eBay Inc.
Q3 2006 Earnings Call Transcript

Published: 18 Oct 2006

[Operator:]

Good day, and welcome everyone to eBay's third quarter 2006 earnings result conference call. As a reminder, this call is being recorded. With us today from the Company is the President and Chief Executive Officer, Ms. Meg Whitman; the Chief Financial Officer, Mr. Bob Swan; and the Investor Relations Director, Ms. Lydia Ventura. At this time I would like to turn the conference over to Ms. Lydia Ventura. Please go ahead, ma'am.

[Lydia Ventura:]

Good afternoon. Thank you and welcome to eBay's earnings release conference call for the third 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 that during the course of this conference call we may discuss some non-GAAP measures in talking about our Company's performance. You can find 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 risk and uncertainty, including those relating to the Company's ability to grow its businesses, user base and user activity. Our actual results may differ materially from those discussed in this call for a variety of reasons, including

[Meg Whitman:]

Thank you, Lydia and hello, everyone. Welcome to our third quarter earnings conference call. I'm pleased to report Q3 was a very good quarter for eBay Inc., with solid growth across all three of our business units

[Bob Swan:]

Thanks, Meg. Today I plan to discuss our Q3 financial performance and update on our efforts to rebalance the eBay Marketplace, and our financial outlook for the fourth quarter and 2007. First, our financial results. Overall third quarter was a very good quarter for the business. We delivered solid revenue growth, strong earnings and free cash flow. In total, our business generated record net revenues of $1.449 billion, representing 31% year-over-year growth. Organic revenue, excluding acquisitions and foreign exchange, were up 20% versus last year. Acquisitions we made over the last 12 months contributed 8 points to our top line growth. Foreign exchange due to a weaker dollar contributed an additional 3 points of growth. Our non-GAAP operating income was $464 million for the quarter, up 18% over the year ago period, and representing a non-GAAP operating margin of 32%. Our non-GAAP EPS was $0.26, a 28% increase from last year and $0.03 higher than the top end of our guidance range. Our EPS strength was driven primarily by better than expected revenue, a more favorable tax rate and higher interest income. Operating and free cash flows were $522 million and $385 million, respectively. Let's take a closer look at each of our segments. The Marketplaces business achieved record net revenues of $1.049 billion, up 22% versus the year-ago period. In the U.S., revenue was $540 million, up 20% over last year, while international revenue was up 25% to $509 million. Taking a closer look at the eBay platform, we added over 9 million new users in the quarter, bringing the total registered user base to 212 million users. eBay new listings in the quarter were 584 million, representing year-over-year growth of 27%. Core listings were up 20%, and store inventory listings grew by 85% to 95 million new listings in the quarter. As we anticipated, store inventory listings growth decelerated, a result of the price changes we implemented in the quarter as part of our eBay Marketplace rebalance efforts. eBay GMV was $12.6 billion, a 17% increase over last year. Excluding the impact of foreign exchange, GMV grew 15%. GMV growth was highlighted by accelerating growth in categories such as consumer electronics, home and garden, toys and tickets and travel. In the U.S. new users grew by 3.7 million, reaching a total of 94 million registered users. New listings in the U.S. grew by 16%, leading to $6.1 billion of GMV, representing a 13% growth rate versus the year ago period. GMV growth was strong in nearly every category in the U.S., benefiting from successful fall marketing campaigns. Excluding Motors, U.S. GMV year-over-year growth rates were stable with last quarter. As Meg indicated, we undertook several initiatives in the quarter intended to help rebalance the eBay Marketplace. In looking at Q3 seller activity, some of the changes we made are beginning to have an impact. In the U.S. new store inventory listings declined by 16% on a sequential basis, and now make up 77% of total live listings, down 6 points from when we announced the changes in July. At the same time, we had fewer store closures than we were anticipating. On the buyer side, it is too early to draw conclusions on our rebalance efforts as the last of the low-price store inventory listings expired in late September. We will monitor the buyer metrics which were originally impacted by the imbalance, including exit rates, return visits and buyer activity, over the course of the fourth quarter and update you in January. In our international eBay business, new users grew by over 5 million, bringing the total to more than 118 million users. New listings grew by 38%, driven by growth across all regions. GMV was $6.5 billion, growing at 21% versus the same period last year, and representing nearly 52% of global GMV. Excluding the impact of foreign exchange, GMV grew 16% versus the third quarter in 2005. In Europe, performance was driven by good GMV growth in several of our markets. In Germany growth slowed due to a couple of dynamics. First, we lapped a very strong prior year third quarter. Additionally, the first half of the quarter was impacted by an overall market slowdown, although we exited the quarter with good momentum. In the UK, GMV growth accelerated, and we're building on our success by leveraging product innovation and cross-platform promotions to drive user activity. France and Italy remain our top performers in the region with impressive growth rates. In Asia, we're making progress in the face of tough competition. In Korea, listings growth accelerated for the third quarter in a row, highlighting our continued efforts to innovate our product offerings and attract new and existing users to the site. In China, we believe we're maintaining share in a highly competitive environment. Strong local GMV growth was partially offset by slower cross-border trade growth as we tightened seller restrictions to limit fraudulent seller activity. Australia continues to be a standout performer in the region. We're also pleased with our smaller markets in Asia as they enjoy healthy growth driven in part by our thriving cross-border business. Marketplaces growth was also driven by our non-eBay branded businesses. More specifically, we saw tremendous strength at Shopping.com, driven by growth in lead store merchants and continued geographic expansion. Our classifieds business is rapidly gaining traction in all of our served markets. Globally, we now get over 22 million unique visitors per month, growing at close to triple-digit rates and we're beginning to monetize some of our classified sites via contextual advertising. Overall, our Marketplace business exited the quarter in better shape than where we entered. We will continue to closely monitor our rebalance efforts and adapt where necessary to ensure the success of the cornerstone of our e-commerce franchise. Now let's turn to our Payments business. PayPal had another excellent quarter, posting record total revenue of $350 million, a 41% increase versus the same period last year. New accounts totaled 8.8 million, and PayPal now boasts a network of 123 million accounts. These accounts helped drive record TPV of $9.1 billion representing 37% year-over-year growth. Internationally, TPV grew by 59% year-over-year, driven by continued geographic penetration both on and off eBay. In PayPal's on-eBay business global penetration of addressable GMV grew to 58% in the quarter, driven by penetration gains in some of our newer markets, such as Germany, France and Italy. In the U.S., UK and Canada penetration rates were 79%, 71% and 86% respectively. We are pleased we continue to grow our developed markets while quickly gaining traction in our more nascent markets. These penetration gains, along with GMV growth, helps drive year-over-year on-eBay TPV growth of 27%, a slight acceleration versus Q2. Our global Merchant Services business continues to post impressive results, generating $3.3 billion in TPV, up 59% year-over-year. While our Merchant Services business is still predominately a domestic franchise, it is rapidly gaining relevance internationally, and will benefit greatly from our recent expansion of currencies and markets. This quarter PayPal transaction expense was 1.07%, down 4 basis points from a year ago period and up 5 basis points from the second quarter. The year-over-year decline is a result of favorable processing rates we negotiated early this year. The sequential increase was driven by an increase in our credit card funding mix, partially driven by new products and enhancements we have introduced in recent quarters, and the growth of Merchant Services. While these products drive incremental payment volume, they tend to be more weighted toward credit card funding, which increases our cost. Our strategy over time is to migrate customers to higher involvement and higher value relationships. The PayPal transaction loss rate in the third quarter increased to 35 basis points, up 11 basis points from a year ago period and 8 basis points from the second quarter. These increases are largely the result of increases in unauthorized charge card transactions, again, partially driven by newer, faster-growing products which have an increased credit card funding mix. We're constantly adapting our fraud models and capabilities to effectively manage our loss rates over time. In summary, PayPal had an excellent quarter and continues to execute well against our long-term strategy. Looking at our Communications business, Skype continues to grow at a healthy pace this quarter, posting total revenue of $50 million, a sequential increase of 13% over last quarter. Skype's user base grew by 136 million, an increase of nearly 23 million users over the second quarter. This represents a sequential increase of 20%, and an increase of 137% from a year ago. User growth continues to be strong across all of our regions. Skype-to-Skype minutes in the quarter were 6.6 billion minutes, down 8% sequentially from the second quarter, but up 77% on a year-over-year basis. The sequential decline is largely a summer seasonal impact. The Skype Out minutes grew to over 1.1 billion, representing 32% sequential growth and 235% growth versus the prior year. The strong growth of Skype Out minutes is partially the result of our free Skype Out promotions in the U.S., Canada and France. We continue to be excited by our progress with Skype, highlighted by rapid user acquisition and development of the Skype ecosystem. Let's now take a look at our business unit performance translated into non-GAAP operating profits. As I indicated earlier, eBay delivered record revenues of $1.449 billion, up 31% year-over-year, and operating margins of 32%, down 3.5 points from last year. Taking a look at the P&L in a bit more detail, first, gross margins were 79%, down 3 points from the year ago period, reflecting the inclusion of Skype and further investments in site operations capacity, primarily related to data center expansion to support our growth. Next, sales and marketing was 26% of revenue in the quarter, down 1 point from the year ago period, and consistent with last quarter. We held our marketing program spend flat as a percentage to revenue versus last year, while continuing to leverage our fixed based costs. Product development was 7% of revenue, on par from a year ago. We continue to increase our capacity, primarily at PayPal, to support major initiatives such as geographic expansion, while driving down our cost per unit to maximize our product spend. Lastly, general and administrative at 14% is up 1 point from the year ago period. The year-over-year increase is driven by higher transaction losses at PayPal, as well as investments in trust and safety programs. Collectively these factors translated into $464 million of non-GAAP operating income, 18% growth on a year-over-year basis. Consolidated non-GAAP net income was $367 million, up 31% over the year ago period, or $0.26 per diluted share. Our strong year-over-year net income growth benefited from a favorable tax rate, as well as increases in interest income due to higher cash balances and interest rates. On a GAAP basis, Q3 net income was $281 million, or $0.20 per diluted share. This includes $74 million of gross stock option expense, primarily related to our implementation of FAS 123 R, in line with our previously stated guidance. Our business model continues to deliver excellent cash flows. We generated $522 million of operating cash flow and $385 million of free cash flow in the quarter. Capital expenditures were 9% of revenue in Q3, and 10% of revenues year-to-date. We have generated $1.2 billion of free cash flow for the first nine months of 2006, while increasing investments to expand capacity in both Marketplaces and PayPal. In July we announced our first-ever share repurchase program. We indicated the $2 billion program would be executed over the next two years, although we would be opportunistic at existing share prices. During the quarter we successfully repurchased approximately 24 million shares at a cost of $667 million, or one-third of our total program. Going forward, we will continue to execute against the program at its current share prices. Even with the repurchase of these shares, we ended the quarter with nearly $3.8 billion in cash and marketable securities. With that, let me turn to our non-GAAP guidance for the fourth quarter and 2007. Looking to the fourth quarter, we feel good about the strength of the business as we exit Q3 and head into the holiday season. We expect Q4 consolidated net revenues to be in the range of $1.615 billion to $1.675 billion, and an assumed U.S. dollar to euro exchange rate of $1.25. On the bottom line, we expect consolidated Q4 GAAP dilutive EPS of $0.27 to $0.28. This guidance reflects a revised full-year effective tax rate of 28% to 29% on a non-GAAP basis. This Q4 guidance implies full year 2006 revenues of $5.865 billion to $5.925 billion, with approximately $195 million coming from Skype, and including the FX benefit of a weaker dollar. In our original 2006 guidance rate at $1.20 per euro, this full year revenue guidance is consistent with the guidance we gave on our July earnings call. We also expect to deliver approximately 32.5% full year operating margins, 0.5 point lower than our previous guidance, the result of stronger growth in PayPal, and fourth quarter promotional efforts to drive PayPal ubiquity across the Web. Even with this change, we are increasing our EPS guidance range to $1.01 to $1.02 per diluted share. Looking forward to 2007, we expect net revenues to grow in the range of 17% to 21% versus this year. There are several factors that will provide more clarity on our outlook as we close out the year

[Operator:]

Your first question comes from Imran Khan - JP Morgan.

[Imran Khan:]

First, a housekeeping question. Is next year’s guidance including the contribution from Yahoo!? And then I have a follow-up.

[Bob Swan:]

Yes, next year's guidance of 17% to 21% growth reflects our best view of how things are going to play out at this stage. As I indicated, there are several things that we expect to get more visibility to as we close out the fourth quarter, which includes the testing that we are currently doing with Yahoo!.

[Imran Khan:]

Meg, moving on to Asia, recently you announced a partnership with PC Home, and there are a lot of press discussions on a potential joint venture in the Chinese market. I was trying to get a sense what is your thought process in terms of thinking in China? Do you feel comfortable as a standalone company, or what do you think about doing a potential joint venture? Secondly, in terms of Skype Me buttons, I was wondering if you give us some sense what kind of conversion rate you're seeing people who are using Skype Me buttons? Thank you.

[Meg Whitman:]

Sure. In China we continue to see healthy growth in GMV and listings. This quarter, particularly healthy growth in the local market. As I mentioned in the script, we actually tightened seller restrictions on sellers selling out of China on eBay.com, Germany, France and Italy because of the fraudulent seller issue that we began to see emerge. So our local market growth is quite healthy. We believe we're actually maintaining share in what is becoming an even more competitive market. There are many new entrants in the business, but we feel pretty good about where we are. That said, the robust monetization path there is unclear. We do charge, as you know, for eBay China, but at a much lower rate than any other market in the world. So we're constantly evaluating how to strengthen our long-term position. What are the alternatives that we can look at there? One thing we most recently did is we realized that PayPal and eBay in China are much more closely linked, and need to be much more closely linked, than they are in any other market. It is a bit more like Korea, where escrow is actually part of the flow on an Internet auction company in Korea. So we combined the entity under one leader. Those are the kind of things we're looking at and we're committed to China for the long term. The other question was --?

[Imran Khan:]

About the Skype Me buttons, yes.

[Meg Whitman:]

Skype Me buttons, yes. On eBay we launched Skype Me buttons in 150 categories in 20 markets, including 14 categories on eBay.com. The early indications are quite positive. What is fun is that we see indications of a higher conversion rate when there are Skype buttons that are used, so we're excited about that. It is early days, and we're going to continue to test and monitor it. But we're excited about it.

[Operator:]

Your next question comes from Doug Anmuth - Lehman Brothers.

[Doug Anmuth:]

I know that you said that you were cautiously optimistic about the sea change, and then you will have more visibility after Q4. But can you give us a sense of whether you're seeing any evidence that buyer demand in the core is strengthening? Then also in your '07 guidance, can you give us a sense of what is built in there in terms of profitability for Skype for '07?

[Meg Whitman:]

Sure. We are cautiously optimistic, and I will tell you why. First is fixed listings growth actually as a percentage of total has declined appropriately. Meaning we're seeing less identical items at relatively uncompetitive prices, which means that the buyer experience is improving. We are seeing early signs of core auction conversion rate improving. As you know, if you look at the data, our unique visitors to eBay.com in particular remain very strong. What we are seeing is more buyers at higher conversion rates, although it is very early. That is why I say we're cautiously optimistic. What you have to remember is most of the changes didn't really take effect until well into September. But I would say cautiously optimistic with more updates at the end of Q4.

[Bob Swan:]

In terms of Skype and '07 guidance, we do expect Skype to continue its rapid growth trajectory into the new year. We do expect that we will exit 2006 in pretty good stead, and that we will be breakeven during the course of the full year of 2007, while making significant investments to continue to build out the ecosystem and expand the product offering.

[Operator:]

Your next question comes from Mark Rowen - Prudential.

[Mark Rowen:]

Thanks. A couple of questions. Number one, you mentioned that the business is becoming more seasonal. It looks like the listings growth in the first part of the fourth quarter decelerated a little bit in the major markets. Are you expecting that to reaccelerate when your ad campaign starts to hit the airwaves, or was there something going on in the first couple of weeks of last year that is causing that deceleration?

[Meg Whitman:]

I think what we're actually seeing is the effects of the rebalancing of the marketplace, that we're still seeing appropriately deceleration in the listings in the store inventory format. That is what is driving the overall listings number. As we look at the larger markets and core listings, actually we're right on where we expected to be.

[Bob Swan:]

I would just add that for the first couple of weeks of the quarter I would say things were more or less on track around the globe.

[Mark Rowen:]

Is your ad campaign, is that about the same time as last year and will run the same duration?

[Meg Whitman:]

Yes. In the United States it launches in about a week or ten days. It will have roughly the same weight and run the same length of time. We're also doing a television advertising campaign in Germany as we have in the past. That should be unchanged, and we're excited about the new generation of the It ad.

[Mark Rowen:]

Then on the advertising partnerships with Yahoo! and Google, now you have been testing at least with Yahoo! for a certain period, can you help us understand what you're discovering, and does it look like is going to be a bigger opportunity than you first thought, or a smaller opportunity, or how do you see it now that you've had a chance to test some of it?

[Meg Whitman:]

Let me describe what we have done, and then I can let Bob take a crack at whether we think it is bigger or smaller. The teams I think first of all are working very well together between Yahoo! and eBay. What we started with was testing contextual-based ad for –[Break in Transmission]

[Operator:]

Please stand by.

[Meg Whitman:]

So maybe we ought to do a test. I wonder whether we know whether we're still connected?

[Operator:]

You are still connected. We can hear you now.

[Meg Whitman:]

They can hear us now. Okay. Sorry about that. So we started testing, as I said, the contextual-based ads on null search results, and those appear to be quite positive and non-cannibalizing. We are extending that test to what we call complementary searches. The early results are good. We also launched graphical ads served by Yahoo! in the Motors category, and we feel good about what we're learning. I don't think we're actually prepared to tell you what the numbers are, or whether we think it is bigger or smaller, but I will let Bob take a crack at that.

[Bob Swan:]

I would just say so far we feel pretty good, but we've got a couple of months of testing. As we indicated, both us and Yahoo! are going to be very cautious that the introduction of these text-based and graphical ads on our site don't negatively disrupt the experience for both buyers and sellers. We're very cautious. Null results are a positive. General or complementary search is just early days, and graphical we just started. We feel pretty good, but we're not going to be able to provide a heck of a lot more visibility of this until we get to January.

[Mark Rowen:]

You expect the test to run until January?

[Meg Whitman:]

Yes, it will run through the fourth quarter.

[Mark Rowen:]

Then last question on Skype. It looks like the revenue per user on Skype in the quarter was down just slightly. I mean not that that is concerning, but can you just talk about any ways that you're discovering that you might be able to monetize the users, other than the Skype buttons on eBay?

[Meg Whitman:]

One of the reasons that the revenue per user was down just a tad in the third quarter was explosive growth of users in Asia. This is a remarkable phenomenon that is taking place throughout most countries in Asia, obviously including China. That sort of explains why there is a slight decrease. We're looking at a variety of incremental revenue streams in terms of monetizing Skype beyond Skype in, Skype out and voicemail. We will be bringing those to market in the first part of 2007. We're also going to continue to work Skype Me buttons on eBay and develop the pay per call, pay per lead business that we have talked about for some time. Stay tuned, Mark, we've got other revenue streams coming online for Skype.

[Operator:]

Your next question comes from Scott Devitt - Stifel Nicolaus.

[Scott Devitt:]

Thank you. Two questions. First, the marketplace GMV, excluding Motors, grew 6 percentage points faster than the reported number. That is the first time that the non-motors GMV has accelerated in quite some time. In three of the four largest non-Motors category -- electronics, home and garden and collectibles -- actually had material growth acceleration in the quarter. I'm wondering if you could talk about initiatives, specifically in those categories that may have driven the acceleration, whether it is related to something about distribution and channels, Shopping.com, or eBay Express, or if it is category/program related? And if those initiatives could be broadened out over time? And then one follow-up.

[Meg Whitman:]

Yes. I think it is a couple of things. One is our rebalancing effort around stores had a disproportionate effect on some of those categories because store owners had really accelerated store listings in those categories. I think that is another positive sign that the rebalancing efforts are taking hold. We have four teams up against all the different categories. I don't think there was anything particularly in the quarter that was unique around those categories. I think it was really a result of the store inventory pricing format that drove those results.

[Scott Devitt:]

Bob, could you define the organic rate of growth in 2007, and what that does exclude? There's about an 8 percentage point spread now between reported and organic. How does that look in '07?

[Bob Swan:]

Essentially we have assumed no acquisitions in that growth rate, and an exchange rate roughly where we are today of a euro/dollar exchange of $1.25.

[Operator:]

Your next question comes from Mary Meeker - Morgan Stanley.

[Mary Meeker:]

A question for Bob and perhaps for Meg as well. On the '07 growth rate question, if you could drill down on that a little bit more. Perhaps if you're willing to give us some ranges perhaps for PayPal and also for eBay U.S., international. Meg, you talked about Skype growth. I assume the Yahoo! revenue, if you're willing to break it down between eBay and PayPal how it would probably fall in the eBay bucket. That would be great.

[Bob Swan:]

As you might imagine, we had a pretty healthy debate about whether to give guidance on '07 at this stage. We concluded that while we didn't have all the answers, we had a bias for transparency and communicated to you what in fact we did know. But there are several things that as we become an increasingly seasonal business, as we have new things like eBay Express, and advertising really launching in the fourth quarter, as we are doing the rebalancing to the Marketplaces there are things that we just don't know. But we feel confident in the 17% to 21% range, and that earnings will in fact grow faster than revenue. Our intention is to, as we always do, give you more insight after we get through this critical holiday season, and more visibility on really how we see the components of growth materializing during the course of the new year.

[Mary Meeker:]

Just one more question. You had a very aggressive stock repurchase in the quarter. Probably frankly far more aggressive than most companies relative to the time they announce and the time they act. You have some cash overseas. Could you give us a sense of how much of what you could do, you did in the quarter?

[Bob Swan:]

As you know, we announced the program back at the end of July, a $2 billion program for a 24-month period. We indicated that based on trading values at the time, that we believed it didn't really reflect the long-term value of the Company, so we were going to be very opportunistic in the early stages. In fact we were, and we will continue to be at today's trading levels. In terms of our cash balances, we have $3.8 billion in cash at the end of the quarter. The cash balances relative to the revenue are not dramatically different, and we will continue to think about ways to have available liquidity for us to execute on the opportunistic program that we have in place. Mary, if I could, I would like to just close out one more comment just on the whole '07 guidance dialog. In the context of a healthy debate we had at this end, and a bias to just be more transparent and tell you everything we know at this stage, despite the fact that we don't know everything and have a bunch of moving parts, I would be remiss if I didn't say that our intentions next year would probably be to more fall in line with our peers and not provide '08 guidance at the end of the third quarter of '07, and get the benefit of getting the more and more important fourth quarter behind us. I would be remiss if I didn't convey that to you. I think and hope you appreciate our trying to balance the utmost transparency with just getting a little more knowledge behind our back as we project forward.

[Meg Whitman:]

With regard to Yahoo! I think it is fair to characterize that the bulk of the revenues will in fact accrue to the eBay side of the business through the shared advertising revenue to the extent that we build a contextually-based ad business on eBay. That isn't to say that PayPal integration into Yahoo! isn't incredibly strategically important, it is because it furthers our advantage of ubiquity on the net. We obviously will share those revenues with Yahoo!, but strategically PayPal integration onto Yahoo! is very important.

[Operator:]

Your next question comes from Anthony Noto - Goldman Sachs.

[Anthony Noto:]

Two questions, first for Bob and then Meg. Bob, it looks like your core U.S. listings accelerated to 10% year-over-year growth versus 6% and your revenue per listing decline improved to down 5% versus down 10%. It begs the question; if you are seeing these improvements in the second derivatives, what could offset that to cause the trends not to continue to improve on a second derivatives basis as we go into to the fourth quarter and 2007? Meg, you had mentioned a stat on eBay Express. You said, people that buy on eBay and eBay Express spend 25% more. Will you focus on trying to get a greater percentage of people to use eBay Express or to use eBay, or will your marketing efforts focus on those that shop online that don't shop at eBay to come to eBay Express? And when will that start?

[Bob Swan:]

On the first one, in the U.S. business as we indicated, we felt a little bit better as we exited the quarter versus when we entered the quarter. Our guidance reflects about a 14% acceleration of revenue in the aggregate from Q3 to Q4. We are expecting a decent acceleration. It is consistent with what we said before. The trends we have witnessed during the course of the quarter give us comfort as we go into the key holiday season.

[Meg Whitman:]

With regard to eBay Express, the focus of the eBay Express marketing for the fourth quarter is going to be around our core eBay buyers and getting an increased share of wallet. What we know is that our core eBay buyers love eBay, but they do shop at other sites for new items in a more convenience-oriented format. What eBay Express, although early, has convinced us of is that they will shop on eBay if they have an opportunity to in a slightly different format. So the marketing is all around our core consumer share of wallet. We may get some new users. We have seen some new users based on the television campaign that ran in September. But priority number one, two and three is more share of wallet from our existing very loyal eBay buyers.

[Anthony Noto:]

I forgot to ask you about pay per call. Will that be a first half initiate next year with Google, the announcement that was made?

[Meg Whitman:]

I don't believe it will be. There is a chance, but I suspect you'll see more activity around that in the second half of 2007.

[Operator:]

Your next question comes from Heath Terry - Credit Suisse.

[Heath Terry:]

I was wondering if you could give us a little bit more on the success that you have seen with eBay Express? Can you tell us whether or not it is attracting a new user base versus traditional eBay buyers that could have been buying on either core or stores in the past?

[Meg Whitman:]

Sure. As you recall, eBay Express is a tailored shopping experience for the convenience-oriented shopper. We were targeting existing buyers to increase the share of wallet. As you know, it has new finding experience, a great finding metaphor, by the way, if you haven't tried it. Mostly new items, all fixed-price, a streamlined check out and a multiseller cart, which is actually very interesting because you can buy multiple items from the same seller. I would say the early results suggest that we are in fact getting a higher share of wallet from our existing consumers, that 25% increase in spending that I mentioned versus the control group. That said, we have seen some incremental new users come who maybe don't shop on eBay at all. But I think it is too early to declare victory on that. I would say you need to really measure us, and we're going to measure ourselves, on whether we take our existing buyers and get a higher share of wallet.

[Operator:]

Your next question comes from Ben Schachter - UBS.

[Ben Schachter:]

I was wondering if we could talk a little longer term about the monetization models of how they're going to evolve with classifieds and Kijiji? You mentioned there was contextual ads running there. I was wondering if you could talk about how that is working today? Are there partners? Are you doing it alone? And then also the relationship with craigslist. Any change there? Are you working with them any more closely? Do you see that relationship expanding? Then a related question on fixed-price goods. You are up to 37%. Do you have a target for where you think that can go in the relatively near term?

[Meg Whitman:]

Let me give you an update on classifieds. We're really pleased with the growth of our overall classifieds business. As I said, we are in 400 cities with Kijiji, Gumtree, Marketplaats, and it is really actually going quite well. Marketplaats is probably the best demonstrated practice of our classified sites. That is largely monetized through advertising. I think we actually do that with Google in the Netherlands, and that has actually worked quite well for Marketplaats. We are rolling out similar programs to our other classified sites. With regard to craigslist, we have a good working relationship with craigslist. We have learned a lot from craigslist. I think they have learned a lot from us, particularly in the trust and safety arena. But no new news there in terms of a closer working relationship. It is just we have a great relationship with them, but that is really all there is to report. With regard to fixed price, we actually don't have a target on fixed price. We go where the buyers take us. I think over the years there has been a steady increase in fixed price. That said, the auction business is the core of what makes eBay different, and we will continue to invest against the auction business. So we don't have a particular target.

[Operator:]

Your next question comes from Justin Post - Merrill Lynch.

[Justin Post:]

Quickly, we look at the GMV growth, and it looks like it has stabilized here a bit, 17% in the quarter, maybe a little less ex currency, but that looks good. Do you still have intentions of trying to get that back towards e-commerce growth? What do you think are two or three key initiatives to do that? Secondly on Skype, it looks like a very nice attractive user base, a lot of monetization opportunities. Maybe you can help us, walk us through what you think are the biggest opportunities there to get more revenue per user going forward.

[Meg Whitman:]

Sure. Let me talk about GMV. We do have an aspiration to grow at or faster than e-commerce growth rates in every market in which we participate. I think actually in most cases that is still the same, that we actually are growing faster than e-commerce. We have a couple plans to continue to do that. One is the continued rebalancing of the Marketplace so that we have a terrific buyer experience. We want to continue to revitalize the core business in auctions in particular. We've got a host of demand generation activities, most notably our advertising campaign across our two biggest markets in the fourth quarter. So very much our objective is to reaccelerate GMV growth in our largest markets. I actually think we will be able to do that. With regard to Skype, the key objective for Skype actually is new user acquisition, active new users, as well as the development of the ecosystem. This is a three-year-old business. While I am interested in the revenue per user, I am more interested in the development of the ecosystem and the growth of new active users. As we head into 2007, the main monetization models are going to be Skype Out, e-commerce, and pay per lead. Stay tuned for more details on that, but I wouldn't be focused and we're not focused on the revenue per user in 2007, because the business is really too young to do that. We want to get as many people on Skype, using the Skype client with that desktop presence as we can by the end of 2007.

[Bob Swan:]

Meg, the only thing that I would probably add is Meg talked about the tailored shopping experiences and how that is one of the key initiatives we have to kind of reaccelerate GMV and get a little bit of insight into what we're doing in Motors, both now and going forward. Obviously, Express is a very important TSE for us to get more share of wallet. We want to continue to look at other categories that we think we can expand our tailored offering to grow within those and potentially new categories.

[Meg Whitman:]

Operator, I think we have time for two more questions.

[Operator:]

Your next question comes from Mark Mahaney - Citigroup.

[Mark Mahaney:]

First, welcome back to Lydia. Second, on eBay Express, two questions. Would that have been part of the improvement in conversion rates that you think you have seen in the marketplace? In terms of the advertising, how do you handle the risk that all the advertising you have had about eBay Express has somehow led people to just to come to the eBay site, not to eBay Express? To what extent do you have to worry about I guess mixing your messages, particularly as you bring back the It campaign later on in the quarter?

[Meg Whitman:]

I don't know the precise answer to your question. My hypothesis is that eBay Express would not have materially affected the increase in conversion rate, because it is still a relatively small portion of the total. Especially if you look globally, because really it was only in the U.S. in Q3. With regard to Express and eBay, what is true is that when you go to the eBay.com home page today there's a lot of promotion around eBay Express. We're trying to introduce our core users to eBay Express. That actually has worked quite well. With regard to the ad campaigns, they were down through the same general look and feel of the It campaign. It had a slightly different feel, as you may have seen in September, but It is the umbrella. It is the umbrella for both Express, as well as eBay.com, and they were designed to be effectively a brand and a flanker brand. I think that is working pretty well. Our consumer feedback suggests that people do understand the difference between eBay and eBay Express.

[Meg Whitman:]

I think we have time for one more.

[Operator:]

Your last question comes from Christa Quarles - Thomas Weisel Partners.

[Christa Quarles:]

Hi, the first question is on China. I was wondering if you could discuss the pros and cons of going through the Yahoo! strategy, deconsolidating your China businesses and partnering up with some local player, or even more broadly partnering with maybe a local portal or search player to help your penetration of those markets? Then the second question is just on Shopping.com. I am just wondering if you could highlight specifically what was so positive there? I think the results against Shopzilla were not quite as positive? Are you developing new products? We heard something around maybe a CTA product.

[Meg Whitman:]

With regard to China, the only thing I can say is I just want to reiterate that we are seeing healthy growth in our local GMV and listings. We are maintaining share in what I perceive to be a very, very competitive market, with low rates of monetization. I just actually don't think it is the right thing to do to comment and speculate on portal versus a Yahoo! strategy in China. We're committed to the Chinese market for the long term. We think it holds great potential. I think that is probably the right way to characterize our view at this point. With regard to Shopping.com, it actually is the leading online comparison shopping site in the United States, having actually regained the lead from Shopzilla in the quarter. We had a quarter with accelerating revenues. I think innovation in the user experience is what is setting Shopping.com apart. If you have not shopped Shopping.com, I would suggest you do. They have a fantastic rollover feature that really allows you to look at a whole host of products in an incredibly consumer-friendly way. It includes more dynamic navigation, larger images and a really great visibility into the content. I would say innovation, innovation, innovation is what is driving Shopping's performance.

[Christa Quarles:]

Does the innovation include a CPA product?

[Meg Whitman:]

We're looking at a whole host of things. Can't comment on that right now.

[Christa Quarles:]

Great. Thanks.

[Meg Whitman:]

Okay. Thank you very much for listening. We appreciate your time. Take care.

[Operator:]

That does conclude today's conference call.