eBay Inc (EBAY) 2008 Q4 法說會逐字稿

Good day, everyone.

Welcome to eBay's fourth quarter and year end 2008 earnings results conference call.

Today's call is being recorded.

At this time, I would like to turn the conference over to Mark Rowen, VP of Investor Relations.

Please go ahead, sir.

Thank you, operator.

Good afternoon.

Thank you for joining us, and welcome to eBay's earnings release conference call for the fourth quarter and full year of 2008.

Joining me on today's call are: John Donahoe, our President and Chief Executive Officer, 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'd like to remind you that during the course of this conference call we'll discuss some nonGAAP measures in talking about our Company's performance.

You can find the reconciliation of those measure 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 the 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 users in established markets, an 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 technology and to the VoIP industry, and our need to upgrade our technology and customer service infrastructure at reasonable cost while adding new features and maintaining site stability.

You can find more information about factors that could affect our operating results in our most recent annual report on our Form 10K and our subsequent quarterly reports on form 10Q available at investor.eBay.com.

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 January 21, 2009, and we do not intend and undertake no duty to update this presentation.

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

Thank you, Mark.

And good afternoon, everyone, and welcome to our Q4 earnings call.

Today I'll talk about our results from both the Q4 and annual perspective.

I'll then outline our key priorities for the coming year before turning it over to Bob for more details on the quarter and our Q1 '09 outlook.

Let's start with a quick look at our Q4 results.

Clearly we've been operating in an almost unprecedented external environment.

You are all aware of the news that we've been reading.

This was an extremely difficult holiday season where consumer spending dropped dramatically while retail sales experienced the biggest decline in decades.

And even e-commerce saw negative growth for the first time.

There's no doubt that eBay was impacted by the macro economy, and our fourth results reflect this.

Our revenue for the quarter was down about 7% to just over $2 billion, nonGAAP EPS was down about 9% to $0.41.

This is eBay's first negative year over year quarter.

We are not happy about that.

However, our Q4 revenue is within the quarterly guidance we set and our EPS is at the high end.

We knew the holiday season would be extremely challenging and we managed our business with a prudent mix of operating discipline and competitiveness.

We fought for our sellers and buyers.

Our focus was helping our sellers compete in a brutal competitive environment and offered great deals for buyers on eBay, while continuing to grow PayPal and the rest of our portfolio faster than e-commerce, and we achieved these goals.

Let me provide a couple of examples.

On eBay our highest rated sellers, those rated AAAA and above, grew their businesses 17% in the fourth quarter, once again demonstrating that sellers who deliver the best deals and a great shopping experience are growing their businesses on eBay.

PayPal merchant services, total payment volume grew 35% in Q4 despite slowing e-commerce growth.

And classifieds continued to thrive in this tough economic victim.

To summarize, Q4 created unique challenges, but we executed well in a difficult environment.

Now let me turn to the full year.

Overall our annual financial results met the initial guidance we set at the beginning of the year.

And we accomplished this in a year where we embrace a tremendous amount of fundamental change and in a year where the external market deteriorated significantly.

Our performance for the full year not only reflects the strength of our portfolio but also the operating discipline and strategic clarity and focus with which have our Management Team is leading the Company going forward.

When I was named CEO at the beginning of last year I said that we were a strong Company with a great portfolio of assets.

I also said that our user experience on eBay had not kept up and we needed to make some fundamental changes to that business.

And so I set three clear priorities.

First, make eBay safer and easier to use.

Second, improve value and selection by combining fixed price with auctions in a uniquely eBay way.

And third, extend PayPals leadership position both on and off eBay.

At the beginning of the year I said that we would move aggressively in 2008 and exit the year a stronger Company, but that achieving our priorities would take time.

So let me recap how we did.

We made more fundamental changes to our core eBay business than any point in our history, most of which we implemented in the second half of the year.

Many of these changes were overdue and were things that our sellers had been asking for and our buyers had come to expect.

And today eBay is safer and easier to use than a year ago.

Our pricing is more competitive, our success is more aligned with that of our sellers and the fixed price at auction are becoming more balanced.

Let me be clear.

We still have a lot of work to do.

We are evolving a large and complex marketplace and the significant structural changes we made in 2008 provide the necessary foundation for us to continue moving aggressively ahead to accelerate growth in our core business.

We also continue to expand the number of ways we connect buyers and sellers.

We have momentum in advertising, classifieds and StubHub.

For the full year text and graphical advertising revenue was up 139%.

StubHub was up 54% and classifieds grew 57%.

These alternative e-commerce formats are increasingly giving us profitable, scalable and more diverse ways to monetize our traffic and connect buyers and sellers.

Collectively our alternative formats delivered over $1 billion in revenue in 2008.

We've also strengthened PayPal both on and off eBay.

PayPal increased its penetration on eBay by nine points during 2008 to 63%.

And we significantly expanded market share off eBay during the year.

And we reached two important milestones for eBay during 2008.

For the first time PayPal's TPV off eBay exceeded volume on eBay, and PayPal merchant services business is now a $1 billion business, up 45% year over year.

We also made two acquisitions that strengthened PayPal during the year which I'll elaborate more on in a minute.

Skype had a terrific year.

Revenues of $551 million were up 44% and registered users reached $405 million, up 47%.

Skype user metrics improved significantly during the year.

As I said many times, Skype is a great stand-alone business and more and more people around the world are discovering the power of Skype as a communications school.

I love the Skype anecdote that Vice President Biden and his wife, Jill, shared earlier this week on Oprah.

Using Skype on their laptop the Bidens chatted live by video with their son who was in Iraq while the Bidens were back stage on election night.

What a fabulous example of how Skype helps family share important moments together regardless of where they are in the world.

Now across our portfolio technology is increase single a key enabler of our growth.

And we invested more in our eBay and PayPal technology platforms in 2008 than ever before.

We also significantly strengthened our portfolio through the acquisitions of Fraud Sciences, Bill Me Later, DBA and BilBasen.

Fraud Sciences enhances PayPal's risk management capabilities.

Bill Me Later further extends our leadership position in payments, and DBA and BilBasen, the top sites in Denmark, broaden our global leadership in online classifieds.

Now while strategically investing $1.6 billion in our portfolio through these acquisitions, we also maintained a healthy balance sheet, ending the year with more than $3 billion in cash.

Organizationally we strengthened our Management Team and drove greater operating discipline across our Company.

As the economy began to turn we took decisive action early and quick to the simplify our organization and reduce our global workforce by approximately 10%.

As a result we are entering 2009 with a prudent cost structure.

And last but not least, we met our financial commitments to you.

Simply put, we did what we said we would do.

We delivered double-digit revenue and earnings growth and generated $2.3 billion in free cash flow while maintaining a healthy balance sheet.

All in all we played a pretty decent game when most playbooks failed.

That's not to say we're content.

We are aware of the challenges we face and I am intent on continuing to address these.

But we also have significant opportunities and I'm confident about our companies future.

We have exited 2008 a stronger Company.

Our portfolio is more diversified than ever and we are more effectively monetizing our platforms in a greater variety of ways.

And I'll remind you that we have proven business models that have significant growth opportunities.

We still have a lot of work to do in our core eBay business.

Our priorities are on making eBay safer and easier to use and improving value and selection remain consistent for 2009.

We are making the necessary changes, tough changes, and we are doing so with focus and conviction.

At the same time we have a powerful portfolio, one that I frankly believe is not fully credited in the value of the Company.

And during 2009 PayPal, Bill Me Later, advertising, classifieds, StubHubs and our other businesses will continue to contribute more revenue, more earnings and more opportunities as we grow, scale and diversify the ways in which we connect buyers and sellers and monetize traffic.

We are the global e-commerce leader and we intend to maintain and extend that position.

The macro economic environment will continue to be extremely challenging in 2009, and we plan conservatively.

But tough times create opportunities for strong companies to get stronger and we intend to do just that in 2009.

Now we'll turn it over to Bob for more details on the quarter and our financial outlook for Q1 '09.

Thanks, John.

First I'll review our Q4 and full year 2008 financial performance in some detail and then I'll discuss guidance for the first quarter of 2009.

During my discussion I'll reference our earnings slides presentation that accompanies the webcast.

All growth rates mentioned in my prepared remarks represent year over year comparisons unless I clarify otherwise.

Overall our revenue is down 7%, nonGAAP earnings were down 9%, and we generated $525 million in free cash flow during the quarter.

Q4 financial results were impacted by a difficult economic environment coupled with a strengthening US dollar.

Through belt tightening we were able to deliver at the high-end of our EPS guidance range despite the fact that the revenue came in at the low end.

2008 overall was a good year financially, strong revenue growth, stronger EPS growth and excellent free cash flow.

We had a strong first half with revenue and EPS up 22% and 25% respectively, but the second half proved to be extremely challenging as global e-commerce slowed, the dollar strengthened considerably and interest rates declined.

Let's take a closer look at our Q4 results.

Our combined businesses generated net revenues of $2 billion in the fourth quarter, a 7% decrease.

Organic revenue excluding acquisitions and foreign exchange was down 3%, and couponing spend reduced revenue growth by an additional three points.

Revenue was negatively impacted throughout the quarter by weakness in the economy as well as a much stronger US dollar.

Despite the tough economic environment, PayPal merchant services, classified, advertising and Skype delivered strong growth.

NonGAAP EPS was $0.41 in the quarter, a 9% decrease.

Excluding the impact of the strengthening dollar our EPS increased 7%.

Tight cost controls offset the impact of lower volume and higher coupon expense.

Our operating margin for the quarter what 32.8%.

We generated free cash flow of $525 million CapEx as a percent of revenues came in at 8%.

Return on invested capital decreased to 26.6% on a trailing 12-month basis.

The decline was primarily attributable to an increase in invested capital due to the acquisitions of Bill Me Later and DBA, BilBasen in the quarter.

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

Overall our marketplaces businesses segment achieved net revenues of $1.3 billion, a 16% decrease.

Excluding the impact of currency, revenues were down 10%.

Transaction revenue decreased 18%, while marketing services revenues stayed flat.

The year over year change in transaction revenues was primarily driven by declining ASPs, a strengthening dollar, as well as our coupon campaign and seller discounts which are recorded as contra revenue.

Marketing services continued to become a bigger component of the marketplaces revenue and as we expand our formats and methods of monetization on the site.

Classifieds grew 48%, text and graphical advertising were up 47%, Shopping.com declined 50%, as rule changes made by search engines last summer disrupted shopping traffic.

A couple of quick highlights on operational metrics for marketplaces.

Active user growth came in at 5% on a trailing 12-month basis excluding China and Taiwan.

Sold items were up 3% in the quarter.

GMV on a geographic basis had USX vehicles down 9% and international flat on an FX neutral basis.

We remain encouraged by our progress in the fixed price format which accounted for 49% of GMV in the quarter and continued to perform better than the market.

Now let's turn to our payments business.

PayPal posted a strong quarter and now represents 31% of company-wide revenues.

Total revenue came in at $623 million, an increase -- an 11% increase.

Total payment volume was $16 billion, an increase of 14%.

PPV increased by 13% in the US while growing by 15% internationally.

PayPal continues to move towards ubiquity on the web, to increase penetration on eBay and an increase single expanded footprint beyond eBay.

PayPal extended its international presence with 45% of revenues coming from outside the US.

In key operating metrics, global active PayPal accounts grew to $70 million, an increase of 23%.

On eBay, PayPals global penetration rate of addressable GMV increased to 63%.

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

Merchant services recorded $8.3 billion of global PPV in the quarter representing 35% growth and accounting for 52% of total TPV.

PayPals global take rate came in at 3.78% in the third quarter while transaction margins were 61%.

I'd also like to discuss some key operating metrics for our latest acquisition, Bill Me Later, a leading online transactional credit provider.

This strategic addition to our portfolio strengthens and extends PayPals leadership position and online payments.

Our portfolio balance at year end was $570 million.

BMLs unique transactional based credit decisioning model enables the business to adapt to the changing economic environment while earning a higher than industry average risk adjusted margin.

In a tough credit climate, the BML team has been tightening their credit decision model.

As expected net charge-offs as a percent of receivables have increased moderately, but the increase is much less than other credit issuers and in line with our expectations.

We continue to make progress with the integration of Bill Me Later and PayPal.

We terminated BMLs high cost financing facility and replaced it with eBay's lower cost to borrowing.

Cross promotional efforts with the BML and PayPal customers is progressing as expected and we've begun integrating our risk management and sales function as well.

The acquisition is off to a great start.

Now let's turn to our communications business.

Skype posted total revenue of $145 million in the quarter, an increase of 26%.

Excluding currency translation, Skype revenue accelerated five points in the quarter.

Total registered users grew to an impressive 405 million, represented an increase of 47%.

Skype to Skype minutes increased to more than 20 billion in the quarter, represent 72% growth.

Skype out increased by 61% to 2.6 billion minutes.

The team at Skype continues to invest and grow the business while maintaining attractive margins.

Overall Skype had an extremely good year with strong user metrics and increasing global footprint, recording over $550 million in revenue and segment margins of approximately 21%.

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

We recorded $668 million of nonGAAP operating income and nonGAAP net income of $524 million.

Sales and marketing as a percent of revenue decreased by 300 basis points, largely due to investments in buyer loyalty and retention, much of which gets recorded as contra revenue instead of being expensed as sales and marketing.

Product development came in 30 basis points higher than last year while G&A was 80 basis points lower.

We now have a separate line item for provision for losses which includes a number of items including: transaction losses and marketplaces and PayPal, consumer protection guarantees, and BML loan losses.

Cash and cash equivalents were $3.2 billion at year end.

Of this, $300 million was held in the US.

Net cash was $2.2 billion as we drew down $1 billion on our line of credit to finance the BML acquisition.

We had $840 million remaining on our credit facility at the end of the year.

Before we get to the outlook for 2009 I'd like to put the full year 2008 in context.

Overall it was a strong year for us.

We delivered $8.5 billion in revenues, an 11% increase, $1.71 of EPS, a 12% increase, and we generated $2.3 billion of free cash flow during the course of the year.

We delivered solid operating margins of 32% with segment margins flat or better across all three of our business segments for the year.

It was a year where we embarked on a series of bold actions to improve the competitiveness of our core eBay business: expanding selection, making the site safer and easier to use and improving the value of deals on the site.

John captured this earlier in his remarks.

We've demonstrated some good progress, but lots of work remains to be done.

We also continue to expand the ways we connect our community of users across our portfolio of businesses.

And as a result we have an increase single diverse portfolio of businesses and revenue stream.

Over the last three years we've virtually doubled the size of the Company, expanded our global footprint with 54% of our business coming from outside the US, and diversified our revenue stream with about 45% of revenues coming from non-eBay transaction revenue.

Our recent acquisition of Bill Me Later and DBA, BilBasen will allow to us continue to extend the way we connect buyers and sellers.

We have lots of work to do, but believe we end 2008 with a stronger and healthier portfolio of businesses well-positioned to deal with extremely turbulent economic times.

Let me put some context around our guidance.

Historically we've given full-year guidance on our Q1 call and will not be doing so today.

The uncertain and unprecedented economic environment, coupled with the volatile currency movement, make it difficult to provide any meaningful outlook beyond the first quarter.

So let me turn to our first quarter nonGAAP guidance.

In Q1 we expect to generate revenues of $1.8 billion to $2.05 billion and nonGAAP EPS of $0.32 to $0.34.

GAAP EPS is expected to be in the range of $0.21 to $0.23.

Our guidance reflects tight cost controls against a backdrop of weaker consumer spending, along with a negative impact from foreign exchange and lower interest rates, both of which had a significant impact on our business.

The midpoint of our guidance is down about 12% over the first quarter of 2008.

The biggest driver of this decline is a stronger US dollar which will cost us approximately 10-points of growth in the quarter.

Our EPS at $0.32 to $0.34 is down 22% year on year.

The stronger dollar, lower interest rates, and dilution from our recent acquisitions will cost us approximately $0.11 in the quarter.

After adjusting for these factors, tight cost controls will offset the impact from volume declines, mix and investments in our higher growth businesses.

Without trying to predict where currencies and interest rates will be throughout the year, I've highlighted the impact these factor will have on the business, along with the dilution from acquisitions, assuming rates remain at their current levels.

The combined impact on the full year would be more than $600 million in revenue and $0.30 or more to EPS.

Our challenge in this environment is to focus on what we can control, which means we will manage cost diligently as we seek a clear picture on the economy and the overall growth rate of the business.

At the same time we'll continue to invest in the higher growth businesses within our portfolio.

In summary as John said we are clear about the challenges and opportunities we have in front of us.

We are clear on what needs to be done in order to accelerate future growth in our eBay business, and I believe our best -- we have our best people in place to focus on our most difficult challenges.

We will focus on growing and strengthening our portfolio by extending our leadership position to meet commerce online payments and online communications.

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

And now we'd be happy to answer your questions.

Operator?

Thank you.

(Operator Instructions) We'll hear first from Doug Anmuth with Barclay's Capital.

Great.

Thank you for taking my question.

A couple of things.

First, I was hoping you could give some color on conversion rates and ASPs in terms of I assume the declines there that you have in previous quarters.

And then secondly, can you comment on the increased emphasis that you guys have put recently on largest merchants and in particular the buy.com relationship and how other similar ones have gone so far?

Do you expect the platform to continue to move in this direction, and what does this mean overtime for some of the smaller sellers on eBay?

Thank you.

Hey, Doug, let me tackle the first one and then have John address the second one.

What we indicated for the quarter is our sold items grew by about 3%.

And that's a function of the equation you've seen throughout the year with strong listings growth, but having an impact on conversion rates, so conversion rates did come down.

GMV and our core business, excluding vehicles, was down 4%, excluding the effect of currencies.

The difference is the seven-point decline in ASPs during the quarter, as we saw consumers continue to trade down and also we continue to serve up the great deals on eBay in a more effective and efficient manner with our new search platform.

And, Doug, on your second question on the larger merchants, here's how we view it.

Let me just say right up front, we are still committed to individual small sellers.

So that, creating opportunity for them to sell on eBay, is as true today as it was five years ago.

That said, what sellers have been telling us for years, the most successful sellers that have been scaling their businesses say that eBay is a very hard platform to scale on, and at some point they reach a point where the way we operate is challenging for them.

And so we are evolving our platform to make it easier for larger merchants to upload high volumes of inventory on eBay.

And we are also trying to make it easier to move deep volume on eBay.

One of the encouraging things we saw in the fourth quarter was, you may have seen our deal of the day promotions.

And we had several examples where sellers came in and said, we are going to offer an extraordinary deal on a given item.

And we had sellers that were moving 5,000, 6,000, 7,000 items within 24-hour period of time.

So we don't view it as either or.

Our ambition is to have the most diverse selection and the most flexible platform so that both small sellers and large sellers can compete and drive good values and deals for buyers.

Operator, we'll take the next question.

If we could ask the callers to limit themselves to one question, so more people get a chance to ask questions, we'd appreciate it.

Thank you.

We'll move next to Scott Devitt with Stifel Nicolaus.

I'll limit it to one.

In reference to Skype, in the slide you noted that the revenue accelerated by 500 basis points on an organic basis, and so now it's on a run rate of north of $600 million in revenue and segment margins of above $120 million.

So I was wonder if you could just update us on your thoughts or plans in terms of creating shareholder value with Skype.

Thanks.

Thanks, Scott.

I said from the beginning, I said a year ago, Skype is a great stand-alone business and that I was uncertain of the synergies between Skype and the other parts of our portfolio.

And today I still think it's a great stand-alone business, and as you referenced, I think we've done a great job on really strengthening this business this year.

I think Josh Silverman and his team who I put in really March or April have had a very positive impact on this business.

Skype to Skype minutes last Q4 were growing at 26%.

Today they are growing at 72%.

Primarily because more and more users are adopting this product in tough economic times, a free product has a lot of traction.

Skypeout minutes have gone from 7% last Q4 to 61% growth this Q4 and as we said it's a $600 million run rate with 20% margin.

So there is no doubt this is a great stand-alone business that's getting stronger.

I think we are now confident that the synergies between Skype and the other parts of our portfolio are minimal.

So we are going to continue to run and operate the business.

It's not a distraction currently and at such time when we have further announcement to that we'll let you know.

But for now we are very pleased of the momentum of the business and it's not a distraction.

Thank you, next question, please.

Our next question will come from James Mitchell with Goldman Sachs.

Mr.

Mitchell, your line is open.

You may be on mute.

Hearing no response, on to our next question, Mark Mahaney with Citi.

Great.

Thanks.

Wanted to ask about product development priorities in the marketplace side.

John, you've done a lot of changes -- or eBay has done a lot of changes targeting both buyers and sellers.

If you think about 2009 could you just tick off what you would now view as the top three priorities in terms of improvements you want to make?

Thank you.

Sure, Mark, thanks.

So I'm pleased with the progress we made in 2008.

I'm frustrated it hasn't yet translated into enhanced revenue and GMV growth, but at the beginning of the year we laid out three priorities, and let me just comment on each.

I said that eBay's competitive position hadn't kept up, and that we needed to focus first on safety or trust.

And so a year ago we had no incentives for sellers to provide a safe and good service experience.

Today we have DSRs and sellers discounts tied to DSRs and there is evidence that it's clearly a safer place to shop as evidenced by the high growth rates of high DSR sellers, but we still have more room to go.

I said we want to make it easier.

A year ago we only had pictures on two-thirds of the listings on eBay.

And today gallery, as an example, is now over 95%, but we still need to make it easier.

And then on value and selection this is the one we made the most fundamental or structural changes.

And a year ago you remember we were still using a fundamentally auction approach to both auctions and fixed price on eBay.

So we treated all listings the same.

Time ending soonest was our search approach on all listings and we priced both fixed price and auctions exactly the same across all categories.

And 12 short months later, we've made -- we've rebalanced pricing overall above auctions and fixed price and then we fundamentally changed how we approached fixed price, so that we can now optimize auctions and fixed price, namely we cut fixed price insertion fees to almost zero.

We made them category based, and we've gone in Q4 to popularity sort for fixed price item.

So I think, I would characterize what we've done in 2008 as sort of making some of the necessary structural changes that provide the foundation for going forward.

If I were to take each of those areas for 2009 in trust or making it safer, we will continue to build on what we've done, but leverage the increased PayPal penetration and look for ways to provide enhanced guarantees.

And when people have problems our resolutions will be easier and more effective.

On making it easier to use I feel we made a good start on search in 2008, but I think we can make it even easier to shop on eBay in 2009 through enhanced search where we'll get better and better.

And then on driving value and selection through that balancing auctions and fixed price in a uniquely eBay way, in 2008 we sort of got the fundamentals I described earlier in terms of pricing and search.

In 2009 I think you can look to see a more cohesive user experience that creatively blends auctions and fixed price in different categories and different ways as we compete throughout the year.

So I'm as frustrated as anyone that the changes we made in '08 did not lead to more immediate results, but I think it sets us up to go after the key priorities in 2009 and continue this what will be multi-year path we're on.

Thank you, John.

Next question, please.

And next we'll move to Steve Weinstein with Pacific Crest.

Thank you.

So as you mentioned you shifted some of your promotional strategy more toward couponing and trying to drive repeat purchase.

I'm wondering what we should expect here for Q1 and the rest of 2009, or if you going to shift the balance back to a kind of more traditional kind of marketing and other type of methods?

Steve, I feel like we made good progress in 2008.

And frankly, given our penetration and scale in our more mature market, the competitive gain going forward is not going to be adding the incremental new user.

It's going to be can we translate the strong user base we've got and large number of users and grow a share of wallet.

And so as you've highlighted we fairly significantly shifted our marketing mix in '08 more towards more loyalty based and frequency based marketing.

I think we learned a lot in couponing and on loyalty.

Frankly that's helped us fight for our sellers in Q4.

It was more a competitive fight against the discounts off buy retailers we are providing.

And in '09 I think we've, Q1 and the rest of '09 we will continue to build on that.

And it's interesting, I'm pleased you see our active user growth with 5%, I wish that were higher, but that's some indication that active rates are going up a little bit.

Our sold volume growth was 3% many I wish it were higher, but it's higher than e-commerce growth rates.

And so we are going to continue to try to drive more frequency with our buyers and get them to shop more and more across categories.

And I think we are just building our muscles really in those areas will be continue to build on the progress in '08 and drive it hard in '09, in what will be a very challenging competitive environment.

Thank you, that's helpful.

Steve, the only thing I would add is, while strategically we will continued to as I think in '08 the year over year impact was fairly significant, because we hadn't done that kind of loyalty retention based marketing in 2007.

As we think about 2009 as the year over year impact we don't imagine it will be like it was in 2008, obviously as we get to a more normalized level.

Let me just add one more thing to build on.

Our IM efforts, we didn't talk a lot about in '08 our internet marketing efforts but we continue to be the -- I believe the largest purchaser of key words and continue to achieve efficiencies and productivity in our effectiveness, both to generate new users through IM, but also to generate repeat usage.

So I think we continue to be the best in the world at that.

Next question, please.

(Operator Instructions) Next, we'll hear from Jeffrey Lindsay with Sanford Bernstein.

Thank you for taking my question.

It looks like the related net charge off rate is going up.

Could I ask how the Company managed BML and will the net charge off ratio be allowed to rise above the credit card industry average going forward?

And as a point of qualification is BML offered overseas?

Thank you.

Let me take the second one first.

On overseas, no.

It's not offered.

Our ambitions -- the ambitions of the PayPal and the Bill Me Later team are to take that functionality and competency overseas, but that's not where we are today.

In terms of, Steve, the net charge-offs, it did grow, what we don't know about the net charge-offs on a competitive basis is how the others will come in when they report their Q4 results.

So we're not exactly sure how we rack and stack vis-a-vis competition, but ours did trend up as we expected.

What the team has done is they have tightened their credit decisioning modeling through the course of Q3 and Q4 to mitigate the impact of potential of higher losses.

And that's one -- that's their secret sauce, and that's what they are great at, and they have great risk management processes to ensure that in issuing transactional credit, as opposed to a line of credit, transactional credit, they can manage risk in a much more effective ways than the rest of the industry.

In terms of the net charge-offs itself, a couple of things different about the Bill Me Later model vis-a-vis the industry.

And that is their customer balance tends to turn more frequently and therefore their denominator isn't nearly as high.

Therefore all else equal, net charge-offs has attend a tendency to be a bit higher than industry.

And secondly, in terms of balance transfers that the industry benefits from when they get somebody to switch credit card usage is in the denominator of the competitive landscape and that's not a function of the BML model.

So all else equal we expect that rate to be a little bit higher than industry just in terms of how its measured.

Our team continues to manage that very effectively with their credit decisioning model.

Next question, please, operator.

Our next question will come from Christa Quarles with Thomas Weisel.

Hi.

Just curious your hiring of [Chris Pain].

One of our views is part of the issue on the site is its really a search problem, and I was wondering if you could highlight any specific product development that you expect to come out of that.

And just one quick housekeeping item I was wondering if you could give us vehicle sales on a domestic and international split?

Thanks.

So thanks, Christa.

As you noted, we bought a small search company in December and [Chris Pain] is the founder.

We picked up Chris and a handful of other topnotch search engineers that not only have a deep background in search but also brought some technologies that we think will enhance our search capabilities.

So we are very excited about them joining our team and we think they will help us accelerate our progress in search.

The way I feel about as I step back on search, one of the real opportunities we have is we have the close transaction data that no one else has online, and between eBay and PayPal that's a real potential advantage.

Frankly, 18 months ago we weren't even collecting that data, that closed transaction data, there's no way we could use it in search.

So I feel like search is stronger today than it was a year ago and it will be stronger, a lot stronger a year from now than it is today.

And our current search team I think enhanced by Chris and his team are going to make good progress.

Again, in '08 it was kind of a year of some heavy lifting and fundamentals.

We launched a new search platform.

We went to best match search for the first time.

So for the first time we incorporated seller quality in search results.

We improved the search and recallability.

We went to popularity or relevant space search in Q4 and fixed price, but we are still learning.

And I think in '09 we will build on those fundamentals, and I think it is absolutely we have opportunity to continue to improve the search experience on eBay and it's a journey that will probably never ends, but I think you'll see some real nice progress in '09.

Christa, as it relates to the vehicles question, just probably worth just highlighting we made a change in kind of how we disclose GMV for us this quarter where we gave you GMV and without vehicles on its own and GMV vehicles.

And the reason we did that is because they are such different businesses.

And the way we manage things and the way we'll present you on a go-forward basis is GMV ex vehicles and GMV with vehicles.

Secondly, as it relates to vehicles itself, GMV was down about 30% in the quarter on an FX neutral basis.

It was down about 24%.

Revenues performed better than GMV on a global basis because we continue to monetize that platform in different ways and GMV becomes increase single less relevant.

We do not plan on breaking out global vehicles by geography, by US and international.

So you are going to have to use your historical relationships to try to get that split if that's important for you.

Okay.

Thanks.

Next question, please, operator?

(Operator Instructions) We'll hear next form Ben Schachter with UBS.

Given the uncertainty around the macro in your common fund cost control, can you help us understand what your internal target operating margins are for '09, and any change to any of the long-term operating targets among the various businesses?

Thanks.

Yes.

I'll tell you, what we are trying to do to manage the business in this rather volatile environment, and I'll do it in the context of our first quarter guidance.

So bear with me a second, because I think it's important to kind of explain while we couldn't provide full clarity for our outlook for the year, maybe explain how we are running the business.

Last year's [fourth] quarter we generated $0.42 of earnings per share, and I highlighted the three areas: how FX, how interest rates, and how the acquisitions that we did are going to impact EPS in the first quarter of this year, which is a minus $0.11.

So we kind of start on January 1st with $0.31 of earnings.

And we are going to grow earnings to $0.33 in the quarter.

And how we are going to do that in a fairly cloudy economic environment is focus intently on the things that we can control.

And the relationship we are trying to drive is to make sure that our cost control and productivity that we generate more than offsets the impact of declines in volume and the change in mix in our business.

That relationship net/net will generate a few pennies of EPS this quarter, best we can tell based on the range of volume that we guided to.

That's how we'll manage the business through the course of the year.

It's not necessarily targeting an operating margin rate for the Company, nor is it necessarily targeting operating margin rates by business unit.

I will say that the implications of FX on our business will have an impact on our operating margin rates in first quarter and we expect to have an impact on full year.

Next question, please.

Our next question will come from Justin Post with Merrill Lynch.

Thank you.

It looks like you've taken a lot of initiatives to really improve the seller profiles which will presumably help the buyers have better experiences.

I'm just wondering what you're thinking is if you have more and larger sellers and reduce the number of total sellers, what that could do for long-term take rates and how you see that affecting your margins?

Or do you really think that will have no net long-term effect?

Just what your thoughts are as the seller mix changes.

Well, the first thing I'd say, Justin, is we have no, I have no stated goals to shift our seller mix.

As I said earlier our goal -- we think we've made it too difficult for larger sellers to sell on eBay, we historically are trying to make it easier.

But at the end of the day we are trying to create an opportunity where all sellers can compete for buyers business and offer the best deal and the best service, and there are many examples where some of the absolute best deals on eBay and the best service comes from smaller sellers.

So I want to be clear on that.

With respect to the impact on margin, I don't think we see it any fundamental shift in margin.

We've shifted our pricing in '08 to where we are somewhat indifferent between format, auction and fixed price, stores and core, and we have begun moving towards category based pricing.

So that I think we are making some of the fundamental changes that allowed sellers to compete and win on eBay.

Anything you can add to that, Bob?

Justin, the only thing I would say is, as a marketplace manager where we don't control the whole end to end experience and we don't have warehouses and we don't have inventory we try to use incentives to ensure that sellers, or particularly power sellers, are doing -- are creating a great experience for buyers.

And from that we believe we can accelerate velocity of trade on the site.

To the extent that the power sellers continue to dramatically improve their service levels, over the long haul we would expect to provide higher power seller discounts which impact our take rate.

And we believe that that is a great trade-off to make to continue to provide great service for buyers, who are power sellers discounts are a little bit higher, experiences of buyers is just that much better and is a result while take rate may be lower, velocity of trade on the site is higher.

So I think that over the long haul that would be a lower take rate that we would feel great about because the experience we are providing is just that much better.

Great.

Thank you.

Next question, please, operator.

And our next question comes from Youssef Squali with Jefferies & Company.

Thank you very much.

John, I want to go back to something you said earlier, something to the effect that your [perform] of assets and you cannot fairly credited in the value of the Company.

I guess an issue in that statement is some of the parts kind of remained a theoretic exercise until investors feel that you are potentially serious about doing something in that vein.

So considering the trend your depiction for '09, is there a point where a more drastic measure and I'm not talking just about a spinoff of PayPal, but just a recap of the whole business, the alternative formats business is doing great, PayPal seems to be doing very well, the core business seems to be now maturing.

Is there a point where a recap becomes a must if shareholders are to make money on the stock?

Thanks for the question, Youssef, because I know it's on a lot of people's minds.

Look, here's how we are thinking about it.

We have a great portfolio.

And I completely agree as I said earlier we are not getting credit for it.

And believe me, Bob and I regularly look at our portfolio to -- with objectivity.

Here's what we see.

We are continuing to drive success in our business in each of the units as well as trying to drive synergies and we still see strong synergies between eBay and PayPal.

And in particular we see the synergies around eBay provides new users to PayPal in essence for free and that continues to be the case.

That's still a little bit less than half of PayPals new users.

Penetration on eBay is still only 63%.

Now we had a greater [grain] of penetration in '08 based on eBay than we had in the last five years.

That's not a coincidence.

We drove that penetration hard and we anticipate similar gains in '09 and that's real synergy, and frankly PayPal is making eBay safer and a more effective marketplace.

I have to add more importantly being part of eBay does not constrain PayPals growth.

Quite the opposite.

Our acquisition of Bill Me Later is a great example of where we leveraged eBay's balance sheet to make a strategic acquisition or an acquisition that is quite strategic to PayPal.

So our intent is to continue to drive these synergies and continue to realize value from them, if and when those synergies would run their course we would reevaluate it then.

But I think for now we feel quite good about those synergies and obviously the synergies between the alternative ecommerce formats in eBay and PayPal continue to be strong.

Operator, we have time for one last question.

Thank you.

We'll move to Imran Khan with JPMorgan.

Yes, hi, thank you for taking my question.

A question for John.

John, if you look at your fixed price as a percentage GMV improved 300 basis points implying that your auction business declining at a faster pace.

So the question is do you think that the consumer appetite for auction related businesses has higher friction has reduced significantly?

And if so, do you think it's going to headwind even if the economy recovers for eBay to grow its marketplace business?

Thank you.

Thanks, Imran.

Let me tell you how we think about it and how we are looking at it.

If you step back we are still in very early days in e-commerce, right?

E-commerce is today only 5% of off-line retail, and frankly I can see that doubling or tripling in the next five to 10 years, because you think about what e-commerce should be it should be a lot hive than 5% of all retail, so it's a large market with lots of long-term growth potential.

But like all markets customer needs evolve over time, and what it takes to compete and win tomorrow is not necessarily what it took to compete and win yesterday.

So we are the global leader, right?

We have a leadership position and we are the only one with a very strong global footprint, but we have to evolve our business model overtime to compete and win.

And at the end of the day customers are my only compass, so we are aren't pushing auction versus fixed price.

We are trying to offer customers choice.

And three years ago auctions were 70% what have we did and fixed price 30%.

As you heard Bob say earlier today, it's now 50/50.

And frankly I'm not certain what it's going to be three years from now.

But what we are doing is we understand where the web is going and e-commerce is going and the kind of innovations we need to do, and so our strategy is two fold.

One evolve the eBay marketplace so that we have a more unique blend of auctions and fixed price and we are frankly somewhat indifferent to the format.

And then secondly we understand that there are going to be a growing number of ways to connect buyers and sellers, and so these alternative e-commerce formats, be they classifieds, be it advertising, be it StubHub, are simply other ways to connect buyers and sellers.

So we want to build the strongest portfolio of formats and monetization approaches so that we can continue our leadership position in ecommerce over the next three to five to 10 years.

E-commerce.

And so frankly the key -- the three or four key themes or principals.

One, the best deals online, two, the widest selection, and three, offering buyers and sellers choice whether they trade, auctions on eBay, fixed price on eBay, through classifieds or through ads.

And we are building the foundation that will allow to us compete and win over the next three to five to 10 years as this market continues to grow.

Great.

Thank you.

Alright.

Thank you, everyone, for joining us and we will catch up with you throughout the quarter.

That does conclude today's conference.

We do thank you for your participation.

Have a great day.