Full Transcript of eBay’s 3Q05 Conference Call - Prepared Remarks (EBAY)

| About: eBay Inc. (EBAY)

Here’s the entire text of the prepared remarks from eBay’s (ticker: EBAY) Q3 2005 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

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Good day, everyone and welcome to eBay's Third Quarter 2005 Earnings Results Conference Call. This call is being recorded. With us today from the company is the President and Chief Executive officer Ms. Meg Whitman and the Chief Financial Officer Mr. Rajiv Dutta. At this time I would like to turn the call over to Ms. Lydia Ventura Senior Director of Investor Relations.

Lydia Ventura Senior Director of Investor Relations

Good afternoon. Thank you and welcome to the eBay’s earnings release conference call for the 2005 third quarter. I'm Lydia Ventura and I am the new Senior Director of Investor Relations for eBay. While new to Investor Relations I've been with eBay for seven years in various finance roles. Most recently as head financial planning and analysis. I look forward to working with all of you. Joining me today are Meg Whitman our President and CEO and Rajiv Dutta 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 web site. Before we begin, I would like to take this opportunity to remind you that during the course of this conference call, we may discuss some non-GAAP measures while talking about our company's performance. You can find the reconciliation of those measures to GAAP measures in the tables of our earnings 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 financial results could differ materially from those discussed during this conference call. Factors that could cause or contribute to such differences include but are not limited to the company's need to manage an increasingly large company with a broad range of businesses of varying degrees of maturity, the company's need to increasingly achieve growth from its existing users as well as from new users in its more established markets, the company's ability to deal with the increasingly competitive e-commerce environment, including competition for it’s sellers from other trading sites and other means of selling and competition for its buyers from other merchants online and offline. The need to integrate, manage and profitably expand the newly acquired Skype business, the regulatory and competitive risks specific to Skype, the litigation regulatory credit card association and other risks specific to PayPal as it continues to expand geographically. The company's need to manage other regulatory tax and litigation risks, even as its product offerings expand and its services are offered in more jurisdictions. The company's ability to update and develop its systems infrastructure and customer service capabilities to accommodate growth at a reasonable cost, the company's ability to maintain site stability and performance on all of its sites while adding new products and futures in a timely fashion, fluctuations and foreign exchange rates, the company's ability to profitably expand its model to new types of merchandising sellers and the company's ability to profitability integrate and manage recent in future acquisitions and other transactions. More information about factors that could affect our operating results is included under the captions "risk factors that may affect results of operations and financial condition" and "management's discussion and analysis of financial discussion and results of operations" which are in our annual report on form 10-K, and quarterly reports on form 10-Q. Copies of which may be obtained by visiting the Investor Relations section of our Web site. Now, over to Meg.

Meg Whitman, Chief Executive Officer

Thank you, Lydia. And welcome, everyone, to today's conference call. On the heels of a great Q2, the company delivered excellent results in Q3. The strategies we put in place at the beginning of the year delivered handsomely building on the momentum from our very strong 2Q. As a result we saw strong growth across every part of the business around the world in what is typically a slower period for our business. The company generated record net revenues of 1.1 billion in Q3, a jump of 37% year-over-year. And pro forma net operating income grew 44% year-over-year, with a pro forma operating margin of 36%. While we saw growth in each of our markets, it was especially strong in our two largest eBay marketplaces, U.S. and Germany which both showed accelerating growth in Q3. Globally, eBay added 11 million new users and generated gross merchandise volume of $10.8 billion. PayPal continued its strong trajectory in Q3, with accelerating growth from merchant services in addition to continued expansion on the eBay platform. In Q3, PayPal added 8 million new accounts and delivered nearly $6.7 billion in total payment volume. And our newer venture, Skype, shopping.com, rent .com, GG and our other classified web sites also showed strong traction across the board. Our performance in Q3 validates the strength of our business model, our short-term strategies for growth, and our long-term plans for investment. eBay and PayPal remain the most powerful e-commerce franchises in the world and the cornerstone of our growing portfolio of online businesses. As a result, we are well positioned for future both in the Q4 holiday shopping season and beyond. Rajiv Dutta will discuss our financial outlook for Q4 and for the full year 2006 in a few moments but now let me spend a few minutes talking about our achievements in Q3. At our analyst day conference in February, we laid out our strategy for driving growth in the eBay business. We have consistently focused on increasing the value of the eBay market place for our users by investing in highly efficient marketing initiatives, and product innovation and reaching out to connect with our community of users. These efforts fueled the continuing momentum we saw in Q3. In the U.S., we deployed smart marketing tactics to bring buyers to our web site and further optimize seller's listings for natural search. These and other marketing efforts helped spur demand on the site and our sellers saw more bid, higher ASP’s and strong conversion rates in Q3. GNV across categories remained strong especially in collectibles, home and garden and business and industrial which all exhibited accelerating GMV growth year-over-year for the second consecutive quarter. And the growth of eBay stores also contributed to increased trade on the site. We exited Q3 with a record 193,000 stores in the U.S., a 35% increase from a year ago quarter. We now have 336,000 stores worldwide. This same focus on higher return activities also benefited eBay's international business. eBay Germany maintained the momentum it build in Q2 and delivered strong results across the board, despite typical summer seasonality. Like the U.S., the German team has been concentrating on increasing trade through efficient marketing, natural search optimization, increasing buyer protection, and community outreach. Which has driven an increase in listings and bidding activity and contributed to accelerating GMV growth. With its renewed growth eBay Germany is well positioned to take advantage of the coming holiday shopping season. Our other international markets also delivered strong growth across a variety of measures. eBay UK demonstrated impressive growth in GMV and transaction revenues. eBay France and eBay Italy again delivered triple digit year-over-year GMV growth for the seventh consecutive quarter. Our business in Korea which now has more than 14 million users continued to generate strong GMV growth and eBay Australia surpassed the 3 million user milestone. And now, one in five Australian adults is a registered eBay user. EBay's business in China also had an excellent Q3 delivering accelerating GMV and transaction revenues. Our Chinese marketplace is more vibrant than ever, providing sellers with strong ASPs and conversion rates. And we added nearly 2 million new users in Q3, bringing the total to 15.1 million, by far, the largest online trading community in China. A power seller on eBay recently told me that eBay is the only marketplace in China on which Chinese sellers can build a serious long-term business. I'm extremely pleased by the progress we've made in China and by the thriving ecommerce environment we are creating for a whole new generation of Internet users. As a result of our growth around the world, eBay international delivered remarkable year-over-year GMV growth of 40%. EBay's international business now accounts for 53% of eBay's user base and 50% of its global GMV. Our newer ventures are also demonstrating strong growth. Rents.com ended the quarter with more than 20,000 apartment properties listed on its site, making it the number one Internet rental listing service on the web. Shopping.com remains the number one shopping comparison site covering all kinds of products from shoes and iPods to hotels and mortgages. And G-GG continues to gain traction, now serving more than 150 cities and regions around the world. PayPal also had an excellent quarter, growing its business on eBay and expanding its merchant services business. In Q3 PayPal reached a record 87 million accounts, processed more than $6.7 billion in total payment volume and generated revenues of 247 million, an impressive 44% jump from the year-ago quarter. PayPal was also growing around the world. PayPal's penetration of addressable GMV in Canada, for example, is now greater than that of the U.S. And after only a year, PayPal is used to settle nearly one quarter of the addressable GMV on eBay France. PayPal launched its newest international service in China in July, which is already seeing healthy adoption among online consumers. Our merchant services business continues to deliver accelerating growth as well. In Q3, a number of popular web sites began offering PayPal as a payment option you willing pet smart.com, petco.com, cooking.com, starbucksstores.com, esurance, Equifax and hot wire. And web site payments pro our product suite for small businesses off the eBay platform, was launched in June is gaining traction. As a result, TPV from merchant services showed accelerating year-over-year growth of 49%. And as we announced last week, we are extending the merchant services business with our acquisition of Verisign payment gateway business. With the gateway business, which processed more than $40 billion in total payment volume in 2004, we can expand our customer base by tens of thousands of new small and medium sized business customers. And combining the gateway with our existing services will allow us to provide merchants with multiple processing choices from a single trusted provider. In addition to growing our core businesses, we've also completed some strategic acquisitions this year. Our portfolio of businesses has become much broader but there is a common thread that runs through these businesses. Each of these Web sites brings communities of people together to meet, talk, buy, and sell. And each empowers people in ways that were inconceivable just a few years ago. As the Internet evolves our vision of e-commerce has also evolved and at the same time we have expanded our addressable market and our opportunity for future growth. Investing for the future is a key part of our long-term strategy. In the early days, we expanded the eBay platform by introducing new trading formats such as fixed price and eBay stores. We also made key acquisitions such as the purchase of PayPal in 2002. This was a watershed moment in our history, because with PayPal we were able to remove friction from the online payment process, which led to a large and successful new business for the company. Last week, we completed another acquisition that we believe will be just as transformational to our business as PayPal was. And that's the acquisition of Skype, the global online communications company. Much like the eBay and PayPal businesses, Skype takes unique advantage of the Internet to deliver a powerful new way for people to communicate online. And while the Skype of today is largely focused on communications, we see incredible potential for its use in e-commerce. Combining Skype with eBay and PayPal will create an unparalleled e-commerce engine for merchants and consumers around the world. Integrating Skype into the eBay marketplace, as well as into shopping.com, rent.com and GG will reduce communications friction between buyers and sellers and increase the velocity of trade. Skype could also help expand eBay and PayPal internationally, especially in emerging markets where a more personal way to communicate online can make e-commerce more familiar. And creating a PayPal wallet associated with each Skype account can make it even easier for users to pay for Skype's eBay based services while at the same time increasing PayPal’s payment volume. The acquisition allows eBay and Skype to pursue on to new lines of business say some lead generation through paper call, services, travel, new cars, and real estate are just a few of the categories that we believe can benefit from Skype. And on its own, Skype is a powerful business model. Skype ended Q3 with more than 57 million registered users and as we have said, is expected to generate an estimated 60 million in revenues in 2005, and more than 200 million in 2006. With eBay behind it, Skype can advance its leadership and Internet voice communications and offer people worldwide new ways to connect online. We're incredibly excited about the acquisition of Skype and the other acquisitions we've made over the past year. They allow us to expand our vision of e-commerce and compliment our existing growth businesses of eBay and PayPal. In short, we are evolving the company and broadening our definition of future growth and success. These ambitious steps towards our future would not be possible without the powerful combination of our core businesses. eBay and PayPal are unparalleled growth engines that speed the ongoing development of their own platforms while allowing the company to expand in new strategic directions. And as you can see from this quarter's results, these are young, very responsive businesses, with considerable room to grow. Now, before Rajiv Dutta presents the financial, I would like to take a moment to announce a future change in our management team. I have asked Rajiv Dutta to take on the newly created role of president of Skype. He will augment the already strong management team we have there, working closely with Skype's CEO Nicholas (14:16) Sentrom and with me. He will also remain on eBay's Executive Management Team. Skype is a huge opportunity for the company and I'm thrilled that he can become more deeply involved with this exciting new part of our business. Rajiv Dutta will remain fully engaged as CFO working with me to find the right replacement and make a smooth transition before he moves to London. Rajiv Dutta has made tremendous contributions to eBay as CFO over the past five years and I'm personally very interested to see what he will accomplish with the team at Skype. Now I will turn it over to Rajiv for a closer look at our financials.

Rajiv Dutta, Chief Financial Officer

Thanks, Meg. Before I get into the financials let me just say that I'm delighted to have the opportunity to help build an exciting new business for eBay, working closely with Meg and Skype management team. However, I would also like to make certain that my transition out of the CFO role and is a smooth and orderly one. As such I will continue as CFO until we find a replacement. In the meantime, it is great to be able to announce yet another great quarter. As Meg described, Q3 was an outstanding quarter that positions the company for continued success. First, the strong business trends that we saw in Q2 have continued into Q3. Q3 revenues exceeded the high end of our guidance by approximately $35 million, which includes $10 million from shopping.com for the first time. These strong top line results were driven by acceleration in the U.S. and Germany, as well as continued momentum in PayPal and the rest of our international markets. Second, the strong revenue performance together with continuing efficiency gains resulted in pro forma operating income which is more than $40 million higher than our guidance implied. Pro forma EPS of $.20 was one cent higher than our guidance notwithstanding with $17 million one-time tax-related charge, which impacted EPS by $.01. And finally, the business momentum remains strong across the board. As a result, we are raising our guidance for Q4, and looking forward to another year of strong growth in 2006. So let's discuss each with ease in a bit more detail starting with the top line. Q3 reflected very strong volume metrics across all of our key metrics. eBay confirmed registered users grew to more than 168 million worldwide, PayPal added record new accounts bringing our total to more than 86 million worldwide, and active eBay users reached a record 68 million in Q3. This user growth drove a record 459 million eBay listings representing 32% year-over-year growth consistent with Q2. We are particularly pleased with store's inventory format listings, which have more than doubled in the past 12 months and continue to grow at triple digit rates. The strong volume metrics translate into eBay GMV of $10.8 billion representing 30% year-over-year growth. Once again, this growth was very broad-based both geographically and across product categories. GMV per active user increased $5 quarter over quarter to $575, reflecting significant increases across all of our major markets. At PayPal, excellent account growth, combined with very strong addressable GMV growth, continuing penetration gains in key markets, and accelerating growth in license service, led to total payment volume of $6.7 billion, up 44% year-over-year. And collectively, these trends powered consolidated net revenues for eBay of $1.106 billion, up 37% year-over-year. Excluding revenues from acquisitions in the past 12 months the company's organic revenue growth year-over-year in Q3 was 33% and further excluding acquisitions and the impact of foreign currency translation(18:06), year-over-year growth was 32%. So let's take a closer look at the business units. In the U.S. marketplace, average daily unique visitors in Q3 to eBay .com grew 27% year-over-year versus 14% in Q2. And when these visitors reach the site, they were very active. Bits for Q3 also boasted accelerating year-over-year growth rates resulting in strong conversion rates and a $16 sequential increase in GMV per active user. In addition, accelerating listings growth combined with strong average sales price increases and robust conversion rates led to a 21% year-over-year GMV growth, resulting in record U.S. transaction revenue of 435 million. Even excluding the impact of shopping .com, transaction revenues accelerated to 29% year-over-year, growth in what is historically been one of our seasonally slowest quarters. From a category perspective, we experienced accelerating growth rates in collectible, home and garden, book, movies, music and business and industrial. Motor vehicles also saw accelerating growth in Q3. Benefiting from industry-wide new car discounts and it is now on a $6 billion annualized GMV run rate. In our newer businesses, rent .com had a strong quarter, boasting more than a 90% year-over-year increase in unique visitors in September and further extending its lead over its nearest competitor. Shopping.com, which we acquired in August 30, had revenues of $29 million, 10 million of which is included in our Q3 results. And also accelerated its year-over-year growth of unique visitors in September. In our international marketplace, notwithstanding the negative impact of foreign currency fluctuations, we continue to see impressive rates of growth. In total, eBay international ended Q3 with over 89 million registered users who had generated GMV growth of 40% year-over-year, which in turn drove transaction revenues of $402 million, up 42% over Q3 of last year. Germany in particular continues the outstanding trends that we saw in Q2. On a U.S. dollar basis, growth was strong and on a local currency basis, both transaction revenue and GMV growth accelerated in Q3. Listings growth accelerated and ASPs and conversion rates remained very strong, driving accelerating GMV growth in most major categories, including business and industrial, computers, consumer electronic, and entertainment. In motors, mobile posted an outstanding quarter with accelerating year-over-year of transaction revenue growth driven by both strong volume from both the dealer and for sale by owner channels. In all of our other European marketplace businesses continues to deliver strong performance notwithstanding our typical Q3 seasonality. eBay U.K. continues to deliver impressive results with strong GMV growth rates driving record levels of GMV for active users and eBay France and eBay Italy once again posted triple digit GMV and revenue growth in this quarter. And turning to Asia, in an adoption company in Korea, once again produced great results recording 62% year-over-year transaction revenue growth, and in China, strong listings growth and increasing conversion rates drove acceleration in year-over-year growth rates for both GMV and revenue. Our efforts to drive continuing strong user acquisition and activation as well as to fortify our position as the most trusted place to trade with other Chinese users have led to outstanding local growth metrics. With both its thriving local business and a rapidly growing export business, we are excited about our position in China. Next, let's turn to the payments business. Q3 was an outstanding quarter. Better than expected addressable GMV, combined with strong penetration gains in North America and Europe led to record eBay generated total payment volume. Penetration rates reached 77% in the U.S., 81% in Canada, and 66% in the U.K. And in the U.K., we reached another key milestone in Q3, PayPal acquired its 10 millionth account. PayPal’s global merchant services business also had a very good quarter, generating $2.1 billion in TPV, up 49% year-over-year, reflecting the second consecutive quarter of accelerating growth. This growth was fueled by an expansion of our merchant acquisition effort, as well as the launch of web sites, payments grow at the end of Q2. To further build on this business, just last week, we announced the planned acquisition of Verisign's payment gateway business and as Meg told you earlier, this is a key part of our strategy, to expand our portfolio of small and medium-sized business customers. Accelerating growth in merchant services, combined with strong growth in eBay volume drove record PayPal PBV in Q3 of $6.7 billion, a 44% year on year growth rate. And PayPal is now on track to finish 2005 with over $1 billion of revenue. Representing a 62% compounded annual growth rate since our acquisition in 2002. Now, let's look at how these revenues translated to profits and cash flows. Revenues that were $35 million above the high end of our guidance, together with continued operational efficiencies, led to more than $40 million performance on the pro forma operating income line versus our previous guidance. Taking a walk down the P&L in a little more detail, eBay's gross margin was sequentially flat at 82%. We continued to be very pleased with the cost reduction initiatives and payment processing, and favorable funding mix trends. Sales and marketing expense in Q3 was 26.5% of net revenues, about even with Q2. In the U.S., marketing programs spend was 17% in Q3, compared with 19.4% in Q2, reflecting continued marketing efficiency. This sequential decline in U.S. marketing was upset by the inclusion of shopping .com, and increased investment in our developing international markets. Product development spending in Q3 represented 7% of revenues, up slightly from Q2, primarily reflecting the ramp in our product capacity at PayPal, as we grow our merchant services business and condition continue our geographic expansion. Looking forward, we will remain committed to investing in product innovation on eBay's sites around the world. General and administrative expenses in Q3 represented 13% of revenues up from 12% in Q2 but in line with the 13% in Q3 of last year. The sequential increase was primarily driven by increasing purchase protection expenses at PayPal, as we expanded our protection coverage globally. As a result of the strong revenue growth and operational efficiencies, pro forma operating income grew 44% year-over-year to $394 million, representing a pro forma operating margin of 36%. Consolidated pro forma net income in Q3 totaled $280 million, or $.20 per diluted share, one cent above our guidance. The strong pro forma operating income results were offset on the bottom line by a $17 million one-time tax-related charge, which impacted our EPS by $.01. This one-time charge related to the final application of tax regulations, requiring the inclusion of stock option expense in inter-company cost-sharing arrangements. These regulations will not have a material impact on future taxes. Operating cash flows of $492 million, and net capital expenditures of $42 million drove record free cash flow to $450 million in the quarter, representing a 123% year-over-year growth. eBay exited Q3 with almost $10 billion in total assets, including nearly $4 billion in cash and investments. Also last week, we announced the completion of our acquisition of Skype. We are very excited about the current trajectory of Skype's business. Skype is adding new users at record pace at more than 166,000 per day and finished Q3 with more than 57 million users. And just today Skype reached another milestone when the service peaked with more than 4 million concurrent online users. Driven by these new users and strong growth in active users Skype is on its way to delivering an estimated $60 million of revenue in 2005. In sum, we could not be more pleased with our Q3 performance, and the momentum in all of our businesses. Growth in our two largest marketplaces, the U.S. and Germany, accelerated. Our other international businesses continued their momentum, and PayPal delivered another outstanding quarter. In addition, a new initiatives rent .com, shopping .com, PayPal merchant services and now Skype had impressive results this quarter and are on a strong trajectory. With that, let's turn our guidance. First discussing the remainder of 2005, and then providing you with an outlook for 2006. Before we get into the details of our expectations, let me briefly mention a few factors that today's guidance takes into account. First, this guidance assumes the U.S. dollar Euro exchange rate of $20.0 for the remainder of the year as well as the full year 2006. Second the GAAP guidance we provided does not take into account the impact of the new stock option expensing rules which take effect January 1, 2006. And finally, this guidance includes the effect of Skype, which closed on October 14, and the assumed impact of the announced acquisition of Verisign's payment gateway, which is expected to close in Q4 2005. Considering these factors, we now expect full-year 2005 net revenues to approximate $4.5 billion, including approximately $45 million from shopping .com, and up to $20 million from Skype. On an apples-to-apples basis, that is excluding the revenue from shopping and Skype, this guidance represents a $10 million increase to our previous Q4 '05 guidance. On the bottom line, pro forma EPS could be as high as $0.83, reflecting $0.84 from our core marketplaces and payments business, and one-cent dilution from Skype. On a GAAP basis total company GAAP EPS including Skype could be as high as $0.74, which includes a $0.4 dilution from Skype. This guidance implies that we are well on track to achieve a 35% pro forma operating margin in 2005. With that, let me turn to 2006. We are very excited about the future, and expect the current momentum to continue. We have a young and responsive company, and believe that our portfolio of businesses positions us well for the opportunities before us. In the coming year, we will work hard on integrating our new acquisitions, while continuing to drive innovation in our core marketplace, and PayPal businesses. We will also continue to make the required investments to insure that we realize the full opportunity before us. These include first continued investment against opportunities in our core eBay and PayPal businesses, including development of our marketplace businesses in China and India, as well as PayPal's geographic expansion. Second, a big focus on our new initiatives including PayPal merchant services, development of our new marketplace sites, and other product innovations and third, integration of the newest member of the eBay family Skype, and in particular, build out of the PayPal business. As a result we expect 2006 consolidated net revenue could be as high as $5.7 billion to $5.9 billion, which includes approximately $200 million for Skype. This implies a revenue growth rate of 26% to 32% over where we expect to end 2005. On the bottom line, we expect consolidated 2006 pro forma diluted EPS to range from $.96 to $1.01, including a $.0.4 dilution for Skype. We expect consolidated GAAP diluted EPS to approximate $0.81 to $0.86 which includes a $0.12 dilution for Skype. Excluding the impact of Skype, the guidance provided today implies that eBay's consolidated pro forma operating margin in 2006 will be roughly flat with 2005 at 35%, implying expansion of our core marketplace's operating margin to offset the structurally lower margins in PayPal and shopping.com, and the investment in our new initiative. In summary, as we head toward the close of the year, I could not be more pleased with the overall health of the business and the opportunities ahead. A strong Q1 was followed by an outstanding Q2 and Q3 with powerful momentum heading into Q4. Looking forward, eBay is positioned for years of strong growth with a clear leadership position in worldwide ecommerce, global online payments and now communications on the net. We are committed to executing against these opportunities with focus and consistency, creating value for both our shareholders and our community of users and now, we would be pleased to answer your questions.

Question-and-Answer Session



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