eBay Inc.
Q4 2006 Earnings Call Transcript

Published: 25 Jan 2007

[Operator:]

Good day, everyone and welcome to eBay's fourth quarter 2006 earnings results conference call. 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, Bob Swan; and the Investor Relations Director, Ms. Lydia Ventura. At this time, I would like to turn the call 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 fourth quarter and full year results for 2006. Joining me today are Meg Whitman, our President and CEO; and Bob Swan, our Chief Financial Officer. This quarter, for the first time, we will be providing a slide presentation to accompany Bob Swan'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. Before we begin, I would like to remind you that during the course of this conference call we may discuss some non-GAAP measures in talking about our company's performance. You can find the reconciliation of those measures to the nearest comparable GAAP measures in the slide presentation accompanying the conference call. 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

[Meg Whitman:]

Thank you, Lydia and welcome everyone to today's conference call. I thought I would start the call by spending a few minutes giving you my perspective on 2006 for both eBay as a company and for each of our three businesses

[Bob Swan:]

Thanks, Meg. Today, I will discuss our Q4 and full year financial performance, an update on our share repurchase program and our outlook for Q1 and 2007. First, our financial results. Overall, Q4 was a great quarter for our business. We delivered very strong revenue, earnings and free cash flow based on good GMV and TPV growth and strong growth from our non-GMV driven businesses, aided by a successful online holiday shopping season. Additionally, we leveraged our balance sheet to repurchase nearly 31 million shares worth $1 billion during the quarter. In total, our business generated record net revenues of $1.72 billion, representing 29% year-over-year growth. Organic revenue, excluding acquisitions and FX, was up 21% versus last year, an acceleration of growth versus the prior quarter. Acquisitions we made over the last 12 months contributed 3 points to our top line growth, and FX, due to a weaker dollar, contributed an additional 5 points of growth. On a non-GAAP basis, operating income was $575 million for the quarter, up 28% over the year-ago period and representing an operating margin of 33.4%. EPS was $0.31, a 29% increase from last year and $0.03 higher than the top end of our guidance range. Our EPS strength relative to the guidance was driven primarily by strong revenue performance, efficient marketing spend and the benefit of a weaker U.S. dollar. Our business model continued to deliver excellent cash flows as well, generating $529 million of free cash flow, 24% growth versus the year-ago period, including capital expenditures of 5.6% of revenue in the quarter. Now let's take a closer look at our segment results for the quarter. In Q4, the marketplaces business achieved record net revenues of $1.24 billion, up 24% versus the year-ago period. In the U.S., revenue was $614 million, up 17% over last year, while international revenue was up 32% to $624 million. eBay global GMV for the quarter was $14.4 billion, a 20% increase over last year. Excluding the impact of foreign exchange, GMV grew 16%, a 1 point acceleration of growth versus Q3. Take a closer look at some of our key operating metrics, we added nearly 10 million new users in the quarter, bringing the total registered user base to almost 222 million users. eBay new listings in the quarter were 610 million, representing year-over-year growth of 12%. Core listings were up 10% and store inventory listings grew by 27% to 84 million new listings in the quarter. Store listings growth continues to slow, a result of our efforts to rebalance the marketplace in the third quarter. The deceleration in growth has improved the mix between core and store listings, while store listing conversion rates have increased as well. In the U.S., we acquired 3.6 million new users, reaching a total of 97 million registered users. New listings grew by 4% compared to Q4 '05, as core listings grew by 5% and store listings declined by 2%. GMV grew 14% to $6.8 billion, a slight acceleration versus Q3. GMV growth was particularly strong in our consumer electronics category, driven by the launch of the Sony PlayStation 3 and Nintendo Wii, which drove better than expected volumes and helped increase overall ASP. In our international eBay business, the user base grew by 6 million, bringing the total to 124 million users. New listings grew by 19% year over year, with strong growth coming from the UK, France, Italy and Australia. GMV reached a record $7.7 billion, growing at 26% versus the same period last year and representing 53% of global GMV. Excluding the impact of foreign exchange, GMV grew 17% versus Q4 '05. In Europe, performance was driven by good GMV growth in several of our markets. In Germany, growth rates accelerated compared to last quarter, driven in part by a successful holiday marketing campaign. The UK saw a robust holiday shopping season as well, and growth was aided by strong user acquisition, good visitor traffic and a unique marketing campaign. France and Italy also had very good quarters and continue to fuel our growth in Europe. Turning to Asia, we continue to take steps to improve our position in a difficult competitive environment. In Korea, actions we have taken over the course of the year have resulted in a stabilizing GMV growth rate, and we believe we are maintaining market share. We continue to enhance our offering, recently launching a new program to offer 100% return guarantee and free return shipping to enhance buyers' confidence in our marketplace. Cross-border trade continues to be a driver of growth in our smaller Asia Pac markets. We saw accelerating cross-border GMV growth in Q4, driven by the strong buyer demand during the holiday shopping season. Our newest shopping destination, eBay Express, showed good progress in the quarter. While the business is still small, GMV transactions transacted through Express more than doubled versus the prior quarter. Growth was driven by strong activity levels, measured in GMV per cart, exceeded our internal expectations. We look forward to building on our early successes and making eBay Express a larger part of our business over time. On the advertising front, we continue to make progress on our Yahoo! relationship, increasing the number of text ads served on most search results throughout the quarter. For graphical advertising, Yahoo! began selling our inventory in the fourth quarter on a limited basis. We're pleased with the initial results from our partnership and are pursuing a considered rollout over the course of the year. We continue to diversify our revenue stream with our non-GMV-driven businesses. Shopping.com continues to grow at healthy rates and drove record levels to our merchants on several days during the holiday shopping season. While our classifieds business is still small, we are seeing triple-digit year-on-year revenue growth, driven by strong visitor traffic across our portfolio. Overall, we're pleased with our Q4 marketplaces performance, which benefited from a strong online holiday shopping season, several hot products and effective marketing campaigns. We look forward to continued success in 2007. Now let's turn to our payments business. PayPal had another excellent quarter, posting record total revenue of $417 million, a 37% increase versus the same period last year. Revenue was driven by record TPV of $11 billion, representing 36% year-over-year growth. In the U.S., TPV grew by 26% in the quarter, while international TPV grew by 60% year on year. Our TPV growth was driven by continued strength in merchant services and record eBay penetration levels in our international markets. In terms of key operating metrics, PayPal added over 10 million new accounts and the global account base surpassed 133 million. Global TPV for PayPal's on eBay business grew by 26%. Growth was paced by 58.3% global penetration of addressable GMV, up over 4 points from last year. In the U.S., the penetration rate of 79% is up 1 point from the prior year, while UK penetration grew 4 points to 73%. In Germany, we reached double-digit penetration for the first time. We continue to expand PayPal presence across the web with our global merchant services business. Merchant services comprises 36% of our total payment volume and posted another quarter of impressive growth, generating $3.9 billion of TPV, up 57% year over year. Our recent international expansion of countries and currencies, as well as further penetration of top online merchants around the world, continue to be key drivers of PayPal's growth. The PayPal Q4 transaction expense rate was 1.08%, relatively consistent with both the year-ago period and the third quarter. The transaction loss rate increased to 41 basis points this quarter, up 8 basis points from the year-ago period and 6 basis points from Q3. These increases were driven by both seasonality and growth in newer products and markets where we continue to optimize between increasing volume and managing our losses. In summary, PayPal had another excellent quarter and continues to be a key driver of our overall growth. Looking at our communications business, Skype once again grew at a healthy pace this quarter, posting total revenue of $66 million, a sequential increase of 31%. Skype's user base grew to 171 million, representing a sequential increase of 26% and an increase of 129% from a year ago. Global promotions drove significant increases in new users this quarter, particularly in Asia, where we added 19 million new users in Q4. Skype-to Skype minutes in Q4 were approximately 7.6 billion minutes, up 16% sequentially and 46% on a year-over-year basis, while SkypeOut minutes grew to 1.5 billion, representing 34% sequential growth and 189% growth versus the prior year. The strong growth of SkypeOut minutes is the result of our rapid user expansion and global promotions. We're pleased with our progress with Skype, highlighted by rapid user acquisition and growth in user activity. Let's now take a look at how our business unit performance translated into non-GAAP financial results. As I indicated earlier, eBay delivered record revenues of $1.72 billion, up 29% year over year. This top line growth, coupled with operating leverage, a lower share count and weaker U.S. dollar, partially offset by a higher tax rate, drove EPS expansion from $0.24 to $0.31, a 29% increase versus Q4 '05. While our operating margin of 33.4% declined by 2.4 points, primarily due to mix changes coming from our lower gross margin businesses -- PayPal and Skype -- we partially offset this decline by operating leverage and the benefit of a weaker dollar. Let's look at where the operating expense leverage came from in a bit more detail. First, sales and marketing expenses were 25.6% of revenue in Q4, down 1.4 points from the year-ago period. The decline from a year ago is driven by more efficient marketing spend and the fact that our faster growing businesses, PayPal and Skype, have lower marketing expense as a percent of their revenue. Next, product development expenses were 6.5% of revenue, down nearly a point from a year ago. We continue to leverage our product spend more effectively to enable continued growth. In the fourth quarter, we launched several product and trust and safety enhancements to the eBay site, including a number of search improvements and our Safeguarding Member IDs initiative. At PayPal, we rolled out our integrated VeriSign merchant solution and an expansion of our available countries and currencies. Lastly, general and administrative expense at 14.4% is up nearly half a point from the year-ago period, driven primarily by increased transaction losses at PayPal. Let me take a minute to provide some context on the full year 2006. As Meg indicated, we got off to a great start this year, encountered some challenges along the way, and ended the year strong. We delivered full year revenue of $5.97 billion, up 31% versus 2005, a 32.8% operating margin and $1.05 of EPS, up 21%. Our top line growth was impacted by the imbalance in our U.S. marketplace, highly competitive markets in China and Korea, and lower than expected monetization at Skype, yet we still delivered good results. Our PayPal merchant services business consistently exceeded our expectations, and we successfully integrated several acquisitions from 2005. In addition, we strengthened our competitive position via acquisitions and investments, including Sonart, Tradera and our partnerships with TOM Online in China and PC Home in Taiwan. In July, we announced our first ever share repurchase program. Let me give you some more detail on our full year cash flows and share repurchase program. We began 2006 with $2.9 billion in cash and generated over $1.7 billion in free cash flow, with an additional $600 million coming primarily from stock option exercises. We leveraged this cash to repurchase 1.7 billion worth of eBay shares over a five-month period, as we believed the long-term value of the company was not reflected in the share price at the time. Despite this significant repurchase activity, we end 2006 with nearly $3.5 billion in cash and marketable securities, nearly $600 million higher than where we entered the year. Today, we announced that our Board has authorized an additional $2 billion repurchase over the next 24 months, in addition to the $300 million of remaining capacity under our existing program, further underscoring our confidence in the company's long-term value. While we will continue to be opportunistic at current price levels, we expect to execute the program at a more balanced pace going forward. Overall, we exit 2006 with a stronger and more diverse portfolio of businesses and an excellent balance sheet. With that, let me turn to our non-GAAP guidance. Last October, we indicated that our Q4 performance, in addition to a few factors we're monitoring, would provide more clarity for our outlook on 2007. Let me give you a brief update on a couple of these areas and a few recent announcements and how they impact our 2007 guidance. First, our Q4 results demonstrate an impressive seasonal quarter, highlighted by good conversion rates and increasing ASPs, and we're increasing our 2007 revenue guidance to reflect this strong seasonal performance. Two of our newer initiatives, eBay Express and our Yahoo! advertising partnership, showed good promise in Q4, but they're still in early stages and are not expected to have a material impact on our 2007 growth rates beyond what was assumed in our October guidance. Second, we strengthened our geographic position via our joint venture partnership with TOM Online in China. We expect this partnership to have a marginally negative impact on our revenue and a slightly positive impact to operating margin and GPS. Third, we recently announced our intention to acquire StubHub, a leading secondary ticket marketplace, further strengthening our core marketplace business. We expect this acquisition to generate $105 million to $120 million of revenue 2007 while being slightly dilutive to our full year operating margin and slightly accretive to full year EPS, assuming a close in mid-quarter Q1. Finally, the expansion of our share repurchase program will have a slightly accretive impact on full year EPS. Based on these factors, we now expect full year '07 revenue in the range of $7.05 billion to $7.3 billion, which implies an 18% to 22% year-over-year growth. We expect to deliver full year operating margin of approximately 33% and EPS in the range of $1.25 to $1.29. This guidance assumes a U.S. dollar to euro exchange rate of $1.25 and a full year tax rate of 28% to 28.5%. We also expect full year free cash flow in the amount of $1.85 billion, assuming capital expenditures between 8% and 9% of revenue and increased cash tax payments compared to 2006. Looking to Q1, we expect revenue to be in the range of $1.67 billion to $1.72 billion and EPS of $0.28 to $0.30. In summary, we are pleased with our strong Q4 results, and while we faced challenges in 2006, we delivered record revenues and exceeded our EPS goals for the full year. 2007 will be another exciting year for eBay as we continue to focus on top line growth in each of our business units while delivering increasing profitability and cash flow for our shareholders. Now we would be happy to answer your questions. Operator.

[Operator:]

(Operator Instructions) Your first question comes from Ben Schachter - UBS.

[Ben Schachter:]

I was wondering if you could just talk about the organic growth rate and remind us what was pulled out of that in terms of acquisitions? Also, if you could discuss how classifieds is moving ahead internationally, and any talk of bringing that over to the U.S.? Thanks.

[Bob Swan:]

I will take the first; Meg, if you could take the second. Total growth in the quarter was up 29%, and 21% was FX neutral and organic. Acquisitions added 3 points of growth and on a year-over-year basis, you will remember that Skype was completed in the fourth quarter of 2005 and the VeriSign gateway acquisition was completed in the fourth quarter as well. So 21% organic FX neutral and the acquisitions added 3 points in the quarter.

[Meg Whitman:]

With regard to classifieds, we continue to extend our classified reach through a combination of building our own sites under the Kijiji banner and acquiring strong local brands like LoQUo, Marktplaats and others. I think the current count is we're in about 400 cities and 33 countries around the world and we will continue to opportunistically expand that. At the moment, we don't have a plan to enter the U.S. business. As you recall, we own 25% of craigslist here in the U.S., but are focused on growing the international business very aggressively. As we reported, we really had a very nice Q4, with classifieds actually beginning to get to critical mass. Next question.

[Operator:]

Your next question comes from Anthony Noto - Goldman Sachs.

[Anthony Noto:]

Thank you very much. Have you considered a more significant recapitalization of the company and some type of leveraged buyback? If you look at the amount of EBITDA you will be generating in 2007, you could easily lever up two times, still be investment grade, still have capital on the balance sheet to invest in the business and do acquisitions; as opposed to doing $2 billion every six to 12 months, doing it in one fell swoop, given the change in your business, and still a discount multiple to the sector. Meg, there continues to be quite a divergence between revenue growth, GMV growth and listings. In the first half of 2006, listings outperformed significantly, but revenue and GMV growth disappointed on a quarterly basis. In the back half of the year we've now seen the inverse. I'm just wondering, as you think about your focus of improving successful listings as opposed to listings at any cost, do you see a point in time when listings more correlate with the revenue again? Could you talk about how much more deterioration you could see in listings growth while still seeing strong GMV and revenue growth? Thanks.

[Bob Swan:]

Anthony, on the first one, we have a great business model that generates excellent cash flows and gives us an extremely strong balance sheet so we always look at how to effectively optimize that balance sheet. Our primary focus is maintaining the financial flexibility to invest and grow in the business, but also to capitalize on opportunities and in effect, repurchase stock when we believe it does not reflect the near-term value of the company. The repurchase program we announced in July, we've been very opportunistic. We have in essence almost completed it in five months' time. This increased size of the program that we announced today is further evidence that we can maintain financial flexibility to invest and growth and capitalize on the trading value of our stock. We will continue to evaluate ways to do that as we go forward. But we think this is the right step.

[Meg Whitman:]

Anthony, let me try to take your next question and let me focus on the brand eBay for a minute, then I will come back to talk about marketplaces in general. With regard to eBay, what you saw over the last 12 months was quite an imbalance in the marketplace. I think you accurately described that. The actions that we took in Q3 and Q2 began to bring balance back in. So listings now I think are at a better balance. Frankly, I think we may still see a change in the ratio between core listings and store inventory format listings, where store inventory and format listings continue to decline as a total overall percentage. But we are really now focused on successful items. And what you saw across the board was a better conversion rate, not only in SIF, but also in core. What that net-net is, is a better buyer experience, because buyers are finding higher quality listings at better prices. That is exactly what got out of balance in Q1. So the actions we took had exactly the desired effect. I would expect on a go-forward basis, it may take two or three more quarters, but you'll begin to see revenue and GMV and listings more back in line. That would be on the eBay side of things. So I think we are moving towards a healthier marketplace. I think we've got a little bit more work to do. We are focused on the user experience in 2007. You still may see some change in ratios. If I step all the way back to marketplaces, you will continue to see a disconnect between revenue and GMV because an increasing percentage of our marketplaces business is actually non-GMV driven. In other words, we can't calculate the GMV on C2C classifieds, nor do we calculate the GMV on Shopping.com. So I hope that gives you a sense. But I think net-net-net, the buyer experience improved and the marketplace is in better balance.

[Operator:]

Your next question comes from Imran Khan – JP Morgan.

[Imran Khan:]

Hi, Meg and Bob. You tried to rebalance the site, and I was wondering if you can give us some sense, how does current conversion rate compare with eBay's conversion rate, say, a year ago, a year-and-a-half ago, before the store became a bigger part of the listing growth? How much can conversion improve from current levels? Secondly, I think you integrated Skype Me buttons on the eBay platform globally, and can you tell us what kind of impact you saw on conversion from that? Thank you.

[Bob Swan:]

Imran, how are you doing? I will take the rebalance effort. As you know, in the first quarter of '06, our conversion rates dropped quite a bit. The efforts that we have talked about in terms of rebalancing were really designed to reaccelerate GMV, primarily by improving conversion rates. The acceleration of GMV from Q3 to Q4 and the acceleration of revenue per listing was primarily driven by a fairly dramatic improvement in conversion rates across virtually all countries and all categories in which we operate. We're not quite back to end of '05, early Q1 of '06 levels so we still have some work to do. But in terms of progress, the efforts are really what drove a lot of the out-performance that you saw in the fourth quarter.

[Meg Whitman:]

Let me take the question about Skype Me buttons. Let me give you an update. On the eBay platform, we now have Skype Me buttons in 150 categories in 20 markets, including 25 categories on eBay.com, which is up from about 14 categories a quarter ago. The early indications continue to be positive on conversion rates with Skype usage. The conversion rates with those listings that people utilize the Skype buttons are positive. So we are going to continue to make those available to our users in a very typical eBay way. When users want to adopt them, they do, and when users don't want to adopt them, they don't. What we now is that when people see their business increase because of Skype Me buttons, they use them more. So I think we will continue to make slow and steady progress here, but it is doing what we hoped it would do.

[Operator:]

Your next question comes from David Joseph - Morgan Stanley.

[David Joseph:]

Hi everyone. Just a quick question related to the core platform. It seems like you are seeing improved health across platforms, and I assume in the U.S. and in Germany. And I'm wondering what you are doing to really capitalize on that. I know you talked a little bit about the user experience and some improvements that you want to make in 2007 and you did bring Philip over to really focus on the core platform. What are his priorities in 2007 and where are you really trying to improve the user experience? Are you pulling in Skype a little bit more into the platform? What are you doing with My World or are you trying to really develop a more social experience there? Secondly, in terms of PayPal and Google Checkout, are you seeing Google Checkout on your radar at all or any kind of impact whatsoever? If so, or even if not, what do think you need to do to compete more effectively in that area?

[Meg Whitman:]

I will take both of those, David. So first of all, you are right, we brought one of our most talented managers from Germany and from Europe to run our core auction business here in the United States. His mission is to accelerate the growth rate of the auction business over time. We are going to do that in a couple of ways. The first is to focus on the user experience as it relates to the auction business. That is going to mean, I think, simplifying the site in some ways, making it easier to find items that a buyer wants. As the eBay platform has grown so enormous, finding has become more of a challenge, and we see that in the user data. Then, looking at other ways to actually continue to increase the fun and excitement of the auction business, which of course is our original business and the business that brought us to the party. So we think we're just at the beginning of seeing some of the really creative ideas that can be brought to bear against that business. We will experiment with Skype. And we will see other ideas that come on that make that auction business really fun. And what works in the United States, we will take immediately, obviously, overseas.

[David Joseph:]

Meg, does that include also maybe pulling eBay Express a little further away from the core platform?

[Meg Whitman:]

Not necessarily. eBay Express is targeted for our existing eBay users who on occasion want a new in-season product or only a fixed price, in and out experience. We think that the two are not actually at odds with one another; that one can grow eBay Express, at the same time accelerate growth in the core auction business. So let me talk about little bit about Google. And it's interesting, we have obviously been monitoring this quite closely. Interestingly, we have really had a great quarter at PayPal

[Operator:]

Your next question comes from Safa Rashtchy - Piper Jaffray.

[Safa Rashtchy:]

Thank you. Can you give us a sense of growth in the eBay component of marketplace revenue, and also how it trended compared to previous quarters? Also, can you give us some color on how much PS and Nintendo contributed in the quarter? Finally, I think I missed the contribution on forex, I believe you said 5% on total revenue. Can you clarify that and can you give us color on how much was that on the marketplace? Thank you.

[Bob Swan:]

I'm sure if I don't cover them all that you will come back to me, so I'll thank you in advance. First, I will go at the end. FX was 5 points of growth on a year-over-year basis in the quarter. In terms of the consumer electronics, both Nintendo and Sony PlayStation, we disproportionately benefited from those hard to find, hard to get items on our site. So clearly, it helped our GMV and helped our ASPs as well. We obviously don't break it out, but we clearly benefited from the activity around those products. On your first question, on our eBay business I think excluding the non-GMV based business or using the GMV platform, I guess, we saw accelerated growth from Q3 to Q4, essentially up a point in the U.S. and up a point internationally. And as Meg said, we kind of attributed that to a strong online shopping season, a couple hot products in consumer electronics, what we believe was a very effective marketing campaign, and then lastly, our efforts to rebalance the marketplace really accelerated conversion rates off of the third quarter. So the combination of those things had us accelerating our eBay platform or GMV-based businesses from Q3 to Q4.

[Meg Whitman:]

Let me add one point on the consumer electronics. We see this every quarter; this is actually not a new phenomenon, but people come to see what is going on with the Wii and the Sony PlayStation. They hear about it in the press, they come to see what's going on and they often end up buying something in another category. Or they bid and they're not the winning bidder, and they move on to another category or another consumer electronic. So it benefits us in two ways

[Operator:]

Your next question comes from Brian Pitz - Banc of America.

[Brian Pitz:]

Thank you very much. On your recent StubHub announcement, can you talk about your plan to integrate listings into your site? If you have any thoughts on what Ticketmaster is doing in terms of stepping up efforts to invalidate ticket barcodes? Secondly, any update on eMedia Exchange and maybe you can talk about the progress in signing up additional publishers? Thank you.

[Meg Whitman:]

Let me elevate the conversation a little bit here. So we see a tremendous opportunity in the online tickets business. It is a business that is very well suited for eBay. In fact, eBay's GMV in this business is actually higher than StubHub's GMV. Not monetized at the same rate, but we have a very strong business here so we are excited about the potential to combine them. It is a passionate user base and an incredibly inefficient market for the most part. With regard to eMedia and Ticketmaster and a number of areas, we are in the early days. We are in a number of discussions with industry leaders and industry players to actually figure out what the right way is to work with those players in the industry. So we will be able to give you an update on that at the end of the second quarter, maybe the end of the third quarter. We recognize the issues you have described and we are taking steps to figure out what the best way to deal with those issues are and leverage partnerships in the industry.

[Operator:]

Your next question comes from Mark Rowen - Prudential.

[Mark Rowen:]

Your advertising revenue was up almost 50% year over year. Was that pretty much all attributable to the new things that you're doing with Yahoo! in the U.S.? Would you expect those growth rates to accelerate as you implement it further into the sites? Second, in China, given that you have the JV now, are you going to be spending less on marketing in China in total or do you still spend the same thing and just move it down below operating profit?

[Bob Swan:]

On the first question, the ad revenue growth is primarily associated with the strong performance of Shopping.com in the quarter. While we are rolling out Yahoo! a bit more in the fourth quarter, relatively little impact. So that growth is primarily driven by Shopping. In terms of China and the joint venture, as Meg indicated we think this is the best long-term play for us in China. We will own 49% of that venture. As a result, the operating profits or the costs that they incur will be borne by us below the operating margin line.

[Mark Rowen:]

Do you expect the marketing spend there to sort of remain constant where it has been or do you plan to increase that or pull it back?

[Bob Swan:]

I think during the course of 2006, we took a lot of steps ourselves to pull it back quite a bit and try to measure the marketing spend more in line with our ability to more effectively monetize that market. So I think we'll see how we, collectively with our JV partner, will manage the marketing spend on a go-forward basis. But clearly down off of '05 and first half of '06 levels.

[Mark Rowen:]

Just a clarification

[Bob Swan:]

Shopping is broken out both between transaction revenue and ad. The growth in the advertising bucket comes from really a variety of stuff. But clearly, the Yahoo! relationship is still in its early stages and they are not driving a whole lot of that.

[Operator:]

Your next question comes from Steve Weinstein - Pacific Crest Securities.

[Steve Weinstein:]

Thank you. I was hoping to get a little better understanding of StubHub and if your guidance reflects a change you'll be making in the business or if we can find out what it did in 2006 in terms of revenue. As it relates to Skype, you said it's not monetizing quite as quickly as you thought. I'm wondering if that is going to impact any sort of earn outs or total purchase price for the company?

[Meg Whitman:]

Let me take the Skype question and Bob, you can talk about the financials, which I think are outlined nicely in your slides. With regard to Skype, you might recall that the earn out is a three-year bullet. So there are no earn out metrics in year one, year two. It is all dependent on three metrics

[Bob Swan:]

In terms of the StubHub question, we think this combination is going to work exceptionally well for our buyers and sellers. StubHub brings a best in class buying and selling experience to a dedicated user base, where we are going to bring a large number of buyers to enable StubHub to keep growing. We obviously haven't closed this transaction yet, so that is what we are focused on in the near term. In terms of what we expect in the 2007 guidance, we told you about $105 million to $120 million of revenue. Our expectation is that the transaction would close by the end of the first quarter, hopefully sometime in February.

[Meg Whitman:]

Well great --

[Operator:]

My apologies. Heath Terry from Credit Suisse First Boston.

[Heath Terry:]

Just in under the wire. I was wondering if you could just talk a little bit about what you are seeing from initial buyer and seller reaction to the advertising that you're doing on the site and the places that you are you using null results or are using the complementary search results, what kind of click-through rates are you seeing? Any anecdotal feedback that you can provide would be really appreciated.

[Meg Whitman:]

We look at the total user experience. And interestingly, on null search results, the early data suggests that no one is bothered by it, either buyer or seller, and in fact actually may increase or improve the buyer experience, because if they get a null search result on eBay, they are actually quite delighted to be shown other results. So this was of course the easiest thing to do and we are moving quite aggressively on that. As we moved into complementary searches, we're going to see what the reaction is. We have actually quite a constructive partnership with Yahoo! to walk our way into this in a considered way, making sure that we are first and foremost focused on the buyer experience and then the selling experience. So we will know more; we are in the early days of testing on that but I would say green light on null search results. I think we have time for two more questions.

[Operator:]

Your next question comes from Scott Devitt - Stifel Nicolaus.

[Scott Devitt:]

First, from looking at the marketplace revenue growth and the GMV growth, it seems like the non-motors GMV accelerated again this quarter, which is positive. I was wondering if you could give us the motors GMV growth in the quarter globally?

[Bob Swan:]

Motors GMV was up 16% year over year in Q4 to about $2.1 billion.

[Scott Devitt:]

Could you talk about the integration of Skype into Google Pack? I don't believe that was part of your broad international agreement and was wondering how you were able to attain access to that platform, given that Google does have a product called Google Talk. Similarly, could you talk about the value that you find in areas such as your feedback system, the ACH transfer system at PayPal, the balance feature at PayPal and the customer service at PayPal, and whether you would be open to opening those respective platforms for the appropriate economics? Thanks.

[Meg Whitman:]

With regard to Google Pack, actually you are right, Skype was integrated into Google Pack I think late last year. Google Pack, and you should ask Google about it, but my understanding is this is an agnostic view of the very best features on the web pulled together that is not actually driven by Google's revenue or interest in promoting their own products. So I think it is actually a testament to Skype that the internal team who makes the decisions about Google Pack thought Skype was deserving about being in this basket of items that you kind of need when you start on the web. So we were excited by that and appreciate their doing that. With regard to feedback and ACH and balance and the customer support levels, let me come back to the buyer and seller value proposition. What these do is give both buyers and sellers more choice on how they utilize PayPal. With regard to feedback, this helps us actually reduce fraud losses across the system because what we learned is with eBay, we knew the front end of the transaction, but with PayPal, we know the back end of the transaction. When you know both aspects of the transaction, you can actually manage your fraud losses in a much better way. So the ability to combine eBay feedback with other elements of our risk model has actually proven to be quite effective over the last three or four years. Customer support levels, we can always get better but we are very proud of our customer support levels at PayPal. The folks in Omaha and John Linden do a really bang-up job and we know that handling customer support for payments is not easy, because when you handle people's money, their level of customer service requirement is very, very high, as it should be. So whether we would give others access to our customer support or our feedback system or, frankly, the crown jewel of PayPal, which is our fraud models, I think that is premature. Okay, thank you for joining us today. We appreciate it.

[Bob Swan:]

One more.

[Meg Whitman:]

Oh, we have one more question? Sorry, I think he asked two, which is why -- I didn't mean two from one person. We have one more, sorry about that.

[Operator:]

Your final question comes from Robert Peck - Bear, Stearns.

[Robert Peck:]

Thank you, I appreciate it. I wanted to ask a couple quick questions here. The first is, Meg, as you think about eBay as a platform, one of the great things about it for your marketing campaign is whatever it is you are looking for, you can find it on eBay. So therefore as you think about it, is there any sort of optimal mix you have for store and core in your listings versus any sort of blanket price increases on the store side? That is one. Number two is it looks like the user activity metrics declined again since last quarter. Could you tell us when you think you start to see that stabilize and when you start to see some of the changes you have done in 2H '06 and 1H '07 will start to affect some of those metrics and reinvigorate some of the user activity?

[Meg Whitman:]

Sure. With regard to the store and core mix, or frankly, auction versus auction, BIN versus BIN, we actually experiment with that over time. If we get the incentives right and we get the pricing right, this market does self-regulate. That is what we need to continue to have happen. We've got this thing out of balance. I think we've now brought it back into balance. The mix will be what it will be once we get all the incentives lined up correctly for both buyers and sellers. With regard to user metrics, actually, what are you referring to? Because most of the user metrics that we look at actually improved in the quarter.

[Robert Peck:]

We're just looking at active users over CRUs.

[Meg Whitman:]

Active users over CRUs, okay. That actually has been going on for quite some time, with a 14% year-over-year growth versus 17% year-over-year growth in Q3. So we're actually seeing it move in a decent direction here. But as that base goes up over time, active users I think it has been true for almost five years that that number has actually been declining. I am not sure, given how fast we add new users and the fact that people come in and reregister over time if they have forgotten their password or user ID, I'm not sure we actually ever see an increase in active users as a percentage of the total. So the things that I look for are GMV per listing, GMV per CRU, trailing 12-month GMV divided by active CRUs, active CRUs in absolute and the growth rate quarter over quarter. So I wouldn't overly focus on active users as a percentage of the total base. Great. Okay, thank you very much. Thanks for listening in. Appreciate it.

[Bob Swan:]

Thank you.

[Operator:]

Once again, thank you all for joining us today. That does conclude the presentation.