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eBay Inc. (NASDAQ:EBAY)

Q2 2006 Earnings Conference Call

July 19, 2006 5:00 pm ET

Executives

Meg Whitman - President & CEO

Bob Swan - CFO

Celyn Frayha - IR

Analysts

Scott Devitt - Stifel Nicolaus

Mary Meeker - Morgan Stanley

Mark Rowen - Prudential Securities

Heath Terry - Credit Suisse First Boston

Christa Sober Quarles - Thomas Weisel Partners

Doug Anmuth - Lehman Brothers

Safa Rashtchy - Piper Jaffray

Anthony Noto - Goldman Sachs

Youssef Squali - Jefferies & Co.

Imran Khan – JP Morgan

Paul Keung - CIBC World Markets

Robert Peck - Bear Stearns

Presentation

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.

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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: eBay, PayPal and Skype. Today I'll give you some perspective on the continuing strength in our global businesses. Bob will then discuss our financial results in detail, including the share repurchase program we announced in today's earnings news release.

As you may recall at eBay's analyst conference in May, we outlined in detail a multi-brand strategy we call the Power of Three. Each of our three businesses -- eBay, PayPal and Skype -- is a successful stand-alone enterprise, but taken together they create unprecedented opportunities for innovation and growth. In fact, I believe that in an environment defined by rapidly changing consumer needs and intense competition, eBay's three number one franchises in e-commerce, online payments and communications are the winning combination.

When I think about how the Net is evolving, whether it is in the way people are shopping online or the way sellers want to advertise or just how people want to communicate, I have no doubt that eBay has the right set of assets for today and tomorrow.

Looking quickly at Q2, within the Marketplaces business, eBay added nearly 10 million new users for a total of nearly 203 million users, or a 29% increase over Q2 of last year. Those users generated record GMV of $12.9 billion. PayPal added 8.7 million new accounts and processed a record $8.9 billion in total payment volume. Skype added 18 million new users and served more than 7.1 billion minutes in Q2. Together, these businesses delivered a record $1.4 billion in net revenues, a 30% increase over last year and strong operating margins and cash flow.

In short, the performance of PayPal and Skype was very strong; and despite slower growth within the eBay platform, the results for Marketplaces were good overall. I'm very pleased that we continued to deliver on our financial guidance. We delivered on that guidance quarter after quarter for eight years by executing like clockwork, and never losing sight of our growth strategy and long-term vision.

So now let me talk about our progress in Q2 across each of our three businesses. First is our Marketplaces business, which is comprised of eBay as well as Shopping.com, Rent.com and our classifieds websites. Globally, eBay delivered strong results, in line with our expectations, driven by ongoing growth in the U.S. business and continued momentum internationally. eBay Global GMV reached a record $12.9 billion during the quarter, an 18% increase year-over-year.

While Q2 growth in our eBay business met our expectations, we want it to be stronger. Seasonality certainly made its traditional appearance in Q2 but growth for the quarter, primarily in the U.S., was most affected by the ongoing listings imbalance we discussed in Q1.

Let me recap the problem and explain what we are doing about it. As you know, today sellers list two products in two primary ways. The first way is through our core traditional eBay auction format that also includes Buy It Now listings. Our core format is the fastest way for sellers to sell inventory on the Net. There is no other place where items typically sell within two weeks.

The second way is through store inventory listings, which gives our sellers the ability to list large amounts of products in their eBay store. This format features low insertion fees and appropriately higher final value fees to encourage an abundance of inventory on the site.

eBay's innovation in listing formats have been a critical part of our successes since 2000. Our varied formats entice a wide array of buyers, while giving sellers the flexibility they need to be successful. Over time, however, we have seen sellers shift their listings from core auction style to fixed-price store inventory format because of the lower insertion fees. Too many items in store inventory format -- rather than in core auction-based format -- have caused the buyer experience to suffer.

The marketplace has been overwhelmed with identical, often poorly-priced items that have diluted the magic of the eBay experience. This has resulted in fewer return visits, higher exit rates and fewer bids per listing. In turn, conversion rates and successful listings have declined and eBay's GMV growth has not been as strong as we would like.

Now for those of you who have followed eBay over time, you know that there is nothing more important than the health of the marketplace. During our Q1 call, we told you we were taking steps to address the imbalance we were seeing.

Specifically in the U.S., we rolled back search functionality that increased exposure of store inventory in core search results. We hoped this rollback would address the growing imbalance between core and store inventory listings. Unfortunately, it wasn't enough. In fact, the imbalance was amplified during the quarter as our sellers positioned their listings for the launch of eBay Express in the U.S.

So an hour ago, we announced to the U.S. community important steps to encourage sellers to direct more inventory to core listings and restore balance to the Marketplace.

First, we are refocusing our marketing to drive buyer demand to traditional core listings. Stay tuned for a variation of our fun and successful “It” campaign during the back-to-school shopping season.

Next, we are increasing exposure for core listings in eBay Express and will be advantaging all core listing formats over store inventory listings.

Finally, we are raising fees for store inventory listings to better align our pricing and enhance the value for sellers to list items in the core format. We are confident that these changes will rebalance our Marketplace and revitalize GMV growth rates. A balanced, healthy Marketplace provides the best buying experience for buyers, while maximizing cash flow for our sellers.

eBay also continues to deliver more products and features to help drive value to the eBay community. I already mentioned eBay Express, which debuted in April and officially launched last month. As we have told you, eBay Express provides two exciting elements that benefit our community. It gives sellers another channel for fixed-price inventory and it provides buyers a great online resource for fixed-price items under the eBay brand. This is helping us capture incremental sales from buyers on newer items they previously shopped for elsewhere. With the new marketing campaign ready to launch, we're really excited about the growth potential in the months ahead.

We also launched eBay Alerts, which enable eBay.com members to receive listing updates and place bids via their mobile phones. We launched eBay Member Blogs and the eBay Wikki, which helps our community connect and facilitate transactions.

Now, on the international front, eBay's business continues to expand. As most of you know, our international platform also contains both core and store inventory listings. While we haven't yet seen the same imbalance outside of the U.S., we are being proactive. Many of our international markets are also announcing today country-specific pricing adjustments and taking action to reduce visibility of store listings in core search.

In Europe, eBay UK maintained its strong momentum by attracting nearly 1 million new users in the quarter. Germany also showed solid GMV and listings growth and we are excited that the UK and Germany will launch eBay Express this fall.

In other markets in Europe, Austria, France, Italy, Netherlands and Spain, continued to thrive. France remains one of our fastest-growing markets with GMV growth of more than 70% year-over-year. In April, we acquired Tradera.com, the leading online auction-style marketplace in Sweden to further expand our geographic footprint.

In Asia, we continued to make progress in highly competitive markets that we believe offer tremendous long-term potential. In China, for example, we continued to see strong growth in all key metrics and we're pleased with our overall results. During the quarter, we saw triple-digit listings growth over the same period last year while GMV growth remains strong.

In Korea, we recently introduced a buyer loyalty points program and longer listing durations to enhance item abundance. We are already seeing positive returns. Listing growth accelerated more than 14 points over Q1 and GMV growth was solid.

In Australia, we strengthened our position as the number one e-commerce site with foreign exchange neutral GMV growth of 55% year-over-year.

The other businesses within the Marketplace's segment also performed extremely well in Q2. Shopping.com had an excellent quarter as it continued to grow and expand its reach around the world. It now operates in five countries with an average of 45 million unique monthly visitors.

Year-over-year, the number of leads Shopping.com generates for its retailers is up nearly 40% globally. In May, Shopping.com launched in Australia. It is already twice the size of its nearest competitor there with more than 200 retailers and 500,000 products.

We have also seen tremendous performance in our growing classifieds business. Our portfolio of classifieds brands -- Kijiji, Marktplaats.nl and Gumtree -- to name a few, now span 21 countries in more than 400 cities. Marktplaats is doing especially well. In fact 50% of Dutch online users visit Marktplaats in a given month and return, on average, 13 times. Our C2C classifieds websites hold the number one or number two position in every market in which they operate.

In summary, I believe eBay's e-commerce Marketplaces are second to none in the fun and selection they offer buyers and in the opportunities they give sellers. Our buyers find a wide array of value-priced items ranging from the hard to find gem to the popular in-season product; and our sellers find unparalleled value. Nowhere else on the Net can you reach so many buyers so efficiently and turn assets into cash in seven days. That is the competitive advantage that will power Marketplaces’ growth and expansion for many years to come.

The second business in our portfolio is PayPal. With more accounts than American Express and Discover, PayPal is far and away the number one online payment service in the world. In Q2, PayPal added nearly 9 million accounts, reaching a total of almost 114 million accounts and representing year-over-year growth of 44%.

Total payment volume, or TPV, grew by 37% year-over-year to $8.9 billion in Q2. Internationally, PayPal TPV was up 55% with significant growth year-over-year in Germany, Italy and France. By allowing sellers to choose the suite of services that best fits their small, medium or large business, PayPal merchants can maintain their direct customer relationships and achieve stronger transaction results.

For buyers, PayPal offers the flexibility of multiple payment methods as well as world-class protection. By helping sellers and buyers master the possibilities of secure online payments, PayPal helps accelerate global trade. PayPal's benefits have clearly struck a chord with millions of users around the world both on and off the eBay platform.

Making PayPal indispensable to online shoppers has made PayPal indispensable to all sorts of merchants. PayPal's Merchant Services Business – that is merchants off the eBay platform -- grew 61% year-over-year in Q2, its fifth consecutive quarter of significant acceleration.

We have aggressive growth plans for PayPal. PayPal is currently available in 55 markets in seven countries. Before the end of the year, PayPal will expand considerably, giving users in over 100 markets the ability to send money using their PayPal accounts. Plus, PayPal will be available in 10 more currencies by year end, bringing the number of currencies PayPal supports to 17.

This combination of global reach, tied to the local banking infrastructure, is creating an unprecedented borderless environment for accelerated trading and financial activity.

PayPal has always lead the way in innovation. For example, in June 2005, we launched PayPal Express Checkout, which streamlines the checkout process for PayPal users while still maintaining the highest level of protection and security. PayPal users love the convenience of being able to pay fast while merchants love the fact that shoppers are less likely to drop out of the payment flow. Merchants tell us they appreciate the fact that Express Checkout keeps buyers on their site, instead of diverting buyers to another website to complete the payment.

More recently, in April, we announced PayPal Mobile, which lets users send money, make purchases and donate to charities by sending a text message from their mobile phones. We are very pleased with how the service is progressing. In fact, in the UK, companies like record label EMI and Stuff magazine have already begun offering merchandise through PayPal's Text to Buy service.

We are also in the process of rolling out our new PayPal virtual debit card to hundreds of thousands of PayPal users. This convenient payment tool gives customers the ability to use their PayPal accounts anywhere MasterCard is accepted online, even if the merchant does not currently accept PayPal. This means PayPal users will not have to enter personal credit card information online beyond their PayPal accounts. Full release of this product is slated for later this year.

PayPal's future is extremely bright. We have a remarkable management team and some 5,000 employees with unmatched expertise in payments and online security. Everyone at PayPal is focused on just one thing: making it safe and easy for people to pay and do business online. With that kind of talent and focus, I have no doubt that PayPal will remain in the number one spot.

Now let me speak about Skype, our third business in the eBay family. Just two-and-a-half years old, Skype continues to show explosive growth. In Q2, Skype added nearly 19 million users for a total of 113 million users worldwide. To put this in perspective, it took eBay eight years to surpass the 100 million mark. Skype has done it in less than three. Skype users collectively spent nearly 7.1 billion minutes skyping with each other in Q2, another strong indicator of Skype's growing appeal.

Skype's popularity around the world is matched by few, if any, properties in the history of the Internet. We believe that has two sources. First, Skype is easy to use and the voice quality is outstanding. But Skype is also an innovation engine, and that innovation is creating features that users love. Skype Video, Web Presence, the ability to seamlessly import contacts from Outlook, SkypeCast, 10-way conferencing and a pocket PC client are just a few of the features Skype has launched in recent months that have attracted even more users.

Those users are attracting a growing ecosystem of software developers and hardware partners that are extending Skype's reach. New devices designed around Skype such as Motorola's Talk & Tunes headset and Polycom's Communicator were introduced in Q2. Dell and Packard Bell introduced new computers featuring Skype on the desktop.

Q2 saw Skype make great strides in North America, one of its newest markets. In May, we announced free Skype out calls for users in the U.S. and Canada. Immediately after the launch of this campaign, Skype downloads throughout North America jumped to nearly three times their previous levels, which were already quite high. By June, registered users in North America crossed the 10 million mark.

As those new users tried free domestic calling, they began to pay for overseas calls and other paid services, such as Skype In and voice mail. Daily revenue from the U.S. and Canada has now accelerated past pre-campaign levels. We are very excited about Skype's progress in North America.

We are also pleased with the progress we've made on integrating Skype with our Marketplaces and payments businesses. Skype has now been introduced to 12 eBay Marketplaces around the world, including the U.S., China, Belgium, Poland, Netherlands and Switzerland, as well as on Marktplaats, Kijiji and Gumtree.

In China now, 30% of eBay's listings use a Skype Me button. In the U.S., where we introduced Skype Me buttons in 14 categories just last month, the early results have been very exciting. Conversion rates and average selling prices for items using Skype functionality increased significantly. The results here are still early. We will get a much better sense of how Skype helps speed transactions in the months ahead as more users add Skype to their listings.

The power of our portfolio of brands also opens new opportunities for the Company as a whole. Our recently announced deal with Yahoo! is a great example of this. We have already begun to work closely with Yahoo! We started testing the Yahoo! search text ads on eBay searches that yield no results.

We'll be implementing another part of the deal as PayPal becomes the exclusive third-party provider of Yahoo!'s online wallet. Next year, you will also see an integrated Yahoo! toolbar and we are already exploring Click to Call advertising technologies that would enable users of both Yahoo! Messenger with Voice and Skype to click and instantly speak to an advertiser. We're very excited about our new Yahoo! relationship and what it represents to our portfolio.

As I hope this quarter's results demonstrate, our business continues to thrive. Where there are challenges, we're moving to meet them. Where there are opportunities, we are adjusting our strategies and tactics to take advantage of them.

The key is to never stand still, to watch our environment closely and to adjust with lightning speed to whatever comes our way. That has been eBay's formula for success for 10 years now, and it's a formula I personally will continue to apply for a long time to come.

There have occasionally been doubts about eBay, perhaps because our business model is so revolutionary. In the early days, people said eBay would never fly. After all, who would be crazy enough to buy something at an auction online? Later, people doubted the value of PayPal. Why does eBay need a bank, went the questions? Today, there are doubts about the strength of our core business and the potential of Skype.

Doubting questions may be par for the course at eBay but so is success. You'll continue to see more innovation and more growth at eBay. Most of all, you will see eBay stay on track to deliver the community experience and financial results you have come to expect.

My personal commitment to eBay could not be stronger. At its core, eBay is still all about dedicated users who believe in what we do and the benefits we bring to their lives. Every single eBay employee owes the community a great deal. We will continue to work each day to make eBay, PayPal and Skype an indispensable part of users' lives.

Now I'll turn it over to Bob for a closer look at our financials.

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: the rapid acceleration of store inventory listings, which have lower conversion rates, has impacted our business in several ways. The buyer experience has been disrupted; overall conversion rates are down, impacting GMV growth; and the longer duration of these listings increases our cost. In fact, store inventory listings now make up 83% of total live listings in the U.S.

In an effort to reset the balance between core and store inventory listings, we announced pricing changes today in the U.S. These changes will be supported by more focused marketing, as well as actions taken to advantage core listings on eBay Express. Our intent is to enhance the buyer experience and increase overall velocity on the eBay platform.

We will also be making changes across many of our geographic markets, including reducing the visibility of store inventory listings and core search results. We are applying learnings from our experience in North America to ensure that the overall vibrancy remains intact in all of our marketplaces. We are confident in our ability to overcome these challenges and the long-term potential of the business.

Now let's turn to our payments business. PayPal's strategic priorities for the year are to expand our on-eBay presence, grow the Merchant Services business and expand further into the area of financial products. PayPal had another excellent quarter, posting total revenue of $339 million, a 39% increase versus the same period last year.

New accounts totaled nearly 9 million and PayPal now boasts a network of almost 114 million accounts. These accounts helped drive record TPV of $8.9 billion, representing 37% year-over-year growth. In PayPal's on-eBay business, addressable GMV penetration climbed to record levels across all our markets.

Global penetration of addressable GMV grew to 56.5% in the quarter, driven by continued penetration gains in our two largest markets -- the U.S. and UK -- which reached 79.4% and 69.7%, respectively. Additionally, we continue to gain traction in other markets like Germany, France, Italy and Australia.

In addition to our continued on-eBay expansion, we continue to diversify the PayPal revenue stream through the growth of merchant services and financial products. Our global Merchant Services business continues to shine, generating $3.1 billion in TPV, up 61% year-over-year, representing the fifth straight quarter of accelerating results. Merchant Services now comprise 35% of PayPal TPV. Additionally, PayPal now has over 3 million business accounts globally.

We are making good progress toward integrating our VeriSign payment gateway merchants well. In the second quarter, we enabled all Gateway merchants to be able to accept PayPal as a method of payment; and in the third quarter we will begin to offer an all-in-one solution to allow PayPal to perform all payment processing for these merchants.

Our financial products portfolio currently consists of the PayPal debit card, PayPal Buyer Credit and the PayPal Plus credit card. These three products have gained excellent traction since they were launched. Soon, we will expand our portfolio with the PayPal virtual debit card, as Meg mentioned. This highlights yet another way we continue to build PayPal adoption across the web.

PayPal had a great quarter, has a ton of untapped potential and remains one of our most exciting growth drivers.

Looking at our communications business, Skype's strategic priorities for 2006 are to continue to acquire new users, grow user activity, develop the Skype ecosystem and continue to build products and features designed to monetize our growing user base.

The Skype growth story continued this quarter with revenues of $44 million, a sequential increase of 26%. Skype continues to acquire users at a healthy pace and earlier in the quarter, crossed the 100 million registered user mark. We ended the second quarter with 113 million registered users, representing an increase of 156% from a year ago and a sequential increase of 20% and we continue to add over 200,000 new users per day. Clearly the network effects of this business are powerful as new users continue to attract other new users.

We also announced the release of several new features in the second quarter designed to drive further adoption and usage of Skype. One feature, the ability to send and receive SMS messages, has seen strong adoption, with users already sending over 30,000 SMS messages per day. Additionally, we recently launched Skypecasts, which have gained great traction since launch.

We continue to be excited about our progress with Skype and we remain on track to achieve our full-year revenue guidance of approximately $200 million, representing a threefold increase over 2005.

Let's now take a look at how our business unit performance translated into non-GAAP operating results. As I indicated earlier, eBay delivered record revenues of $1.411 billion, up 30% year-over-year and operating margins of 33%, down nearly 5 points from last year, driven primarily by: Skype, investments in trust and safety and increased product development at PayPal.

Let's take a look at the P&L in a bit more detail. First, gross margins were 80%, down 2.5 points from the year-ago period, reflecting the inclusion of Skype and continued growth of PayPal, which have structurally lower gross margins. Additionally, we continue to invest in site operations capacity to support our Marketplaces’ strategic priorities and growing PayPal business. These investments are partially offset by continued transaction expense leverage PayPal.

Next, sales and marketing was 26% of revenue in the second quarter, in line with the year-ago period and down sequentially by 1 point, consistent with our normal seasonal marketing spend. Product development was 7% of revenue, unchanged from the year-ago period. We continue to increase our absolute dollar investment in product development while managing our cost per developer unit down to grow capacity faster than our spend.

Our efforts in product development were highlighted this quarter by several new product launches, including eBay Express, PayPal Mobile, eBay Blogs and Wikkis and Skype integration on several eBay sites, to name a few.

Lastly, general and administrative expense was 14%, up 2 points from the year-ago period. The year-over-year increase is driven by investments in trust and safety designed to enable safe trading on the eBay platform and ensure PayPal remains a secure way to pay online.

Collectively, these factors translated into $460 million of non-GAAP operating income, 13% growth on a year-over-year basis. Consolidated non-GAAP net income was $351 million, up 14% over the year ago period, or $0.24 per diluted share and $0.01 above the top end of our guidance range.

On a GAAP basis, Q2 net income was $250 million or $0.17 per diluted share. This includes $85 million of stock option expense, primarily related to our implementation of FAS 123R, in line with our previously stated guidance.

Our business model, with good top-line growth and strong operating margins, continues to generate excellent operating cash flows. We generated $516 million of operating cash flow and $367 million of free cash flow in the second quarter. Year-to-date, we have generated $1.1 billion of operating cash flow and $818 million of free cash flow, and we end the quarter with approximately $4 billion in cash and marketable securities.

We indicated at Analyst Day we would evaluate our balance sheet, cash position and business model to determine whether we could maintain our financial flexibility to invest and grow the business and return capital to shareholders. Our balance sheet is as strong as it has ever been, despite over $2.7 billion cash spent on acquisitions in 2005 to expand our market opportunities.

Over the last 18 months, we have generated $2.4 billion in free cash flow and we have more cash on hand today than in the history of the Company. We have concluded that given our strong cash generation potential as well as $4 billion in cash and marketable securities on hand, we have a great opportunity to initiate a share repurchase program at this time.

Let me reiterate a few specifics about the program. Our Board of Directors has authorized a $2 billion repurchase of our stock within the next two years. The repurchases will be financed from the Company's working capital and opportunistically executed at current price levels. The repurchases may be made through the open market and privately negotiated transactions, and the timing will depend on a number of factors, including: share price, market conditions, and other uses of cash. The repurchases are not expected to have a material impact on EPS in 2006.

And with that, let me turn to our non-GAAP guidance. We gave guidance at the beginning of the year for $5.7 billion to $5.9 billion of revenue, 33% operating margins and EPS of $0.96 to $1.01. Through the first half of 2006, we have met or exceeded our guidance and we are on track to deliver our full-year plans.

We are reiterating our revenue guidance of $5.7 billion to $5.9 billion and full year operating margins of 33%. Based on our strong first half EPS performance, we are tightening our full year EPS range to $0.98 to $1.01. We also expect full year free cash flows to be $1.7 billion or above.

Looking to Q3, we expect consolidated net revenues to be in the range of $1.355 billion to $1.430 billion. On the bottom line, we expect consolidated Q3 non-GAAP diluted EPS of $0.22 to $0.23. This guidance reflects a U.S. dollar to euro exchange rate of $1.20 for the second half of 2006 and a full year effective tax rate of 29% to 30% on a non-GAAP basis.

In summary, I want to take a few minutes to put the quarter in perspective. We generated 30% top line growth, with 9 points of growth coming from acquisitions we made in the last year to strengthen our competitive position and open up new markets for future growth and monetization. Our gross margins are 80%, which puts us in select company. We're making significant investments to extend our leadership position across our businesses. Last but not least, we generated over $0.5 billion in operating cash flow and we have an incredible balance sheet, one that affords us the ability to opportunistically repurchase shares when we believe the true value of the Company is not reflected in the current share price.

We believe the current challenges in the eBay business are manageable and we are addressing them head-on. We are executing on the strategies we detailed at Analyst Day and continue to monetize our unique and highly complementary assets. And, we're confident in our ability to sustain our growth over the long term and consistently deliver on the guidance we provide.

Now, we would be pleased to answer your questions.

Question-and-Answer Session

Operator

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

Scott Devitt - Stifel Nicolaus

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 - Stifel Nicolaus

Thanks, that is helpful.

Operator

Our next question comes from Mary Meeker - Morgan Stanley.

Mary Meeker - Morgan Stanley

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 - Morgan Stanley

Thanks.

Operator

Our next question comes from Mark Rowen - Prudential.

Mark Rowen - Prudential

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 - Prudential

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 - Prudential

Great. Thanks.

Meg Whitman

Thank you, Mark. Next question.

Operator

Our next question comes from Heath Terry - CSFB.

Heath Terry – CSFB

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 – CSFB

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 - Lehman Brothers

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 - Lehman Brothers

Great, thank you.

Meg Whitman

Thank you.

Operator

Our next question comes from Safa Rashtchy - Piper Jaffray.

Safa Rashtchy - Piper Jaffray

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 - Piper Jaffray

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:

One is to make sure that all Internet auction site listings appear in online comparison shopping sites, which is where most Koreans start their search for products.

Secondarily, we have reduced listing fees and that has actually accelerated growth; you saw that in this quarter's results.

Finally, we are highlighting new in-season products for young female shoppers, which is the market segment that Gmarket went after successfully.

So I have confidence in the Korean team. I love the results that we saw in Q2, so stay tuned. It's going to be a little bit of a battle there but I have a lot of confidence in our ability to maintain the number one position.

Safa Rashtchy - Piper Jaffray

Great, thank you.

Meg Whitman

Thank you, Safa. Next question.

Operator

Our next question comes from Anthony Noto - Goldman Sachs.

Anthony Noto - Goldman Sachs

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 - Jefferies & Co.

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 - Jefferies & Co.

Thanks a lot.

Meg Whitman

Thank you.

Operator

Our next question comes from Imran Khan – JP Morgan.

Imran Khan – JP Morgan

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 – JP Morgan

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 – JP Morgan

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 – JP Morgan

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 - CIBC

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 - Bear Stearns

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 - Bear Stearns

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.

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Source: eBay Inc. Q2 2006 Earnings Conference Call Transcript (EBAY)
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