eBay Inc.
Q2 2006 Earnings Call Transcript

Published: 20 Jul 2006

[Operator:]

Please stand by, we are about to begin. Good day, and welcome everyone to eBay's second quarter 2006 earnings results conference call. (Operator Instructions) With us today from the Company are the President and Chief Executive Officer, Ms. Meg Whitman; the Chief Financial Officer, Mr. Bob Swan; and from Investor Relations, Mr. Celyn Frayha. At this time, I would like to turn the call over to Mr. Frayha. Please go ahead, sir.

[Celyn Frayha:]

Good afternoon. Thank you and welcome to eBay's earnings release conference call for the second quarter of 2006. Joining me today are Meg Whitman, our President and CEO; and Bob Swan, our Chief Financial Officer. This conference call is also being broadcast on the Internet and is available through the Investor Relations section of the eBay website. Before we begin, I would like to take this opportunity to remind you during the course of this conference call, we may discuss some non-GAAP measures in talking about our Company's performance. You can find a reconciliation of those measures to GAAP measures in the tables of our earnings press release. In addition, management may make forward-looking statements regarding matters that 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 our increasing need in established markets to grow revenues from existing users as well as from new users; an increasingly competitive e-commerce environment; the complexity of managing a growing company with a broad range of businesses; the impact of the Company's recently announced pricing and product changes; regulatory tax and litigation risks, including financial industry risks specific to PayPal and risks specific to Skype's technology and to the VoIP industry; our need to upgrade our technology and customer service infrastructure to accommodate growth at a reasonable cost, while adding new features and maintaining site stability; our need to successfully extend our platforms to new countries and new types of merchandise and sellers; foreign exchange rate fluctuations and the impact and integration of recent and future acquisitions. You can find more information about factors that could affect our results in our annual report on our Form 10-K and our quarterly reports on Form 10-Q available at investor.eBay.com. You should not unduly rely on any forward-looking statements and we assume no obligation to update them. Now over to Meg.

[Meg Whitman:]

Thank you and welcome, everyone to today's conference call. Q2 was a good quarter for eBay with continued growth and momentum across our three business units

[Bob Swan:]

Thanks, Meg. Today, I plan to talk to you about our Q2 financial performance, the share repurchase program we announced today, as well as the financial outlook for the remainder of 2006. First let me discuss our financial results. Overall, we had a good quarter. We delivered solid revenue growth, strong earnings and another quarter of impressive operating cash flow. Our performance was driven by record revenue from PayPal, especially merchant services, continued growth at Skype and despite some near-term challenges, a good quarter for the eBay Marketplaces. As I explained at the Analyst Day in May, I believe we have a solid financial model and that our business has tremendous long-term potential. Our Q2 performance reinforces my beliefs. In total, our business generated net revenues of $1.411 billion, representing 30% year-over-year growth. Organic revenue was 21% on a year-over-year basis. The acquisitions we made over the past 12 months to strengthen our leadership positions, including Skype, Shopping.com, and the VeriSign payment gateway contributed 9 points of top line growth. FX did not have a material impact on our results. Our non-GAAP operating income was $460 million for the quarter, up 13% over the year-ago period and representing a non-GAAP operating margin of 33%. Our non-GAAP EPS was $0.24, a 10% increase over the second quarter of 2005 and $0.01 higher than the top end of our guidance range. Additionally, operating and free cash flows were $516 million and $367 million respectively. Taking a closer look at each of our segments, the focus of our Marketplaces business has been to reinvigorate the core business, expand our served market and increase our monetization opportunities. In Q2, the Marketplaces business achieved net revenues of $1.028 billion, up 22% versus the year-ago period. In the U.S., revenue was $509 million, up 20% over last year and international revenue reached a record $518 million, up 24%. Taking a closer look at the eBay platform, user growth continues to be strong with nearly 10 million new users in the quarter, crossing the 200 million registered user mark, bringing the total to nearly 203 million new users. eBay new listings in the quarter reached a record 596 million, representing year-over-year growth of 35%. Core listings were up 22% and store inventory listings grew by 178% to reach nearly 106 million new listings in the second quarter. eBay GMV was $12.9 billion, an 18% increase over last year. GMV was driven by accelerating growth in categories such as motors, computers, sports and tickets and travel. In the U.S., new users grew by 3.1 million, reaching a total of 90 million registered users. New listings in the U.S. grew by 23% year-over-year, leading to $6.1 billion of GMV, representing a 15% growth rate versus the year-ago period. The motors category accelerated on a year-over-year basis versus Q1 as we headed into the strong car buying season. In fact, this past quarter, the 2 millionth passenger vehicle was sold on eBay Motors, an amazing milestone. In our eBay international business, new users grew by 6.7 million, bringing the total to 113 million users. New listings grew by 47% year-over-year, driven by broad-based growth across our international portfolio; and, from a format perspective, the continued acceleration of store inventory listings. GMV was $6.8 billion, growing at 22% versus the same period last year and representing nearly 53% of global GMV. In Europe, Germany and the UK continued to pace our international growth. Germany was our biggest single driver of listings growth, growing at 50% year-over-year with the books and music categories leading the way. The UK continues to be one of our most successful markets, with the highest GMV per capita in any of the countries we operate. We just announced the launch of a new Motors Classifieds format in Germany and the UK, which has helped continue to build user activity on those sites. France and Italy continue to enjoy strong growth in their respective markets and we further strengthened our international portfolio in Q2 with the purchase of Tradera, the leading auction-style marketplace in Sweden. We continue to make progress in Asia despite a tough competitive environment. Our focused efforts in China and Korea are starting to show some traction. In China, both new and successful listings growth accelerated on a year-over-year basis versus the prior quarter. In Korea, new listings grew at 112% and our local team is responding well to a more competitive environment, innovating and transforming our platform as the market changes. One example of this innovation is the launch in Q2 of a new mobile auction platform and partnership with SK Telecom, the number one mobile carrier in Korea. While eBay met our growth expectations in the quarter, as Meg said, we had hoped the actions we took in early Q2 would have a more positive impact. Today we are announcing a series of actions intended to better balance core and store inventory listings. A bit more context on the problems we are facing

[Operator:]

(Operator Instructions) Our first question comes from Scott Devitt - Stifel Nicolaus.

[Scott Devitt:]

Thanks. I had just one question related to your free cash flow and operating cash flow. I think historically, or at least in the recent past, CapEx has been about 7% of revenue and you are running 10% year-to-date. I'm wondering if we should expect a slowing in the second half and if not, what the increased capital costs are in the business? Because I think at the current run rate, it would put you closer to $600 million than the implied $400 million at the beginning of the year. Thanks.

[Bob Swan:]

Yes, thanks for the question. Yes, in fact, we are running capital to revenues higher in the first half than our full year plans. We expect the capital intensity to decline in the second half. Our full year free cash flow guidance was $1.7 billion plus. We anticipate at this stage the capital will be a bit higher for the full year, approximating about 9%. Because we see opportunities to accelerate some of our capital expenditures from '07 into '06 and reduce some of our dependencies on co-location data centers, which will enhance our productivity going forward. So we will be higher for the full year. We believe we will go back to the 7% to 8% as we go into '07 and beyond. But we will still deliver the full year free cash flows of $1.7 billion plus.

[Scott Devitt:]

Thanks, that is helpful.

[Operator:]

Our next question comes from Mary Meeker - Morgan Stanley.

[Mary Meeker:]

Thank you. The question I would like to ask is, would you still be buyers of your shares for your stock repurchase program at $35 a share? But I will not ask that question. The question I would like to ask is, on the rebalancing of the marketplace, do you have a sense of when you will know if that is or is not working effectively? The second question is, by our math, the Skype monetization continues to improve, the Yahoo! deal will begin to show some traction in '07. It's conceivable to us that that combination of Skype and Yahoo! potentially adds up to $1 billion in '07 revenue and could help assist an accelerating rate of revenue growth for the Company in '07 versus what you report in '06. Any thoughts? Thanks.

[Meg Whitman:]

I will take the rebalancing question, Mary. As you know, the price increase around the world, the store inventory format doesn't take place for 30 days from now, and we are beginning to change the visibility of core auction listings around the world now. So I think we will have a much clearer idea by the middle to the end of Q3 and we will certainly report on that at our Q3 earnings. But we have a high degree of confidence that these steps are going to result in the right results for both our buyers and our sellers.

[Bob Swan:]

Mary, I think in terms of Skype and Yahoo! and their implications for '07, obviously, Skype in the quarter had a great quarter. We continue to believe we can deliver $200 million for the full year, which suggests continued acceleration based on the progress that team is making and we would expect progress to continue into '07. Yahoo! as well, we're very excited about that, both in terms of its impact on the Marketplaces’ business as well as what it means for PayPal. But we're going to wait until we get a little bit of the product roadmap execution behind us and a little bit of traction. As we indicated when we announced the deal, we'll give some insights as to how that impacts '07 when we give our '07 guidance.

[Mary Meeker:]

Thanks.

[Operator:]

Our next question comes from Mark Rowen - Prudential.

[Mark Rowen:]

Thanks, good afternoon. A couple of questions. Meg, your ad revenues as a percent of the total is less than 3% this quarter. A few years back, you said that you didn't really think that that would ever be a much bigger portion. Of course, that was when the ad market wasn't too good. Given the fact that you have this new partnership with Yahoo!, are you rethinking that? Do you think you can monetize the page views better with advertising in certain cases than you can in your marketplace? I have a follow-up if I could.

[Meg Whitman:]

Yes, Mark, I would say that is an accurate statement. As you know, Shopping.com is an ad format today, as is C2C classifieds business, everything from Gumtree to Marktplaats. So we're getting more experience with ad revenues. That said, we do think that the Yahoo! deal does offer us an ability to monetize sites on eBay that aren't well monetized today. You saw this week, we launched the Yahoo! Ad Network on about 50% of null search results on eBay.com. So we are off and running, and as I said, I think we will know more. But I think we are more bullish on advertising than I would have been, probably three or four years ago.

[Mark Rowen:]

Then a few of the retailers have reported pretty weak sales in July, weaker than expected at least. I was wondering if you were seeing any signs of a consumer slowdown in demand on your site?

[Meg Whitman:]

We think that the consumer buying experience degradation that we saw in Q2 was actually not broad-based. It was because we had let the store inventory format get out of balance with the core format. So we're not seeing a fundamental slowdown in consumer activity. What I think we did see is that we really got a little bit away from what made eBay the unique and wonderful experience that it is. So I wouldn't say it was more broad-based; I wouldn't say it is environmental. I would say it was more the fact that we let that balance get out of whack.

[Mark Rowen:]

Great. Thanks.

[Meg Whitman:]

Thank you, Mark. Next question.

[Operator:]

Our next question comes from Heath Terry - CSFB.

[Heath Terry:]

Great, thank you. I was wondering if you could talk a little bit about what you are seeing right now in the breakdown of store formats, in terms of those that are going to be impacted by the increase in final value fees? So those that fall below $25 and the ones that you are seeing above $25. Also if you could talk a little bit -- I know you guys generally try not to do anything without talking to at least some of your Power Sellers and such -- what kind of reaction are you expecting from them to this price increase?

[Meg Whitman:]

Heath, it's too early to tell because we just announced the price changes to the SIF format today and they won't go into effect for 30 days. So I can't really give you any indication of what we are going to see. What we hope will happen is that great SIF items will continue to be listed, but more core auction items will come to the site that are value-priced and fit the core eBay experience. With regard to our community of users, you're right, we talk to our community all the time. I think they will understand the rationale for this rebalancing of the Marketplace. They understand auction is the key to eBay. Sellers know it's the place where they get cash flow and high turns; and they know that buyers love the joy of discovery and the thrill of the winning and things like that. So I think that they will understand. Our user community is not usually enthusiastic about price increases and I understand that. But I think the majority of our Power Sellers who sell in core will understand what we are doing to rebalance the Marketplace. I would say that Bill Cobb and his North American team in particular have done a remarkable job with an outreach program to explain this in much more detail than we have explained past price increases.

[Heath Terry:]

Great, thank you.

[Meg Whitman:]

Thank you.

[Operator:]

Our next question comes from Christa Sober Quarles- Thomas Weisel Partners.

[Christa Sober Quarles- Thomas Weisel Partners:]

Hi, just following up on some of the store issues. First, on the pricing changes, as you look at comparable options for sellers -- to some degree, the stores is more of like a cost per action program. Do you look at other programs and say, is this comparable? Then, does this also limit your uptake of Express to some degree in making that a viable site? The second question around it is really related to the syndication of SIF listings. Have you looked at potentially putting those on sites other than Express and potentially acting as a viable marketing services provisioner for your sellers off of the eBay platform? Thanks.

[Meg Whitman:]

So in terms of comparable options, I think your question, Christa, is, is this still a real value for eBay sellers? The answer to that is yes. We continue to evaluate, is this a vibrant selling proposition for users? What we know is that the take rate on eBay -- either in SIF and core, or a blended average -- is lower than anyplace else on the web. But the key is the inventory turns and the cash flow. On eBay, often the selling price is a little lower, which our sellers have concerns about, but of course that's the value proposition for buyers. So it's high turns, high cash flow for sellers. We think actually from a comparable point of view, we are still very much in the lead. With regard to eBay Express, I actually think what we are doing on SIF will improve eBay Express, because what we need to have going on in eBay Express is items of a real value. To have lots of commodity-oriented fixed-price items in Express will be interesting. What will be a lot more interesting is if we have really high-quality SIF listings and very high-quality fixed-price core items. In terms of the syndication, we are the number one storefront solution. We announced today over 500,000 stores worldwide. I think there's lots of things we can do with that storefront product. So stay tuned because we haven't yet, I don't think, fully mined the power of those 500,000 storefronts.

[Christa Sober Quarles- Thomas Weisel Partners:]

Just a quick follow-up. The idea of depth on Express is more important at this point than breadth? Is that what you are saying?

[Meg Whitman:]

I think that both are important on Express, but what is most important on Express is that there are items that represent a real value. eBay is known for value shopping. What we want to make sure that we encourage, through favoring our core listings on Express, is that when you come to Express you find new and now items, but you find them at a real value.

[Christa Sober Quarles- Thomas Weisel Partners:]

Great, thanks.

[Operator:]

Our next question comes from Doug Anmuth - Lehman Brothers.

[Doug Anmuth:]

Great, thank you. I wanted to ask a question about eBay Motors, which it was good to see reaccelerated to 19% growth year-over-year. In the past, we have seen Motors negatively impacted by OEM incentives, some pick up there. I wanted to see how you think you're positioned here, now that OEM incentives are picking up again during the summer? Separately, I wanted to ask about the impact of the World Cup late in the quarter? Thank you.

[Meg Whitman:]

Let me answer the Motors question. Yes, we're very excited about the performance of our Motors business and we are going to see even more excitement, because right about now in Europe, we are launching a new Motors format that includes the learnings from Mobila, which is our German classifieds site, where no matter what you are looking for, we think we're really going to have a great offering for you because we're going to combine classified listings as well as our auction listings in the definitive online marketplace for cars throughout Europe. We're going to start in Germany and the UK. I think it launches this week or was in tests last week and launches in the next couple of weeks. So great news I think on the Motors front in Europe. In the United States, we're also testing a new motor format that's been in four test markets and off to good results. So I think we have some great product innovation coming down the pipe in Motors. So I think we're in very good shape regardless of the fact that OEM incentives are going up. I think we actually will be able to ride through what might be normally a little bit of a slowdown in the Motors business. With regard to the World Cup, I think that we did see a decline in site activity during the World Cup, particularly in Germany. It was interesting. You could be in the site op center, and when the World Cup game started, you could actually see the site activity decline pretty dramatically. I wouldn't say it was a huge factor in our Q2 results, but it was just remarkable. The first ball was kicked, site activity declined; it stayed low through the whole game and then popped right back up again and we saw this time after time again. As you know, the Europeans and the rest of the world are focused on the World Cup in a way that we didn't see in the American market.

[Doug Anmuth:]

Great, thank you.

[Meg Whitman:]

Thank you.

[Operator:]

Our next question comes from Safa Rashtchy - Piper Jaffray.

[Safa Rashtchy:]

Good afternoon, and thank you. Meg, you mentioned that organic growth was 21% and in the past you have said that you remain confident eBay can grow faster than the e-commerce market. It appears that at least this quarter, that would be below what the market is growing at. Do you think this is a one-quarter event and you can regain faster than market growth, or is this a new way that we should look at your growth patterns?

[Meg Whitman:]

Safa, I think our goal is to grow faster than e-commerce. I would say actually in Q2, we grew faster than e-commerce in the eBay business in virtually every market. But our objective is to continue to outgrow e-commerce. I think the steps that we're taking to rebalance the Marketplace to get core GMV growth accelerating in our major markets, as well as PayPal's eBay business, I feel confident that over time we're going to accelerate to grow at e-commerce levels or faster.

[Safa Rashtchy:]

A quick follow-up if I may. Could you comment on China and Korea in particular? Those are markets that you are heavily focused on and is very competitive. Some of the reports we get suggest that your competition is now number one in those markets -- at least in Korea certainly, in terms of the e-commerce market share. Do you think that you need to gain a number one position or are these markets different in structure that two players can coexist and winner takes all is not necessarily the rule there?

[Meg Whitman:]

It's early days, Safa, and I don't know the answer to your question. What I can tell you is that while I think we are behind a tad in China, we have been steadily improving our performance over the last 12 months. There's no question that when we cut over to the global trading platform, that actually took a chunk out of our growth rates. We had to make the site more Chinese, we had to get a local team trained and ready to go. But over the last 12 months, our performance has continued to uptick there and it is a long game in China. With regard to Korea, we have seen a new competitor who has come in with some nice innovation and very competitive prices; we have responded. Really, it's been a three-pronged approach in Korea

[Safa Rashtchy:]

Great, thank you.

[Meg Whitman:]

Thank you, Safa. Next question.

[Operator:]

Our next question comes from Anthony Noto - Goldman Sachs.

[Anthony Noto:]

Thank you very much. Meg, I was wondering if I could ask you a question about revenue growth and then Bob a question on margins. The high end of your revenue guidance for the third quarter at $1.43 billion basically implies that you do not expect, at that level, a slowdown in revenue growth. I was wondering if you could comment specifically on how you think about listings growth and revenue per listing to get to that number, and if there's anything in there for eBay Express? My sense is listings are still growing in the mid-30s like they did this quarter and so revenue per listing, if it's hitting bottom and an area of decline, with the price increase you could see an acceleration. I wanted to just verify that. Bob, do you think we have seen the bottom in margins in terms of a decline this quarter, and they should be up sequentially throughout the rest of the year? Then your EPS guidance, does it assume any buyback for this year? Thanks.

[Meg Whitman:]

Let me take the first one, Anthony, as best I can. The dynamics that we will see, we're not entirely sure of as we attempt to rebalance the marketplace. As you know, revenue per listing for core auction items or core listings is higher than for store inventory format. Even with the price increase, that will still be true. So the question is, how does this market rebalance itself and what kind of acceleration do we see in core listings? So I think we have given guidance, given the best that we see right now, and not entirely sure how fast or to what extent this market will rebalance. So we've given our very best estimate; and again, I think we will know more at the end of Q3.

[Bob Swan:]

One other point is obviously Express, we're really going to roll out full bore in the back-to-school timeframe. So in terms of full quarter effect, we don't anticipate a whole lot because we'll really start the campaigns towards the end of August in the U.S., in the UK and in Germany. Relative to your operating margin question, for the last year, we were at 35%. We said this year that PayPal and Marketplaces would maintain their margins but with the acquisition of Skype, that would cost us roughly 2 points. So full-year operating margins would be 33%. That's essentially where we were in the first half, 33% operating margin. So we don't expect any dramatic first half to second half changes. Your second question I believe was the buyback? No, we do not anticipate there will be any material effect on EPS with the execution of the buyback in the second half of '06.

[Operator:]

Our next question comes from Youssef Squali - Jefferies & Co.

[Youssef Squali:]

In trying to fend off a potential competition from Google Checkout -- which if you're an AdWords advertiser, it's virtually free to use -- would you consider lowering your fees on PayPal to potentially become more competitive? Secondly, early indications we have gotten speak to relatively lukewarm success with eBay Express. Is that just a function of putting the right marketing support behind it, which I understand will be for the back-to-school, or is there anything else that you guys would need to do to jump start it?

[Meg Whitman:]

Let me take the question about lower fees on PayPal. That's not something that we contemplate. Let me just give you some perspective here. As you know, PayPal is by far and away the number one online payment service with nearly 114 million accounts. TPV grew 37% year-over-year this quarter. Merchant Services grew 61%. The fundamental value proposition of PayPal is tremendous. For buyers, buyers get more choice. Think about it. When you go to a land-based store, you pull out your wallet and you have a choice. You can pay with a credit card, you can pay with a debit card, you can pay with cash, you could write a check. That's what PayPal allows you to do online. You can pay with any vehicle that you want. For merchants, we also give merchants way more choice. They can integrate it as a mark, in the context of their current checkout flow, we can handle all payment processing for that merchant and they get to keep control of the customer and the customer doesn't have to click off that website. We do it all with the absolute best safety and security. So, I think that we just have to continue to improve that value proposition and stay in that number one position, and grow the Merchant Services business as fast as we possibly can, and that's the path that we're on. With regard to eBay Express, actually, it's early days. It's a new site, it takes some time. Remember, eBay Motors took a couple of years to get real traction. We are excited about the early results of eBay Express. We are continuing to refine the search algorithms and wait for the marketing to kick in, because I think this is going to be a home run. The early survey results say that nine out of ten users are excited about eBay Express, it more than met their expectations; and five out of ten say they're going to do more business with eBay because of eBay Express. So I'm very excited about it. Stay tuned, we will give you a full update at the end of Q3.

[Youssef Squali:]

Thanks a lot.

[Meg Whitman:]

Thank you.

[Operator:]

Our next question comes from Imran Khan – JP Morgan.

[Imran Khan:]

Hi, Meg and Bob. I have a housekeeping question and then a more broader question. In terms of the broader question, Meg, I think Bill Cobbs recently talked about how a store listing has a 14 times longer duration, longer to sell. What are you doing in terms of increasing the conversion rate on the store inventory format? What are some measures you are taking, steps to increase the revenue per listing on a storefront? Secondly, Bob, I think in the past you talked about U.S. and international GMV growth and gave some color on the German GMV growth. I was wondering if you could address that? Thanks.

[Meg Whitman:]

So with regard to store inventory formats, I think in the store inventory format we have encouraged people to list a lot of items that sit on our site for a relatively long time. Bill was right, it's about a 14 times duration. I think the key is to get better priced, more value-oriented fixed-price items into SIF. By increasing the price that we did today on SIF around the world, I think we're going to incent the right behaviors. That if you're going to put something on the site, it really should be priced well so that you can optimize the chance that you will sell it. I think eBay Express will increase the turns of SIF, but ultimately the market, I think, has to get rebalanced back to a bit more core and a little less SIF.

[Bob Swan:]

Imran, I think your question was on Germany GMV.

[Imran Khan:]

And U.S. and international as well.

[Bob Swan:]

U.S. and international. Yes, we kind of characterized the second quarter as a good quarter in U.S. and international, but clearly we thought we could have done better. The highlights of our script today is really dealing with the actions that were taken on reinvigorating the core and putting more inventory into the core format that we believe will help both in the U.S. and internationally. In addition to that, as we spoke, the launch of eBay Express, we are pretty excited by it and that really doesn't start rolling out until the marketing campaigns later in the summer. So, we think that will have some uptick as well. In Germany, you'll remember a year ago that that was one of our toughest markets. We announced several actions at the time that really reinvigorated our growth in the second half of last year, in the first quarter this year. We talked about it quite a bit at Analyst Day. But there's more work to do there. It is obviously one of our biggest markets. We have a huge number of registered users and through eBay Express, through the new Motors classifieds, through the pricing changes we have done on books and in movies, we're really doing the things we think are necessary to stimulate growth in Germany. It's a big market for us and it's an important market for us.

[Imran Khan:]

Bob, as a follow-up, the pricing changes you did in the BMV sector on the books, can you talk a little bit, maybe give us some color, what kind of reaction you saw, what kind of conversion you saw from that? Thank you.

[Meg Whitman:]

Sure, so I think what you are referring to is in Germany, we actually took down the insertion fee on books, movies and music. We saw a significant increase in listings in books, movies and music, and an increase in successful items but the conversion rate did fall. In the pricing that the German team announced today, they are actually taking the insertion fee up on those books, movies and music; not to all away where it was before, but I think it was $0.01 going back up to $0.05 or $0.10. So I think we had the right strategy there. I think the insertion fee was too low and now we're going to take that back up. Hopefully what you'll see is the listings growth will continue, the conversion rate will go up and you'll see velocity of trade in the German market on books, movies and music continue to do very well.

[Imran Khan:]

Great. Thank you, that’s very helpful.

[Meg Whitman:]

You are welcome, thank you.

[Operator:]

Our next question comes from Paul Keung - CIBC.

[Paul Keung:]

Good afternoon, Meg and Bob. A question about the potential operating leverage associated with the rebalancing strategy. I guess as you work on the rebalancing between the core and the SIF listings, how significant is that rebalancing associated with sales and marketing spend? I ask this because you have managed the marketing spend pretty well this quarter, so in my mind when I work the conversion rates, higher store listing fees, I'm coming up with a lot more leverage if that strategy works, than what is implied in your guidance.

[Meg Whitman:]

So I think you have identified the right issue here, which is, I don't think we actually need to spend more marketing dollars to revitalize this market. We have great traffic to the site. The traffic continues to grow nicely as it has for the last 12 months. It is about making sure buyers find what they want on the site and again, it's the items that are of real value in a fun format. So if GMV accelerates as we hope it will, there may be some leverage in the marketing spend. But we want to make sure we tell people we have eBay Express, that we tell people the joy of eBay. That is going to be happening not only in the United States but obviously in the UK, Germany, France, Italy, Korea, and China and Australia.

[Bob Swan:]

In terms of the guidance, historically, sales and marketing is a little bit bigger in the fourth quarter relative to the rest of the year and we anticipate that the same this year. Operator, could we take one more question, please?

[Operator:]

Yes, sir. We will take our final question from Robert Peck - Bear Stearns.

[Robert Peck:]

Congratulations. Thanks for taking my call. Meg, there's been a lot of questions today on addressing the supply side of moving listings from stores into core, core to store. I wanted to get a little bit of a feel on your demand side of the equation. We would guess that with this price increase, you would see some listings move from store to core, which would once again probably strengthen the supply side of the equation. When and how should we start gauging the demand side of the equation increasing on the core part itself? Part two of the question is, when you start to incorporate Yahoo! Ads, what have you started to see as far as buyers clicking through and leaving the eBay site and yet not coming back?

[Meg Whitman:]

With regard to the demand side, actually, I think that the demand is still there. But as we shifted the balance, what we did see, as I said in my opening remarks, fewer return visits, higher exit rates, fewer bids per listing. That's because on fixed price items in core eBay, you don't get the watching, you don't get the outbid notices, you don't get people coming back as much. As a result, I think that's why you saw a slower GMV rate, growth rate, than we might have otherwise anticipated. So I think the demand side is there. I think we just have to get the right inventory on the site in front of the right people. I have confidence that we are going to do that. I don't know how you will have visibility into that except to check conversion rates and see what happens to core auction listings, which we're incredibly transparent about. Obviously, we will report on our progress in Q3, but probably it's about core auction listing growth and conversion rates of those listings. With regard to Yahoo!, too early to tell. We just launched the Yahoo! Ad Network on no search results this week. So too early to tell.

[Robert Peck:]

Thanks, Meg.

[Meg Whitman:]

Good, thank you. Thank you for listening today. We appreciate it.

[Operator:]

This does conclude today's conference call. We appreciate your participation. You may disconnect at this time. Did you know? Seeking Alpha selects and aggregates content from over 100 stock market bloggers and money managers. You can get Seeking Alpha articles and transcripts about this or any other stock in your portfolio emailed to you on publication. Or you can get our wildly popular One Page Annotated Wall Street Journal Summary emailed to you every morning before the market opens. We don't spam, never sell email addresses, and there's easy-unsubscribe in every email. Sign up here.