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EBay (EBAY)

Q4 2005 Earnings Conference Call

January 18th 2006, 2:00 P.M. PT

Executives:

Lydia Ventura, Senior Director, Investor Relations

Meg Whitman, Chief Executive Officer, President

Rajiv Dutta, Chief Financial Officer

Analysts:

Mary Meeker, Morgan Stanley

Mark Rowen, Prudential

Imran Khan, JP Morgan

Scott Jeff, Stiper Nicholas

Mark Mahaney, Citigroup

Robert Peck, Bear Stearns

Anthony Noto, Goldman Sachs

Jeetil Patel, Deutsche Bank

Paul Keung, CIBC

Heath Terry, Credit Suisse

Presentation

Good day, everyone. And welcome to eBay's fourth 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, and the Investor Relations Director, Ms. Lydia Ventura. At this time I would like to turn the call over to Ms. Lydia Ventura. Please go ahead ma'am.

Lydia Ventura, Investor Relations Director

Good afternoon. Thank you and welcome to eBay's earnings release conference call for the fourth quarter 2005. 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 website.

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 in talking about our company's performance. You can find the reconciliations of these measures to GAAP measures in the tables of our earnings release. In addition, management may make forward-looking statements regarding matters that involve risk and uncertainty 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 emphasized 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 its 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 businesses including Skype, the Payment Gateway business acquired from VeriSign and Shopping.com. The regulatory and competitive risks specific to Skype, the Litigation Regulatory Credit Card Association and other risks specific to PayPal especially as it continues to expand geographically. The Company's need to manage other regulatory tax and litigation risks, even as its product offering to expand and its services are offered in more jurisdictions. The Company's ability to upgrade 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 features in a timely fashion, fluctuations in foreign exchange rates, the Company's ability to profitably expand its model to new types of merchandising sellers. Assumptions and methods used to value and expense stock options provided to employees and the Company's ability to profitably integrate and manage recent and 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 condition and results of operations" 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 website. And now, over to Meg.

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Meg Whitman, Chief Executive Officer, President

Thank you, Lydia. And welcome, everyone, to today's conference call. Q4 was an outstanding quarter for eBay, for strength growth and export momentum of profitable across the board. EBay added 12.5 million new users and generated record growth merchandised volume of $12 billion. PayPal added nearly 10 million new accounts and delivered a record 8.1 billion in total payment volume. Skype and Shopping.com the newest addition to our Company, also had record growth this quarter. As a result the Company delivered record net revenues of 1.3 billion in Q4, up 20% sequentially and 42% year-over-year. These results are a truly remarkable year for the company.

At our Analyst Conference in February, we made our strategies for growing each of our businesses. And those strategies worked. We achieved accelerating growth in our two largest eBay market places in US and Germany and in many of our other international price as well. We grew PayPal’s eBay business around the world and expanded its business of eBay, and we broadened our vision for bringing people together to meet across south, which yet added tradition of new businesses such as Skype. These efforts allowed us to deliver outstanding results for the full year.

In 2005, the eBay community generated $44.3 billion in GMV, up 30% from the full year 2004. PayPal added 32 million new accounts, an increase of 51% from the prior year and the company’s net revenue for 2005 jumps 39% from the full year 2004.

2005 was eBay’s 10th anniversary and our 8th year as a public company. In just a few short years, eBay has become an important part of people’s lot. Millions of people have turned eBay change in the way goods are bought and sold around the world. And 100s of thousands of our vendors have discovered economic opportunity on eBay. Online payments have revolutionized ecommerce, and now voice on the net is bringing people close to the earth. These trends have fueled the growth of our business allowing us consistently generate strong results for our shareholders. In fact, on the compound annual growth rate since 1998, our revenues have grown 76%, while our proforma EPS have jumped 75%. Few 10 year old companies have delivered these kinds of results.

eBay’s success within a journey of discovery and innovation. In the beginning, our business consisted only of the eBay market place. Four years ago, we added PayPal which has been extraordinarily successful. And last year, we launched Kijiji our international platform, and acquired several new companies including Skype, shopping.com and rent.com. Today, I believe we have the best ecommerce portfolio in the world. Our journey has paid off and laid no one should ever imagine ten years ago.

Now before Rajiv discusses our financial results for Q4, I’d like to spend a few minutes talking about the achievements of the three key businesses in our portfolio. The eBay market places, PayPal and Skype. eBay continues to be our largest growth engine. In Q4 delivering accelerating transaction revenue gross margins on both the sequential and on year-over-year basis. As I mentioned earlier in February, we laid out our strategy for driving eBay’s growth for 2005. We consistently focused on increasing the value of the market place for our users by investing in marketing and product innovations and connecting with our community of users. These efforts fueled to continuing momentum we saw in Q4 especially in the US and Germany. In the US holiday shopping on eBay.com was strong powered by marketing that brought more buyers to the sites, and encouraged them to shop in more categories.

Our humor is to get television campaign was very popular. Early data shows that it has its high awareness, and boosted purchase intend among online shoppers. In fact, holiday traffic on eBay.com was on at all time high in Q4. at its daily users besides enabled more than a billion page here and 660 million purchase. According to net ratings eBay.com was once again the most visited ecommerce website during the holiday season. We saw particular strength in the entertainment, sports and other categories, each of which demonstrated accelerated year-over-year GMV growth, reflecting larger holiday shopping trend. And as in past years, the scarcity of hard items, this year the Xbox 360 and the iPod helps drive traffic indeed on the site. We also saw accelerating GMV growth in categories not typically associated with the holiday shopping season, such as collectible, help community and events tickets. And fixed price trading reached record levels attending for 34% of GMV in Q4, up from 31% in the quarter a year ago.

Product innovations helps make it easier for sellers to sell and buyers to shop. For example, in November we launched eBay market place for search, a tool that helps sellers analyze sales in categories across the sites. And the enhancements we made to eBay stores throughout the year give sellers more flexibility in managing and marketing their listings. As a result, we exceeded the year with a record 212,000 stores in the United States, a 34% increase in Q4 of last year. we now have 383,000 stores worldwide. For buyers, we launched more to help shoppers make informed choices and currently in the work in eBay express, a new feature that will give shoppers a quick and easy way to find items that assist fixed price for a convenient oriented buying. As trade on the cycle, we will continue to innovate help our buyers and sellers become even more successful. Trends were similarly strong for eBay sites around the world. eBay Germany in particular had a great Q4, delivering another quarter of accelerating GMV and transaction revenue growth on a local currency basis. This growth results from high return efforts begun earlier in the year, especially strong integrated marketing campaign. Through a smart mix of on line and off line marketing that created merchandizing and promotion, you were able to bring more buyers to German sellers throughout the quarter. In the UK, we added more than a million new users and those users were more active whenever to contributing strong conversion rates in GMV growth. eBay brands also had a strong quarter with record new users and GMV.

And eBay Italy which now have only nearly 3 million users again delivered triple digit year-over-year geographic growth in Q4. while holiday shopping is not as strong Asia-Pacific, our market places there also showed healthy growth in Q4. EachNet auction company, our business in Korea continues to grow faster than ecommerce delivering strong GMV and revenue growth in Q4. and eBay Australia delivered 78% year-over-year GMV growth in the quarter with record new users and listings. Despite the competitive landscape in China, eBay EachNet added a record 2.8 million new users in Q4, bringing the total to 17.9 million users. Listings and others also reached the points, and conversation rates remained strong driving accelerating year-over-year GMV growth. eBay continues to be the online marketplace for serious buyers and sellers in China. With superior cost system we are unique to the tradition to capture China’s evolving ecommerce users. Over the past six month, we have been experimenting with product and pricing changes to attract these users. For example, lastly we need to get integrating Skype into the eBay platform, enhancing online communication with such an important element of trading there. Because Skype is so popular in China, now adding 39,000 new users a day, we have received incredibly positive feedback from the Chinese user community.

Tomorrow, we will be requiring all sellers on eBay EachNet to offer safe payment options on their listings. The two options, PayPal and our local sellers have been very popular today. 85% of listings in China offer one or both. Even our deep expertise in phase trading one of our competitive advantages, we can help buyers and sellers build the truly, trusted online market place in China. In return, we will weigh all final value on eBay EachNet. We tested this formula over the past few months with great success or excited about these changes and the benefits in building our business in China for the long-term.

In addition, our international classified business Kijiji continues to grow. In the ten months since its launch, Kijiji has become the number one global platform, now serving within 40 Countries and 300 Cities in regions around the world. And finally, the strong holiday shopping season online was also good for shopping.com, which had a busiest holiday season ever. In November and December, shopping.com experienced close to a 30% increase in traffic, compared to the same period last year. And shoppers purchase the wider range of product having home furnishings and closing to the more traditional consumer electronics items. Shopping.com website in the UK and France also did well. And in November, we launched new site in Germany which has already nearly 3 million offerings.

The second business in our portfolio was PayPal. When we acquired PayPal in 2001, we laid out its three phase strategy for growth. First, PayPal focused on expanding its service among eBay users in the US. Second, with again expanding PayPal to eBay’s international price. And third, we started to fill PayPal business of eBay. As a result of this very broad addressable market, PayPal delivered outstanding results this quarter. In Q4 total accounts, 1% year-over-year and PPV by 45%, and for the first time PayPal’s annual revenues surpass a billion dollars.

PayPal’s international business also continues to the strong growth demonstrating that it’s benefit trends as well around the world. By the end of Q4 PayPal’s penetration of addressable PPV on eBay trend has grown three fold since the launch of the local service four short quarters ago. And its penetration on eBay Australia has grown at a similar way. Overall, global PPV on eBay is 40% year-over-year. And as a result, merchants’ services business payment of eBay’s platform continues at rapid expansion. PPV for merchant services grew 56% year-over-year its third consecutive quarter of acceleration, and continue to find since every week. In Q4, Dell, Sharper Image, ESPN and United Way to name just a few began offering PayPal on their website. And our new payment Gate Way business which we acquired in November is off to a great start. We’ve already began to go and market our products small and new impart merchants.

The newest business in our portfolio is of course Skype. Before Skype continues to roll out new product innovations to expand its service and add new users. On December 1st we launched 2.0 with features integrated video calling and greater personalization. In addition, we expanded the Skype Ethernet system working with some of top names in consumer technology to create new ways to use the service, such as the world’s first Skype-enabled wireless mobile telephone, and radio shops within the first US retailers offers Skype products and software in its 3,500 stores nationwide. Consumer response, all of its activity has been tremendous. In Q4, Skype added an average of 190,000 new users a day, and exceeded the year with a total of 75,000 million users, up 38% since we announced the acquisition in September. We are at now more than 4.9 million concurrent users at the period of Skype. We are also excited about the synergies between Skype and our other businesses. You will see deeper integration of Skype with eBay and PayPal this year. Already we are promoting Skype to users across all of our sites and beginning to integrate to several of our market places, such as China, Taiwan and Belgium as well as Marktplaats.nl our classified website in the Netherlands. We are gratified by the response we’ve gotten from our users except the sellers who have been very positive about the Skype and plans pay per pal offerings. Our plans to Skype are right on track. And we are more certain in the average of combination of Skype, eBay and PayPal will help define the feature of ecommerce for merchants and consumers for world over

Closing out our 10th year, we are on exciting point in the company’s evolution. Our portfolio of businesses is coming and the synergies between eBay and PayPal and Skype are just beginning to take hold, not since media first were to decide ten years ago has there been so much promise in our future. Working closely with our user community we are true changing the way the world need fox, buy and sell. It’s wonderful to be part of that, I’m more confident in ever that the investments we made will ensure bright future for the company and internet users around the world.

The first ten years were only beginning, and now I’ll turn it Rajiv for closer look at our financials.

Rajiv Dutta, Chief Financial Officer

Thanks Meg. Q4 was a very impressive holiday quarter for eBay, as the business performs strongly on all fronts capturing a research in 2005. The trends this quarter was underscored by accelerating year-over-year revenue growth rate on fourth year reported and organic basis. eBay’s revenue growth accelerated in Q4 exceeding the top end of our guidance by $44 million in the reported basis and $55 million on a foreign exchange neutral basis. This revenue was driven by outstanding performance in our two largest markets, the US and Germany, a great quarter from shopping.com, accelerating same of volume growth in PayPal and tremendous performance through Skype. In short every eBay business contributed to this quarter’s results.

The strong revenue performance and continued operational efficiencies in that core businesses generated record proforma operating profits and operating cash flows. Proforma operating income was approximately $43 million higher than our guidance had implied and the proforma EPS of $0.24 that’s $0.3 higher than our guidance. Operating cash flow reached a record $526 million in the quarter. These results made 2005 a truly remarkable year. We demonstrated a strong growth across all of our businesses significantly strengthened our strategic positioning and delivered outstanding financing performance. We entered 2006 with an incredible portfolio of assets and significant momentum. So let’s discuss this quarter’s financing performance in a bit more detail starting with the top line

My all indication, the 2005 holiday season was very strong free ecommerce. At eBay integrated marketing campaign, key business initiatives and products innovation over the course of 2005 amplifies this mega trends across each of our business. As a result the quarter saw terrific consumer engagement across the board. In the eBay market places shoppers are fluxed to be their size delivering record visitors in its largest market US, Germany, and the UK. eBay confirmed registered users grew to 181 million world wide and actual eBay users reach the record 72 million in Q4.

PayPal added a record number of new accounts in the quarter and ended the year with $96 million accounts world wide driven by very strong growth across all of our key market, and Skype added an average of over a 190,000 new users per day to end the over with a record 75 million registered users world wide representing 200 and 80% year-over-year-growth. This Spectacular user growth in turn fuels record activity. Collectively these trends drove consolidated net revenue for eBay of 1 billion $329 million, up 42% over the prior year reflecting an acceleration from 37% in the prior quarter. Excluding revenue from acquisition within the past 12 months and normalizing for the impact of foreign currency translation year-over-year growth accelerated to 34% from 32% last quarter.

Now take a look at our three business unit eBay, market places PayPal and Skype. First, with respect to the eBay market places. As Meg mentioned earlier the business had a remarkably strong holiday shopping season. eBay listing reached a record 546 million listings in the quarter representing an accelerating 35% year-over-year growth rate which in turn grew eBay GMV of $12 billion. Normalizing for the impact of foreign currency translation, GMV grew 26% over the year ago quarter. On a local currency basis GMV per active user increased most of our key markets further underscoring these trends with the holiday season.

In the US marketplace, average daily unique visitors to eBay.com grew 32% year-over-year versus 27% in Q3 and sellers in the US posted over 261 million new listings accounting for 25% year-over-year growth, an acceleration of 4 point versus last quarter. As a result of the accelerating listings growth and higher ASPs, core year-over-year GMV growth excluding motor vehicles also accelerated. On a category basis, we saw accelerating GMV growth rates and health and beauty, sports, choice, entertainment and tickets. Motor vehicle sales have expected grew slower in Q4 due to normal seasonality which was further accentuated by the timing of OEM incentives in the summer.

In the international market place we saw strong growth across our key market not withstanding the negative impact of foreign currency translation. Once again, our German business within a remarkable performance on several trends. Both buyer and seller activity levels was very strong to the holiday season and listing starts the 100 million mark for the first time driving another quarter of accelerating revenue and GMV growth rate on a local currency basis.

The UK achieved record reach and also posted very strong buyer and seller activation levels, which grows a significant listing activity during the first two weeks of December in the peak holiday season. On a local currency basis France and Italy once again generated triple digit GMV growth rate and in fact just as quarter France had the 5 million register user mark. Korea, now with more than 15 million users continued to generate strong GMV growth, and in China GMV year-over-year growth rate accelerated for the third consecutive quarter.

In 2006, we will continue to execute against the three drivers of our Q4 success marketing, business initiatives and product innovation. Earlier today, we announced the modification of the USP structure with a number of search in PC creatures and future discount. All with the focus on ensuring the vibrant market place and the success with eBay community of buys and sellers. At same time we made out some of the exciting new business initiative and product innovations that would be launched in the next few months including sustained investment in both online markets by marketing, product enhancement in eBay stores, and the launch of eBay express. In addition, we will be increasing the exposures of seller store inventory listings in cost search at no additional cost. Cumulatively, we expect that these changes will significantly enhance the eBay value proposition and do no expect any change in the overall take place. We are very excited about the impact that these initiatives will have in 2006.

Shopping.com also had an outstanding Q4 remaining the leading online comparison shopping site with 50 million unique visitors worldwide in December and caused a top destination for shoppers speaking the season of product. As a result of the strong holiday season shopping.com generates over $51 million of revenue outperformed our Q4 guidance by over $16 million and exceeded the top end of the full year guidance range that shopping.com management has provided at the beginning of 2005.

Turning to our payments business, PayPal delivered excellent results once again. Strong accounts growth combined with directed levels of addressable GMV strong penetration gains marketing market and another quarter accelerating Global merchant services grew total payment volume of $8.1 billion. This represented accelerating year-over-year growth of 45%. The tremendous holiday performance in our eBay markets grow record addressable GMV penetration rate increased to 77.5% in the US up almost 1 point sequentially and to 68.9% in the UK up over 2 point sequentially. Globally 111 million eBay transactions were completed with PayPal in Q4. In the UK alone nearly 3 of every 4 items sold were settled with PayPal in Q4.

Merchant services continues its impressive growth trajectory posting its third consecutive quarter of accelerating total payment volume growth with 2.5 billion in Q4 or 56%year-over-year growth. Almost in services business with service trends by the acquisition of VeriSign's Payment Gateway business in November 18 which contributed 6 million of revenue in Q4. Together these trends drove record net revenue with $304 million, a 48% increase from the year ago period, and 4 point acceleration from last quarter. PayPal finished 2005 with over $1 billion of revenue representing 47% versus growth versus 2004.

Last on US business, Skype had a very strong Q4 continuing its rapid growth. User acquisition remained incredibly strong, and these new users continue to find service engaging which led to record confirmed users of 4.9 million earlier this week. In Q4, Skype delivered $25 million of revenue of $5 million higher than our guidance, as result Skype handily exceeded its 2005 revenue goal of $16 million for the full year that we had indicated when we announced the acquisition. As we’re working at our product road map and the opportunity for integration with eBay and PayPal are enthusiasm and confidence and Skype potential has only increased.

Turning back to the P&L, now let’s take a look at how these revenues translated to profit and cash flow. Revenues that were $44 million above the high end of our guidance, together with continued operational efficiencies led to a $43 million out performance on the proforma operating income line versus our previous guidance.

Looking at each of the components of the proforma P&L in a little more detail. eBay's gross margins in Q4 was 82% consistent with Q3 reflecting operation efficiencies in the eBay platform offset by the mix impact of PayPal and now for first time in Skype. Sales and marketing expense in Q4 with 28% of revenue up from 27% in Q3 due tot the launch of our holiday television campaign and the first full quarter of shopping.com results was down 1% point from Q4 2004, driven by optimization of our marketing mix and increased focus in online marketing efficiency. Product development spending in Q4 represented 7% of revenues consistent with Q3, reflecting continued investments in product development capacity in both PayPal and eBay market places

General and administrative expenses in Q4 represented 13% of revenues also consistent with Q3 reflecting efficient scaling if administrative expensive offset by continued investment in consumer protection program and people increase in data transaction loss rate. As a result proforma operating income grew 43% year-over-year to $448 million representing proforma operating margin of 34%. Consolidated proforma net income in Q4 totaled $340 million representing 50% year-over-year growth and proforma EPS with $0.24 per share, approximately $0.3 about our guidance. Excluding the impact of Skype

Q4 proforma EPS grew 52% over the prior year. Operating cash flow in Q4 reached a record $526 million for the full year 2005 eBay generated an impressive $2 billion of operating cash flow, representing 56% year-over-year growth and almost $1.6 billion of free cash flow, 59% growth versus last year. In sum Q4 was outstanding quarter for eBay and successful end to another great year. We finished 2005 with strong performances in every eBay business and strong momentum going into 2006. Now let me turn to our guidance

The yearly results for Q1, indicates trends across every eBay business. The momentum from 2005 has continued, this business is on track to achieve our internal project and we are excited about the new initiatives and the investments being launched this quarter. For the full year 2006, we continue to expect consolidated net revenue from range of $5.7 billion to $5.9 billion which includes approximately $200 million for Skype. On the bottom line, we expect consolidated 2006 proforma diluted EPS to range from 96 to $1.1 including a $0.4 solution with Skype. Consolidated GAAP diluted EPS, it is expected to range from $0.65 to $0.71 which includes a $0.12 dilution with Skype and $0.16 to $0.17 dilution from the impact of the new stock option expensing grew which took effect on January 1, 2006. The guidance perfumes a US $ Euro exchange rate of a $20 for the full year. With respect to Q1, we expect net revenues to be in the range of $1,365 million to $1.38 billion. Further more we expect consolidated Q1 proforma diluted EPS to range from $0.22 to $0.23 and GAAP diluted EPS to range from $0.14 to $0.15 once again reflecting the impact of both guidance and the new stock option expensing growth. To understand this guidance from the field of a very strong Q4 it is important to understand that as we have extended our portfolio of assets with new business such as shopping.com and PayPal merchant services and as online consumer shopping becomes more main stream, we have seen a ship from our traditional seasonal pattern. While our guidance reflected a strong Q1, we do not expect the same sequential growth in the first quarter as we have seen historically. Our full year guidance similarly implies strong sequential growth in the second half of this year to reflecting the shipping seasonality. For the full year 2006, we continue to expect a 35% proforma operating margin excluding Skype roughly flat for 2005. This reflects strong investment in first half of the year related to the integration of our new businesses and continued expansion in PayPal merchants services leveraging VeriSign Skype businesses. In addition, this guidance reflects changes in the companies overall business mix with significantly faster growth coming from the Skype and new business that accounts for key investment in 2006. Including Skype proforma operating margin expected to be 33%.

As we reflect back over the last 12 months, we are extremely proud of our accomplishments. We took actions that led to accelerated growth rates from our two largest market places being US and Germany delivered over $1 billion of revenue at PayPal and significantly strengthened our business portfolio for acquisitions Skype and shopping .com and the launch of classified business.

Today we are the leader in ecommerce, online payments and online syndication. We end 2005 even stronger than we’ve started and entered the New Year with significant momentum across all of our business for sustained long term growth.

Thanks and now we would be pleased to answer your question. Operator?

Question and Answers

Operator

Thank you. Operator Instruction And our first question comes from Mary Meeker from Morgan Stanley.

Q - Brian

Brian, this is for Mary. How are you guys, right great quarter. Can you quantify what was fundamentally different this holiday season versus last holiday season I known you had fairly some issues in the back half this quarter. What did you learn from last year or they driven by the investment and then may be as a second part of that , you could talk a little bit more detail about the investments in the US and the Germany. What was specifically working for drive growth rate?

A - Meg Whitman

Sure I’ll take that, and I would broadly characterize our initiatives into three bucket, more effective marketing, excellent business initiatives and product innovation. This is a very young and responsive business, we make small changes and what we have learned is that we can generate significant changes in trajectory. If I purchase on eBay US and Germany, I would say the largely the formula was the same, that first of all we change the balance between offline and online marketing, and improved our ability to optimize napple search and optimize page search. We also did, I think the better job in both Countries of integrated marketing campaign and in the United States with a particularly effective message in the head campaign, and then we also did you known initiative in customer safety and customer support seller online, as well as product innovation small changes that basically made at easier for buyers to buy in and seller itself. So it was a whole host of thing but if I had to point to one thing I would say, you known a better balance of our final online marketing and integrated marketing.

Q - Brian

Great thanks

A - Meg Whitman

Thank you

A - Meg Whitman

Next question?

Operator

Our next question Mark Rowen from Prudential.

Q - Mark Rowen

Thank you, and congratulations. My first question is to Rajiv. And it basically is the relationship between listings versus merchandise volumes and transaction revenue, and the between those seems have been moving around a lot for the last few quarter, and so if I look at you your listings which were up 35% even if I accept stores that was up 28%, it only generated gross merchandise volume of 22% and I know you said how that was a part of that but on gross merchandise volume for listing was down 9%year-over-year, and despite that you got 37% transaction revenue growth or even if I accept shopping .com 30%. So I was wondering if you could comment about the relationship between the two, I mean is the reason gross merchandise volume so much lower than listings growth, because ASP and success rate are following?

A - Rajiv Dutta

Sure, sure, Mark let me take that question. You know, as I said in my prepared comments, the underlying metrics in the business in the US is from actually around the world was very, very strong and robust. The GMV growth rate as I pointed out was lower than the revenue growth rate, and this is impart due to two things. One, and this accounts for almost 4 or 5 percentage points differential in growth rate in foreign exchange. So particularly when you look at our currency translation on a year-over-year basis, the GMV is impacted by the fact that currency was against that. The second major component that accounts form almost an equal impact to foreign exchange is motor vehicle. Motor vehicle always has a seasonal down tick in Q4, this quarter we believe that this is actually further accentuated by the fact that there was some very strong OEM incentive in the middle part of this year. So when you look at the GMV growth rate, actually when you look at the GMV excluding motor vehicles and normalizing for foreign exchange, there is no difference in the relative pattern between GMV growth rate and the rest of the business including listings. Now just to add a couple of more points with respect to some of the things that influences the relative metrics, one is Q4, seasonally is a fair greater promotional activity. So we definitely do see greater listings activity in Q4, this is true in Germany and this is true around the world in Q4, this quarter was not that different. And one other thing I’d point to, if you are looking at overall revenue, don’t forget that revenue now includes shopping.com, which was $50 million we have to normalize for shopping.com as well.

Q - Mark Rowen

Okay

A - Rajiv Dutta

And to this particular point, sorry if I may add, ASPs are actually was strong and robust, conversion rates very strong and robust, and mindful of stores versus non-store listings.

Q - Mark Rowen

Okay. Second, on the fee changes that you’ve announced today. Can you give us a sense on the final value fees, how much of that changes your rate going forward once those are instituted?

A - Meg Whitman

Sure Mark. So, let me just anchor pricing discussion in what we always have said and remains through which we try to manage the health environment through the market. And the pricing changes that we made always have a first eye on how was the top in conversion rates and health environment give the overall market. So we had a number of decreases, the decrease in fees, these are all US exchange rate changes by the way we will be announcing from international changes later on in the quarter. But in US, we decrease in certain fee in the corresponds from $0.25 down to $0.20, and then get some bundling feature fee like gallery, subtitles, listing designers, you can get all three for $0.55, which is actually a 32% discount. Picture show is now for free; sales report of lots free, and we just counted pricing on picture manager and actually increased the storage limit. The one and only one pricing increase itself without the backend, we increased the final value fee in the middle from 2.75% to 3%. And then added some value in terms of putting shift in general search inventory format into general search as well as offering eBay expressed for no incremental cost. And we also believe we are going to able to continue to drive record levels of traffic to eBay even as the complexity of buying key words continues to increase. So net net net , we think we’re increasing the value propositions for sellers, and when we add it all together at least right now we don’t see that take break will be influenced really in one way or another. At the end of the year on either eBay market place in UK, all revenues provided by GMV, we think that take rate would be roughly the same given all these difference changes.

A - Rajiv Dutta

You know, we would add that we do expect that this to be accretive broadly speaking to revenue, because what we expected to be is driven by increased volume as of sellers get rid of success as they utilize features that we know are incredibly successful in conversion rates in helping conversion rates.

Q - Mark Rowen

Okay great thank you.

A - Meg Whitman

Okay. Thank you Mark. Next question.

Operator

We go next to Imran Khan from JP Morgan.

Q- Imran Khan

Hi Meg and Rajiv good quarter. A couple of questions, first, meg you know during the Skype acquisition you talked about model, I was wondering if you can share some what kind of, if you have any update in terms of integrating Skype, classified listing or main platform listing. And secondly, moving onto Rajiv, Rajiv I know you talked about that you have different kind of businesses and different kind of seasonality. But if you just purely look at the listing growth sequential from Q4 to Q1, should we expect to see the same kind of seasonality that we saw over the last two to three years from Q4 to Q1?

A - Meg Whitman

I will take the first question on Skype integration. So we did the first thing which was heavy gross marketing with close to eBay marketing places as well as PayPal, you know we had onsite marketing on most eBay property, home pages, PayPal, Classifieds, we have a Skype hub page on both eBay and PayPal, and you know something where we distributed Skype has set to all eBay power sellers, I am talking about our merchants with a tremendous response. We now move on to the next section which is these integration into the market places and the development of the Skype for model. So those projects are on the product roadmap, we anticipate through 2006 you will see those integrated Pay per Pal as well as integrated and for our classified section, and stay tuned, you know typically won’t announce that right before we launch it.

A - Rajiv Dutta

And with respect to your question on listings. You know there is many kinds of discussion in listing, I don’t particularly track listing, you know there is a number of things that we will be doing no difference from previous quarters, as we are looking at the overall sequential growth rate for the business, you know be mindful of obviously the fact that shopping has a sequential down from Q1, which is along the launch of shopping.com, PayPal merchant services is also now much more holiday season dependant, as it’s the overall eBay businesses, because it could have easily driven by holiday seasonal shopping for the rest more means in consumers come online. Looking at the listing, if you look from either the US business or the international business, I don’t expect to see a significantly different trajectory, listing for that said it is not a perfect measure for understanding look happy to underlying revenue.

Q- Imran Khan

One last housekeeping question, did you break down the GMV numbers with the US or international, thank you?

A - Rajiv Dutta

No we did not.

Q- Imran Khan

Okay. Did you share that or

A - Rajiv Dutta

Yeah, I mean the GMV growth rate for international very closely track the revenue growth rate, so if you think about the power that was breakdown which means power between revenue and GMV growth rate is very consistent, keep in mind that all of the foreign exchange effect obviously related to the international, I can figure.

Q- Imran Khan

Thank you, very much for the time. I appreciate it.

A - Rajiv Dutta

Thanks. Next question?

Operator

We go next to Scott Jeff (ph) with Stiper Nicholas (ph).

Q - Scott Jeff

Hi Margaret thank you. The question is first related to autos, what you look forward in terms of reacceleration of solely OEM incentive or would it be any other driver there, and then secondly free cash flow in 2005 with 145% of net income, I was wondering if you give some guidance with some of ratio think about their ratio going forward either as a percentage of net income or as the percentage of operating income, and finally what your CapEx guidance in the fiscal ’06, thanks.

A - Meg Whitman

With regard to autos. First of all in Q2 and Q3 that is historically the strongest period for autos. So really except the reacceleration especially in the United States and Germany and in the UK in those two quarters, and we also have a number of products innovation that have see fixed price in the summer time, so I am not worried about autos we had anticipated slow downs and we anticipated we have reacceleration in Q2 and Q3 on the US of the product innovation and seasonally you know a bit stronger.

Q - Scott Jeff

You know, with respect to the cash flow and free cash flow there is nothing that this model that is fundamentally changing, the cash flow generation capability of the business, I have expected to many ways more of the profitability of the business advertisement in years and quarters previous. The CapEx we expect to be as percent of revenues, broadly consistence with what we had e in 2005 which will in rise add about 7% revenues, so that would meet our CapEx range for 2006 somewhere between $400 million and $420 million, but this is a very strong cash doing business and we expected to continue to be that way.

A - Meg Whitman

I mean, you may remember about size, it’s size is even less capital incentive in eBay, and the total CapEx budget size in 2006 is $2 to $3 million. So Skype is not going to drive our CapEx expenditure.

Q - Scott Jeff

Thanks.

A - Rajiv Dutta

Next question

Operator

We have next Mark Mahaney from Citigroup.

Q - Mark Mahaney

Thank you, two quick questions, one, any update on the CFO search, and secondly just to pin down on guidance a little bit, you clearly had our performance in the quarter, I think versus the midpoint to your revenue guidance, you are up something like $64 million, $65 million, yet you are not changing the revenue guidance for us. Is there something you are seeing that which were incrementally more cautious about '06 given the out performance in December quarter, thank you.

A - Meg Whitman

With regard to the CFO search, we have innovated a number of candidates, so I must say it was hard to tell, but we actually are down to a very short list of finalized candidates and we are really feeling good about the short list and sharpening that closure in the next couple of weeks.

A - Rajiv Dutta

And Mark I had expecting question everyday, but I am very much focused on being here to getting the next year for on board and making sure that we have an appropriate transition. So, I think you know with respect to your second question in terms of guidance I was waiting how along into the Q&A before that question comes up. So here is you know there is a couple of headlines things had made. We have a very meaningful look under business which business is doing very strong and in fact I men specifically notes to point out that as we look at the first couple of weeks generally we see some very good strong and very strong trend, really confirming to us the momentum we’ve seen in Q4 and in 2005 just continuing into 2006. There is the CapEx that I have pointed out which relates to the seasonality of the business, because we now have some very large components return to the next that are more Q4 dependence. So the question is to how does that translate into 2006, you know the way we are looking at this is that we have a number of new businesses and a number of new business initiatives that are peripheral to consumption 2006 and what we’d like to do is to get some more visibility into how these are performing before we update guidance for you again. It’s a pretty transparent business as we go through the quarters we will share with you.

Q - Mark Mahaney

Thank you very much.

A - Rajiv Dutta

Thanks.

A - Meg Whitman

Next question?

Operator

We go next to Robert Peck of Bear Stearns.

Q - Robert Peck

Hey congratulations, I just wanted to touch in a couple quick points. One, Meg, could you give us your though on the GMV effect going forward not in a near-term, but may be go long-term on Google in remarks, and number two could you also touch those on may be some more most specifics of PayPal and EachNet in China remember CRU, Active users, GMV.

A - Meg Whitman

So when I talk a little bit about Google based and free mot, we will take it and call something else now other than free mot, that is a Microsoft product. Can you, read or focused and I am very glad to start this initiative well over a year ago, because we have to take straight up leading to the local classified business if I mentioned in 40 Countries and over 300 Cities. And we believe that it does have increase in returns on a local basis. So we’re really pleased with where we are and we’re really excited about the fundamental underlying technology platform. That said, we’re going to keep an eye on Google base, keep an eye on Microsoft Classified efforts. And you know, then you also have to remember if we have ability to efforts from eBay platform in every major country, we have a leading position across the world and we can leverage eBay traffic, and you know focus actually matters. We are number one in ecommerce, I think we know more about I think we know more about these businesses than anyone else and we really hope that to stand up in good step. So, if, I am, with regard to the GMV tax and I don’t think it’s hard for us to the desk, and you know we have our classified businesses going to grow fast because that doesn't have GMV component to us. The GMV is going to be slightly overtime less relevant matrix, because we have lots of businesses where there is no GMV, number for example shopping.com, classified, rent.com etc. If we go to China we are excited about China, we have just had over third quarter of accelerating GMV growth rate, we had some very positive impact in previous Skype changes Skype was sealed with huge enthusiasm by our journeys few in a days and I think leave to great enhance except in face little a critical season point for Chinese users. So the business is strengthening we have a great team there, and actually on the eBay side we just had a new country manager about the management rule rode up in running and off to a good start. PayPal has good penetration on eBay for GMV is going very, very well in China and then of course we have Skype in China in its joint venture with form online. So we’ve got core businesses in China all of which had synergy with one another. So you know, what we are to a long infrastructure that we had set for a long time and we are really excited about the momentum we have seen in the last three quarters.

Q - Robert Peck

Thanks Meg, congratulations.

A - Meg Whitman

Thank you.

A - Rajiv Dutta

Next question?

Operator

Moving on next to Anthony Noto with Goldman Sachs.

Q - Anthony Noto

Thank you very much, Rajiv, given your comments about guidance and your comment that we can see the biggest transparent which are conservative, I just want to note down some of the organic growth rate in fourth quarters, and surely this is, from my estimates fourth quarter domestic organic revenue growth was roughly 26% to 28%, in the Internationally organic growth rates excluding effects was roughly 46% to 48%, I was wondering if you can confirm those numbers, so you can kind of back up some PCs mobile units, that you are pointing to given a listing in jump 10% sequentially quarters they already. And then, Meg you mentioned Pay per call, I was wondering if you could comment who we see 2006 paper call integrated into eBay US in the stand point of sponsored listings against key word such as well as, potentially launch of one or two categories that are just pay per call not a listing fee or final value fee, we have any really testing on opportunity, thanks.

A - Rajiv Dutta

So, actually your first couple of question that in '06, sort of your estimates on growth rate looking like organic rate growth rate domestic 26-28, International 46-48, those are well we speak at what is very consistence with what the growth rates was in normalized from exchange and when you normalize for the acquisition.

Q - Anthony Noto

And just sorry, and those were both faster than Q3, was up a bit.

A - Rajiv Dutta

Absolutely, so the thing that I think give up, particular session if you are looking at the Q4 results is organic acceleration, whether we are looking at, the eBay businesses, all we looking at the PayPal business, or we looking at posted your acquisition that all perform really very well.

Q - Anthony Noto

Thanks Rajiv.

A - Meg Whitman

And with regard to your question. Pay per call, whether will be innovated in the eBay US and other we will launch new categories that are only takes for lead. Your call will be announce Skype back, we laid out those plants we are committed to those plan the timing and the market in which we launch, we have an non stop, but we remain committed to those plans. Yeah we can’t really say more about that crisis for a minute.

Q - Anthony Noto

How about just sponsor listings on key words such as within the core business today, in the US, is that we get in '06?

A - Meg Whitman

Stay tuned, we will pick you will see, that this is a very competitive market and then I just want to make sure that we don’t get out ahead of our goal.

Q - Anthony Noto

Thanks, thank you very much

A - Meg Whitman

Thank you, next question.

Operator

We go next Jeetil Patel from Deutsche Bank.

Q - Jeetil Patel

Hey, Rajiv, couple of questions looking at the PayPal business, I guess search business seems to be greater in streaking up from the world, and I guess you look at the payment systems being used on the retail or merchant side on those kind of clicks being generated, is there an opportunity to may be partner with some of the search companies or one of them to basically integrate your payment system known as PayPal with their marketing and distribution capabilities, and then secondly on just the overall GMV growth rates, can you just characterize as you look at the 22%, 26% foreign exchange adjusted GMV growth for the fourth quarter, how do you think it’s in some of the bigger regions like Germany, UK and the US on a GMV growth basis relative to the broader industry growth which do you think, grew with the market faster in line, overall can you just give us a characterization there, thank you?

A - Meg Whitman

With the regard to take off, let me step up back a little bit and remind you the provisions for PayPal on the global online payment standard and that can name new buying some things for new or from a large business. It can mean people paying each other on a person-to-person pay another basis and can also name payments that are buying micro payments contents on the web as well as enhancing the ability of other buyers to pay big attendance, so we are opened to partnering with anyone as long as is it further is a tribute on objective of PayPal and continues to build the PayPal brands. So we are open to it, just a number of difference discussions that happen from lunch time, but again we are very serious about making for the pick up and, so we just moving the online global payment standards.

A - Rajiv Dutta

Sure, and with respect to the second part of your question that related to GMV growth rate for eBay versus the overall industry, I think the person I find to it, the statement that Meg made earlier which is the eBay business is not composed not more than just GMV growth, so when you look at things that the shopping.com in our classified business, it is a little difficult to characterize, you know how those are doing relative to the company to the overall industry. But as we look at the quarter in Q4 in particular, we look at the same date of the Q2, we have not seen much industries specific data for Q4 and the US, Germany and the UK, I can’t tell you that this from our extend looking at these businesses and how they have come, they are very pleased, with our growth in each of these markets, we wait and see how that fax up relative to eCommerce growth and I think across the board these businesses actually continue to accelerate really well.

A - Meg Whitman

And as we told at our Analyst Day in February, or objective is to grow our market place as faster than eCommerce. Will that happen every quarter and every market I can’t say definitely yes, or definitely no, but the long term objective is to continue to go faster than eCommerce in every market and allow them to the business.

A - Rajiv Dutta

Great thanks next question.

Operator

We have next question from Paul Keung with CIBC.

Q - Paul Keung

Good afternoon guys, thanks for taking my question, first question you told us before that detail on PayPal, what was the growth of PayPal if you take up VeriSign acquisition, and I guess what really, what is the organic growth of the merchant services and should we expect acceleration versus services and how do you all stay solid?

A - Rajiv Dutta

Sure, VeriSign, actually called out only accounted for about $6 million of revenue in Q4. So if you strip that out I think merchant services would just over 50%, 51% growth on a year-over-year basis and still accelerating, and PayPal overall accelerating even excluding the VeriSign gateway business. So the gateway business actually its not add that much to PayPal growth solid in Q4, it was $6 million.

Q - Paul Keung

And how should we take about in '06 and I guess when I question.

A - Rajiv Dutta

Skype.

A - Meg Whitman

You should continue to look for VeriSign raising merchant services, towards the beginning I believe that the merchant services pulse rate and that is continuing expansion internationally we have just began, the merchant services program I though the United States it is really only began in the UK. So we've got international there, we've got monetization opportunities there. Website payments flow which is our new small merchants of eBay product, again it really largely at US products today, we have lots of opportunity to expand that internationally and then the VeriSign payment's gateway business and our ability to interpret that and actually take all those small merchants and in forward stand to go to a forward one solution on PayPal that is actually the huge objective for 2006. And it’s one of the reasons that we haven’t taken up guidance, as we really want to see how that works, we want to see what the upside isn’t that and we will you give you an update at the end of Q1 and end of Q2 about how that’s going, but we takeout that’s one of the biggest things after this but the pickup is of their content of gateway.

Q - Paul Keung

Okay. Thanks very much. And as the follow up, the second question was on Skype's. This is an easy question. And in the total business, obviously I would free execution in the quarter and we see design much near the conservative, but the business will come along before if you take a look at the end of the analog, but is it safe to say given that what is that the design we actually have exceed forecast, somewhere you thought it would be doing 9 days ago?

A - Rajiv Dutta

Yeah it's absolutely I mean is this, I think I pointed out Skype have exceed our expectations.

A - Meg Whitman

Both on revenues and business product.

Q - Paul Keung

Okay, so that the change for '06 so if you look to make a different assumption on that then you have I would say since to be in progress, is it what we say in the fourth quarter correct?

A - Rajiv Dutta

That I will leave to you and to the follow up.

Q - Paul Keung

Just a time, okay thanks a lot.

A - Rajiv Dutta

Terrific, I think we have time to just one more question please.

Operator

Thank you. Our next question comes from Heath Terry of Credit Suisse.

Q - Heath Terry

Great, thank you. I was wondering if you could just talk a little bit about the impact of the US express launch on your plans for shopping.com, should we expect that at some point for shopping.com to be more integrated into eBay express and much as same way that you have done with half over the years and then when take on merchant services was invaded you talked about the percentage PayPal transaction that were going over the slide having past some levels that what you have to Americans express in terms of the percentage of transaction, is anything like that you can talk about with the new partners like Dell, that you have in the fourth quarter?

A - Meg Whitman

Okay, so let me take the question about eBay express and shopping.com, we don’t actually import see, at least in the next couple of years, integration of the shopping.com site and the eBay.com site and eBay express. eBay express is actually a new way to shop on eBay. It leverages shopping.com technology in terms of the catalog, and it's doing the first time foundation of our new enhanced searching and finding technology which we refer from the Del as in the past. And it has some really fine features like the shopping cards for multiple sellers, so I have to buy Adams import sellers that all in the card and check that all one. So fundamentally the inventory is inventory on eBay that’s been aggregated. And that is object price largely new and we actually got it to check out really fast using PayPal. Shopping.com of course to the shopping comparison site that primarily used by large retailers drive new customers for their products, so the similarities our fixed price in new season and but the rest of the site is really quite different, and we like having the two assets in our portfolio because we think that target different customers and different customer shopping occasion, so don’t look for an integration at least in the several years.

A - Rajiv Dutta

And you know with respect to the second part of your question, PayPal and it’s take up with larger merchant in particular Del, these really pleased, I mean this is very early but we have had very good take up for PayPal, in terms of number of the transactions being processed by Del, it’s going very fast. When you look at merchant services more broadly, I mean this is now the third consecutive quarter of accelerating growth merchant services. So as Meg pointed out, and we are taking some more steps, when we acquire PayPal we talked about for the few business PayPal which is building on.com in the US, taking PayPal global with the eBay properties and then taking it across outside eBay to merchant services, that could be focused on, you know early returns is very pleased, but in a number of new initiatives that are on the cost for the year.

Q - Heath Terry

Great, thank you.

Meg Whitman, President, Chief Executive Officer

Thank you very much for joining us everyone, we appreciate your attention.

A - Rajiv Dutta

Thank you.

Operator

That does conclude today's conference. Everyone have a great day.

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Source: eBay Q4 2005 Earnings Conference Call Transcript (EBAY)
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