eBay Inc. (EBAY) Q3 2007 Earnings Report, Transcript and Summary

Welcome to eBay's third quarter 2007 earnings resultsconference call. Today's call is being recorded. With us today from the companyis the President and Chief Executive Officer Meg Whitman; Chief FinancialOfficer Bob Swan; and the Vice President of Investor Relations, Mr. Mark Rowen. At this time I would like to turn the call over to Mr. MarkRowen. Please go ahead, sir. Mark Rowen: Thank you, operator and good afternoon. Thank you forjoining us. Welcome to eBay's earnings release conference call for the thirdquarter of 2007. Joining me today on the call are Meg Whitman, our Presidentand Chief Executive Officer; and Bob Swan, our Chief Financial Officer. We're providing a slide presentation to accompany Bob'scommentary during the call. This conference call is also being broadcast on theInternet, and both the presentation and call are available through the investorrelations section of eBay's website. Before we begin, I'd like to remind you that during thecourse of this conference call, we may discuss some non-GAAP measures intalking about our company's performance. You can find the reconciliation ofthose measures to the nearest comparable GAAP measures in the slidepresentation accompanying the conference call. In addition, management may make forward-looking statementsregarding matters that involve risks and uncertainty, including those relatingto the company's ability to grow its business, user base and user activity. Ouractual results may differ materially from those discussed in this call for avariety of reasons, including our increasing need to grow revenues fromexisting users in established markets, an increasingly competitive environmentfor our businesses, the complexity of managing a growing company with a broadrange of businesses; regulatory, tax, as well as IP and other litigation risks,including risks specific to PayPal in the financial industry and risks specificto Skype's technology and to the VoIP industry; our need to upgrade ourtechnology and customer service infrastructure to accommodate growth atreasonable cost, while adding new features and maintaining site stability;foreign exchange rate fluctuations; and the impact and integration of recentand future acquisitions. You can find more information about factors that couldaffect our results in our annual report on Form 10-K and our quarterly reportson Form 10-Q, available at investor.eBay.com. You should not unduly rely on anyforward-looking statements and we assume no obligation to update them. With that, let me turn the call over to Meg. Meg Whitman: Thank you, Mark.Welcome, everyone to today's conference call. Q3 was a strong one for thecompany. We delivered record net revenues of $1.89 billion, representing a 30%year-over-year growth rate. Non-GAAP earnings per share was up 59% and freecash flow grew 32%, even as we continued to invest in some of our mostimportant businesses. eBay International, PayPal Merchant Services, StubHub, Classifieds,and our advertising businesses all performed above our expectations during thequarter. We feel good about our strategy headed into Q4, and the investments weare making in our various businesses. Let me give you some highlights for eachof our business areas: Marketplaces, Payments and Communications. Our Marketplaces business unit delivered record net revenuesof nearly $1.32 billion this quarter, with a powerful combination of both GMVbusinesses, like eBay and StubHub, and non-GMV businesses, like Kijiji andShopping.com. This portfolio continues to enhance our overall top line andbottom line growth. The PayPal business continues to deliver incredibly wellacross the globe, marked by an increase in total payment volume up 34% to $12.2billion. Revenue grew to $470 million, and we couldn't be more pleased by thetrajectory of this business. I will spend some time in a moment talking about Skype andthe announcements we made at the beginning of this month; but to give you somecontext upfront, this is still a rapidly growing business. Skype added 26million users in the quarter, bringing the total to 246 million, while revenuealso grew by 96% year over year. In addition to achieving profitability aheadof schedule during the first quarter of this year, Skype also turned in higher thanexpected non-GAAP operating profit this quarter. Now I will give you a bit more detail on the quarterlyresults for each of the three business units. Beginning with Marketplaces,let's take a look at our GMV-driven businesses, starting with eBay in the U.S.and in Germany.As you will recall from the last few quarterly calls, we talked about our plansto reaccelerate GMV growth on these sites, so I thought I would spend some timegiving you an update on our current progress against this multi-quarter plan;what we've learned from the initial findings, and what we have planned for Q4. Overall the core business in the U.S.and Germany isa bit healthier, as evidenced by higher conversion rates, an increase insuccessful listings, and moderately higher ASPs versus a year ago. With the barfor customers' expectations higher than it has ever been, we accelerated thepace of product changes on eBay.com and eBay.de to better meet -- and hopefullyexceed -- these expectations. During the quarter, we made substantial enhancements to thebuyer experience, particularly around finding. One part of the new experienceis Best Match, which uses more intelligent search and discovery technology to servemore relevant items to shoppers. We've already seen conversion rates are upamong the buyers who have been exposed to Best Match. We also introducedSnapshot View, which gives buyers a better way to visually browse through theitems that they have found on eBay. The launch of the new home pages in the U.S.and Germanyoffer buyers and sellers a simpler, and more personalized front door to eBay.Both the U.S.and German home pages were redesigned to have a much more modern look andsimplified usability. Innovative features like My eBay at a Glance and RecentlyViewed gives users a snapshot of the most relevant information about theirtrading activity right on the home page. Early results suggest the new homepage is helping our customers get to items of interest much more quickly. In the U.S.,we launched a new bid history page, which gives users more information aboutbidding activity and also gives buyers the ability to bid directly from thepage. The German team launched a fun feature that allows sellers to uploadvideos of their items they are selling, and they also developed a micro sitethat shows hot eBay trends and real-time statistics on the items with the mostbids. Finally, in both markets we launched a very simple sellingflow designed for new sellers. This is a one-page listing flow designed to makeit faster and easier for new sellers to list their items. We've been presentingthis as an alternative option for sellers, and early results suggest that usersare having good success listing their items more quickly. In addition to the product changes we made this quarter,we're also focused on improving the breadth and quality of inventory through avariety of pricing promotions. The intention was to give immediate feereductions to our sellers and encourage them to adopt features that areparticularly beneficial to our buyer community, like the gallery feature. Ourgoal has always been to provide the best economics on the web for sellers, andsome of the learnings we've had around these pilot concepts will help informfuture pricing decisions. Over the last few quarters we've talked about our ongoingcommitment to trust and safety on eBay. Through our focus on reducing phishingscams and increasing the rapid identification of bad sellers, we madesignificant progress on our efforts to keep the site clean. Effectiveenforcement of our seller nonperformance policy and high adoption rates of ourenhanced feedback system ensures that our members are both receiving andproviding the very best buying experience on the web. With our product changes happening at a rapid pace, coupledwith our aggressive stance on trust and safety, we continue to make progress onenhancing the shopping experience for American and GermanyeBayers; but there's still a lot more work to do. It's too early to declarevictory, but we are confident that the strategic direction is on track. Looking beyond our two largest markets, eBay continues toperform well around the world, particularly in the UK,France and Australiawhere GMV accelerated this quarter. We are also very pleased by the strongperformance of Italyand Belgium,and the recent business performance in Koreacontinues to prove that the product and pricing changes we've made there arepaying off in a meaningful way. Lastly, StubHub remains the world's largest ticketmarketplace and a great acquisition for eBay. StubHub announced earlier inOctober that it would soon make its 10 millionth ticket sale in the company'shistory. To give you some perspective on how significant this really is, 10million tickets would sell out every game to be played in this year's MajorLeague Baseball playoffs; eight stadiums, four division series, two LeagueChampionships, and one World Series, nearly five times over. Let me spend a minute on the results from our Classifiedsbusiness. Our global multi-brand Classifieds portfolio continued its rapid growththis quarter, posting triple-digit operating and financial metrics in manymarkets. Monthly unique visitors to these sites are up nearly 200% year over year,and more than 135,000 new ads are being added each day. As we mentioned last quarter, we launched Kijiji in the U.S.to more than 200 cities at the end of June. After just three months, there aremore than 100,000 live ads available at any time. We continue to be veryexcited about our Classifieds business. While it's still relatively small, it isshowing extraordinary promise. As I said last quarter, we would make more changes to eBayin the next several months than we have made in the last several years. As youcan see, we are well on our way here. I know that our efforts will give ourusers a superior buying and selling experience, especially during the busy Q4holiday shopping season. Speaking of the fourth quarter, we have some excitingplans to support our holiday efforts around the world. In the U.S.,we will continue to invite our community to Shop Victoriously with ourinnovative marketing campaign during the holiday season. This campaign isgenerating excitement and activity among our community, as indicated by ourmost recent on-site promotions, which are on track to become the most activeever consumer promotions that we have run. In Germany,a well-integrated marketing campaign is also planned, anchored by the populartaglines "Look What I Have." The German marketing team has designed aprogram that will actively market eBay.de to buyers and sellers through TV,radio and print ads, as well as through outdoor marketing and onlinepromotions. In the area of pricing, we want to ensure our U.S. sellersour off to a great start for the holiday season, so we are announcing thatstarting tomorrow insertion fees will be reduced by at least 33% throughNovember 5th. This will apply to all listings on eBay.com and eBay Motors inboth the auction style and fixed-price formats, and could mean a savings of upto 50% for items listed under $1. You'll also see many of our markets aroundthe world launch similar tests this quarter. Also in the fourth quarter you will see us continue toincrease our customer support efforts by adding more representatives in ourcustomer care centers and improving the technology they use to cater to our topbuyers and sellers worldwide. As we've done all year, we will continue to rampour trust and safety efforts ensuring our site is, as always, a greatdestination for this gift-buying season. Overall, our Marketplaces business continued to performwell, delivering strong revenue and making our vision of providing anyone withthe type of online commerce experience they want a reality, no matter wherethey live or what kind of format they want to buy and sell in. Now let me turn to payments. PayPal had an excellentquarter. October marks the fifth anniversary of the closing of the PayPalacquisition, and we continue to celebrate the great success of this business.As evidenced by the numbers this quarter, adoption of PayPal continues tosteadily increase all over the globe. Simply put, consumers continue to preferPayPal when shopping online. Recent consumer research found that PayPal was thesecond most popular way to pay online in the U.S.,right behind Visa. In the UK,PayPal was tied with Visa as the most popular way to pay online. Our Merchant Services business continues to grow rapidly aswe see widespread adoption of PayPal by merchants in the U.S.and abroad. We have recently added brand-name merchants like Hasbro, Footlockerand Blue Nile in the U.S., as well as Lindt Chocolates, the famous Swisschocolate maker; and Telethon, the largest charitable organization in France.In Australia,PayPal Merchant Services payment volume grew more than 145% year over year. I am particularly pleased to see that PayPal has gainedmomentum among the airline industry, adding four domestic airlines thisquarter, including Northwest Airlines, Southwest Airlines, Midwest Airlines andU.S. Airways. Just these four airlines alone represent $9.5 billion ofaddressable TPV for PayPal. In preparation for Q4, we're excited about the plans thatPayPal has for consumers doing the holiday season. We've created an integratedmarketing campaign designed to bring great value to consumers through exclusivepromotions and an assortment of special offers from PayPal merchants. We lookforward to welcoming additional merchants to the PayPal family in Q4, includingmore airline partners. Continuing the strong momentum for PayPal remains a strategicfocus for the company. Our goals are to increase PayPal ubiquity, sustain theexisting core growth, and enhance the user experience, allowing us to remainthe world's preferred online payment service. As for our communications business, I know most of you sawthe announcement we made at the beginning of the month regarding the departureof Skype's CEO Niklas Zennstrom, as well as the accelerated earn out paymentsand impairment charge. Clearly, we are disappointed in the impairment charge.However, we remain confident about this business in the longer term. Since our acquisition of Skype two years ago, Skype hasadded more than 188 million users and enabled more than 60 billion minutes ofconversation globally. In the third quarter, Skype delivered revenues of $98million, representing a growth rate of 96%. With its world-class voice callingand video capabilities, it continues to distance itself from its manycompetitors. As a part of the announcement we made earlier this month, wealso said that we are in the process of looking for a new CEO. I'm pleased toreport that we are making progress here. The strength of the Skype brand hasgenerated tremendous interest, and we are delighted by the strong internal andexternal candidates we're considering. From this very qualified group, we hopeto make a selection very soon. Over the next several months, we will work to improve theway we engage and delight Skype users. For example, yesterday's announcementabout the MySpace/Skype partnership is the next phase in our plan to make Skypeavailable across multiple platforms. We also want to fully develop our nascentecommerce services, like Skype Prime and Skype Find. Additionally, delivering the synergy with eBay and PayPalthat we had always envisioned will be a renewed priority. We are also lookingforward to the next generation of the SkypeClient, which has some fantasticfeatures and will debut next year. Skype is a great business with a lot of potential. With the earnout component no longer a factor, we will be better able to prioritize ourresources, refocus the team and strengthen execution to ensure that Skype userswill continue to enjoy and benefit from this fantastic technology. So overall, the third quarter of 2007 was a great start tothe second half of the year. We've made good progress against this year'sstrategic plan, highlighted by significant product changes and strong financialperformance from our portfolio of businesses. Before I close, let me say a word about 2008. As Bob stated atthis time last year, we won't be giving 2008 guidance until our Q4 earningscall in January. This is because it's extremely difficult to give you anaccurate forecast before the most important quarter of the year for us iscompleted. That said, as we head into 2008 we will continue to focus onaccelerating GMV growth in eBay's largest markets. Our learnings from 2007 havegiven us confidence to move faster and more aggressively on productenhancements, pricing changes, customer support and trust and safety investments,as well as customer loyalty programs. All of these changes are designed toimprove the end-to-end user experience for both buyers and sellers, and cantherefore change the trajectory of GMV growth. This strategy benefits PayPal significantly, as the growthof the core eBay business is also extremely important to PayPal's financialarchitecture. All of this will take investment and focus in 2008, but we areconvinced it is the right thing to do. It's important to note that theseinvestments will all go right to our users in the form of a better experience,better support, and better pricing strategies designed to maximize value forour sellers. We will also invest in our newer, faster-growing businesseslike Skype, PayPal Merchant Services, Classifieds and advertising. While thesebusinesses are currently lower-margin businesses for the most part -- with theexception, of course, of advertising -- they are still relatively new and holdgreat promise for revenue growth and operating margin expansion in the future.We also plan to significantly increase our focus on leveraging our coststructure and driving productivity. We've always been disciplined about ourcost structure, but in 2008 you will see a greater emphasis on both operatingsmarter and more efficiently. In closing, I continue to be extremely impressed with theachievements of our entrepreneurial community of global users, and our nownearly 15,000 employees around the world. We are on an exciting journey, and Ibelieve that we will continue to make history together. Now I will turn it over to Bob for a closer look at thenumbers.

Thanks, Meg. Today I'll discuss our Q3 financialperformance, along with our outlook for the fourth quarter of 2007. During mydiscussion I will reference our earnings slide presentation, which accompaniesthe webcast. Overall, we're very pleased with the financial results we postedin Q3. Our results reflect strong top line growth, even stronger non-GAAPearnings growth, and excellent free cash flow. We continued our sharerepurchase program in the quarter, buying back $500 million of eBay shares inQ3, and $2.8 billion since we launched our initial repurchase program in Julyof last year. Although we're disappointed with the impairment charge wetook in the quarter, we still believe that Skype has great potential. With strong financial performance in each of the first threequarters of the year, we approach the remainder of the year focused on theexecution of our business plan and confident in our ability to deliver strongfull year revenue and earnings growth. In total, our combined businesses generated record netrevenues of $1.9 billion, a 30% increase over last year. Organic revenuegrowth, excluding acquisitions and FX was 23%. The growth was driven by anacceleration of Marketplaces international GMV-based revenues, anotherextremely strong performance from PayPal Merchant Services, almost triple-digitgrowth from Skype, and continued traction in some of our non-GMV businesses,such as advertising and classifieds. Non-GAAP EPS was $0.41 for the quarter, a 59% increase fromlast year and $0.08 above the top end of our guidance range. This was primarilydriven by operational out performance, which we mostly reinvested back into thebusiness, a lower tax rate, including $0.04 from a one-time tax asset, andtranslation benefits resulting from a weaker U.S. dollar. In the third quarter, we generated $510 million of free cashflow, an increase of 32% above last year's level. This outstanding growth wasdriven primarily by earnings expansion, coupled with a year-over-year reductionin CapEx as a percentage of revenue. Now let's take a closer look at our segment results for thequarter. Overall, our Marketplaces business had a very good quarter, withstrong top-line growth and profitability. The Marketplaces segment achieved netrevenues of $1.3 billion, an increase of 26% over the year-ago period. GlobalGMV was $14.4 billion in the quarter, a 14% increase over last year.Approximately 51% of revenue and 53% of GMV came from our internationalmarkets. Now let's walk through some of our key operating metrics. eBayMarketplaces added nearly 7 million confirmed registered users in the quarter,bringing the total user base to 248 million. New listings totaled 556 millionin the quarter, a decline of 5% versus Q3 last year, with core listings down 3%and store inventory listings down 14%. New listings totaled 254 million in the U.S.and 301 million internationally. U.S. GMV grew by 10% over last year to $6.7 billion, asimilar increase to last quarter. Core listings increased modestly, while muchof the growth was fueled by increases in conversion rates and ASPs due tohigher quality inventory listings on our site. International GMV grew by 17% year over year to $7.7billion. Excluding benefits from foreign exchange, international GMV grew by10%; a 2 point acceleration sequentially on an FX-neutral basis, primarilydriven by strong a conversion rate and ASP improvements in our German business.France and Italy,which are at earlier stages of development, continue to be strong contributorsto our overall European performance. In Asia, we're pleased with theprogress we're making in Korea,as year over year revenue growth accelerated nicely in Q3 following lastquarter's acceleration of GMV growth. We are increasingly confident that theseresults demonstrate the initiatives we've introduced in Koreaover the past year or so are resonating with consumers in that market. In Australia, listings and GMV growth rates acceleratednicely and in China, our joint venture with Tom Online is off to a good start,as our new site went live in Q3 and listing levels are already higher than theywere prior to the joint venture. Let me give you some additional color on the wide gapbetween the 5% decline in new listings and our 26% growth in Marketplacesrevenue. The influences causing the diversions are twofold. First, GMV grewsignificantly faster than new listings. Second, revenue continues to grow muchfaster than GMV. The gap between listings and GMV growth is driven by severalfactors. First, we no longer include listings from our joint ventures in Chinaand Taiwan; this,plus our recent acquisition of StubHub accounted for approximately 5 points ofthe difference. Second, improved ASPs and conversion rates accounted forapproximately 10 points of the difference. Third, FX drove the remaining 4points of divergence to total GMV growth of 14%. The gap between our GMV and revenue growth is also driven byseveral factors. First, continued strength in our non-GMV businesses such asShopping.com, Rent.com, classifieds and advertising, contributed 4 points ofgrowth on a year-over-year basis. Classifieds continues to exhibit hyper-growthcharacteristics, and advertising continues to gain significant momentum on oursites. Overall, our advertising and other revenue within Marketplaces increased67% over last year, accounting for 4% of Marketplaces revenue in the quarter. Second, StubHub, which receives a higher take rate than oureBay Marketplaces, as well as our joint ventures in Chinaand Taiwanwhere we no longer recognize local GMV or revenue due to our minority interest,drove approximately 5 points of the differential. Finally, the revenue shift invehicles to non-GMV based formats such as classifieds and dealer subscriptions,as well as pricing actions we've taken in the last 12 months drove theremaining 3 points of growth. So in summary, our Marketplaces business performed well thisquarter. We continue to invest in significant enhancements to the buyerexperience, and we'll continue to conduct pricing tests on our various sites aswe go forward to better understand how we can optimize growth rates in ourmarketplace. Now let's turn to our payments business. PayPal postedanother strong quarter with total revenue coming in at $470 million, a 35%increase versus the same period last year. This quarter's performance onceagain underscores the progress we're making in our efforts to accelerate theubiquity of PayPal on the web by increasing penetration on eBay and expandingour global footprint beyond eBay. Total payment volume in the quarter was $12.2 billion,representing 34% year-over-year growth, the second quarter in a row of growthacceleration. TPV grew by 27% in the U.S.and 49% internationally. TPV growth continued to benefit from our ongoinggeographic footprint expansion, with international TPV accounting for 34% ofthe total, compared to 31% in 3Q'06, primarily driven by the tremendousstrength in Merchant Services. In terms of key operating metrics, PayPal added nearly 11million new accounts in the quarter, ending Q3 with 164 million total accounts.On our eBay platform, PayPal's global TPV grew by 18% year over year. TPVgrowth was fueled by increases in GMV, coupled with an increase in globalpenetration rates to 61% of addressable GMV, up from 58% last year. The on eBay platform, PayPal's Global Merchant Servicesbusiness recorded another phenomenal quarter, generating $5.4 billion of TPV,representing a 61% year-over-year growth and marking a second straight quarterof acceleration. We continue to attract top online retailers to our platform,and we're extremely excited about the traction we have gained. We also launchedPayPal PayLater in the quarter, a new transactional credit offering that webelieve could accelerate future volume. PayPal's Q3 transaction expense was 1.15%, 8 basis pointshigher than the year-ago period, and 3 basis points higher than last quarter,primarily due to growth in new PayPal customers, who initially tend to favorcredit card over bank and store balance transfers. PayPal recorded a transaction loss of 25 basis points thisquarter, a 10 basis point improvement from the year-ago quarter and 4 basispoints lower sequentially. However, 9 basis points of the loss rate improvementwas due to a change in estimates related to chargeback loss recoveries. In summary, PayPal had another great quarter and itcontinues to be one of the key drivers of our companywide growth. We continueto make significant investments in order to extend our leadership position inthe online payment space, and we believe the strong growth we've experienced inrecent quarters confirms that these investments are beginning to pay off. Now let's turn to our communications business. Skype enjoyedhealthy growth in the quarter, posting total revenue of $98 million, anincrease of 96% over the year-ago period, while delivering a third consecutivequarter of segment profitability, excluding the impairment charge, which I willdiscuss in a moment. Skype's total registered users grew to nearly 246 million,representing an increase of 81% over last year. Geographically, all three majorregions: Europe, North America,and particularly Asia, exhibited robust growth. We remain less pleased with user metrics, with Skype Skyminutes at 6.1 billion during the quarter, down 8% compared to last year, andSkype out minutes at 1.4 billion, an increase of 25% versus last year. As weannounced several weeks ago, we agreed to pay approximately $530 million tosettle all future obligations under our earn out agreement with certain Skypeshareholders. In the third quarter, we took an impairment charge for the $530million earn out, plus an additional $900 million to writedown Skype goodwillon our books. Reflected in this writedown is the fact that Skype has yet toachieve some of the milestones we had hoped for at the time of acquisition.But, we still believe that this young and fast-growing company has greatpotential. We will continue to focus our efforts on engaging ourrapidly-growing Skype user base and expanding our product and feature set. Now let's take a look at how business unit performancetranslated into non-GAAP financial results. As I indicated earlier, eBaydelivered record net revenues of $1.89 billion, up 30% year-over-year.Acquisitions we made over the last four months contributed nearly 4 points toour top line growth, and FX contributed an additional 4 points. This top linegrowth, coupled with a lower share count from our share repurchase program andlower tax rates driven by our increasingly global footprint, including theonetime benefit I discussed earlier and a weaker U.S. dollar drove EPSexpansion from $0.26 to $0.41, a 59% increase versus Q3 '06. Operating margin came in at 31.4% in Q3, 70 basis pointsbelow last year's level. The decrease in operating margin was attributable to anegative mix shift as PayPal and Skype, our lower-margin businesses, grewfastest; as well as additional investments across all of our businesses,partially offset by operating leverage, productivity improvement and foreignexchange. Let's take a look our operating expenses in a bit moredetail. Sales and marketing expense was 24.5% of revenue in the third quarter,a 50 basis point improvement from the year-ago period, as we leveraged ourtechnology and benefited from a positive mix shift from faster-growing PayPaland Skype. Product development expense was 7.6% of revenue, 60 basispoints higher than a year ago. The increase is primarily related to productenhancements at PayPal, as well as enhancements to the buyer experience inMarketplaces. Lastly, G&A expense was 13.6% of revenue, down 110 basispoints year over year as we continue to leverage our existing G&Ainfrastructure. Collectively, these factors translated into $593 million ofnon-GAAP operating income, up 28% on a year-over-year basis; and non-GAAP netincome of $564 million, up 53% from last year. We ended the third quarter with nearly $4.4 billion in cash,cash equivalents and investments, an increase of $600 million from the end oflast quarter. We generated $620 million of operating cash flow in the quarter,while CapEx was 6.3% of revenue, resulting in $510 million of free cash flowgeneration. Proceeds from stock option exercises, equity gains and otheritems added approximately $600 million, and we repurchased approximately $500million worth of eBay shares in the quarter. Let me remind you that the $530 million payment related tothe Skype earn out took place in early Q4, so it didn't impact our cash flowstatement in the third quarter. With that, let me turn to our non-GAAP guidance for Q4 andthe full year. Now that we have a strong third quarter behind us and somedecent momentum heading into the all-important holiday season, we're raisingour guidance for 2007. We're increasing our revenue guidance to a range of $7.6billion to $7.65 billion, an increase of approximately $250 million from ourprevious guidance, partially due to good execution in the third quarter, andpartially due to FX benefits. We're increasing our non-GAAP EPS to a range of $1.47 to$1.49, $0.12 higher than our previous guidance at the midpoint. Our increase inEPS guidance includes $0.03 of Q3 operational out performance, of which we reinvested$0.02 back into the business; $0.05 from a more favorable than previouslyexpected full-year tax rate; $0.04 from a one-time tax benefit in the thirdquarter; and a $0.02 benefit in the back half of the year from foreignexchange. We continue to expect full year '07 operating margins ofapproximately 33%, and we are raising our free cash flow forecast to $2.05billion on full year CapEx in the range of 6.5% to 7.5% of revenue. Our revisedguidance assumes a full-year non-GAAP tax rate of 21% to 21.5%. Specifically for Q4, we expect net revenues in the range of $2.1billion to $2.15 billion, representing a year-over-year increase of 22% to 25%.This expected deceleration from recent quarters is primarily a function of moredifficult year-over-year comparisons. We expect non-GAAP EPS to be in the rangeof $0.39 to $0.41, equating to a year-over-year growth rate of 30% at themidpoint. Fourth quarter guidance assumes a U.S.to dollar euro exchange rate of $1.38. As Meg mentioned earlier, we won't provide earnings guidancefor 2008 until next January. However, I want to give you a glimpse into howthings are shaping up in our view. On the positive side, we're building somedecent momentum as we exit 2007 and head into 2008. We believe we're starting tosee some benefits from the investments in our core business. In addition, the rapid growth trajectory we've experiencedin PayPal and Skype will likely continue. We believe our newer formats, such asClassifieds and StubHub, as well as newer methods of monetizing our trafficsuch as advertising will continue to gain momentum next year. Finally, webelieve we'll continue to benefit from economies of scale and productivityimprovements. We'll also face some operating margin headwinds entering2008 as the competitive environment continues to intensify and our investmentsin growth opportunities accelerate. First, while the Marketplaces business willhave a very strong 2007, we need to accelerate the pace of change. Our effortsaround products, trust and safety and pricing are helping, but we'll need to domore, do it better and do it faster in 2008 in order to accelerate GMV in our largest markets. Thiswill require investment. Secondly, the rapid growth of PayPal and Skype, our lower marginbusinesses, will continue to put pressure on operating margin as the mix of ourbusiness continues to evolve and diversify. Third, PayPal Merchant Services and PayPal PayLater havegreat opportunities ahead, and we'll likely accelerate investment there inorder to build ubiquity and adoption. Finally, we believe we may have monetized Skype a little tooearly and a little too much these past few quarters, and we'll be likely toreinvest some of those profits to stimulate user activity in 2008. In summary, we believe our Q3 results mark another quarterof strong performance, and we're focused on execution as we approach the mostimportant shopping period of the year. Once we have the holiday season behindus, we'll know much more about our approach to 2008, and look forward toupdating you in January. Now we'd be happy to answer your questions.

Yourfirst question comes from Shawn Milne - Oppenheimer. Shawn Milne - Oppenheimer: Thank you, and thanks for taking my question. Meg, youtalked a little bit about the early success in Best Match. Can you talked aboutthe rollout plan? It looks like what we've seen so far has been more commodityor UPC-based categories, and if you can just give a little more color aroundwhat you're seeing in conversion rates, that would be very helpful. Thank you. Meg Whitman: Best Match, you're right. We have started in categories thathave good catalogs associated with them. Whether that's books, movies andmusic, consumer electronics, things that have basically ISDN numbers associatedwith them. Those tend to be more commodity-oriented items than unique itemslike collectibles or used products. What we've seen is that we can get people to the itemthey're looking for faster, make it easier for them to look at a smaller numberof listings as opposed to page after page of listings, and we are seeing somepositive early results in conversion rates. So we will continue to roll thatout across categories as we head into 2008. I don't believe there's going to be much more rollout in2007 because we pretty much put a moratorium on the site for the holidayseason. But we're encouraged, and you'll see the pace of change accelerate morerapidly in the first quarter of 2008.

Your next question comes from Scott Devitt - StifelNicolaus.

Thank you. I'm trying to better understand the long-termmargin structure at PayPal, given that Merchant Services is now about 44% ofthe total payment volume. I'd be interested if you could provide some moredetails on Merchant Services specifically? What I'm interested in is possiblythe domestic/international split of the payment volume, possibly the operatingmargin structure of Merchant Services versus PayPal on eBay. Then if you could just expand on your disclosures in thelast 10-Q related to direct contribution margins for PayPal. It seems likethat's gone from 26% last year to 18% from the last disclosed numbers. Again,just trying to understand the margin structure of that business as MerchantServices grows over time. Thank you.

What we've seen over the last several quarters in theacceleration of PayPal growth is primarily driven by the traction we continueto get from Merchant Services, both here domestically and specifically,internationally. So Merchant Services is becoming a much bigger piece of theoverall PayPal business. We said a year or so ago the long-term operating margins forour PayPal business we believed would be in the 20% to 25% range. What that entailsis continued accelerated growth in Merchant Services and improving penetrationon eBay, over time. What we've experienced in the short term with rapid growthis our customers have a tendency to use credit cards in their initial earlyadoption of PayPal. The less we know about consumers, all else equal, thehigher the fraud losses. So in high growth periods -- which Merchant Servicesare in -- our transaction expense and our fraud losses have a tendency to behigher. That's what we've been experiencing over the course of the first couplequarters this year in the transaction margins on PayPal. We believe over time, as customers mature in their uses ofPayPal, what they have done is adopted more ACH methods of payment thatenhances margins. As we learn more about them, our fraud models are moreeffective in detecting potential fraud. So all that means is we feel great about PayPal's growth. Wefeel even better about the traction we're getting in Merchant Services. Long term,operating margins in PayPal we believe to be in the 20% to 25% range.

Your next question comes from Jeffrey Lindsay - SanfordBernstein. Jeffrey Lindsay - Sanford Bernstein: Can we get a littlebit more detail on the increase in product development costs? Specifically,what was the nature of the rise from 7% to 7.6%? Secondly, possibly a related question. Do you have plans topossibly go to an open platform to improve R&D cost performance?

I'll take the first part. In terms of product development,we've been talking about continuing to accelerate our product efforts, and Megwalked you through a lot in the introduction, particularly on the Marketplacesor eBay side during the course of the quarter. This has been a constant themefor us to put a little more into product, and a little bit less into marketingto improve the user experience. So the results of a lot of that investment wentvia the site in this quarter. In addition to that, PayPal, we've continued to invest inbuilding out its global product footprint and make its underlyinginfrastructure a little more agile to support its increasing growth. Thecombination of those two things are what's driving up the R&D expenses as apercent of total. Meg Whitman: Interestingly, ourdevelopment capacity has actually expanded faster, because not all of thedevelopment capacity has been added here in the United States. So while 7% went to 7.6%, ourcapacity actually increased much more dramatically. I think we're really pleased by the way we'rehandling product development expansion across the company. With regard to open platforms, we have had, I would say,moderately open platforms on eBay for many years. We have had a robust suite ofAPIs. But there is more work to do around these open platforms. The thing thatobviously we always have to be focused on is on the PayPal side, we handlepeople's money. So our tolerance for risk, our tolerance for fraud, is lowerthan it is in almost any of our other businesses. The same is somewhat true for eBay in that we are a targetfor account takeovers and other things. But that said, we have watched what isgoing on in the marketplace with open platforms. We are committed to, over thenext couple of years, opening up our platforms more so that we can get otherpeople to do some of the R&D and some of the new, fun niche features thatwould be welcomed by our users. So, thanks for that.

Your next question comes from Anthony Noto - Goldman Sachs.

Thank you very much. Bob, on slide 8 of the slides you provided theconversion rate and ASP contribution of 10%. Meg, you talked about rolling out some ofthese new initiatives that are adding conversion rate. Do you think you canmaintain that year-over-year growth rate of 10%, or do you think it's in thelow single-digits? Where do you think it goes? The combination of really justimplementing some of the technology to drive conversion rates higher as opposedto just pricing mechanisms? Meg, you're lowering fees through November 5th by about, Ithink you said, 33%. Obviously your revenue guidance is higher. So I waswondering how you're really funding that? Do you think you get incrementalvolume against the lower revenue per listing on the front end? Thanks.

I'll start, Anthony.I think a couple things; first, what we saw happen during the course of thethird quarter is continued improvements in conversion rate and ASPs virtuallyacross all of our markets. What we anticipate happening as we go forward intoQ4 is the year-over-year comps related to listings will become cleaner. Weexpect to see some listings growth as we enter Q4. We're expecting conversionrates to hold, and they're holding off some relatively tough comps from fourthquarter last year. We do however expect ASPs to decline. There's a couple ofdynamics that we think will drive that decline. One is the absence of, you mayremember last year's fourth quarter had some high ASP consumer electronicsproducts that really drove an increase in ASPs. We don't anticipate that kindof increase in ASPs this year. As a matter of fact, we anticipate them comingdown. Secondly, we're driving more velocity in the lower tranches,and in the lower tranches with lower average selling prices. The combination ofthose two have conversion rates holding but ASPs likely declining in the fourthquarter. Meg Whitman: Anthony, let me take your question about lowering fees.We've done a lot of pricing tests over the last 12 months, but this is thesingle biggest pricing test we have ever run in terms of decreasing insertionfees for a sustained period of time. The truth is, we don't exactly know howthis will work. But we expect listings to increase; we except successful itemsto increase; we anticipate perhaps ASPs will go down, as Bob said. What theresult is on revenue, we don't know. We've taken our very best guess and we'vefactored that into our fourth quarter results. So suffice it to say that if we hadn't done this pricingtest, revenues might have been higher. But we really do not know. Part of thistest is actually to get some real-world data on a pretty significant decreasein our insertion fees. And we wanted to get a fast start to the holidays for oursellers. As I said, it is through November 5th. So this is the same pricereduction. I actually think this isgoing to turn out well for us, but we have factored that into our guidance. I would say we have been appropriatelyconservative in factoring that into our guidance.

Your next question comes from David Joseph - Morgan Stanley. David Joseph - Morgan Stanley: Thank you. Mary and I have just one question. It seems thateBay is pretty well-positioned for the holiday season right now. You've seenthe quality of goods improve pretty dramatically on the site. You're improvingthe user experience. We certainly like the Snapshot, and we're looking forwardto the new checkout, though it doesn't sound like you're going to be gettingthat out before the holiday season. But it seems that now really the focus is on the biddingactivity. You're getting maybe perhaps some inactive buyers back to theplatform and have a new and improved experience. To that end, I guess, all eyeswould be a little bit on the marketing campaigns that you launched inmid-September. You said that the initial results were somewhat positive. I am wonderingif you could provide a little bit more color on that? But also, give us alittle bit more of an idea of what other marketing you might be doing toattract or drive activation or activity? Meg Whitman: Sure. I think you're right. I think we have good plans forthe holiday season, not only in the U.S.but also in Germanyand the UK, aswell as most of the eBay countries around the world. Inactive buyers are certainlya part of that campaign. With regard to these integrated marketing campaigns, and Iwould say they're better integrated than they have ever been before , thefeedback that we've gotten from our community of users is very good. Ourcommunity of users likes these campaigns and that's important, because whenthey like the campaigns, they tend to be more involved with the site. Most ofthe marketing just started in mid-September, so it's a little early to tell.But if you look at the early results, I think, we feel pretty good about it. The marketing campaigns also have some new features; catalogsevery month, and also more couponing. Now that most of the listings on eBay.comoffer PayPal, we can actually effectively utilize couponing which is atraditional holiday season marketing tool that we've not really been able touse in the past. So I think we are well-positioned. I think we've got a greatcampaign in place across our countries, and we'll see how it works out.

Your next question comes from Ben Schachter - UBS. Ben Schachter - UBS: Looking at thepercentage of revenue, or percentage of GMV that's coming in at fixed price,I'm wondering if there's an optimal number that you're looking at there? Withinthe context of how you look at the Store versus Core, and how there were somestructural disruptions. Is there any chance that you think the percentage ofGMV that's fixed price, can that get to a point where there will be structuralproblems with the business? Meg Whitman: Our objective is tofollow the user. This is a marketplace, and we want to do what the users wantto do; what the sellers want to sell, and what the buyers want to buy. But oneof the keys to fixed price is our finding product, or Best Match. Because whathappened to us last year is we added a whole host of fixed price listings, andthe search or find capability was not up to sorting through this vast number ofincreased and not particularly well-priced inventory. That created some of theuser experience issues that we had last year. So it's actually not about the format; it's about thefinding metaphor that has to keep up with fixed price. So I think we're betterpositioned than we've have been in that regard, and I think we're also verypleased with the Stores vibrancy. We still have well over a quarter of a millionstores in the U.S.and that continues to grow. Our ProStores product hit an all-time record lastweek in terms of the number of stores. So the net-net-net is I think, you're going to see a higherpercentage of our GMV in fixed-price. I think it's the fastest-growing part ofthe market. We can now cope with it from the finding metaphor point of view.

Your next question comes from Mark Mahaney - Citigroup. Mark Mahaney - Citigroup: Thank you very much. One question on Skype and one on Germany. OnSkype, you made comments about monetizing Skype too early. Were there specificthings that you're referring to there? What were the initiatives that weremonetized too quickly? Last quarter I think you had said that German GMV growthwas up mid single-digits. Is there a specific update to that, or was it roughlyup that same level again this quarter? Thank you. Meg Whitman: With regard to Skype,when the earn-out incentives were in place, because two of the three metrics werefinancial metrics -- revenue and gross profit -- there was a lot of incentiveto monetize this user base really fast. Whether it was the call setup fee,whether it was the rates that we charged SkypeOut and SkypeIn, I think wedialed that up too fast given that the value proposition for Skype in the earlydays was, you can talk for free. So I understand why it was done. I think it was done tooearly with not as much focus on delighting the user, whether that wassimplicity of UI, whether that was customer support. You're going to see usback off some of that monetization a little bit to continue to delight theusers.

In terms of Germanyprogress during the quarter, we saw GMV acceleration from Q2 to Q3 on anFX-neutral basis. As Meg indicated, we saw some decent growth in listings,conversion rates, and ASPs continued to improve during the course of thequarter. The combination of those three things resulted in acceleration of GMV. I would say that we also had relatively speaking, some easiercomps. Because you'll remember last year we talked quite a bit about the WorldCup. The comps on a year-over-year basis were a little bit easier this year. Butmodest listings growth, improved conversions and ASPs; that is acceleratingGMV. Meg Whitman: One last point onSkype. I think the other thing is we over-monetized a bit, but I also think wedropped a bit too much profitability to the bottom line, because the teamwasn't focused on how we could actually utilize this, if you will, excessprofitability to drive user engagements. I think that was the nature of an early-stageteam that is going to end up needing to spend a bit more money on marketing anduser engagement. So it may be that we over-monetized a bit. I think weprobably, better said, dropped a little bit too much money to the bottom linefor this stage growth of the company.

Your next question comes from Heath Terry - Credit Suisse. Heath Terry - Credit Suisse: I just wanted to dig a little bit deeper on the decision tolower insertion fees. I am curious as to what's really motivating that. You'veseen such strong improvement in ASPs and conversion rates following the feeincreases. I'm wondering if you're beginning to feel like there's not enoughinventory on the site, or there's just not a broad enough representation ofproduct going into the holiday season that we've gotten to the point that weneed to encourage more listings? Meg Whitman: I think there are a couple of factors at work. One is wewant to make sure that we have great breadth of inventory --and high qualityinventory -- on the site for the holiday season so we wanted our sellers to getoff to a fast start. That's why we made the decision to lower prices for such asustained period of time. The other thing is we want to see what happens when we takea price decrease of this magnitude. What is the listings elasticity? What isthe conversion rate? What is the nature of what we do here? I think the learning over the last 12 months, letme speak for myself personally, is we have a number of different levers topull. We've got product levers, we've got marketing levers, we've got customersupport and trust and safety levers and we have a pricing lever that we havenot ever really decreased price. It is possible that by decreasing price, weactually increase the revenues and vibrancy of this market in such a way thatthis price decrease is more than self-liquidating. Now, I don't know that that's going to happen. But we werevery much in favor of saying let's see what happens when we take a prettysignificant sustained decrease in insertion fee in our largest market. Let'ssee what happens there. It may well be better for sellers, and interestingly there, better forbuyers. We may end up with a win-win. But we will see, and we will report backin the first quarter.

Your final question comes from Victor Anthony - BearStearns.

First on category pricing. I know you've been testing thatin the UK, oryou plan to do so, I think next week. Wonder if you could talk about what'sinfluencing that change? When do you plan to move that over to the U.S.? Second, one more question on the rationale for the insertionfees. I wondered how much of that decision was influenced by the competitivelandscape, and in particular Amazon? Thanks. Meg Whitman: On category pricing,actually a number of countries around the world have done category-basedpricing. Germanyhad pricing scenarios on tech and consumer electronics. They have a toys-basedcategory pricing coming in for the holiday season. The UK,you mentioned, has had differential pricing on a number of categories. I thinkapparel was one. I think that differentiated category pricing may be in ourfuture. As you think about it, our sellers have very different margins onwhether it's a watch, or whether it's a piece of apparel, or whether it's avery competitive consumer electronics; high price or low price. So again, we'relearning. One of the great things is we have laboratories around the world thatwe can test this strategy. So I suspect that category-based pricing may well bein our future. With regard to competitive dynamics, actually the cost ofselling, the total all-in cost of selling on eBay is extremely competitiveversus anyone, including Amazon. The mix of fees around the world can bedifferent, where there are virtually no insertion fees and much higher valuefees. So one of the things we are testing is what does a reduction in theinsertion fee do? How does that play out? I wouldn't say it was necessarily competitively driven; itwas, let's take a look at the entire market dynamic. It's 12 years since welaunched this marketplace, and let's really take a big, bold experiment thatwe've never done before and see what happens to the overall vibrancy of themarket. I think that's it. Thank you very much, and we look forwardto talking to you next quarter.