Full Transcript of eBay’s 3Q05 Conference Call - Q&A (EBAY)

| About: eBay Inc. (EBAY)

Here’s the entire text of the Q&A from eBay’s (ticker: EBAY) Q3 2005 conference call. The prepared remarks are 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.

Question-and-Answer Session

Operator: Thank you. At this time, if you would like to ask a question, or have a comment, please press star one on your touch-tone telephone. If you are using a speaker phone today, please remember to turn your mute function off to allow your signal to reach us. Once again if have you a question or a comment, please press * 1 now.

Scott Dennis - Legg Mason.

Q: Thanks. Two questions. One around the core business, and then Skype. The first question regarding the relationship between core listings, gross merchandise value, and revenue, last quarter, I think the growth of those three metrics year-over-year was 32, 36, and 40%, and this quarter, it was 32, 30, and 37. So the spread between listings and revenue actually tightened. I was wondering if that was just generally ASP’s converging or something else? And then secondly on Skype, wondering if the opportunity with that product to actually further improve your competitive position in China, and possibly maybe even re-enter Japan with the core business, and maybe finally, wondering if the percentage of Skype accounts that actually are funded with PayPal currently today? Thanks.

A - Rajiv Dutta: Okay. So let me take the first of all those questions, which relates to the relative relationship between the growth rates of listings and GMVs and revenue. So you know, when you look at the overall revenue growth that we saw accelerating particularly in the U.S. business, this is, just to be very clear, driven by volume. It is driven by listings. We had more users come to eBay and more of these users listed more items, which in fact is what really drove the revenue acceleration. But you are correct, we had seen increases in average selling prices actually now for a number of quarters and we saw that again in Q3, and we have also seen some very robust conversion rates. You know, typically in Q3, we would expect to see that to drop a little bit. And we actual saw robust conversion rates in the quarter in the U.S. business. So that is what is accounting for the slightly shifting relationships between these relative metrics.

A - Meg Whitman: With regard to Skype, Scott, in China, we actually think that the combination of eBay, PayPal, GG, and Skype gives us a tremendous set of assets with which to really grow our business in China. And as you know, Skype, one of Skype's strongest marks is in fact China, so we do think that there is going to be some very interesting integration points, and with all of our businesses. As you know you may know that Skype has a joint venture in China with Tom online, a very powerful mobile port in China. So there are very interesting opportunities there. And stay tuned with more details there. With regard to re-entering Japan, you know, Japan is a tough market for us, but Japan is again a very strong market for Skype, and it may provide actually a nearer term opportunity for PayPal, because if we fulfill the vision of every Skype account that comes with a PayPal account, that's a great way for PayPal to enter Japan. So there might be an opportunity to enter with, you know, a new marketplace model that's more on a lead generation basis than a transaction revenue model, but that's probably a little bit longer term. With regard to the percentage of Skype accounts that are funded by PayPal, it is about 25% of the of Skype accounts, mostly in the U.K., that are in fact funded by PayPal. But again, it is not a wallet. It is that they top up their Skype account by paying with PayPal. And the vision of course is actually to have a wallet so that due need any more top-up, you simply draw down out of your PayPal account as you pay for the Skype fees.

Q: Okay. Thanks a lot.

A - Meg Whitman: Great. Next question?

Operator: Mark Rowen - Prudential.

Q: Thanks. Good afternoon. Before I ask my questions, first of all, Rajiv Dutta, I want to wish you luck in your new position. And I think whoever fills your shoes is going to have some big shoes to fill. So you might be with us for a while. My questions are I have two questions. One is, on store listings, economics, store listings have been growing significantly faster than the auction listings, and the fixed price listing, you buy it is now listing, but the economics per list having been improving for the last couple of quarters. So can you give us a sense of what is happening with the economics of the store listings? Is the velocity increasing? Is the ASP increasing? Is the success rating improving on those?

A - Rajiv Dutta: Thank you. And first of all thank you for your comments and just to be clear, Mark, I am going to be here for a while, so you won't be getting rid of me that quickly. You know, to your point about what is happening with store's inventory listing, what we call listing, stores inventory format, you're correct they have been growing much faster than the auction listings on eBay. And the economics, as you recall, we changed some of the pricing with regard to stores inventory format, earlier this year, and part of the reason for doing that was to balance the relative economics between stores and the rest of the auction format. So as a result of, you know, some of the changes we made, and then what buyers and sellers have been experiencing, is infact very, very good conversion rates and good ASPs. And that has absolutely been impacting the overall economics as far as listings, not just for our sellers but then also by consequence for eBay. So it remains a very successful product integration, much like many years ago, this is really driving incremental growth and so we're really pleased with the overall trend lines for this listings. It is clearly driving a significant part of the growth in the U.S. business.

A - Meg Whitman: And I say these two formats really work together what we know is, our sellers to combine core eBay listings with a store actually do more business on eBay. Their repeat business is stronger and they are able to increase their ticker price if you will, if buy camera, you get a camera case and so from a marketing perspective I think we are seeing the power of these two formats work together to the advantages of market place to the advantage of our sellers and then directly upwards to the advantage of eBay.

Q: So it’s the ASP and the success rates, though, that are improving and not necessarily the velocity of those listings?

A - Rajiv Dutta: You know, the velocity of the listings are improving, but what is you know, the velocity is a slightly tougher measure to capture because most of these listings are either good till cancelled, they're on a 30-day cycle, so it is very difficult to keep track of exactly whether the same items are being re-listed or are they new items but when you look at the overall listing, there is no question that ASPs and conversion rates are driving some of the improvement.

Q: Okay. And then Meg, you said that the U.S. and Germany both accelerated in the quarter. Is there anything specifically that you're doing that has caused those rates to accelerate, or are the markets just improving, the economy is improving, at all? Are they external factors and something you're doing something specifically?

A - Meg Whitman: No the result of the improvements in Germany and the U.S. is very specifically driven by actions that are taken by the team in these markets. And let me categorize them for you, because they're quite similar, I think, between the U.S. and Germany. The first, I think, is that first of all we are capitalizing on the great franchises in both markets. But we are actually improving the efficiency of our marking efforts, including natural search optimization as well as more of our Internet marketing. Secondarily, some of the product features and functionality that we have introduced, we just talked about some of it in terms of stores and store inventory format is also increasing the value proposition for both our buyers, for our sellers, and therefore, they're bringing more "good goods to the market for buyers. And also trust and safety, particularly in Germany, we have actually just introduced pay with PayPal and you're covered. And we believe that is actually having a really nice effect on buyer’s confidence on buying on the German marketplace. So what we're seeing is accelerating bids, and accelerating average weekly unique visitors. The GMV per active user grew $16 in the U.S. and we're seeing improved average selling prices and improved conversion rates. So it is directly a result of the actions that we've taken. And I think what it underscores for us is these are very young businesses, they are very responsive, when one takes deliberate action, and goes deep in customer insight, that you can actually move the needle here pretty fast. And I think particularly in Germany, the renewed growth has happened faster than we anticipated.

Q: Okay. Great. Thank you.

Operator: Christa Quarles - Thomas Weisel Partners.

Q: Hi, couple of questions. First just housekeeping. Rajiv Dutta, does the guidance next year include or exclude the 100 million from Verisign?

A - Rajiv Dutta: Short answer to that it includes the Verisign revenue.

Q: Perfect. Wasn't clear on that. Second we've seen some deceleration in the U.K. in our own listing accounts and I was wonder if you could comment on that more specifically, and whether you could portend a similar sort of deceleration in Southern Germany, put your thoughts there, and then finally, just on Skype, my understanding is that you do not have paper call capability today. Would you have a preference to buy or build that as you try to build out that functionality next year? Thanks.

A - Meg Whitman: So, let me take the question with regard to the U.K. You know, one of the interesting things is that obviously growth remains very strong, but we are a learning organization and the lessons that have been learned in the U.S. and Germany are already being applied to the U.K. And we have I think the best ever sort of cross-functional and cross-business unit teams that we've ever had. So rest assured that the learning’s from the U.K. and Germany are rapidly being applied to the U.K., so we hope you know, we hope to mitigate what would obviously be a more natural decline in that marketplace. With regard to pay per call, our instinct is to build that functional inhouse. You know, we have some plans under way in that regard. And so that will be part of the Skype effort over the next bit of time.

Q: Is that included in the 200-million revenue next year? Or is it going to be a longer-term development than that?

A - Rajiv Dutta: It would be 200 million largely in Skype revenues and there is a very small component of pay per call. We see there as a longer term buildout, which is particular as that reflects the revenues.

Q: Thanks, thanks so much guys.

A - Rajiv Dutta: Thank you again.

Operator: Anthony Noto - Goldman Sachs.

Q: Thank you very much. First of all Rajiv Dutta congratulations. Well deserved. My questions really revolve around the holiday season and the sort of business trends that you see coming into the third quarter. First, Meg, I was wondering if you could comment specifically on what you do differently this year going into the holiday season based on lessons learned from last year? And then if you could incorporate into that any benefits from integrating the structured search technology from shopping.com, where are you in that process? And then Rajiv, the second question relates to the sequential growth. I think if I back out all the anomalies of acquisition, etc, the original fourth quarter versus third quarter growth rate was around 13 to 14% in your old guidance and now it looks like to be around 9 to 10% which seems very conservative to me, U.S. accelerated and Germany accelerated and what is going on with PayPal so I was wondering if something is going on differently or if you're being conservative and I figured I would give you a hard time since this is probably your last time doing this. Thanks.

A - Meg Whitman: Good for you, Anthony. Let me talk a word bit about what we have planned of the holidays for a couple of our biggest markets. Let me start with the United States. We are really excited about the new brand campaign. It is a fully integrated marketing campaign that covers TV, print, Internet marketing, direct marking, and on-site. And simply put, we want people to check eBay first no matter what you're looking for and the message is reinforced in the official tag line, whatever it is, you can get it on eBay. And the ads break tomorrow, or the next day, and you can actually go to the Investor Relations section of the eBay Web site and see the ads right now before they actually go live. And we're really pretty excited about it. I think it is a more inclusive message than last year. There is more of a call to action than there was last year. So we're pretty excited about it. With regard to Germany, they are also embarking on an integrated marketing campaign that will in fact include it will be the third year of 321 nines, and we're really excited about it. I think that they're off to a very good start there, and again, build on the leadership position in Germany. The U.K. also has a great holiday campaign under way. They had very good results this year. They've got a great marketing team there. So we have good deal of confidence there. And actually, a fun one is going to be in China. We are actually going on television, in print, outdoor, and in a major marketing push for China in Q4. The commercials go live in seven days. And we're really looking forward to a great holiday season in China. So I think we've got it right this year. The proof will be in the pudding. But we feel real good about the campaigns in our four largest markets.

A - Rajiv Dutta: And Anthony, with respect to the second follow-up question, I appreciate the consistency of the question. So I would say that, you know, when you look at the Q4, this is a very robust year-over-year growth. You know, and we are excited about the momentum in the business. And you know, what I would say to you is the same thing I've said before, which is this is a transparent business. Are you going to view how it progresses, just as we do, and as we look out on Q4, from this vantage point, we are expecting a strong Q4, which is reflected in our guidance.

A - Meg Whitman: Anthony, I forgot your question about shopping.com. Whether eBay will benefit directly this holiday shopping season from the catalog capabilities since shopping.com. As you know before we bought shopping .com, we were improving the find ability on eBay around the world and that will continue, I think the find ability will be the best ever in Q4. There was some value add from shopping.com technology, but you recall it only closed on August 30. So we will not see the full benefit of that. Separately, we expect shopping.com to have a good holiday season as well. So I think that was the answer to your shopping.com question.

Q: Great. Thank you.

A - Rajiv Dutta: Next question?

Operator: Heath Terry - CSFB.

Q: Great. Thank you. I was wondering, with the introduction of reserve pricing, and the auto business in Germany, back in May, have you seen any reaction there, in that business, since the introduction there? And also, if you could just talk a little bit, Rajiv Dutta, you may have said this during the numbers, but can you talk about to what level the acquisitions contributed in Q3 and so are you looking at this on a year-over-year basis, trying to get to kind of an organic number, is there a way to get to that?

A - Meg Whitman: So let me answer the question about Germany autos. Reserve pricing absolutely had the desired effect in the German auto business. Before reserve pricing we saw a very low average selling price for used cars, and that has continued to actually improve because people can now set a floor by which they don't want to sell below, so that was completely the right strategic move. The other really fun thing about the auto business in Germany is the synergy between mobile DE and the eBay Germany motors business, that has been really a really nice synergy. Today, when you go on mobile, if you don't find what you're looking for, you see Germany, eBay Germany auto listings and vice versa, as a result the conversion rate is up and the GMV rate is up in the autos business. I think there is a lot more running room in autos in Germany. It was an under penetrated under exploited category that I think findings, of unlocking the secret sauce there. So I think you can look for continued growth in the German auto business, in the auction format as well as the classified format.

A - Rajiv Dutta: And with respect to the second part of your question and let me answer both piece, for Germany, there really is no acquisition in the year-ago comparison that would impact the year on year growth rates because mobile as you recall was a quiet Q2 of 2004, so when you look at the numbers, you know that business accelerated on an organic basis. And again, to reiterate a point I made earlier, this is volume acceleration. This is primarily driven by listings. Many of the other metrics, the fundamental metrics improved very strongly, but the primary driver has been volume, both the U.S. and Germany. And with respect to sort of eBay overall, in my prepared remarks, that actually talked about excluding the acquisitions from the year-over-year comparison, and the acquisitions that fall under the sort of less than 12-month sort of mark are market plus in the Netherlands, rent .com and shopping.com. And if you exclude all of these, year-over-year growth on an overall eBay basis, with 33%.

Q: Great. Thank you.

Operator: Mary Meeker - Morgan Stanley

Q: A question about PayPal. You took a more conservative effort to managing the business last December, you focused more on eBay or PayPal off of eBay, Meg, you talked a little bit about some of the wins of eBay vendors you had this quarter. Can you give us a sense of how we should think about the PayPal milestones for the next three, six, nine months? How we should think about more large vendors coming on as PayPal customers, how we should think about the growth in digital content? Thanks.

A - Meg Whitman: So you're right, we actually put a concerted effort against the merchant services business. You remember year one after acquisition with eBay .com and eBay international and 2005 was our first year of really focused effort around merchant services. So we're pleased with the results. We have targeted, you know, the top merchants on the net to go after. Some of these sales cycles are quite long, so we are well in process with many, many of these very large merchants. The next milestone will be obviously, we want to get more than our fair share of those. The next thing we've got to do is of course integrate Verisign. The key aspect of the Verisign payment gateway business is to capture all of these thousands of merchants and make sure that they have an opportunity to purchase the entire suite of payments products from PayPal. It is still going to be a small business focus with them but as I said, we're still also focused on the large merchants. Digital still needs to emerge. We are, you know, ready with payments, we are talking to a number of different players in the marketplace, and we are all over it. We do have a very nice micro payment solve that is ready to be brought to market.

Q: Thank you.

Operator: Saifer Rashid - Piper Jaffray

Q: Good afternoon. A couple of questions, Meg, you talked about some impressive wins, new merchant wins on the PayPal platform, could you give us a sense of the adoption rate of PayPal as a payment mechanism among those merchants? You seem to have some new data now. And second, could you talk about some time lines that we should be considering over the next 12 to 24 months in which we could see integration of shopping .com, rent .com, and Pay-Per-Call from Skype, within the eBay platform? Thanks.

A - Meg Whitman: Sure. Let me talk about the adoption rate. Usually in the first, you know, three to six months when we go live with a site like pet co or pet smart or the ones I mentioned, you will see anywhere from a 3 to 8% penetration in terms of the number of payments that go through PayPal in a merchant like that. And then in the second year, we don't have a lot of experience yet in the second year you begin to see that pick up. Obviously, when we are the sole source provider for on SMV, 100% goes through PayPal. So that is usually the starting point, the 3 to 8% penetration rate.

A - Rajiv Dutta: With respect to your question of shopping, rent and now Skype in terms of the Pay-Per-Call, you know this is these acquisitions, particularly shopping has just closed. Skype has closed literally two days ago. So work is continuing as we speak. You know, we will be absolutely working on shopping .com and the way we are going to look at this is what are quick things that we can do and try to get them done as soon as possible. You know, things like Pay-Per-Call will take more time. Pay-Per-Call is something that we had indicated when we acquired Skype. It is something that will be built out over the next several quarters, and so, you know, sometime next year is when you should start seeing some of that rollout.

A - Meg Whitman: Next question?

Operator: Steve Weinstein - Pacific Crest

Q: Thank you. Just a couple of questions. First, can you tell us how much was the organic growth, if any, was in the international revenue? And then looking at the PayPal metrics for I guess transaction loss rate, you know, it seems to me as those kind of move back to a normal rate from abnormally low last quarter, but I'm wondering if you think this is an appropriate rate to use for modeling going forward?

A - Rajiv Dutta: Sorry, Steve, could you repeat the second part of your question again?

Q: Sure. The transaction loss rate for PayPal that you reported, it was abnormally low in the June quarter.

A - Rajiv Dutta: Correct.

Q: And it seems to be normalized now but I just want to make sure of that.

A - Rajiv Dutta: Let me give you a little bit of input to both of those. So I think with regards to your first question, as far as the international business is going, yes, it is growing very fast and it is absolutely contributing to the overall growth rate of the business, but then so is PayPal, and so is the U.S. business. So if you look at the overall organic growth rate in the business, which as I pointed out is about 33% in response to an earlier question, you know, the sort of main components of this business are the marketplace business, including the U.S., which by the way is the single largest marketplace business that we have, followed closely by Germany. You know, between the U.S. and Germany, these are the two largest businesses in the marketplace. PayPal is a very big component of that, and obviously the largest business that PayPal has is in fact the U.S. business, and then third is the international. So each of them contributing, all of them growing very, very well.

A - Meg Whitman: And I would actually say the organic growth rate for international as a percentage of the total is actually higher, because virtually none of the acquisitions were international in nature this year. Each net is over a year old so that would be included in the international that would be included in the organic growth rate. Shopping.com is largely domestic, rent .com is largely domestic, so virtually all of the international growth was organic.

A - Rajiv Dutta: Yes. And with respect to the loss rate at PayPal, you know, what we mentioned the last time is, you know, PayPal is really very, very advanced in its fraud capability, in terms of its modeling and its understanding. And frankly, prevention of that behavior, which results in loss reserve and so that number has been coming down pretty significantly. And in June, we had seen, as you correctly pointed out, very low rate of the loss reserves that we had accrued for. In Q3, what we had pointed out last quarter is that we were substantially upping the purchase protection that we were offering. Not just in the United States but also in other places such as Germany, and so part of what has what you see over here is in fact the effect of that increased purchase protection that we're now offering, you know, to our buyers in multiple sites around the world.

Q: Okay. Thank you.

A - Meg Whitman: And I think the other thing to know about that loss rate, Steve, is while we want to keep that number, you know, down low, there is the objective is not to drive it to zero, because if you drive it to zero, you actually drive trial away from PayPal. So it is a finely tuned number that moves with decisions we make about buyer protection and about the number of new users and the ease with which they can get a PayPal account. So I think this is probably a decent number to model going forward, but I will tell you could be up or down based on what we decide to do around the screens of letting people in, and the buyer protection levels that we deploy in countries around the world.

A - Rajiv Dutta: We optimize it relative to overall volume growth.

A - Meg Whitman: Exactly.

Q: Okay. Thanks.

A - Rajiv Dutta: Thanks. I think we have time for maybe one more question.

Operator: Imran Khan - J.P. Morgan.

Q: Yes, hi, a couple of questions. First, I was wondering if you could talk, what is your foreign country impact sequentially and eBay international business, and secondly, I was wondering, Meg, if you could talk about a couple of concerns that investors have in terms of Skype acquisitions that your planned revenue per minute will decline, and as the number of _____ users in Skype increases, it will decrease usage level. So I was wondering if those are true, if that is true, how do you try to drive the revenue growth, and if it is not true, why do you think it is not true? Thanks.

A - Meg Whitman: Okay.

A - Rajiv Dutta: So let me take the foreign country impact first. We have actually you know, this is a number that we keep a close eye on. On a year-over-year basis, foreign countries really didn't have much of an effect this time around. But on a foreign country basis, if you look it, for sequentially, it impacted our revenues by 15.5 million, on the revenue line, it negatively impacted us. And on the bottom line, it impacted us by about $10 million.

A - Meg Whitman: With regard to Skype, let me make a couple of comments. One is, it is very clear that voice communications is moving on to the Internet. And the marginal cost of voice transmission of the Internet actually is zero, which I believe means that in the end, the price that anyone can provide for voice transmission on the net will trend towards zero. Now, by the way I don't think that is going to happen in the next year or two years or even three years, but I do believe that your statement that actually the revenue per minute will go down over time. And of course, as the P to P usage, Skype users to Skype users go up, the percentage of users that you can actually charge for will actually go down so I actually agree with that and we understood that when we looked at Skype. Our belief is that the winner in this space will be those that have the largest ecosystem, and what I mean by that is, the largest number of registered users, the largest number of voice minutes, the largest number of developers who develop against the platform, the best product, and the best array of value-added services that users of a certain network are willing and want to pay for. And we think that this that the way ultimately four or five, six years from now, maybe it will be a little sooner is, that the value-added services will be the way that Skype and many other of these providers are monetized. And we think we have a huge lead in that regard. One of the things we understand now better than ever is how far ahead Skype is in users, in usage minutes, and in the product capability that Skype brings to market, and the size of the ecosystem. The hardware ecosystem, the developer ecosystem, the build out of the APIs. So we subscribe to your thesis. I don't think it is this year or next year, but I believe the ultimate monetization method of voice communications on the net changes from a revenue per minute to, you know, based on the size of the ecosystem.

Q: Thank you.

A - Meg Whitman: Thank you. Thank you for joining us today. And we look forward to seeing you soon.



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