eBay Q4 2009 Earnings Call Transcript

| About: eBay Inc. (EBAY)


Q4 2009 Earnings Call

January 20, 2010 5:00 pm ET


Mark Rowen - Vice President, Investor Relations

John J. Donahoe - President, Chief Executive Officer, Director

Robert H. Swan - Chief Financial Officer, Senior Vice President - Finance


Mark Mahaney - Citi

Doug Anmuth - Barclays

James Mitchell - Goldman Sachs

Scott Devitt - Morgan Stanley

Imran Khan - J.P. Morgan

Stephen Ju - RBC Capital Markets

Gene Munster – Piper Jaffray

Justin Post – Bank of America/Merrill Lynch

Spencer Wang – Credit Suisse

Heath Terry – FBR Capital Markets

Brian Pitz - UBS


Hello and welcome to eBay Incorporated's fourth quarter 2009 earnings call. Today’s call is being recorded. At this time, I would like to turn it over to Mark Rowen, Vice President of Investor Relations. Please go ahead.

Mark Rowen

Thank you, Kevin. Good afternoon. Thank you for joining us and welcome to eBay's earnings release conference call for the fourth quarter and full year of 2009. Joining me today on the call are John Donahoe, our President and Chief Executive Officer; and Bob Swan, our Chief Financial Officer.

We are providing a slide presentation to accompany Bob’s commentary during the call.

This conference call is also being broadcast on the Internet and both the presentation and call are available through the investor relations section of the eBay website at investor.ebayinc.com.

Before we begin, I’d like to remind you that during the course of this conference call we will 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 relating to our future performance that are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. These statements include, but are not limited to, statements regarding expected financial results for the first quarter and full year of 2010; the focus of the payments and marketplaces business units going forward; and future growth in the marketplaces and payments businesses.

Our actual results may differ materially from those discussed in this call for a variety of reasons, including but not limited to: the continuation or worsening of the global economic downturn; changes in political, business and economic conditions; foreign exchange rate fluctuations; the impact and integration of recent and future acquisitions; our increasing need to grow revenues from existing users in established markets; an increasingly competitive environment for our businesses; the complexity of managing an increasingly large enterprise with a broad range of businesses; our need to manage regulatory tax, IP and litigation risks, including risks specific to PayPal, Bill Me Later, and the financial industry; and our need to upgrade our technology and customer service infrastructure at reasonable costs while adding new features and maintaining site stability.

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

You should not unduly rely on any forward-looking statements and we assume no obligation to update them.

All information in the presentation is as of January 20, 2010 and we do not intend and undertake no duty to update this presentation.

With that said, let me turn the call over to John.

John J. Donahoe

Thank you, Mark and good afternoon, everyone and welcome to our Q4 earnings call. Today I will talk about our results from both the Q4 and full year perspective, and I will then outline our key priorities for 2010 before turning it over to Bob for more details on the quarter and our 2010 Q1 and full year guidance.

Let us start by taking a quick look at our Q4 results. Revenue growth was up 16% to $2.4 billion; non-GAAP EPS was up 9% to $0.44 and we generated free cash flow of almost $600 million.

In addition, we successfully completed the sale of 70% of Skype for approximately $1.9 billion. This move allows us to focus our energies on our two core businesses, payments and marketplaces.

All in all, we had a strong Q4 with both of these core businesses accelerating sharply from the third quarter. Let’s take a look at what we have accomplished in each business unit in Q4, and for the year.

PayPal posted terrific results, significantly expanding its global presence. For the first time, PayPal’s total payment volume past $20 billion in a single quarter. PayPal is truly a global business, now supporting 24 currencies in 190 markets with 81 million active accounts.

In 2009 for the first time annual revenue and TPV from PayPal’s Merchant Services business exceeded PayPal’s volume on eBay. And PayPal’s volume is predicated on a core, fundamental strength: merchants realize higher conversion rates when PayPal is available as a payment option.

By almost every measure, PayPal’s strengthened its competitive position in Q4. Total revenue and TPV both grew significantly year over year. Penetration on eBay increased 3 points year over year, PayPal’s Merchant Services business once again delivered very strong performance, with TPV growth of 50% in Q4.

This growth is global. In the U.S., PayPal’s Merchant Services TPV grew at 10X the market growth rate for ecommerce. International Merchant Services TPV grew 80% year over year, and volume from outside the U.S. now accounts for 40% of PayPal’s total TPV.

PayPal continues to leverage this unique global footprint by making it easy to send and receive payments across borders. In fact, cross-border trade now accounts for almost 25% of PayPal’s total payment volume. And PayPal continues to drive further penetration in major markets. For example, in Japan PayPal has signed agreements with five of the country’s leading gateways, representing over $14 billion in new addressable TPV.

We also became the first major payment platform to open up to third-party developers, a move which will accelerate PayPal adoption and innovation. Since opening the PayPal platform in early November, more than 12,000 developers have signed up and the first payment applications have already launched.

Simply put, PayPal is leveraging its advantages for merchants and consumers and rapidly expanding our global presence. PayPal is well on its way to becoming the preferred online payment provider around the world.

Turning to eBay, our Q4 results demonstrate continued progress as we improve value, selection and trust, and turnaround this business. Marketplace revenue grew 15% in Q4, but more important, our progress is evident across the three underlying metrics we are using to measure our success. Net promoter scores for both buyers and sellers are up significantly in our major markets. Sold items accelerated for the third consecutive quarter, up 11% globally year over year and core GMV growth also accelerated for the third consecutive quarter. In fact, in most of our major markets we were able to grow at or above ecommerce growth rates during Q4.

Let’s take a quick look at what’s behind this momentum. Asia Pacific remains our fastest-growing region, where GMV grew almost 50% over last year, and that is before adding G-market, an acquisition that extends our leadership position in Korea and enhances our momentum in the region.

And eBay’s ability to conveniently connect buyers and sellers across borders continues to be a competitive strength. For example, exports from Chinese sellers doubled in Q4, delivering over 15 million great deals to consumers all over the world during this holiday season.

In Europe, we have successfully transformed our seller value proposition and business model over the past 18 months. By offering lower insertion fees to our sellers, we have almost doubled the number of live listings, a significant increase in selection. We plan to adopt similar best practices in the U.S. in early 2010.

And we are improving the fundamentals of our business, which positions us to win in the secondary market. And in fact, we are increasingly moving new types of merchandise at high velocity.

In North America, we experienced early success with our fashion vault pilots, with brands such as Cole Hans, DKNY, Hugo Boss and MaxMara. Popular items sold out in hours and drove strong incremental sales for our sellers.

eBay is absolutely becoming a more trusted marketplace. Buyers are responding and our best sellers are winning, and we are continuing to raise the bar for our sellers. As you know, we have introduced a top-rated seller status that all buyers can see. In Q4, our top-rated sellers in the U.S. grew same-store sales by over 10%, and accounted for approximately 30% of total core GMV. In Germany, our top-rated sellers grew same-store sales by 25%, and in the U.K. they grew same-store sales by 35%.

Bottom line, sellers who deliver the very best experience are succeeding on eBay and buyers are benefiting. These turnaround efforts are paying off. Market share gains are evident internationally where we are further along in our turnaround. In the U.K. for example, we posted 17% growth during the second half of 2009, significantly outperforming the market.

We are also increasing innovation across eBay and becoming a more technology-driven company. One example of this is our efforts in mobile commerce, where eBay made tremendous progress over the past year. Our eBay mobile application has been downloaded almost 7 million times, making it consistently one of the top apps on the iPhone. And even more important, consumers are using our mobile applications, changing the way they shop and generating over $600 million in GMV on eBay during 2009, more than a 200% increase over the previous year.

We will continue to innovate in mobile in 2010 and provide consumers with other convenient ways to buy, sell, find and pay for the best deals on eBay with their smartphones.

Turning to our adjacent ecommerce formats, StubHub had a strong quarter with Q4 ticket sales up 54% over last year. High profile concerts and sporting events such as the World Series drove strong ticket demand and market share gains. People are increasingly shopping on StubHub for sought-after tickets at great value in a marketplace they can trust.

Our classifieds business was up 20% in 2009 as we strengthened our global footprint. We saw promising early results from initiatives in Spain, France, Germany and Italy that integrate our local classifieds offerings with the core eBay business and eBay brand. We expect these initiatives to continue to drive innovation in other markets in 2010.

So overall, this was both a strong quarter and a strong year for our marketplaces business, and we feel good about our progress.

Before I close, let me remind you of the three-year growth targets we laid out for our company in March of 2009. First, we said that PayPal will be the leader in online global payments, and we intend to almost double PayPal to revenues of between $4 billion and $5 billion by the end of 2011. PayPal made significant progress towards this goal during 2009.

Second, in our marketplaces business, we said we will focus and win in the secondary market and grow adjacent formats such as classifieds. Again, we made progress towards this goal in 2009, improving our growth rates relative to the market. We plan to grow GMV with ecommerce in 2010 and grow our business faster than ecommerce in 2011.

So 2009 represented an important first step toward our three-year goals, and we are entering 2010 with strong momentum. Now, with the sale of Skype, we are fully focused on our two core businesses: payments and marketplaces.

We have clear priorities for both businesses in 2010. At PayPal we will strengthen and expand our leadership position in online payments, and we will do this by continuing to maximize PayPal’s potential on eBay and rapidly growing merchant services through merchant acquisition and increased consumer preference, as we expand our consumer footprint. And, we will continue to launch new products and accelerate innovation off of our platform in this exciting business.

In our core eBay marketplaces business, we are positioned in 2010 to make even more progress in trust, value and selection and further penetrate the secondary market. We will do this by offering buyers great experiences they can trust with innovative shopping experiences that deliver great value and selection, and by providing tools and pricing to align our success with our sellers. We will continue to make eBay the most attractive opportunity available for entrepreneurial sellers, casual consumer sellers and larger sellers.

So today we are a more customer-focused and technology-driven company. We are driving significant operational efficiencies that enable us to reallocate and reinvest significant resources into our growth initiatives that directly benefit our customers. I continue to be pleased with our pace, our progress and our performance.

We are committed to consistently delivering on our financial commitments while doing what is necessary to position our business for long-term growth and leadership. Now I will turn it over to Bob for more details on the quarter and our financial outlook.

Robert H. Swan

Great, thanks John. During my discussion, I’ll reference our earnings slide presentation that accompanies the webcast. All growth rates mentioned in my prepared remarks represent year-over-year comparisons unless I clarify otherwise. Also, I would like to remind you that we sold the majority of Skype on November 19, so financial results for Skype are only included up to that date.

Overall, we delivered strong fourth quarter results. We outperformed on both the top and bottom lines and we increased the financial strength and flexibility of the company. We executed against our strategic priorities during the quarter. PayPal continued to gain market share as transactions and TPV growth accelerated sharply. And we completed the first phase of Bill Me Later integration into the PayPal wallet.

As John highlighted, marketplaces achieved improvement in all three of the key metrics: net promoter score, velocity and market share.

Finally, we completed the sale of Skype, focusing our portfolio on our strategic mission of connecting buyers and sellers online.

So we are pleased with the results we achieved this past quarter, particularly given the backdrop of a difficult consumer environment both here in the U.S. and abroad, and we head into 2010 cautiously optimistic.

Our combined businesses generated net revenues of $2.4 billion in the quarter, a 16% increase, or 19% excluding Skype from Q4 2008 and Q4 2009. Organic revenue was up 12%, a sharp acceleration versus Q3. A weaker U.S. dollar increased our revenue growth by 4 points, and acquisitions decreased revenue growth by 1 point.

Fourth quarter non-GAAP EPS was $0.44, a 9% increase. Excluding Skype, non-GAAP EPS grew at 11%. The year over year increase was primarily due to higher volume, productivity gains and FX, partially offset by a lower take rate.

Non-GAAP operating margin was 29.3%, down 350 basis points driven by business mix, acquisitions and a favorable one-time item in the fourth quarter of 2008. We generated $598 million of free cash flow in the quarter, or 25% of revenue. CapEx as a percentage of revenues was 7% for the quarter, and 6.5% for the year.

Return on invested capital was 22.2% on a trailing 12-month basis, marking the first sequential improvement since the third quarter of 2008.

Now let’s take a closer look at our segment results. Starting with our payments business, PayPal had an exceptional quarter. Total revenue increase 28% to $796 million, a sharp acceleration from Q3. Total payment volume increased 34% to $21.4 billion. Geographically, TPV growth was 22% in the U.S. and 54% internationally.

PayPal’s Merchant Services business posted another great quarter, with the number of payment transactions growing 53%. This, coupled with a slight decrease in average transaction size resulted in $12.1 billion of global TPV, representing 50% growth over last year.

Merchant Services accounted for 57% of total TPV in the quarter compared to 50% in the fourth quarter last year.

PayPal’s transaction margin was strong, improving to 62.1% in the quarter. Although global take rate was down, we were able to offset this decline with modestly lower transaction expense and a more significant improvement to transaction losses due to better fraud detection and prevention.

PayPal’s segment margin came in at 17.8% in the quarter, up 300 bips from Q3 and down 100 bips year over year. The 100 basis point drop from last year was primarily the result of an economic currency hedge and dilution to the Bill Me Later, partially offset by higher transaction margin and volume-related leverage.

Let me touch on a few key operating metrics for Bill Me Later. Bill Me Later’s gross receivable balance at quarter end was $673 million. The quality of Bill Me Later receivables has improved, which reduced growth, but we continue to believe this is the right trade-off in the current economic environment.

The net charge-off rate decreased slightly to 11.1% in the quarter, and risk-adjusted margin remained better than industry average.

Now let’s move to our marketplaces business. Overall marketplaces achieved net revenues of $1.5 billion, a 16% increase from last year, and sharp sequential improvement. Growth was driven by the acquisition of G-market, strength in our StubHub and classifieds businesses, and improvement on the core eBay sites. International accounted for 60% of marketplaces revenue this quarter, up from 55% in the year-ago period.

We continue to be pleased with the double-digit growth we are seeing in our fixed price format. Auction format GMV declined slightly, which represented an improvement over the prior quarter. Vehicles also improved from prior quarters.

Let’s turn to marketing services and other, which we view as alternative formats for bringing buyers and sellers together. Our classifieds business continued its strong trajectory with 20% revenue growth, or 9% on an FX neutral basis. Total global advertising revenue increased by 3%. Advertising revenue was negatively impacted by the placement of advertising on our eBay sites as we continue to optimize the user experience.

Shopping.com, Rent.com and other revenue was up 7% in the quarter.

Just a couple quick highlights on marketplaces operational metrics. Velocity, or sold items, grew at 11% in the quarter, excluding G-market, driven by geographic strength in China cross-border, the U.K. and Germany. Marketplaces segment margin was 40.4% in the quarter, down 480 basis points. The main drivers include dilution from acquisitions and increased litigation expense and reserves in the fourth quarter of 2009, as well as a tough comp due to the reversal of accrued bonuses in the fourth quarter of 2008.

Global take rate was 7.5% in the quarter, down 20 basis points from last year. Excluding the impact from vehicles, StubHub, currencies and G-market, take rate was down 40 basis points year over year. The decline in take rate is primarily due to a reduction in featured fees and larger discounts given to our highest rated sellers.

In the fourth quarter sales and marketing as a percent of revenue was up 140 basis points due to increased investment in Merchant Services, a shift in type of spend from contra to expense, and the inclusion of G-market. Our core marketplaces marketing program spend for 2009 was down modestly from 2008 levels, as we continue to use data and technology to improve the efficiency of our market.

Product development was 30 basis points higher than last year driven by a continued investment in the user experience and our technology platform. G&A costs increased 160 basis points from last year, predominantly due to a tough a comp from the reversal of accrued bonuses in Q4 2008 and the inclusion of G-market. Our provision for transaction and loan losses was up 40 basis points, primarily due to our new eBay dispute resolution program and higher VML credit loss.

Last March at our analyst day we discussed the need for us to operate smarter and more efficiently. At that time we laid out plans to reduce our cost structure by a cumulative $2 billion over three years. We remain on track to achieve this goal, generating more than $600 million in savings since the fourth quarter of 2008, and we have reinvested these savings into area of customer experience, trust, marketing and technologies to improve our competitive position.

From a cash perspective, we generated strong free cash flow of approximately $600 million during the quarter. We received $1.9 billion in cash for the sale of 70% of Skype and we paid off the remaining $200 million balance on our line of credit. Cash, cash equivalents and non-equity investments was $5.2 billion at quarter end.

We brought back $1.1 billion from overseas as a result of a business restructuring during the quarter, and ended the quarter with $1 billion cash in the U.S. While the tax impact is $200 million to $225 million from the business restructuring that will occur in the first quarter, it will give us additional flexibility with our U.S. cash balance.

While the first half of 2009 was an extremely difficult environment to operate in, we built momentum throughout the year. Revenue accelerated in the second half, EPS improved in the fourth quarter and we generated excellent free cash flow throughout the year, and we exited 2009 stronger than we entered it.

Given that, let me turn to guidance. A year ago, in light of the cloudy economic environment, we suspended issuing full year guidance. While there is still some uncertainty in the economic outlook, we are reinstating full year guidance for 2010 due to better visibility on the economy and progress we’ve made in our core marketplaces business. Our guidance for the first quarter and full year 2010 no longer consolidates Skype, as we will incorporate Skype into our financials using the equity method of accounting.

For Q1 2010 we anticipate revenue of $2.1 billion to $2.2 billion. This represents growth of 12% to 18%, excluding Skype. We anticipate non-GAAP EPS of $0.39 to $0.41 which represents growth at 8% to 13%, excluding Skype.

For the full year of 2010 we anticipate revenue of $8.8 billion to $9.1 billion. This represents growth of 9% to 12% excluding Skype, and we anticipate non-GAAP EPS of $1.63 to $1.68, representing growth of 11% to 14%, again also excluding Skype.

In summary, we are pleased with the progress we have made in 2009. We continue to focus on our key priorities. In payments, we will strengthen and expand our leadership position in online payments while accelerating innovation off our platform. In marketplaces we will continue to make progress in trust, value and selection while further penetrating the secondary market, and we will continue to becoming a more customer-focused and technology-driven company.

We remain cautiously optimistic as we head into the new year. Now, we would be happy to answer your questions. Operator.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Mark Mahaney – Citi.

Mark Mahaney – Citi

Thanks, I would like to ask a two-part question. First, is it clear to you from a macro read that the internet consumer, and consumer discretionary spend has come back? Is that part of your cautious optimism for 2010?

Secondly, Bob, just in terms of the EPS, organic and revenue growth, organic guidance for 2010, if there isn’t a change in the tax rate that implies that margins are up? Or, should we assume that the tax rate is consistent with Q4 levels going forward?

John J. Donahoe

Mark, maybe I’ll take the first part of that and Bob the second. On our macro outlook I would say two things. One, on the economy we don’t have any additional insights versus anyone else. I would say we are cautiously optimistic about slow, steady progress in the global economy. So there is no intended message on that.

What we do see, however, goes back to what I said at analyst day last March, which is ecommerce continues to gain share versus offline retail. We saw that in the fourth quarter, where I think when it is all said and done ecommerce growth rates will be higher than offline retail. I continue to believe we participate in a large and growing market where there is going to be a lot of opportunity for multiple winners.

I think we feel good about the market we are competing in, and cautious about the economic outlook.

Robert H. Swan

Mark, in terms of your second question on our full year guidance, we gave roughly 10% top line growth and about 11% to 12% bottom line growth.

From a tax rate perspective, we expect the tax rate to go up year on year, and quite a bit from Q4 which as you can see was at a pretty low level. We are looking at 20% to 21% tax rate for the full year of 2010.

What that implies is we will see modest operating margin expansion from 2009 to 2010 reflected in our guidance.


Your next question comes from Doug Anmuth – Barclays.

Doug Anmuth - Barclays

John, you talked about how the international business is further along in the turnaround than the U.S., and I am curious what you think the primary things you need to do here in the U.S. are, and why the international business is really further ahead?

Secondly, Bob, can you talk about the $1 billion plus that you basically have now in U.S. cash and what your intentions are, now that you’ve brought some back?

John J. Donahoe

Sure, Doug. On the international business one of the benefits we have, particularly in Germany and to some extent in the U.K. is we can clearly differentiate business sellers from consumer sellers, and so when we put in place the pricing changes we did at the end of ’08, we differentiated business pricing from consumer pricing across fixed price and auctions more aggressively in Europe. And in particular, we particularly lowered insertion fees on fixed price.

As I said, what that did is that allowed a huge inflow of fixed price items from business sellers and it allowed consumer sellers to add their items, but more in an auction format, which I think is increasingly the better way for consumer sellers to sell on eBay.

In the U.S., we don’t have the luxury, if you will, of being able to mechanically differentiate consumer sellers from business sellers so we didn’t go to quite the same extremes in our pricing here. We also have such big selection in the U.S.

So I think what we’ll do in 2010 is take some of the learnings that we generated outside the U.S. and apply them as appropriate and as tailored to the U.S. market. I think we feel we’ve proven out some of these things outside the U.S. and they will apply inside the U.S.

Robert H. Swan

Doug, on your second question we end the year with a great cash position, but as you know the makeup of our cash has been predominantly offshore historically, and that was exacerbated by the proceeds from the Skype transaction. That being said, we’ve continued to pursue ways to get in more equal distribution of our cash geographically, provided we can do it as efficiently and the restructuring we did in the fourth quarter allowed us to do that to bring more of our total cash position here domestically.

I would say our priority is we will continue to maintain a conservative balance sheet, but to give us the flexibility to first be able to finance the growth of our expanding Bill Me Later portfolio here domestically and also the capacity or the flexibility to pursue acquisitions both internationally and domestically as they arise and materialize. So our priorities haven’t really changed. I think our fourth quarter allowed us to get a more equal distribution of where our cash sits and gave us a good chunk of cash here domestically.


Your next question comes from James Mitchell - Goldman Sachs.

James Mitchell - Goldman Sachs

Thanks for taking my one-part question on the marketplace segment margin. I guess the marketplace segment margin was down year on year because you are consolidating G-market now and those unusual bonus reversals in the fourth quarter of last year. Can you talk about why the marketplace segment margins were down quarter on quarter? Is it mostly due to non-recurring items like litigation expenses or mostly due to recurring items like lower fees?

Robert H. Swan

James, first maybe if I could just characterize the change in margins year over year in terms of what is going on underneath the covers, and this is I would say an ink comment but definitely pertains to the marketplace business.

First our program that we term as Operational Excellence which essentially is finding better ways to do more things efficiently enabled us to generate great productivity in the marketplace business during the course of the year, including the fourth quarter. We’ve taken that productivity and we’ve reinvested it in lower take rates and higher product related expenses. So those two, good productivity going into lower take rates and higher product-related expenses.

The margin decline is really due to the acquisition of G-market, number one. Number two, in the fourth quarter two things that you highlighted. One was a good guy last year, the reversal of bonuses in the fourth quarter, and the other was a bad guy in 2009, which was higher litigation reserves and expenses.

So a little bit of both. The sequential decline Q3 to Q4 was primarily due to a lower take rate and the impact of higher litigation expenses. If I roll the clock forward in terms of implied margins in our 2010 guidance, we have essentially implied, as I indicated to Mark, that margins overall will go up modestly from 2009 to 2010 and in our marketplace business they will be relatively stable. We will continue to absorb the impact of lower take rate changes that we did in Q4, which will impact the full year of 2010, but we will fund those by continuing to operate smarter in all the different components of our costs in the core business.


Your next question comes from Scott Devitt - Morgan Stanley.

Scott Devitt - Morgan Stanley

On the recent acquisitions, G-market and Bill Me Later seem to be doing very well. I was wondering if you could comment on the integration progress that you have had between eBay Korea and G-market, both from a sales standpoint in terms of infrastructure, as well as any early progress that you’ve made with Bill Me Later and PayPal Checkout.

Robert H. Swan

Let me do those in order. First on G-market, as you know, Scott, we closed the transaction in June. The objective of the combination was to consolidate our leading position in Korea to continue to operate two different platforms by generating significant synergies from the integration of the back office function.

I would say our team in Korea, both the G-market team and the ISC team have made tremendous progress on essentially all fronts in a relatively short period of time, so we feel very good about the back office integration, the inherent synergies. Secondly, the combined business gaining market share in Korea while continuing to operate two different front offices, if you will, or platforms.

On Bill Me Later, we are just over a year into the combination, just to refresh your memory, the intention was to take the number one – PayPal – and the number two alternative online payment businesses with very complementary skills and put them together, leveraging the complements. Bill Me Later with a very strong, large merchant presence; PayPal with a very strong, small sole-proprietor SMB kind of presence. With the combination of the product, the platform and the sales force that we would be able to increase our presence with large and small merchants to offer our consumers more choices at relatively low cost transaction expense as we monetize both merchants and consumers.

One year in we feel very good about the continued presence with merchants here domestically and we saw those reflected really in the accelerating TPV for PayPal during the course of the second half of the year. We just launched the product integration for Bill Me Later and the PayPal wallet in the fourth quarter and we feel good about the trajectory. We have another product launch early in 2010. We feel pretty good about the combination of those two platforms.

So all in all we have invested quite a bit and strengthened our Asian presence with G-market in expanding our reach of the PayPal business with Bill Me Later. Six and 12 months in respectively, we feel very good about our positioning.


Your next question comes from Imran Khan - J.P. Morgan.

Imran Khan - J.P. Morgan

One, take rate. How should we think about the take rate long-term as you try to give better experience to sellers, what is the optimized take rate that you have in your mind?

Secondly, as the credit costs stabilize or even credit costs start going down, how aggressively will you push Bill Me Later? How should we think about near to mid-term Bill Me Later as a percentage of your total payment volume?

John J. Donahoe

Thanks, Imran. I will take the first and Bob, why don’t you take the second. On take rate, I appreciate the way you asked the question because people tend to focus quarter to quarter and the way we really think about take rate is stepping back. I will remind you that it was only 24 months ago when I first took over in this role we had one take rate applied to all categories in all geographies across all sellers around the world.

The structure of that take rate really hadn’t changed since the beginning of eBay. So we set out on what we knew was going to be a three to four year process to make changes in our take rate that would better align ourselves with our sellers and make a robust marketplace. So we have really focused on three things during that time.

One, we have gone to category-based pricing, which makes sense.

Two, we’ve made significant changes in rebalancing front-end versus back-end fees, which is to say we were probably 70/30 front end to back end since the beginning of ’08, and today going into 2010 we are more 30/70 – 30% front end, 70% back end. What that really means is we have aligned our incentives with that of our sellers. If they don’t succeed in selling we don’t succeed in collecting fees.

The last thing we have done is we have incented our sellers such as that sellers that give the best service to buyers gets the lowest rates on eBay. So we are two-thirds of the way through. We have put some things in Q4 which took a further step in that direction, and we will make a few more changes in ’09 that I think have to do with taking the learnings from Europe and applying them in the U.S. about rebalancing.

But I feel good that coming out of 2010 we will have the structure and alignment of our pricing in the marketplace that is aligned with sellers and optimized for marketplace success.

Robert H. Swan

Imran, in terms of your question about Bill Me Later and just general credit environment, a couple things. Obviously our intention with the integration of Bill Me Later into the PayPal wallet in the product flows, the intention is to give consumer choice. With that choice we believe that with the unique Bill Me Later offering that they will increasingly choose Bill Me Later as a way to settle their online payments and Bill Me Later will grow as a percentage of PayPal volume. That being said, in the near to medium term it will still be a relatively small piece of overall PayPal volumes.

Secondly, in terms about credit decisioning or our underwriting, we don’t expect in the medium term to really change how we think about credit decisioning in this current economic environment; i.e. we will continue to be fairly disciplined on keeping net charge-offs relatively low and expanding risk-adjusted margins for the portfolio until we see better consumer sentiment and economic environments going forward. It will be a bigger piece, it will be relatively small in the short to medium term and we will continue to be very disciplined in how we underwrite it.


Your next question comes from Stephen Ju - RBC Capital Markets.

Stephen Ju - RBC Capital Markets

What do you think the fixed price of the percentage of the total mix can go, longer term, for the marketplaces forum? Items sold growth outstripping GMV growth by continued ASP compression, is this due to the increasing mix of fixed price or are there other factors?

John J. Donahoe

On the fixed price versus auction, I would make one very important point upfront, which is our goal is to offer buyers and sellers choice and to make our marketplace as seamless and indifferent between that choice as possible. So one, we are not driving one versus the other. That said, what is clearly happening is fixed price is growing more rapidly than auction as the marketplace rebalances because that is the format that many business sellers choose to sell in and many consumers choose to buy in.

We don’t know where it will land. Again, I think Bob said at analyst day we started 30/70, that is 30 fixed, 70 auction and my guess is we could end up somewhere around 70/30. That varies a lot, by the way, by category. There are certain categories like collectibles where auctions is a natural way to set a market price, and others like consumer electronics where there is more clear pricing. In an efficient market, fixed price makes sense.

So the important point is we are indifferent in terms of margin, in terms of our marketplace. Then on items sold and GMV, I think it is important to just note the economy is impacting ASPs, we see that both on eBay and PayPal, PayPal ASPs have been coming down off of eBay as well as on eBay. Two, one of the things that eBay offers, I think has been a source of advantage for us is in a tougher economy where consumers are trying to get more out of what they spend, we see them trading down on eBay, which is to say instead of buying the latest model Blackberry they are buying a brand new Blackberry that was last year’s model for less. Or, instead of buying a brand new bicycle they are buying a used bicycle.

We see actually within categories people getting what they want but just trading down in terms of what they are buying and what they are getting for their dollars, and in that way eBay is a fairly unique marketplace in offering the ability to do that.


Your next question comes from Gene Munster – Piper Jaffray.

Gene Munster – Piper Jaffray

My question is a follow-up to Stephen’s just a point of clarification. The shift from auction to buy it now impact on your margins, I thought I heard you said that it has no impact and you are indifferent, but I just want to clarify that.

Robert H. Swan

That is correct, we have done a variety of price changes over time but in essence, whether it is fixed price, buy it now, auction there are common themes. Lower upfront, fewer features and the shift of conversion has gone more from our sellers to eBay, and the fee structure, there is no dramatic change between the different formats. So we wanted to provide consumers the right choice, and oh by the way, the margin structure is tapered, it is not dramatically different in terms of overall impact.


Your next question comes from Justin Post – Bank of America/Merrill Lynch.

Justin Post – Bank of America/Merrill Lynch

I think one of your real important goals is to grow as fast as ecommerce this year, and as I look at the Merchant Services business, ex-FX, it went from 35% growth to 47%, so improved 1200 basis points. When I look at the marketplace business, it improved about 400 to 500 basis points, whether you look at revenue or GMV, ex-FX.

Do you think the marketplace business is just taking a lot of share versus the market? Or do you think it is doing okay and your core business still has a ways to go? What do you think are the one or two most important initiatives for 2010 to get it to as fast as ecommerce? Thanks.

John J. Donahoe

Well Justin, let me answer what you intended. The Merchant Services business is absolutely gaining share of online payments. As I said, it is kind of stunning, but the Merchant Services business grew 50% in Q4 in terms of TPV, and that is 10 times faster than the market in the U.S. and comparable outside the U.S.

So that business is still in, I believe, its early days of the global roll out of what is a very attractive and differentiated product for merchants and for consumers. So we envision that business continuing to gain share.

The core eBay business, including the PayPal on eBay, that is the one that we said was going to grow more slowly than the market in ’09, at market growth rate in 2010 and faster in 2011.

There is no silver bullet in what is driving it. That said, I am pleased with where we are coming into 2010 and I don’t know, I love all my children, not just one, so I will list three things that I am looking forward to in 2010 in the marketplace business.

One, we are going to further extend trust by offer enhanced buyer protection, so buyers can buy absolutely confidently and safely on eBay. Two, value and selection will continue to extend with both pricing and the continued improvement in search. You recall Mark [Hargis] talking about our approach to technology in search at our analyst day. We are absolutely becoming a more technology-driven company and our search team is increasingly top notch.

Then lastly, I think what is going to be fun about 2010 is you are going to see some real differences in the eBay user experience. You will see this most notably in clothing, shoes and accessories about mid-year where the eBay experience as you know it will look very different and you will see us taking advantage of how we bring the unique inventory we have to buyers in some new and creative ways.

So again, that is on top of a technology platform we have been building under the eBay business that I think will really hit its stride in 2010 and 2011. I am looking forward to this year and think that we will continue to build on the momentum that we are building up.


Your next question comes from Spencer Wang – Credit Suisse.

Spencer Wang – Credit Suisse

A question on the PayPal take rate, given the expansion of the Merchant Services business, should we continue to expect the take rate to drift lower beyond 2010? Can you give us a rough sense of the take rate difference between Merchant Services and the on-eBay TV?

Robert H. Swan

Let me emphasis our priorities in terms of how we manage the volume and the economics associated with the core platform. Obviously more presence on merchants, more preference for consumers drives volume growth. Then the thing that is most important for that volume growth for us is the transaction margins that we generate as a result of three related variables: one, the global take rate; secondly the transaction expense and third the fraud losses.

So it is the interaction of those three variables that drives transaction margins that we said back in March 60% or higher over the next three years, and what we just said today that we improved Q3 to Q4 to 62%. That dynamic, what we expect to transpire over that timeframe is there are so many variables that go into global take rate that can influence to the positive side, or just take rate alone, the negative side.

For example, continued progress of expanding PayPal on eBay in Germany has a relatively low take rate. It has very low transaction expenses and very attractive transaction margins. So there are variables in the portfolio where global take rate may come down, but at times fundamentally lower transaction expense and still generate 60% plus kind of margins. So overall, we will continue to manage gaining more presence with merchants, more preference from consumers at transaction margins that take the combination of global take rate, transaction expense and fraud losses that enable us to generate 60% plus transaction margin and drive leverage from an operating expense standpoint to expand overall operating margins in the PayPal business.


Your next question comes from Heath Terry – FBR Capital Markets.

Heath Terry – FBR Capital Markets

Bob, you mentioned bringing the billion back to the U.S. included roughly $300 million in tax costs. When thinking about the remainder of cash that you have got overseas, is 20% or so the right rate to think about in terms of the costs, eventually, at some point to bring the rest of that back?

Robert H. Swan

Not really. There are obviously lots of different variables that go into the effectiveness and the efficiency of getting our cash equally distributed around the globe, and I think that those variables include potential internal restructurings, potential repatriated dividends, potential financing of onshore assets with offshore cash, I mean there are a variety of different variables, all of it within today’s regs have different implications for effectiveness of repatriation strategy.

I think what we have said is we will continue to look at how to get an equal distribution of our cash across the globe so we have the ultimate flexibility to pursue opportunities as they arise, with a real big bias for doing it as fast and efficiently as possible, and every one of the strategies has different kinds of implications.

The ability now versus where we were bringing back while it had tax cash costs associated with it, relatively speaking it was a fairly attractive and efficient way to restructure our balance sheet with a legitimate business purpose at relatively low tax costs. We will continue to pursue all sorts of different strategies and each and every one of them are somewhat dependent on the circumstances.

Mark Rowen

Operator, we have time for one last question.


That question then will come from Brian Pitz – UBS.

Brian Pitz – UBS

A quick question on mobile. Is it becoming a more meaningful contributor to revenue? Are there any specific product categories where adoption has been greater?

Second unrelated, any prospects for announcements regarding new, exclusive product inventory from the likes of Tiger Direct or other new vendors into 2010, as you guys had previously announced? Thanks.

John J. Donahoe

Thanks, Brian. Mobile absolutely is in the phase of an inflection point, and there is no doubt that the iPhone and smartphones in general have just illustrated to consumers all over the world the power of what a mobile device can provide. We have been quite fortunate in that both eBay and PayPal lend themselves to the mobile format well.

The engaging nature of eBay auctions is something that can be really brought to a mobile device and our best sense is that our mobile commerce offering at $600 million could be half the volume in the mobile goods market thus far.

So we intend to be all over it. We have released another app, the eBay Deals app and we will continue to find new and interesting and creative ways to bring our inventory to the mobile device in ways that are engaging for consumers. How much of that will be incremental volume versus just a device shift, we don’t know and to some extent we don’t care. We view mobile as simply one more device as a way to connect buyers and sellers.

What is interesting is you don’t see people necessarily starting, doing and then concluding their whole shopping experience on one device or another. They may do a search at home and put it in their My eBay, they may finish the transaction while standing in line in Starbucks and pay right there with PayPal, or the reverse.

So mobile will be an important trend. We feel we are out on our toes innovating both with eBay and PayPal in mobile.

In terms of the exclusive inventory, our marketplaces seller team is out talking with several brands and several people that have inventory. I think 2009 was the year of proving we could move high volume SKUs in very short periods of time, and I think we’ve done that, so there are certainly a growing number of people who want to talk about distributing on eBay. In some cases, that will be exclusive and others it won’t, but we feel poised to take advantage of this private sales trend where retailers are looking to get rid of high quality branded goods in quick and efficient ways online.

So that’s it. Thanks everyone, we look forward to talking to you in 12 weeks.


Ladies and gentlemen, again thank you very much for joining us today. That will conclude today’s call. Again, have a good day.

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