eBay Q1 2008 Earnings Call Transcript

| About: eBay Inc. (EBAY)
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eBay Inc. (NASDAQ:EBAY) Q1 2008 Earnings Call April 16, 2008 5:00 PM ET


Mark Rowen - Vice President, Investor Relations

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

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


Mark Mahaney - Citigroup

Brian Pitz - Bank of America

Jeetil Patel - Deutsche Bank

Imran Khan - JP Morgan

James Mitchell - Goldman Sachs

Doug Anmuth - Lehman Brothers

Justin Post - Merrill Lynch

David Joseph - Morgan Stanley


Good day, everyone, and welcome to eBay's first quarter 2008 earnings results conference call. This call is being recorded. With us today from the company is the Chief Executive Officer, Mr. John Donahoe and the Chief Financial Officer, Mr. Bob Swan. At this time, I would like to turn the conference over to Mr. Mark Rowen, the Vice President of Investor Relations. Please go ahead, sir.

Mark Rowen

Thank you, Operator. Good afternoon. Thank you for joining us and welcome to eBay's earnings release conference call for the first quarter of 2008. Joining me today on the call are John Donahoe, our new President and Chief Executive Officer, and Bob Swan, our Chief Financial Officer. We are providing a slide presentation to accompany Bob’s commentary during the call. This conference call is also being broadcast on the Internet and both the presentation and call are available through the investor relations section of the eBay website, investor.ebay.com.

Before we begin, I would like 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 reconciliation of those measures to the nearest comparable GAAP measures in the slide presentation accompanying this call.

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 under user base and user activity. Our actual results may differ materially from those discussed in this call for a variety of reasons, including our increased need to grow revenues from existing users in established markets, an increasingly competitive environment for our businesses, the complexity of managing a growing company with a broad range of businesses, regulatory tax, as well as IP and other litigation risks, including risks specific to PayPal and the financial industry and risks specific to Skype's technology and to the VOIP industry, our need to upgrade our technology and customer service infrastructure to accommodate growth at reasonable cost while adding new features and maintaining site stability, foreign exchange rate fluctuations, changes in political, business, and economic conditions, and the impact of integration of recent and future acquisitions.

You can find more about factors that could affect our results in our annual report on Form 10-K and our quarterly reports on Form 10-Q. You should not unduly rely on any forward-looking statements and we assume no obligation to update them.

And now, let me turn the call over to John.

John J. Donahoe

Thank you, Mark and welcome, everyone to today’s conference call. As you know, this is my first earnings call as eBay's CEO and I am excited to be here. Here’s how I plan to spend the next few minutes.

After recapping the priorities I laid out in our last call, I will give you a highlight of the company’s Q1 financial performance. Then I’ll give you my perspective on the results from each business unit, as well as the progress we’ve made against our priorities. And finally, I’ll give you a few closing thoughts before turning it over to Bob for more detail on the quarterly figures and our outlook for the full year.

In January, at the time of my appointment as CEO, I told you that I believe this company had an incredibly strong portfolio of businesses and an excellent 13-year track record. I also told you that I thought eBay had not quite kept pace with the changing competitive environment and with our customers’ expectations. And I said that 2008 would be a year of bold changes where we would make breaks from the past by delivering against three clear corporate priorities.

One, make eBay easier and safer to use; two, improve value and selection through pricing and incentives and by weaving auctions and fixed price in a uniquely eBay way; and three, extend PayPal's leadership position in online payments both on and off eBay.

During the call today, I will walk through progress we’ve made against these three priorities.

But first I want to summarize our overall financial results from the quarter. Looking at the company’s performance, this was a strong financial quarter for eBay. We delivered nearly $2.2 billion in net revenue, representing 24% year over year growth. We also delivered non-GAAP EPS of $0.42 and generated $632 million in free cash flow. We also repurchased $1 billion of stock during the quarter.

Our marketplaces business unit delivered $1.5 billion in revenue, an increase of 19% over last year, while global GMV increased 12% to $15 billion. This business is off to a good start for the year, highlighted by improving metrics and encouraging trends in the eBay business, as well as excellent performance by StubHub, our online tickets marketplace.

On the payment side, PayPal continued to perform extremely well. PayPal delivered revenues of $582 million, up 32% from the same period last year. Total payment volume, or TPV, on the eBay global platform was up 17% and merchant services TPV was up 61%. These figures are impressive and we believe there is even more potential for eBay to expand both on and off eBay.

Skype also had another strong quarter. Skype posted total revenue of $126 million for the quarter, an increase of 61% over last year. We also saw Skype's key user metrics improve significantly, particularly the number of active users and the volume of both Skype to Skype and Skype out minutes. More people then ever are using Skype to stay connected with their friends and family around the world.

Other highlights from across the company include our classifieds business, which had very strong user growth and revenue growth at 60% from the same period last year. And we continue to gain traction in our text and graphical ad business, which posted 151% revenue increase for the quarter.

All in all, we delivered strong financial performance for the quarter and feel good about the solid start to 2008.

Now I would like to turn to the marketplaces’ results and the progress we’ve made in that business. Back in January, I was very explicit that we are extremely focused on improving the buyer experience on eBay. This is not to say that sellers are not important to us but our belief is and always has been that what is good for buyers is ultimately good for sellers, and this successful balancing of the ecosystem is what makes for the most healthy and vibrant marketplace.

So with buyers in mind, we announced several changes in January. First, we announced a reduction in insertion fees, we made gallery photos free in the U.S., and we increased final value fees. In essence, we rebalanced our pricing model to encourage greater selection and to better align eBay's success with that of our sellers. We also announced that we are moving forward toward best match search, an innovation at the heart of bringing the best items and best values to our buyers.

Second, we said that for the first time in our history we were going to start rewarding sellers who provide the best buyer experience. You’ll recall that last year during 2007 we implemented detailed seller ratings, or DSRs, which allow buyers to rate sellers on the qualities of service most important to them.

During Q1, we began using DSRs to extend seller discounts for qualified power sellers based on the quality of their service and we began to increase exposure for listings and search results for those sellers who have consistently high DSRs -- in other words, sellers who provide the best customer experience.

And third, we announced a bold revamp to our feedback system. Feedback has always been at the core of eBay's success. For sellers, it represents nothing short of reputation. For buyers, it’s a critical element of trust and creates the mindset needed for a successful transaction.

Over the years, our feedback system had lost some of its balance and fairness, so in January we set out to fix this by announcing a series of changes.

Now as we expected, some of the announcements generated a lot of passion from our community and this is a good thing. eBay was built on strong customer input. That input makes us stronger because we listen.

For instance, we heard a lot of feedback from our media sellers that the pricing structure we announced didn’t make economic sense for their businesses. So after hearing their thoughts and taking into consideration a number of factors, we made the decision to move to category specific pricing for our media sellers.

At the same time, the eBay leadership team has a deep understanding of our marketplace. We sit in the unique position of hearing all of the feedback from all sides and we stayed the course on the changes that we believe are critical to the overall health of the marketplace and the long-term success of our entire community of users.

So the question is how are these changes impacting our business? Let me say that while it is still too early to know the long-term success of these programs, we are encouraged by what we are seeing. Here are a few highlights.

Global listings growth improved to 10% year over year, while conversion rates declined only slightly. And since the time our pricing changes took effect six weeks ago, we have seen measurable improvements in listings, sold items, and GMV in our three largest markets.

We are also seeing early progress from best match, which is just rolling out in the U.S., Germany, U.K., and France, where there appears to be finding the right product from the best sellers is getting easier on these sites. And as always, we will continue to iterate our best match based on our ongoing learning.

And lastly, there is some evidence that the buyer experience is getting better. Gallery photos have achieved nearly 100% adoption across all categories in the U.S. and have overall made for a cleaner site and enhanced buyer experience.

Also, average DSRs have shown signs of improvement. Buyers are telling us that sellers are communicating with more detail and more accuracy, and average shipping costs in the U.S. are 2% lower since we announced that seller discounts would be tied to these measures. This tells us that sellers are really applying themselves to making customer satisfaction a competitive advantage on eBay.

I am encouraged by the direction the metrics are headed. We believe these positive indications tell us that eBay is in fact becoming easier and safer to use. I am also pleased by the e-mails I’m receiving from sellers telling me that they have seen their businesses accelerate due to the changes we’ve made. And I remain confident that we made the right call for the marketplace and for the long-term prospects of the company.

That said, I want to be very clear -- we still have a lot more work to do. We remain committed to making the necessary changes that will make eBay easier and safer and we intend to make additional changes throughout the year. These include innovations that will work to improve trust, enable a better finding experience for our customers, and expand selection of inventory in a uniquely eBay way.

Let me give you just one example of what we are up to. We recently announced safer payments in Australia. Safer payments is a policy change that requires sellers in Australia to offer PayPal as the only payment option. We see this as an additional safety net for buyers and an ideal way to give buyers a higher degree of protection and trust when transacting on eBay. And we believe this will eventually lead to increased transaction volume.

In fact, we are so confident that this will promote a safer eBay experience for buyers, we are simultaneously increasing PayPal buyer protection to $20,000 Australian dollars. Now, for those of you that don’t have your calculators on hand, that’s about $18,500.

eBay Australia has always been a proving ground for new programs and policies, so we will carefully evaluate the impact of safer payments and then use this to inform our approach in other countries.

So overall, I am pleased with the quarterly performance from the marketplaces business and I am encouraged by some of the positive trends we are seeing as a result of our efforts. There is a lot more work to do but I am confident we are on the right path to maintain our leadership position in today’s competitive e-commerce landscape.

Now let’s take a look at the operating details from PayPal and Skype. As I mentioned earlier, PayPal had a very strong quarter. I told you in January that PayPal is a gem of a business and that we’d continue to focus on PayPal's growth. As evidenced by the numbers from this quarter, PayPal remains a fantastic trajectory.

PayPal's Q1 global TPV of $14.4 billion accounted for nearly 9% of worldwide e-commerce, with more than a third of that coming from countries outside the U.S. This is an all-time high for international TPV.

Also during Q1, PayPal processed an average of $158 million of TPV each day, which translates into over $6.6 million of TPV per hour. This gives you some idea of the large amount of volume flowing through the PayPal system on any given day.

Our merchant services business, or PayPal off eBay, continues to shine. Global merchant services volume accounted for 46% of PayPal TPV, a new record.

In the U.S., a recent study showed that 25% of online U.S. retailers now accept PayPal, including many major retailers like CompUSA and Jet Blue Airlines, which we added during the quarter.

In Europe, our merchant services business continues to accelerate, where we’ve seen PayPal drive incremental sales of up to 5% for our largest merchants. In addition, recent research shows that small to medium sized merchants can receive up to 15% incremental sales after adding PayPal.

In Q1, TPV from PayPal's European merchant services business delivered 69% year over year growth. PayPal is now available as a payment option on more than 130,000 European websites, including the Ferrari Store in Italy and Office Depot in the U.K.

Lastly, we acquired Fraud Sciences, an Israeli based company with expertise in online risk tools. With PayPal's top priority to offer the most secure payment system in the industry, we believe that Fraud Sciences tools and advanced analytics will help enhance and complement PayPal's proprietary fraud management system.

So as you can see, PayPal continues to impress with its rapid growth and excellent execution. I believe 2008 will be PayPal's best year yet, especially as we continue to innovate around ways for PayPal and eBay to work even more closely together to drive a great buyer experience.

Now let me turn to Skype for a minute. Skype continues to experience tremendous growth. Registered users grew to 309 million and more and more people are using Skype in their daily lives than ever before. In fact, in February of this year, Skype announced that it had enabled a total of 100 billion minutes of conversation. That is a remarkable milestone.

Skype also reached another important milestone during the quarter. A recent study showed that brand awareness of Skype in North America had doubled. This is particularly significant given that Skype is less well-known here in the U.S. than in Europe or Asia.

Also in the quarter, our Skype marketing team developed a fantastic partnership with Oprah Winfrey. For all of you Oprah fans, you know that she now uses Skype video to have on-air conversations with her guests during her hugely popular TV show and via her online webcast series. Clearly this has been a big win for the Skype team.

And lastly, we were pleased to announce the appointment of Josh Silverman as President of Skype. Josh is a seasoned executive with great international experience and I am very confident in his abilities to further accelerate Skype's business. With new leadership in place, 2008 looks to be another impressive year of innovation and growth at Skype.

So with Q1 behind us, I feel very good about the direction we are headed. We’ve come a long way in just three months. During that time, eBay has embraced an exciting new mindset. More than ever, we are focused on making eBay more appealing to buyers while giving sellers the tools and support they need to thrive.

eBay employees have been tightly reorganized around our priorities and there is a strong sense of clarity and purpose to everything we are doing. And while there is still a lot more work to do, I am confident that eBay is reinventing itself in exhilarating new ways that will strengthen the growth of our business and lead to an even more exciting future.

I look forward to updating you again on our progress in July during our Q2 earnings call. And now I’ll turn it over to Bob for a closer look at the numbers.

Robert H. Swan

Thanks, John. Let me review our Q1 financial performance in some detail. During my discussion, I’ll reference our earnings slide presentation which accompanies the webcast.

Overall, we are very pleased with our first quarter results. We generated strong revenue growth, even stronger non-GAAP earnings growth, and excellent free cash flow. In a volatile market, we opportunistically repurchased $1 billion worth of eBay shares during the quarter, or almost 3% of the outstanding shares.

All in all, we are off to a strong start for the year despite a tough economic climate.

Before I delve into the numbers, I would like to touch on a quick housekeeping item, a new revenue classification. Today eBay represents a portfolio of businesses, some of which monetize the services we provide to our users in new and different ways. Therefore, in order to help investors better understand our portfolio, we are introducing a new framework for revenue classification.

We believe this new classification will increase transparency and provide better alignment with some of the non-GAAP metrics we report. In the new classification, transaction revenue represents fees earned from marketplaces GMV, PayPal TPV, and telecom offerings.

Marketing services and other primarily includes revenue earned from advertising, shopping.com lead generation fees, third-party services, as well as interest earned on certain PayPal account balances. I’ll talk more about this later.

Now let’s dive into the numbers. In total, our combined businesses generated record net revenues of $2.2 billion in the quarter, a 24% increase over last year. Organic revenue growth excluding acquisitions and FX, was 16%. Growth was once again propelled by PayPal and in particular merchant services, Skype, classifieds, and advertising.

Additionally, GMV growth was stronger than expected, helped by the pricing changes that John discussed earlier.

Non-GAAP EPS was $0.42 in the first quarter, a 26% increase from last year and $0.03 above the high end of our guidance range. The EPS performance was driven by a stronger-than-expected top line growth, a lower tax rate, benefits from a weaker U.S. dollar, and a lower share count.

Operating margin came in as expected at 32% in the quarter, 160 basis points lower than last year, primarily due to a business mix shift towards our higher growth but lower margin PayPal and Skype businesses, and higher litigation expenses.

We generated free cash flow of $632 million in the first quarter, an increase of 32% above last year’s level, primarily driven by earnings expansion.

Now let’s take a closer look at our segment results. Overall, our marketplaces business segment achieved net revenues of $1.5 billion, an increase of 19% over the year-ago period. Global GMV was $16 billion in the quarter, a 12% increase. The seven point gap between GMV and revenue is largely driven by marketing services growth of 56%.

Within marketing services, our classifieds business continued to experience robust growth at 60% year over year, and our graphical and text advertising revenues increased more than 150% as we expanded coverage and improved targeting. Marketing services increased to 15% of marketplaces revenue in the first quarter, up from 11% last year.

Overall GMV growth came in slightly better than we expected as some of our new initiatives gained traction. In addition, cross-border trade helped increase GMV growth, accounting for 18% of global GMV in the quarter compared to 16% last year.

That being said, GMV growth was negatively impacted by the broader economic environment in two of our largest markets, the U.S. and the U.K., which resulted in weaker domestic demand on these sites.

Now let’s walk through some of the key operating metrics. eBay's market prices had 84 million active users on a trailing 12-month basis, an increase of 1% over last year or up 6% excluding China and Taiwan. New listings totaled $647 million in the quarter, an increase of 10% year-on-year. The acceleration in listings growth was helped by the strong reception by sellers to our lower listing fees, particularly in the media category, as well as the promotion in late March.

U.S. GMV was $7.2 billion in the quarter, an increase of 7% year over year, driven by strength in media and apparel. International GMV grew 17% to $8.9 billion, accounting for 55% of global GMV.

Excluding benefits from foreign exchange, international GMV grew by 8%, driven by consumer electronics, apparel, and home and garden.

In Europe, GMV growth accelerated in the U.K. and in Germany, where our new pricing structure has attracted more merchandise to our site, which in turn helped to accelerate the number of items sold.

In Asia, we are extremely pleased with the progress in Korea, where Q1 GMV grew 36% over last year, excluding vehicles. We accelerated GMV growth for the second quarter in a row and continued to gain share in a highly competitive market. We also continued to experience robust GMV growth in Australia.

GMV in the fixed price format continued to grow rapidly in Q1, increasing 22% over last year and accounting for 42% of global GMV. As John stated earlier, we’ll continue our efforts to make it easier for buyers to find the best selection at the greatest value, regardless of the format.

Overall, the marketplaces business had a strong quarter. We continue to execute on our 2008 priorities and while there is still significant work to be done, we are encouraged by the early results we have seen thus far.

Now let’s turn to our payments business. PayPal posted yet another very strong quarter with total revenue coming in at $582 million, a 32% increase versus the same period last year. Total payment volume in the quarter was $14.4 billion, an increase of 34% year over year. TPV grew by 29% in the U.S. and 43% internationally.

We believe the strong growth trajectory we’ve seen at PayPal over the past quarters is a reflection of the continued progress in our efforts to achieve ubiquity for PayPal on the web, through increased penetration on eBay and an expanded footprint beyond eBay.

In key operating metrics, PayPal had 60 million active accounts at the end of the quarter, an increase of 17% over last year. On the eBay platform, PayPal's global TPV grew by 17% year over year. TPV growth was fueled by increases in GMV coupled with a 220 basis point increase in the global penetration rate on eBay to 54.5%.

Beyond the eBay platform, PayPal's merchant services business posted another phenomenal quarter and now it’s penetrated 31 of the top 100 online merchants in the U.S.

Merchant services recorded $6.6 billion in global TPV in the quarter, representing a 61% year-over-year growth and accounting for 46% of the total TPV.

PayPal's Q1 transaction expense rate was 118 basis points and the transaction loss rate was 24 basis points. Segment margins for the quarter came in at 23%, up 180 basis points from last year, as we continue to benefit from the investments we made in 2006 and 2007.

In summary, PayPal notched another great quarter. Our global payments business continues to strengthen and PayPal is one of the key pillars of our company-wide growth strategy.

Now let’s turn to our communications business. Skype posted total revenue of $126 million in the quarter, an increase of 61% over last year. Total registered users grew to an impressive 309 million, representing an increase of 58%.

The growth rate of our key user metrics accelerated this quarter as Skype-to-Skype minutes were up 30% to 14.2 billion and Skype-out minutes increased 33% versus last year to 1.7 billion.

Now let me touch briefly on Inc. level operating expense and cash position before I discuss our 2008 guidance.

We reported $701 million of non-GAAP operating income, up 18% from last year, and non-GAAP net income of $562 million, up 22%. Sales and marketing improved 100 basis points from a year-ago period, due in part to a more efficient online marketing spend and in part through investments in buyer loyalty and retention, some of which get recorded as contra revenue instead of expensed to sales and marketing.

Product development came in 10 basis points higher than last year as we continue to make enhancements to the customer experience, and G&A was 70 basis points higher than last year, primarily due to one-time litigation expenses.

We ended the first quarter with more than $4 billion in cash, cash equivalents and investments, a decrease of approximately $900 million from December 31. During the quarter, we brought back approximately $2 billion from our international subsidiaries to the U.S., which allowed us to repurchase 37 million eBay shares at a cost of approximately $1 billion without the need to access our credit facility.

So with that, let me turn to guidance. In Q2, we expect to generate net revenues of $2.1 billion to $2.15 billion, and we anticipate non-GAAP EPS in the range of $0.39 to $0.41. For the full year 2008, we now expect revenue to be in the range of $8.7 billion to $9 billion, and non-GAAP EPS in the range of $1.70 to $1.75, up from previous guidance of $1.63 to $1.67.

While we are raising our full year outlook, we still remain cautious about the economic environment. The increase in our guidance reflects our strong Q1 performance, coupled with benefits from a weaker dollar and a lower share count due to our repurchase activity in the first quarter. Adjusted for these factors, the guidance for the rest of the year is similar to the view we laid out for you three months ago.

This guidance reflects the possible impact of the changes that are necessary to strengthen our competitive position. John highlighted the changes we will be making, including steps to improve trust, make finding easier, and expand selection, all of which may introduce volatility into our business over the next few quarters.

For instance, one such initiative he discussed, safer payments in Australia, may negatively impact short-term GMV in that market. Our guidance captures this volatility, a higher level of investment, and our cautious view on the economy.

In summary, 2008 is off to a good start -- strong top line growth, even stronger bottom line growth and excellent free cash flow. During the quarter, we rolled out several initiatives aimed at improving our marketplace business and there will be more to come. Although cross border trading expanded on our platform, U.S. e-commerce growth rates our slowing. Our outlook for the rest of the year reflects our intention to invest in and strengthen our business for the long run.

And now we’d be happy to answer your questions. Operator.

Question-and-Answer Session


(Operator Instructions) We’ll take our first question from Mark Mahaney. Please go ahead.

Mark Mahaney - Citigroup

Great. Thank you. Two quick questions, please, first on the buyer side, the buyer experience improvements, are there other steps you can do going forward? And would part of that be a more aggressive advertising campaign to let people know about some of the seller improvements or the improvements to the marketplace that those seller changes have brought?

And then secondly, could you just go a little bit into more detail about what economic impact you are seeing. The U.S. GMV trends, the TPV trends show a deceleration but really within trend line, it doesn’t appear externally that you’ve seen a major economic impact yet on your business. Thank you.

John J. Donahoe

Sure, Mark. I’ll take the first question and Bob, maybe you handle the second. In terms of our buyer experience, Mark, we do not anticipate, to directly answer your question, doing an advertising campaign in the near future that advertises these changes but rather want to get our buyers experiencing that and simply coming back for more. And the early data we are seeing is that buyers are noticing the changes, most noticeably by giving higher detailed seller ratings. We are encouraged by that because it says sellers are now competing on service as well as on price and we think our buyers are noticing that. And the most powerful way to drive our growth is for our buyers to keep coming back and buying more. So we are going to keep our heads down, really focused on that buyer experience for the remainder of the year.

Robert H. Swan

And Mark, in terms of the economic impact, particularly here in the U.S., yeah, you’re right. The trendline for U.S. GMV was pretty stable during the course of the quarter and as John indicated, we saw some momentum from the initiatives that we launched towards the end of February.

That being said, some of our growth in GMV was from very -- from strong cross-border trade and we saw towards the end of the quarter as we try to isolate cause and effect between the initiatives we were seeing and the overall economy and the impact. We saw a slowing in terms of buyers propensity to buy towards the end of the quarter.

Mark Mahaney - Citigroup

Thank you, Bob. Thank you, John.

Mark Rowen

Next question, please.


We’ll go next to Brian Pitz with Bank of America Securities.

Brian Pitz - Bank of America

Thanks. You mentioned modest downward impact to take rates from listing changes over the course of the quarter, but when you look at the numbers it seems like take rates were down only slightly. Can you give us a sense for what you are anticipating for changes in take rates going forward based on listings changes?

And then, any additional color on the U.S. and the U.K.? Are you seeing slower traffic? Should we think about it in terms of lower potential conversion rates, purchasing of lower ASP goods, and any specific weakness to verticals in terms of those markets? Thanks.

Robert H. Swan

Thanks, Brian. I’ll start. I’m not sure I got the whole question but in terms of overall take rate for marketplaces, on a year-over-year basis there was a modest increase. But there’s a couple dynamics underneath the covers. One, StubHub had a great quarter, grew very fast and that has a higher take rate, as you know, than the rest of our business, so that helped the overall numbers.

Secondly, vehicles grew a little bit slower and that has a lower take rate, so overall that positively impacts our take rate.

Offsetting those two positives though was a relatively flat take rate in the U.S. and modestly lower in the U.K. and Germany.

As we think about the rest of the year, as John indicated we will continue to make changes to drive great selection on the site and that will -- we anticipate that could include pricing changes probably more category in nature.

Secondly, we’ve made very good progress in a relatively short period of time. Our sellers have made good progress on DSRs. In turn, that will drive higher discounts which we’ll feel great about paying as they improve the buyer experience.

And lastly, we will step up the level of couponing to engage and retain our active user base over the course of the year, and the combination of those three things will have -- result in a modestly lower take rate and modestly higher contra revenue for the rest of the year.

Brian Pitz - Bank of America

Great, and just any additional color, U.S., U.K. in terms of what we could expect in terms of your slowdown that you are seeing? Is it ASPs, conversion rates on those goods, just early stage or is it too tough to tell?

John J. Donahoe

Brian, I would separate two things. One is what is the response we are seeing to the changes we are making, and then the second thing would be what impact is the economy having. Let me first address the first.

You know, it’s only been about six weeks since the changes we announced have gone into place, so that the rebalanced pricing took effect in the U.S., Germany, and the U.K., that the incenting sellers to provide good buyer experience in the form of seller discounts and exposure and search, and increasingly exposing best match search to those.

And in both the U.S. and U.K., we’re encouraged by the early results. We see increased listings, conversion is held up. It’s declined slightly in both so it’s successful -- item growth is up and GMV is up in both, and that’s also true, by the way, in Germany. So we are encouraged by those early results.

The vertical results is an interesting question because in the U.S., one particular standout category has been media. As you know, we went to media specific pricing and we intend to over the year continue to implement some pricing changes in a more category based way, because we think that’s one of the ways that will allow us to allow -- recognize that sellers have different margins in each category and we can gear our pricing more toward it.

So from a structural level, given the changes we’ve made, we are encouraged by the early results and then when we overlay the economy, we just simply have a cautious outlook. Traffic actually held up in the first quarter. Our traffic, our total aggregate traffic site wide, we had 80 million uniques and the same number of page views, but we are conscious that we are not immune to changes in the economy and the good news for us is that our priorities remain the same in good economic times or bad, which is to say our focus this year is on improving the user experience, improving the buyer experience.

And we think we’ve got some unique advantages in uncertain times because of as Bob mentioned, our cross-border trade, because eBay is the source for great deals and eBay still remains the only place you can turn assets into cash in seven to 14 days.

So we are not counting on any of that but we are going to be aggressive in going after it.

Brian Pitz - Bank of America

Great, thanks. Great color.

Mark Rowen

Next question, please.


We’ll go next to Jeetil Patel with Deutsche Bank.

Jeetil Patel - Deutsche Bank

A couple of questions -- I guess can you talk about what have you learned from buyers and their behavior in terms of the response to the couponing that you did throughout the quarter, or I think during the major changes you made, as well as best match. What do you think had the bigger impact in terms of incenting buyers to transact or helping transactions there as you look at all these changes made?

And then, can you talk about I guess the notion of couponing, is the strategy to improve the low ASP high volume categories through couponing and is it accretive? And then I have a quick follow-up. Thanks.

John J. Donahoe

With respect to buyer reaction to the changes, we are seeing really a couple of things. One on couponing, some very surprising and positive ROIs. Let me be clear -- our focus on the couponing is for our top buyers and the first place we are focusing our couponing is when we see a decline in frequency, we’ll send a coupon or when we see someone buying in one category and we want to incent or motivate them to buy in another category, we’ll do it.

And so it’s still a relatively small sample in Q1 but we’ve seen very good redemption rates and we think that’s leading to more buyer loyalty over time. So we’ll expand that in Q2 and again, based on that learning we will continue to expand it during the year but it’s going to be very targeted and very focused on the key points in a customer’s lifecycle where we think it can have the biggest impact.

With respect to best match, the biggest impact in best match I think in the first quarter has been we are -- buyers are seeing more items from sellers that provide good buyer experiences, so the biggest impact has been high DSR sellers are getting more exposure on the first page and lower DSR sellers are getting less, and so buyers aren’t conscious that they are seeing a higher quality inventory necessarily on the surface but we are seeing that in those categories, in those situations where we’re ramping that up, we’re seeing higher conversion rates.

I also want to be clear on our approach to best match. We are not approaching best match as some huge initiative that is going to roll out overnight. Best match is a series of changes, a series of iterations where we are taking advantage of our unique proprietary data on closed transactions and our experience and we’ll continue to make iterations based on our experience throughout the year.

Robert H. Swan

Just to add a little more color on John’s comments on couponing, what we’ve concluded is the best way to grow our active user base is by not to lose any of them and coupons is one of the vehicles that we’ll have to do that.

The second thing that you’ve seen during the course of the quarter is the sales and marketing as a percent of revenue has come down and it’s because we believe the couponing and the retention of best buyers is a lot more efficient than having to necessarily go out and generate new buyers while not keeping the ones we have extremely satisfied. So that’s a little bit of a shift in terms of how we think about retention relative to acquisition in our sales and marketing dollars.

And then the second thing you see is slightly higher product related expenses for the user experience relative to sales and marketing as well.

Jeetil Patel - Deutsche Bank

Can you talk about when couponing actually becomes accretive? Is it on the first transaction, is it third transaction? And then also can you just talk about whether you’ve changed how long you hold the consumer buyer dollars before you transfer the money to sellers and let them go ahead and ship the item? Are you carrying a higher flow in terms of days between buyer collection and seller notification to ship the item?

Robert H. Swan

I’ll take the first one and I couldn’t quite get the second part because you are going in and out on us. In terms of coupons, as John indicated, we’re at the relatively early stages of using coupons to retain and increase the level of activity of our existing buyers. And we feel like that’s a very efficient spend.

In terms of the accretive nature of it or not, I’d just characterize early days. These are high ROI dollars and we’ll continue to do more of them.

The second part, Jeetil, I apologize. You were kind of going in and out, so --

Jeetil Patel - Deutsche Bank

I’ll catch up with you offline on that but any way to characterize how the first two weeks have gone in April?

Mark Rowen

Operator, next question, please.


We’ll take our next question from Imran Khan with JP Morgan.

Imran Khan - JP Morgan

Thank you for taking my questions. Two strategic questions. First, John, I think eBay is an investor of a company called [inaudible] and they had some great success with the installment payment on market [inaudible] platform. Any thought on building installment payments for PayPal? I know you have a partnership, so if you can give some color, what’s your thought on that front?

And secondly, you have strong growth of registered users and Skype to Skype minutes, but one of the things that you talked about when you acquired Skype was integrating Skype on the eBay platform. Can you give us some update what kind of traction you are seeing integrating Skype on the eBay platform? Are you satisfied with that? If not, what can you do about that? Thank you.

John J. Donahoe

Sure, Imran. Let me just take your first -- I’ll actually take both questions. On your first question on installment, we do. We announced last year a product called PayPal Later -- PayPal Pay Later, rather, and that’s a transactional line of credit which allows merchants to offer flexible and customized financing options to buyers at the point of sale, even if the buyer doesn’t have a PayPal account.

And we are partnered with GE on this. The credit is determined and issued by GE Money and it’s based on the buyer’s credit history. So we think there is nice potential there and on top of the PayPal platform, which of course is unmatched with the number of merchants, the number of consumers we have, we think if this is going to take off anywhere it’s going to take off on PayPal.

So I think you’ll see us increasing our focus on this, increasing our marketing around it as the year goes on.

With respect to Skype and integration on eBay, as I said earlier we are delighted that we now have Josh Silverman in and running Skype and what we know is Skype is a great standalone business that’s experiencing explosive growth in terms of its financials and in terms of its user base.

What we really haven’t had a chance to test as aggressively as we’d like is the synergies and so we’ll be testing and experimenting with our synergies in 2008. One of the ways as you described is what synergies exist between eBay and PayPal. And they aren’t always going to be what we initially thought. Let me give you an example.

Skype announced a product called Skype Prime, which is in essence a services marketplace on Skype. And we’ll begin to cross-promote this a little bit on eBay but Skype is just now getting to some of its e-commerce priorities and we’ll explore those synergies as we go longer in the year. We’ll also explore the Skype and PayPal synergies.

Mark Rowen

Next question, please.


We’ll take our next question from James Mitchell with Goldman Sachs.

James Mitchell - Goldman Sachs

Thank you very much for taking a couple of questions. You noted that weaker domestic demand has been impacting the U.S. and U.K. marketplace businesses a little. Could you talk about whether that weakness should hypothetically affect PayPal's third-party business, or whether the secular growth of PayPal's third party is so strong that it’s impossible to tell?

And then secondly, you also noted that media and apparel drove U.S. GMV growth and you’ve commented extensively on the media up-tick. When you look at the apparel strength, do you attribute that primarily to buyer behavior or is it because the recent initiatives, such as free gallery inclusion are disproportionately benefiting a power relative to other categories?

Robert H. Swan

I’ll take the first one on PayPal. What we get out of PayPal and the merchant services business in particular is a broader look into how e-commerce is growing overall. It just gives us a much broader lens because as John indicated, we’re a significant player on the top online retailers and as we watch merchant services growth, we -- it’s a tale of two cities. One is we are still in relatively hyper growth mode of 61% global growth of TPV, stronger outside the U.S. than here in the U.S. But we do see a gradual deceleration partly because we are dealing with large numbers.

In deciphering between what is share of checkout gain versus new account gain versus overall relative economy is an art, not a science at this stage. But I would say it’s one of the data, one of the variables, one of the inputs where it gives us a broader lens into an overall e-commerce landscape that the experts have suggested has gone from a 19% growth rate in the fourth quarter down to about a 13% to 14% market rate of growth here in the first quarter. And that’s a data point that we use in looking forward.

John J. Donahoe

And that’s in the U.S.

Robert H. Swan

Yes, sorry, U.S. market growth rate.

John J. Donahoe

And James, on your second question, apparel in many ways represents the best of the changes we are making because we are seeing the whole ecosystem effect. So we saw increased supply with the rebalancing of the pricing and frankly we saw increased supply of quality inventory, an upgrade in the quality of the apparel inventory.

Free gallery in the U.S. made it a better buying experience, a more visual buying experience, and I don’t know if you tried the snapshot view on our site but we are creating -- finding experiences that are more visually oriented in the apparel category.

And then we think better buyer experience. Apparel sellers are offering better, more accurate descriptions of their items, better return policies, better shipping, and so we think buyers in the apparel category are noticing that this is happening and that’s being measured by higher DSRs, the ratings they are giving our sellers.

So we are encouraged. Again, it’s early days but these are the kinds of fundamental changes we want to be making across all of our categories and we think they will add up to a better buyer experience and better growth.

James Mitchell - Goldman Sachs

Okay, great. Just in terms of the first question and a clarification -- I’m a little new to this game but hypothetically, all else equal, I would have thought that a marketplace business such as yours would be a little less cyclically exposed than the payments business. And do you think that that is correct but it’s being offset by the fact that PayPal is just at an earlier stage of growth than the eBay marketplaces, or do you think that that may be incorrect?

John J. Donahoe

I think what we’d say is that we like being in a marketplaces business at this particular time in the cycle, because as I said earlier we think the marketplace has some unique characteristics, being a global trading platform for cross-border trade and also being a place where we have great deals and assets to cash in seven days.

In the payments business, obviously we are more exposed to global economic conditions but PayPal's rapid global growth and increased ubiquity and share of checkout is driving a lot of growth there, so it’s hard to separate the impact on the economy when you have a merchant services business growing at 60%.

So we are keeping a close eye on it but we are, as I said earlier our priorities for 2008 remain the same under both economic -- under all economic conditions.

Mark Rowen

Next question, please.


We’ll take our next question from Doug Anmuth with Lehman Brothers.

Doug Anmuth - Lehman Brothers

Thank you for taking my questions. First one is could you provide an update on the timing and the progress of the new initiative around the split screen between auction and fixed price, when that could potentially roll out?

And then secondly, could you talk about the drivers behind the lower transaction loss rate at PayPal? Thank you.

John J. Donahoe

Doug, let me take your first one and all the product people at eBay are going to laugh at this one because it’s a little dangerous when the CEO starts taking out a product mock-up and talking about it. Because that happened to be my favorite product mock-up.

So here’s the reality -- what our customers value most is value and selection and the format they buy in is of secondary importance to them. And so our focus and priority is to bring the unique inventory we have in auction format and in fixed price format and bring it to buyers and bring the best values to buyers in a more effective way.

We are testing a variety of product manifestations of that, including that split screen that I was showing during the investor show, which by the way still happens to be one of my favorites. The good news is I won’t make the decision of which product approach gets used, our users will. And as we are testing these different formats, and frankly different formats in different categories, we will roll out the ones that buyers respond best to.

And by the pre-holiday season, I think you are going to see in different categories different user experiences that bring both the fixed price and the auction listings to bear in a way that buyers can make choices, and again I’ll end where I started, which is what our buyers tell us repeatedly is they care most about getting a good value on eBay and they care secondarily whether it’s in an auction or a fixed price format.

Robert H. Swan

On the second question in terms of PayPal fraud losses, I would say the team has made great traction in driving down fraud losses quarter over quarter for about six quarters in a row now and they’ve done it not just by driving down fraud losses but also enabling us to extend and expand our protection programs for both buyers and sellers, so it’s been great performance.

And the way they do it is their secret sauce of their fraud detection model that gets more sophisticated the more data they have. The more data and the more transactions, the more insights they have to determine who the good buyers and sellers are and who aren’t. So the team has really made tremendous progress and we believe that with the recent acquisition of our friends at Fraud Sciences over in Israel that their technology and our scaleable platform will enable us to continue to make pretty good progress.

Mark Rowen

Next question, please.


We’ll go next to Justin Post with Merrill Lynch.

Justin Post - Merrill Lynch

Thank you. I just want to dive in a little bit more to best match. Our data would indicate conversion rates have been coming down for quite a while. Since you went public I think they are down and I am sure you can quantify that if you feel like it, but as you think about conversion rates, we’ve seen modest up-tick in Yahoo!’s revenue per search and it just seems like being able to find things much easier, you are going to see much higher conversion rates.

We know that listings are up quite a bit but do you measure it on items per user and do you think you can really increase that long-term?

And then the second question is just on books, music, and video. It’s up -- the growth rate has reaccelerated. What one thing would you attribute that to and can you apply that to other categories?

John J. Donahoe

Thanks, Justin. Let me take your latter answer or latter question first and then get the former. On books, music and video, on media, we think frankly the category based pricing made a big impact, and so the fact that we lowered fees and rebalanced pricing there in a category specific way had an increase in listings combined with better finding and the other changes, buyer changes we’ve made has resulted in higher successful items and higher GMV growth. So as I said earlier, we envision doing more category based pricing as the year goes on.

With respect to best match, the conversion rates should go up over time. I mean, as I said earlier, we are layering, iterating best match in I think a very thoughtful and disciplined way. So one of the first things we’ve done is highlight sellers that have the highest DSRs and making sure they are getting more visibility and exposure.

The next thing we will be layering in is taking advantage of the historical data we have on key search terms and improving the relevance of search results that come back.

The third thing that we’ll be layering in is in fixed price format. Not having [inaudible] play the fundamental sort role but to allow the lowest price, highest quality seller fixed price items to be higher up in search results.

And so I think the evidence is in the recent weeks, we’ve had an increase in listings, sold items have gone up, conversion rate has declined slightly but we feel like it’s held up pretty well and we feel optimistic that the changes we will continue to make during the year will result in both improving conversion but more importantly improving growth in GMV.

Mark Rowen

Operator, we have time for one last question.


That final question will come from David Joseph with Morgan Stanley.

David Joseph - Morgan Stanley

Just I guess two quick questions -- first on PayPal, when your Q comes out, should we expect the contribution margin to have improved for PayPal?

Also on Skype, when you pull out a bump a little bit from other revenue, it looks like transaction revenue in Skype decelerated pretty significantly to about 55% year over year versus 79% in the fourth quarter. I just want to get an understanding of what happened there.

And then also just last -- sorry, I know that in terms of all the product changes that you are expecting the rest of the year, can you pretty much -- you know, you mentioned a lot of things there. Can you prioritize them for us? What do you think are going to be the most impactful product launches throughout the rest of the year on the marketplaces? Thank you.

Robert H. Swan

I’ll start with the first. I think the question was PayPal transaction margins and yeah, we as I indicated a bit earlier, David, we began to accelerate the margins in PayPal in the fourth quarter of last year, where we began to see some of the benefits from the investments we’ve made over the last couple of years. So Q3 -- Q4 accelerated year-on-year and Q1, we saw a pretty good acceleration versus the same quarter last year.

So with overall take rates staying relatively flat, transaction expense going up marginally, fraud losses coming down, we see pretty good margin expansion on PayPal.

The second -- on Skype transaction revenues, yeah, you know, we actually feel pretty good about the Skype growth rates both quarter on quarter and year on year, of transaction revenues. So I --

David Joseph - Morgan Stanley

It seemed like the usage increased pretty dramatically but at the same time the revenue decelerated, so I was just wondering if you were doing something on the monetization there.

Robert H. Swan

I think a couple of things that we talked about last call, one of the things that we are trying to do in Skype this year is we’ve got this massively growing user base and we want to -- the key ingredient for them is to engage the user base, so we’ve looked at a couple of the quarters across the globe to figure out how we can modify the equivalent take rate, if you will. We’ve tweaked the take rate in a few instances but that’s not having a dramatic impact on a year-over-year basis.

David Joseph - Morgan Stanley

And John, just lastly on the product changes and just really two things that we’ve noticed, one is you seem to be spending. You are increasing your spend, which is a good thing. You are looking to improve the user experience. We are all focused on demand and we’ll see if that comes to play.

But if you could prioritize the product changes, and also just really give us an understanding, April seems to be starting off strong for you, based on the data that we’ve been looking at. Can you give us a feeling of what data -- what April is looking at versus even March? Thanks.

John J. Donahoe

Well, Bob’s absolutely shaking his head saying I can’t say anything about April, but let me just talk about the changes we have between now and the rest of the year. You know, David, I think one of the things we’ve learned over the last really 12 to 14 months is that we’ve got to manage this ecosystem. And so we are talking about changes to trust, that is making it safer; changes to finding, which is making it easier; and changes to selection, right? So the rebalancing, the best match, the category based pricing, the safer payments. And we think it’s the interactive effect of those things that’s resulting in a better buyer experience and a healthier marketplace.

And so we are going to continue pushing hard on all three dimensions and we will -- we are confident of the direction, we’re confident of our -- of the outlook. There may be some changes that will have some negative short-term impacts as we -- you know, Bob mentioned Australian safe payments, that as we go to all electronic payments and there’s cash and checks and things that come off the site, we may have some sellers that make some noise and/or pull some things, but we are absolutely confident in the direction we are going that we are going to improve the buyer and overall user experience on eBay and that that is going to lead to a healthier, more vibrant marketplace.

David Joseph - Morgan Stanley

Thank you.

Mark Rowen

Thank you, everyone, for joining us.


This does conclude today’s conference Thank you for your participation. You may disconnect at this time.

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