in larger part to investments in buyer loyalty and retention, much of which gets recorded as (inaudible) revenue instead of being expense to sales and marketing.

Product development came in 30 basis points higher than last year while G&A was up 50 basis points due to higher fraud losses at PayPal and bad debt expenses.

We ended the third quarter with $3.3 billion in cash and cash equivalents, down $400 million from last year.

As quarter end, $2.9 billion of our cash was located outside the US.

During the quarter we repurchased approximately 25 million eBay shares at cost of $623 million.

So with that, let me turn to guidance.

For the full year of 2008, we now expect revenue to be in the range of $8.525 billion to $8.675 billion and non-GAAP EPS in the range of $1.69 to $1.71.

The reduction in our guidance is primarily a function of a stronger US dollar, a tougher economic climate, and dilution from the acquisitions announced last week.

The weak trends we saw in the second half of the third quarter have continued in to Q4, and our guidance reflects the uncertainty in global consumer spending.

We continue to anticipate free cash flow for the year to be $2.35 do $2.45 billion in line with prior guidance.

In the fourth quarter, we expect to generate net revenue of $2.02 to $2.17 billion, and we anticipate non-GAAP EPS in the range of $0.39 to $0.41.

In summary, it has been a very busy quarter at eBay.

We met our revenue guidance and exceeded EPS guidance despite a strengthening dollar and a tough consumer spending environment.

We generated $543 million in free cash flow.

We continued to take bold actions in our core eBay business by reducing up-front fees on fixed price, a format that consumers increasingly prefer.

We continued to invest in our higher growth platforms, classifieds, PayPal merchant services, advertising, and StubHub which, combined, grew by 55% in the quarter, and we intend to strengthen our portfolio with the acquisitions of DBA and Bill Me Later, acquisitions that are expected to extend our leadership positions in classifieds and at PayPal.

We are lowering our outlook for the fourth quarter in light of the strengthen in US dollar, a weak consumer spending environment, and dilution from recently announced acquisitions; however, we are confident in our priorities as we focus our efforts on making it easier and safer for our customers.

While we will take more time than we expected, we are confident in our ability to ultimately stimulate GMV growth in our market place business.

And now we would be happy to answer your questions.

Operator.

Thank you.

(OPERATOR INSTRUCTIONS).

Our first question comes from James Mitchell with Goldman Sachs.

Great.

Thank you for taking my question.

Your fourth quarter guidance seems to imply really no Christmas, which is kind of consistent with my expectations for my own lack of compensation, but putting that to one side, do you see the economic cyclicality hurting the market place business or do you also see some impact on the PayPal business?

And then on Slide 18, I think, you refer to more marketing dollars part of the reason for the earnings guidance revision for the fourth quarter.

I think year to date your marketing spend is sort of tracking flat to down.

Do you see that turning around sharply in the fourth quarter?

Thank you.

Thanks, James.

First, regarding economic cyclicality, what we saw during the course of the second quarter, first I'll kind of characterize external signs and then internally how it impacted our business.

We saw a fairly sharp deceleration in retail sales, in vehicle sales during the course of the quarter, merchant services which has a pretty good visibility in to what is going on in e-commerce overall decelerated during the course of the third quarter, and then, forth, e-commerce growth rates here in the US were not -- we don't have as good data outside the US but here in the US decelerated rather sharply Q2 to Q3.

We felt the effects of that across all aspects of our business.

While PayPal had a very strong quarter, it did suffer from the decelerating growth rates really starting in the second and third week of August as it exited the third quarter.

And we expect those dynamics to impact our business in the fourth quarter.

In terms of the question on guidance and marketing spend, we have generated some improvements in our overall marketing spend during the course of the year.

We were 400 basis points down in the third quarter; however, as you'll remember, we are spending more on buyer retention kind of programs versus acquisition-related programs through couponing and loyalty programs, and those dollars are impacting revenue in terms of contra revenue as opposed to marketing and expense.

We expect in the fourth quarter in this tougher economic environment that we will be spending even more marketing dollars as a percent of revenue than we did in the third quarter that will impact both contra revenue and our sales and marketing expense as a percent of total.

James, it's John here.

The way we're going to spend that is to really fight for our sellers.

We envision a tough holiday season and we feel a strong need to get out there and help drive demand on behalf of our sellers.

We'll increase internet marketing, we'll increase our couponing, we'll increase cash back program with Microsoft promotion, things that we have proven ability to generate returns from.

Next question, please?

(OPERATOR INSTRUCTIONS) And next we will hear from Youssef Squali from Jefferies.

Thank you very much.

Okay.

So my one question, John, if I look at the -- some of the parts for eBay, the stock certainly looks pretty cheap on that basis.

The only issue is really kind of remains a theoretical exercise unless management gives you serious consideration and is willing to act on it.

Are you and how long would you wait before considering a potential restructuring of the business as the core continues to weaken?

Thanks.

We're continuing to, as I said, invest in our areas of strength and we see strong synergies between the core eBay business and the PayPal business, and strong synergies between the eBay business and the other e-commerce formats.

And the -- I get a question frequently on PayPal of wouldn't we be better off with PayPal being separate?

Our sense is no, that actually there are strong synergies between PayPal and eBay, that eBay continues to provide PayPal with new customers, that there's still growth for PayPal left on eBay.

As we said, we're delighted penetration grew more in third quarter than it has any quarter in the past.

It's now at 60% globally.

We think that can go higher.

And there's nothing being a part of our portfolio that is holding PayPal back.

In fact, quite the contrary.

The overall part of the portfolio allows us to move on an acquisition and opportunity like Bill Me Later.

We are focused on trying to take advantage of the synergies.

We don't think we have fully realized the synergies between eBay and PayPal, and our classifieds business, advertising, and StubHub all have strong synergies with eBay.

The one question is Skype.

Skype I think is a great stand-alone business.

Obviously the more we let it stand alone the more it seems to deliver fantastic results.

Right now it's not a distraction and we are focusing our attention on eBay, PayPal and e-commerce businesses, so we'll continue to assess its role in the portfolio, but right now it is not a distraction.

It is delivering good results.

Next question, please?

Your next question comes from Christa Quarles with Thomas Weisel Partners.

Hi.

Following up on the PayPal slowdown, it looks like international in particular fell off fairly significantly in the quarter.

I was wondering if you could give us some deeper insights there in terms of which markets you are seeing strength and if that's really reflective of what is going on with the broader e-commerce market in those areas.

And then also if you could update us on your G-market intentions.

The filing suggests that you are intending to get more than 50% of G-market, so I was wondering if you could follow-up on that, thanks.

First, on the PayPal slowdown, yes, we saw some deceleration -- or more deceleration, I should say, outside of the US.

A function of a couple of things.

One, Q2 to Q3 currencies.

So with the stronger dollar clearly international revenues are translating at a tougher rate.

Two, the on eBay business decelerated Q2 to Q3 along with the GMV deceleration and then, third, our global merchant services business we saw some deceleration Q2 to Q3, both here in the US and outside of the US.

In terms of G-market, let me -- maybe let me put our -- or reiterate our M&A philosophy and focus and then maybe put Korea in to context.

First, we have said that we're going to continue to maintain the flexibility to invest our -- to invest and grow our businesses through acquisition, and we have highlighted three specific areas of focus.

One, geographic strengthening.

Two, adjacencies that leverage and strengthen our core businesses.

And, three, technology that enable and strengthen our core businesses.

That's the three areas that we have been focused on over the last three years and that has resulted in acquisitions like StubHub which we feel great about.

More recently fraud sciences which is a technology that enables PayPal.

And then recently Bill Me Later and DBA are classifieds kind of extensions of our core business.

So that has been our M&A strategy for the last several years.

In terms of Korea, we got a great business in Korea.

Our RIC business has been performing very well over the last couple of quarters and we continue to focus on competing and growing in that market.

Along the lines, we in conjunction with G-market have filed with the Korean regulators to assess whether it would even be possible to take an equity stake in G-market and recently got a favorable ruling in that regard.

I think we'll evaluate on an ongoing basis whether that makes sense in terms of the best uses of how we allocate capital in a disciplined way.

Let me just come back and make one comment, Bob, on your first.

While there was a deceleration in the market and -- outside the US -- PayPal's international business is one of the things I think we're very excited about.

We continue to see merchants adopting PayPal in Asia, across Europe, and even in Latin America and other places where we don't have a strong eBay presence because it's driving incremental growth and it's opening up a worldwide global market place for those merchants.

In fact, TPV outside the US is up 37% for the quarter and the merchant services international growth was close to 50%.

The economy is impacting I think the whole world, but the core value proposition PayPal delivers to merchants around the world is this global payments platform is one that is -- we continue to think is quite powerful and merchants are responding to.

Next question, please?

We'll hear next from Mark Mahaney with Citi.

John, I wanted to ask you a question about the timing or the speed at which you think it is optimal to try to remove sub par sellers off the network.

Is there still leverage you have there to accelerate that and how do you balance not trying to be too disruptive to the seller community with trying to limit the length of duration in which buyers on the site can still have sub par experiences?

Thank you.

Thanks, Mark.

That's a great question and one that we spend literally hours each day on.

Here is how we're trying to do it.

The first thing is we're not assessing sub par sellers, we're letting our buyers to do it.

These detailed seller ratings where buyers are rating our sellers, that's the foundation we're using, and so I think that's a very important principal here, where we're creating a marketplace that allows transparency.

And, as I mentioned earlier, what is interesting is when you lay out our highest rated sellers, that is sellers that have 4.8 and above and then look at sellers 4.6 to 8, 4.4 to 6, 4.4 and below, you see growth rates now increasingly very consistent with those where buyers are increasingly buying from the highest rated sellers and buying less, in fact they have stopped buying from lower rated sellers.

And so that tells us at eBay marketplace is getting safer.

I think some are saying we should be moving faster and more aggressively on that.

I think our sellers would say we're probably moving too fast and too aggressive.

We're trying to strike that balance where a long-term seller has the opportunity to improve their service on eBay and improve their ratings from buyers, but we see clear evidence that its -- the site today is safer and easier to use than it was six months ago.

We put these changes in in March, it's safer today.

Buyers are telling us that in their qualitative data and what has yet to have happen is have that convert in to more purchases.

Next question, please?

Our next question comes from Brian Pitz with Banc of America Securities.

Thanks.

Would you discuss where you expect to take rates for marketplace to go?

Do you expect it to be really just more than modest impact at this point?

And any color you can give us on expected exchange rates that are baked into your guidance?

Thanks.

Let me take the take rate point and then Bob will take the exchange rate.

Our goal with our pricing changes this year was to modestly reduce our take rate.

We're obviously significantly rebalancing our fees to reduce the up-front fees and put more -- align our success with that of our sellers and the net effect of what we expect in a conversion neutral environment is the take rate will come down modestly over time.

We have also gone to category-based pricing because margins for sellers differ significantly by category.

So, conversion impacted on the short-term but the general direction we're trying to do is to ensure that our marketplace is the most competitive marketplace for sellers to sell on.

I just -- just one -- one other observations on that, Brian, is in the quarter our take rate actually went up, which is a function of modestly lower take rates but also the mix of our business, so our highest take rate business, StubHub, continues to demonstrate great growth, and our lowest take rate business vehicles has really been suffering by the overall economic environment, so those are two kind of degradations about the overall take rate that's reflected in Q3's results.

In terms of exchange rates, we try to stay away from giving specific rates, but what I would say is 90 days ago when we spoke to you, we were looking at a euro that was about 158 to the dollar and a pound that was about 198 the dollar.

And today reflected in our guidance for the rest of the year it is closer to a spot rate that is about 136, 137, and a pound a that's about 178 to 177 to the dollar.

So what has transpired over the course of the last three months is about a 10% strengthening of the dollar and that will impact our revenues from last time we spoke to you by about $200 million.

Next question, please?

Our next question will come from Jeffrey Lindsay with Sanford Bernstein.

Hi, just following on from that.

Could you give us a sense of -- are you undertaking any hedging initiatives or do you have any in place to offset the risk of this dollar appreciation, and then can you give us any color on the quality of receivables in the Bill Me Later acquisition and your expectations for net charge offs?

Do you think they are going to stay at the current 3.4% rate?

Thank you.

Yes, in -- first, in terms of hedges, for the most part, our hedging strategies are entered in to at the beginning of the quarter for the next 90 days, for the most part.

So we are exposed in terms of translation of revenues within the quarter.

However, we hedge our exposures, in terms of income, within a range in the 90-day period.

So we get pretty protective within the 90-day period but not very protected overall beyond 90 days.

In terms of Bill Me Later's receivable portfolio, we indicated last week that our expectation was that the receivable portfolio would be about $550 million give or take when we close the transaction later on in the quarter, and when we assess the portfolio, we try to take in to account both historical trend rates, what we are seeing on recent approval rates and charge-offs, and a view on a go-forward basis about what we could expect the current economy in the future would be on the portfolio and, with that, we tried the best we could to take that in to account and giving you the $550 million loan portfolio balance.

Next question, please.

Our next question will come from Imran Kahn with JPMorgan.

Yes, hi.

Thank you for taking my questions.

The question is if I look at your listing growth rate the last three quarters and look at your conversion rate, it seems like there is an inverse relationship, so trying to understand this 18% conversion decline.

How can you turn it around?

You talked about [best match] I think you rolled it out in Italy.

Give us some color, when should we expect to see that in the US?

And do you expect the conversion rate to continue to decline?

If so, for how long?

Imran, let me address that.

The conversion rate is actually transitioning as we talk because the recent changes we have made are changes in the nature of fixed price listings where now instead of a seven-day listing, sellers are getting a 30-day listing good to cancel, and so what I think we will see is a site that has more listings, but those fixed-price listings will only get exposure when the sellers offer the best prices and the highest service.

So we're going to spend less time on conversion, more time on sold items, and what in essence is happening is our search, our finding platform is changing how we bring value to the top of the search results.

Auctions will continue to come time ending soonest, which is the best way to bring the best values to a buyer in an auction format for auction listings, and then for fixed-price listings the change we're making in Q4 is that instead of time ending soonest being what is bringing the fixed-price listings to the top of the list, we will find the lowest-price, highest quality seller fit with that particular search and bring that to the top of the list.

So conversion rates will probably still remain relatively lower because of the increase in fixed price listings, but successful items, that is sold items, is really the metric we will be focusing on.

Just thought I'd mention that's down 4 points in Q3, we think largely driven by the economy, and it's a metric we're very much focusing on both to assess how finding is going as well as how our site is going in Q4 and beyond.

The only other thing I would add, Imran, is a better consumer spending environment all else also impact conversion.

Sure.

So that clearly is one we believe is impacting growth of sold items.

Next question, please.

Next we'll hear from David Joseph with Morgan Stanley.

Yes, hi, just -- I think I'm going to ask the first question a little bit differently.

You might have addressed this a little bit.

Your fourth quarter guidance implies a decline in revenue of about 4% at the midpoint of the year versus 11% growth implied in the prior guidance, and given that you reiterated guidance in the beginning of September, it sounds like there was significant weakness in September which is in line with what we have been hearing in retail across the board, but wondering if you could tell us -- talk to us a little bit about the linearity and what you have even seen in October.

And then just assuming that GMV declines again in the fourth quarter, maybe you can give us a sense of what we should expect for 2009.

Should we start modeling a decline in GMV in 2009 as well?

Dave, in terms of kind of sequential growth rate, Q3 grew by 12% and our implied guidance in Q4 has us at about minus 4%, and I would characterize maybe three things primarily that are impacting that.

One is clearly the third quarter was impacted by a strengthening dollar and a weaker economy, but in the latter part of the quarter, so as the dollar strengthened quite a bit towards the end of the quarter and we had the full effect in the fourth quarter, the economy weakened quite a bit in mid August and for the rest of the quarter and the combination of those two things are making the growth deceleration or growth from Q3 to Q4 that much tougher.

The third thing I would add is, as John indicated, we are going to, in a tough consumer spending environment, we are going to be spending more on sales and marketing, particularly in coupon-related expenditures, and that will impact the revenue growth as well.

And I think -- I would like to say I wish there was a lot more clarity in at least in my crystal ball on what is going to transpire over the critical holiday season for us but, honestly, there's not and, as a result, as you can tell by our guidance the range that we gave you in the quarter is a lot wider than it normally is at this time just because -- just a reflection of just the uncertainties we see in the consumer spending environment.

Operator, we have time for one last question.

Our last question comes from Scott Devitt with Stifel Nicolaus.

Hi, thank you.

At today's close your market cap is about $20 billion and you have about $3.6 billion of cash and short-term investments, and the company has spent $5.3 billion in buybacks over the past couple of years at about $30 a share.

With your free cash you are are going to generate in 2008 in an S&P-type dividend pay out, you could have a 4% or 5% dividend yield.

I was just wondering if there is any change any company's perspective in respect to returning capital to shareholders via the existing buyback versus a dividend in the future?

Thanks.

Thanks, Scott.

I -- we end the quarter, you are right, with $3.3 billion in cash.

As you know, the reality of that cash is about $400 million sits here in the US and the rest of it offshore.

So the inherent flexibility we have to use our strong balance sheet and our strong cash flows here domestically has a pretty severe tax rate penalty associated with it, so that's number -- that's a constraint we have to deal with.

Secondly, you also realize that with the acquisition of Bill Me Later and the relatively low cash position we have here in the US as we will be using both our cash and available financing, including our line of credit, to finance that transaction, and in a sense we'll have borrowings here in the US post completion of that transaction.

And then third, and from a more macro perspective, I would say we always look at our inherent capital structure and the best way to maintain our financial flexibility to invest and grow while redeploying our capital to shareholders, and we'll continue to do that.

Okay.

Thank you for joining us, and we'll see you in 90 days.

That does conclude's today's conference.

We do thank you for your participation.

Have a great day.