eBay Inc. (EBAY) Q4 2010 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by, and welcome to eBay's Fourth Quarter 2010 Earnings Conference Call. [Operator Instructions] And now I'll turn the program over to Tracey Ford, Director of Investor Relations. Please go ahead.

Good afternoon. Thank you for joining us, and welcome to eBay's Earnings Release Conference Call for the Fourth Quarter of 2010. Joining me today on the call are John Donahoe, our President and Chief Executive Officer; and Bob Swan, our Chief Financial Officer. We're 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 at investor. ebayinc. com. In addition, an archive of the webcast will be accessible for 90 days through the same link. Before we begin, I'd like to remind you that during the course of this conference call, we will discuss some non-GAAP measures in talking about our company's performance. You can find a reconciliation of those measures to the nearest comparable GAAP measures in the slide presentation accompanying this conference call. In addition, management may make forward-looking statements relating to our future performance that are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. These statements include, but are not limited to, statements regarding expected financial results for the first quarter and full year 2011 and the future growth in the Payments and Marketplaces businesses. Our actual results may differ materially from those discussed in this call for a variety of reasons, including, but not limited to: the aftereffects of the global economic downturn; changes in political, business and economic conditions; foreign exchange rate fluctuations; the impact and integration of recent and future acquisitions; our increasing need to grow revenues from existing users, particularly in more established markets; the increasingly competitive environment for our businesses; the complexity of managing increasingly large enterprise with a broad range of businesses at different stages of maturity; our need to manage regulatory, tax, IP and litigation risks, including risks specific to PayPal, Bill Me Later and the financial industry; and our need to upgrade our technology and customer service infrastructure at reasonable cost while adding new features and maintaining site stability. You can find more information about factors that could affect our operating results in our most recent annual report on our Form 10-K and our subsequent quarterly reports on Form 10-Q, available at investor.ebayinc.com. You cannot rely on any forward-looking statements. All information in this presentation is as of January 19, 2011. We do not intend or undertake no duty to update. With that, let me turn the call over to John.

Thanks, Tracey, and good afternoon, everyone, and welcome to our Q4 earnings call. In 2010, we have focused our company on three priorities: first, becoming a more customer-focused company; second, creating better user experiences through technology-driven innovation; and third, driving operating efficiency to reinvest in growth. We've made steady progress each quarter, and we ended the year with strong Q4 results. I'm proud of what our teams have accomplished. We're becoming a stronger, more competitive company. We're creating opportunity for sellers and merchants worldwide. Our products are becoming more innovative. And we're making it more convenient for millions of people to shop and pay online every day, with more choices to help them find whatever they want, whenever they want, wherever they are. In Q4, revenue and earnings per share exceeded our guidance. Excluding Skype, revenue increased 10%, and non-GAAP EPS was up 24% year-over-year, driven by both stronger performance and onetime items. And we generated free cash flow of over $650 million. PayPal drove strong payment and revenue growth while expanding margins. And eBay accelerated sold items growth, driven by gains in the U.S., U.K. and Germany. We've extended our leadership position in mobile commerce, nearly tripling our eBay Mobile GMV year-over-year to nearly $2 billion, with strong holiday shopping momentum in Q4. In 2011, we expect Mobile GMV to double to $4 billion. Mobile is clearly becoming a new way people shop, and eBay is helping to lead the way with innovative apps across multiple platforms, including the iPad. Our Mobile apps have now been downloaded more than 30 million times in eight languages across 190 countries. We also expanded our capabilities. In Q4, we made or announced acquisitions that we believe will strengthen our position in fashion, mobile and local commerce. brands4friends, Germany's largest online shopping club, deepens our fashion leadership position in Europe. In the U.S., Critical Path Software gives us deeper mobile application development capabilities. And our acquisition of Milo allows us to blend local off-line retail into an easy and convenient online shopping experience. Across our core businesses in Q4 and 2010, we made progress against our growth objectives. Distinctions between online and off-line commerce continue to blur, and consumer behavior around how people shop and pay is rapidly changing. Our customer focus, deep commitment to technology-driven innovation and our operating discipline not only generated a strong quarter and year, but also position us well to be at the forefront of trends that are shaping the future of shopping and payments. Now let's look at the Q4 results for each business unit. PayPal had another great quarter and a strong year, extending its lead in almost every area of online payments while significantly improving profitability. PayPal finished the year with more than 94 million active accounts. We added more than 1 million active accounts each month in 2010, a PayPal record. PayPal also set a record in Europe, where we bypassed $1 billion in revenue in 2010, a great milestone. It was only two years ago that PayPal's entire international business surpassed the $1 billion mark, so this is a real accomplishment. This performance underscores the momentum and opportunity PayPal has worldwide as more merchants and consumers embrace PayPal as a safer, more convenient and easier way to pay and be paid. In fact, PayPal's business outside the U.S. now accounts for nearly half of PayPal's revenue in Q4. And PayPal continues to expand its footprint and strengthen its local competitive offerings, creating innovative partnerships with leading banks and mobile providers as well as local governments in markets such as Mexico, Brazil and China. And worldwide, PayPal's mobile adoption gained great momentum in 2010, generating 5x the payment value over the previous year and exceeding our expectations. In the U.S., PayPal signed an important deal in Q4 with GSI Commerce, a leading e-commerce service provider. We believe this partnership will help to accelerate merchant adoption of PayPal's two-click Express Checkout on brand-name retail sites. PayPal's penetration on eBay increased four points in 2010 and reached 70% in Q4. We continue to see great synergy between eBay and PayPal. eBay, for example, is now the largest source of new accounts and payment volume for Bill Me Later. And speaking of Bill Me Later, this is a great example of how PayPal is driving payments innovation and offering more choice and convenience. BML handled more than $1.3 billion in payment volume in 2010 and achieved profitability ahead of our expectations. In 2011, you'll continue to see us focus on delivering innovative choices for consumers in the PayPal wallet to drive BML growth, profitability and engagement. Turning to eBay. Our team continues to make good progress in improving the customer experience and driving better and more innovative ways to connect buyers and sellers. In Q4, core GMV growth accelerated three points in the U.S. and two points internationally. Europe continued to perform well in Q4, led by the U.K., where growth accelerated and we significantly outperformed e-commerce. In Q4, sold items grew 25% in the U.K., and GMV was up 19%. In the U.K. and Germany, our eBay Fashion business, a real focus for us in 2010, grew faster than e-commerce. And in the U.S., our Fashion business also performed well in Q4, accelerating five points from the prior quarter. We believe these results validate our focus on creating compelling vertical shopping experiences for our customers. Driven by improvements in the product experience and trust, Net Promoter Score for eBay buyers has improved now for six consecutive quarters. And in the U.S., top-rated sellers who consistently delivered a superior experience gained ground in Q4, accounting for 38% of GMV, up three points from the prior quarter. And same-store sales for these top-rated sellers increased 12% in Q4, outpacing the e-commerce market. Customers shopped a dramatically different eBay in the fourth quarter of this year than a year ago. The shopping experience is now cleaner, faster and easier to navigate. Great deals on a wider range of products were easier to find through our core search experience and features such as Daily Deals and Deal Finder. And we introduced innovative social commerce offerings, such as eBay Group Gifts. I'm extremely pleased with the progress our eBay product team is making and the increasing speed and agility with which we're driving innovation and delivering better customer experiences. Turning quickly to our adjacent formats. Classifieds was up 12% in Q4 on an FX-neutral basis over the same period last year. And StubHub had another great quarter, with revenue up 18% and ticket sales up more than 20% year-over-year. In summary, we accomplished a great deal in 2010. We executed against our commitments, and we ended the year a stronger company with good momentum entering 2011. We're focused on strengthening our core eBay business and driving global growth at PayPal, and we're beginning to lean into the next evolution in e-commerce, hoping to define and evolve how people shop and pay worldwide. With our focus on technology, we're increasing our pace of innovation. We're not only responding to current customer needs, but are also helping to shift, drive leads in online and off-line shopping behavior. I'm more confident than ever in the power and synergy of our portfolio, the strength of our core brands and businesses and our ability to leverage technology to create opportunity and drive long-term growth. I look forward to seeing many of you in a couple of weeks at our Analyst Day. And now before taking questions, let me turn it over to Bob, who will provide more details on our Q4 and 2010 performance and guidance.

Thanks, John. During my discussion, I'll reference our earnings slide presentation that accompanies the webcast. All growth rates mentioned in my prepared remarks represent year-over-year comparisons, unless I clarify otherwise. Overall, we delivered strong fourth quarter results. We came in above our guidance on the top and bottom line as we continued to execute against our strategic priorities for both PayPal and Marketplaces. During the quarter, we generated free cash flow of $657 million. We repurchased approximately $400 million worth of eBay shares, and we issued term debt of $1.5 billion to capitalize on the low-interest-rate environment and enhance our financial flexibility. Lastly, we closed three acquisitions in the last three months that will help strengthen our portfolio of businesses. We're pleased with the progress in Q4 and 2010, and we carry that momentum into 2011. In the fourth quarter, our combined businesses generated net revenues of $2.5 billion, up 5%, or a 10% increase excluding Skype. Organic revenue growth was up 12%. Foreign exchange decreased growth by two points, and the inclusion of Skype in 2009 results decreased growth by five points. The year-over-year increase in revenue was primarily due to a stronger holiday season; strong performance across our international businesses, with continued Marketplaces strength, particularly in Europe; and PayPal's strength driven by Merchant Services. Fourth quarter non-GAAP EPS was $0.52, a 16% increase, or 24% excluding Skype. Non-GAAP operating margin was 29 1/2%, up 20 basis points from Q4 '09. The year-over-year increase in EPS was primarily due to strong top line growth, a lower effective tax rate and solid productivity. We had several things that transpired in the quarter that are worth highlighting in an effort to provide a bit more transparency on our results. Versus the guidance we gave back in October, there are three things worth breaking out, two that were positive and one that was negative. First, a stronger holiday season and better performance from Marketplaces and PayPal generated $116 million, or five points of growth, and contributed $0.04 of earnings above the midpoint of our guidance. Secondly, we settled some uncertain tax positions in the quarter that lowered our effective tax rate and generated $0.06 of additional earnings per share in the quarter. Third, on the negative side, we settled the lawsuit in the quarter and we reserved for an ongoing dispute related to an indirect tax position in one of our foreign locations. These adversely impacted revenue by $59 million and EPS by $0.04. All told, the onetime items reduced total revenue growth by approximately three points and increased EPS by $0.02. From a segment perspective, Marketplaces results were negatively impacted by four points of revenue growth and two points of segment margin. Free cash flow was $657 million in the quarter, up 10%. Cash flow was reduced by a onetime tax payment of $147 million in the quarter. For the full year, we generated more than $2 billion of free cash flow despite approximately $350 million in onetime tax payments. Let's take a closer look at our segment results. PayPal had another great quarter, with strong top line growth and higher segment margins. Total payments revenue was $971 million, representing growth of 22%. Total payment volume increased to $26.9 billion, or up 26%. We continue to expand our global footprint as international TPV grew 34% in the quarter and now makes up 43% of our total TPV. A few quick highlights on PayPal operational metrics. Merchant Services TPV grew 36% in the quarter, and we continue to expand our global footprint, our merchant coverage and our share of checkout. Q4 Merchant Services TPV accounted for 62% of PayPal's total TPV. On eBay, PayPal's TPV growth rate was 11%. Penetration of addressable GMV increased 410 basis points to 70%, an all-time high, with penetration gains in most countries across the globe. PayPal transaction margin was also strong, increasing to 63.8% in the quarter. The global trends of a decreasing take rate continues but were offset by significant improvements in transaction expense and transaction losses. PayPal's segment margin accelerated to 22.1% in the quarter, up 430 basis points year-over-year. The increase from last year was primarily the result of operating leverage, higher transaction margins and continued improvement at Bill Me Later. We ended 2010 with PayPal's segment margins at 21%, ahead of the 18% to 20% target we set for 2011 at our Analyst Day in March 2009. Let me touch on a few key operating metrics for Bill Me Later, which continued to make solid progress in the quarter. Bill Me Later's TPV was up 49% as consumers, both on and off eBay, turned to BML for both convenience and choice. The gross receivable balance at quarter end was $1 billion, up 48%. The charge-off rate continued to decline to 6.1% from 7.3% in Q3 due to improved quality of the portfolio, a higher receivable balance and improved collections. Risk-adjusted margin increased 290 basis points sequentially to 14.4% due to lower credit losses and higher merchant revenue from increased volume. It was a strong year for the BML business as TPV grew 41%, receivables portfolio grew 48% and risk-adjusted margins accelerated and net charge-offs declined. Now let's move to our Marketplaces business. Overall, Marketplaces achieved net revenues of $1.5 billion, a 4% increase. Marketplaces FX-neutral revenue was up 6%, driven by higher GMV volume. Marketplace generated 59% of its revenue internationally this quarter. Turning to marketing services and other, which we view as alternative formats for bringing buyers and sellers together. Revenues were 17% of Marketplaces' total revenue and had FX-neutral growth of 13%. This was primarily driven by strength in the Advertising business, particularly in international display and U.S. -taxed advertising. A few quick highlights on Marketplaces' operational metrics. Active users increased to 95 million, up 5% year-over-year, driven by strength in the U.K., U.S. and Germany. Sold items grew 10%, a one-point acceleration from Q3, driven by acceleration, again, in the U.K., DE and the U.S. U.S. core GMV growth was 5% in the quarter, a 3% acceleration from Q3. The increase was due to a stronger holiday season and an improved user experience from product and site changes, partially offset by continued lower ASPs from a broader selection of well-priced inventory. International core GMV grew 6%, or 9% on an FX-neutral basis. The increase was due to strong growth in the U.K., Germany and Australia. This was partially offset by a decrease in China's cross-border trade, which was negatively impacted by increased trust standards to improve the user experience. Our Korean business continued to exhibit solid growth, but GMV growth slowed as we continued to be less dependent on coupons that don't generate buyer loyalty. Marketplaces segment margin was 39.2% in the quarter, down 120 basis points from a year ago. The main drivers of the change included a onetime legal settlement and indirect tax impact, which were partially offset by savings from operational initiatives. Global take rate, excluding vehicles, StubHub and onetime impacts to Marketplaces revenue, was 7.95%, essentially flat with a year ago. Turning to operating expenses. In the fourth quarter, our operating expenses were 43% of revenue, essentially flat on a year-over-year and sequential basis. We've invested more in product development, achieved productivity gains in G&A and improved provision for transaction and loan losses. From a cash perspective, we generated free cash flow of $657 million in the quarter, net of a $147 million tax payment. Cash, cash equivalents and non-equity investments totaled $7.8 billion at quarter end. We strengthened our U.S. cash position with the issuance of $1.5 billion of term debt as well as $300 million of commercial paper. Additionally, we financed approximately 2/3 of the BML receivables portfolio growth with offshore cash. During the quarter, we repurchased 13.7 million shares of stock for an aggregate price of $413 million. We closed both the milo.com and Critical Path acquisitions in the quarter, and we end the year with a strong balance sheet, including approximately $2.7 billion in the U.S. We used our balance sheet to strengthen our portfolio by expanding it in new adjacencies and accelerating innovation through three acquisitions in the quarter. As John mentioned earlier, expanding our local presence, accelerating our mobile capabilities and growing our CSA vertical are important strategic initiatives for our company. The acquisitions of Milo, Critical Path Software and brands4friends will help strengthen our capabilities in each of these areas, respectively. Now let me turn to guidance. We've outperformed our expectations for 2010. And we enter 2011 with confidence in our Payments business, and we're seeing strength in the Marketplace business. Our guidance reflects a few things. From a macro perspective, we're assuming a relatively stable outlook on the overall economy, exchange rates to hold relatively where they are now and global interest rates that remain generally at current levels. From an operating perspective, we expect PayPal to continue its strong performance from expanded merchant coverage and share of checkout while generating operating margin leverage. We expect Marketplaces to have a solid performance in its core markets, driven by continued progress in trust, value, selection. And third, we expect our non-GAAP effective tax rate will be in the range of 18 1/2% to 19 1/2% for the year. For the full year, we anticipate revenue of $10.3 billion to $10.6 billion. This represents growth of 12% to 16%. And we anticipate non-GAAP EPS of $1.90 to $1.95, which represents growth of 10% to 13%. For the first quarter of 2011, we anticipate revenues of $2.4 billion to $2.5 billion, representing growth of 9% to 14%. And we anticipate non-GAAP EPS of $0.44 to $0.46, which represents growth of 5% to 10%. In summary, we had a strong close to a good year. From a business standpoint, our global footprint expanded, innovation accelerated and operational excellence freed up capacity to invest in the business and strengthen our competitive position. We have an excellent balance sheet. We announced several key acquisitions to strengthen the portfolio, and we repurchased $713 million in stock during the year. We increased our financial flexibility through an offshore funding vehicle for Bill Me Later growth, the initiation of a $1 billion commercial paper program and the issuance of $1.5 billion in term debt. As we enter 2011, we believe the overall macro environment has stabilized, while internally, we are building on a solid foundation with continued focus on growing the PayPal business and improving the Marketplaces. And now we'd be happy to answer your questions. Operator?

[Operator Instructions] Our first questioner in queue is Sandeep Aggarwal with Caris & Company. Sandeep Aggarwal - Caris & Company: Can you please let us know, have you achieved the level of improvement in U.S. marketplace that you had hoped when you made material fee changes in February? And how would you compare, basically, overall U.S. improvement relative to Germany and U.K. ?

Sure, Sandeep. As you referenced, we implemented on March 30 the very significant pricing and search exposure changes in the U.S. that we had done in Europe 18 months earlier. As I said in April, based on our experience in Europe, it takes a couple of quarters, two, three quarters, to work them through, and that was certainly the case in the U.S. And we made solid progress in the fourth quarter, the same customer metrics I always refer to as what I look at: Our buyer Net Promoter Scores in the U.S. improved for the sixth consecutive quarter, with buyers clearly saying they see improved trust and improved searchability or discoverability; sold item growth grew 8% in the fourth quarter, which is an acceleration over the previous quarter, so buyers are coming to us with more frequency; and then GMV grew 5%, which is a three-point acceleration from Q3 and reflected working through some of the second-order effects from the changes in March. So I feel like we end the year in North America on a good trajectory. I'm not satisfied with where we are in the U.S. market. Our GMV growth is still behind that of the market. But I feel like we're on track and now begin implementing the vertical shopping experiences and other search-related activities that will build on the fundamental change we made last year and allow us to close the gap between our growth rate and that of e-commerce. Sandeep Aggarwal - Caris & Company: And John, can you please talk about the application of the eBay Bucks program in terms of what benefit do you drive or see the incentive you are providing to the buyers?

Yes, eBay Bucks was a program that, frankly, we were surprised at the attractiveness to heavy eBay buyers. And as you know, we started a couple of years ago focusing first on how do we retain and deepen our relationships with our top customers? And these are people who like coming to eBay, who buy with more frequency, and eBay Bucks was something that they responded to. What we see is the people that are using eBay Bucks are buying with more frequency, we think that's one of the things driving sold item growth, and we believe we're gaining share of wallet with those buyers. It's not something that's going to necessarily attract new customers to eBay, so it's something that's very much focused on our top buyers, and it's one element of our marketing mix. I would characterize it as one tool in the marketing tool kit.

Our next questioner in queue is Scott Devitt with Morgan Stanley.

John, coming out of the year with PayPal margin above the high end of your three-year range, as Bob mentioned on the call, could you just talk about the way you're thinking about the margin profile for PayPal over the next several years as the business remains in growth mode? And then separately, Bob, could you give the sold items number x Gmarket? I don't think that was in the presentation unless I missed it.

I'll let Bob handle both of those.

Yes. The sold items, Scott, we just give you kind of the year-over-year impact. Because Gmarket was not new in the quarter, that year-over-year dynamic of excluding and including it is no longer relevant. So sold items growth was up 10% on an apples-to-apples basis year-over-year. On Payment margins, back in March of '09, we said that by 2011, we'd be at 18% to 20% operating margins. And as I indicated and you referenced, we had 21% for the year. So we feel great about not just where we are in terms of margin expansion, but also the fact that we've made significant investments during the course of that time to, in essence, roughly double the amount of total payment volume from 2009 to 2011. So we feel relatively good. And the three things that improved the margins during the course of 2010 we expect to continue, and they were simply good leverage on top line growth; secondly, you know that we're very laser-focused on transaction margins and keeping them above the 60% level; and third, continued progress in scaling the Bill Me Later business and using our collective risk management tools to appeal to more consumers but also to drive down credit losses. So those three dynamics are the things that contribute to margin performance improvement. And we expect those to continue, but it won't be at the expense of investment. We think we have a wonderful business with lots of opportunity, and we will continue to invest to ensure we capitalize on the growth prospects in front of us.

Can I just ask you to clarify on the sold items? I thought the intent behind that was to normalize for the couponing in Korea and such that the Gmarket acquisition had comp last quarter as well. I'm just wondering is there a way to give that number to normalize for Korea, given what you're doing in that country from a couponing standpoint?

The 10% growth on a year-over-year basis is apples-to-apples. There is a way to give you Gmarket-specific performance, but it's just not as relevant, and therefore, we're not going to. So I think the 10% is really indicative, Scott, of how well we performed across the globe, apples-to-apples, in the quarter.

Scott, what I'd just say, in Korea, we are very focused on leveraging both Gmarket and IAC to build a sustainable business and build it in a healthy way, in a way -- a year ago, 18 months ago, or maybe it was two years ago now, we were beating each other's brains out with couponing, and it wasn't necessarily producing more loyal customers. And what we've now got is we've got two sites; one that's focused on hard goods and skews toward male consumers, that's IAC; and the other that has soft goods and skews toward female shoppers, that's Gmarket. And a platform that now sellers can leverage on across both more seamlessly. And we're focusing more on customer loyalty. And the place you really see it is GMV growth versus revenue growth. The revenue growth is very much consistent with market, and in fact, perhaps a little bit above the market. It's the GMV growth in the short term that suffers from us couponing less, if you will. And we're just pouring that money into more loyalty programs, but the most important point is the competitive position of that business is improving.

Our next questioner in queue is Mark Mahaney with Citi.

A question just about the guidance. You've got EPS growth materially, or somewhat materially, below the revenue growth, yet you've got a lower tax rate. And it sounds like you're kind of calling for operating leverage in the PayPal business. So what's going on here? Just a mix shift to the lower PayPal business? Is it also dilutive acquisitions? Or is it also a lookout, outlook for material reduction in the segment margins at the Marketplace business?

In the aggregate, implied in our guidance is operating margins that are relatively flat year-on-year. The reason EPS growth is not quite as high as revenue growth is, first, because our tax rate is getting better. My guidance had us at about 19% for 2011. The overall tax rate in 2010, as the result of the fourth quarter items, was 18%. So tax rate is more effective, but in 2010, we have the, kind of, the collective benefit from prior periods flowing to the tax rate in 2010. So our effective tax rate will, in fact, be up a little bit versus 2010. The second thing is, as you know, we raised about $1.5 billion of debt in the fourth quarter, and we will incur kind of the full-year effect of interest expense. Those two drivers are primarily the difference between revenue growth and EPS growth. Overall, operating margins for the portfolio will be relatively flat year-on-year.

Our next questioner in queue is Jeetil Patel with Deutsche Securities.

Can you I guess maybe talk about the impact of the Durbin bill, in terms of the fee changes, to your business in terms of costs? Is that something that drops to the bottom line? Or do you plan to kind of make any changes on pricing as you look at the PayPal set of the business? Second, I guess you talked about it a couple of years ago, kind of gaining share in '11, maintaining share in '10. I guess, can you give us an update as to kind of how it shook out for '10 and '11, I guess, your plan, how fast you think e-commerce grows U.S. and then global and then how you pace against that?

John, maybe I'll take the former and the latter up too. Jeetil, thanks for the question, because I know Durbin is on lots of people's minds. As you know, the draft regulation just came out at the end of last year. Fairly long, it's fairly complicated, and it's in draft form. So we know it's going to change and get a little bit clear. Maybe, overall, if I cut through it all in terms of what we determine the impact of our business is, in the short and the medium term, we believe it'll probably neutral to positive on our performance. And let me maybe provide a little bit -- maybe a little context as to why we say that in terms of how we think it's going to impact us. First, we believe our transaction expense as a result of the changes will, in fact, go down as we incur lower processing costs on debit transactions, and that'll be a reasonably significant number. If, how and when we pass it on to customers is a bit of a TBD at our end, but that, net-net overall, we think that's a neutral-to-positive impact. The second area that we're impacted is on the fees that we charge for the PayPal debit card, and that's a relatively small, small portion of our revenue. It will be impacted by Durbin, but it'll be an insignificant, immaterial impact on the business. The third area, which is a little more indirect in nature, and that is whether those that are more directly impacted by Durbin, whether they will pass on higher fees that would negatively impact PayPal, particularly on ACH-related transactions. I would say a few things. First, in the short to medium term, I don't anticipate that happening. We'll see, but I don't anticipate it happening. Secondly, we have multi-year agreements with strategic partners for those transactions that, essentially, go through beyond the 2012 for the most part. So there's, again, we have some contractual protection with some important strategic relationships that would mitigate it in the event that they increase ACH cost. And then, third, this is -- we have a pretty rich history in dealing with inflationary pressures on different forms of payment in the wallet. And in effect, how do we give consumer choice by leveraging technology and incentives to migrate consumers to what would be low-cost trails? So I don't believe that ACH will go up. In the event that it does, I'd say we have contractual protection for 18 to 24 months. And I think we're pretty effective at managing the dynamics of the PayPal wallet to impact any specific changes. So all in all, our interpretation of the results, I would characterize it as, again, short and medium term, neutral to positive and long term, very manageable in the context of our business. And maybe, John, before I hand it off, there's one more point that's probably worth mentioning. I think there's some concerns that PayPal will be regulated by the Fed as a card network. I would say that we do not believe this will be the case for several reasons. One, we don't charge interchange fees. Secondly, we use existing card networks to move PayPal payments. And then last, the payment networks themselves treat us like a merchant. So for the concerns around us being regulated as a card network, we do not believe that that will ultimately be in the final bill when it comes out later this year. So a long answer but a very important question, and that's kind of how we're interpreting where this regulation is or where it's going to go and the impact on our business. John, you want to. . .

Good. I'll take the -- I can't even remember what the second question was now, but I do think -- I mean, we spent a lot of time working with Durbin, and I think we feel comfortable with where we are. And if anything, it could improve our competitive position. Jeetil, I think your second question was on the Marketplace business and how we're growing relative to the market and then maybe a little bit about the e-commerce outlook. So in 2010, we grew our global Marketplaces revenue 9% on an FX-neutral basis and GMV about 11%, and that was roughly in line with the markets in which we participate in. But obviously, within that, we had some markets where we grew faster than the market, like the U.K., like Australia, like Korea and other markets, where we grew more slowly than the market, the U.S. being the most pronounced of those. But as I said earlier, I feel good about where we are exiting the year. And I'm confident and optimistic we will make continued progress into 2011, and our goal is still to grow at or faster than the market. Now the market growth rate is an interesting question, because I'd say two things here. One, at our Analyst Day in March of 2009, I said that I thought e-commerce would go from 5% of off-line retail to somewhere between 15% to 20%. And we still believe that, and we saw a little bit of that in the fourth quarter with the e-commerce growth rate gap over retail widening. So I'm not sure I can exactly predict what the 2011 e-commerce growth rate is and will be, but what I will say is we clearly see changes and trends in the market that increase the fundamental attractiveness of our market and, we believe, play to our advantage as a company. And in particular, Mobile is now increasing the number of Internet-enabled transactions, right? And in the process, it is really rapidly blurring the line between online and off-line. And so what we're trying to do is ensure that we're on our front foot and we are aggressively capitalizing on that as a company, because what we see is merchants or sellers around the world now realizing that they have to compete in a multi-channel way. No longer can someone just be a website or just be an off-line retailer. No longer can you just have your off-line store and at night, your own website. You've got to get your inventory or your service out in a multi-channel way, and you have to deal with things like mobile, like social, like the blurring lines. And we believe our company, both eBay and PayPal, and our focus on connecting buyers and sellers fits that need very, very well. And one of the things that we're finding is increasingly relevant is we tell these merchants we will never compete with them. Our goal is never to be a retailer. So when we now call on a merchant to either have them put their inventory on eBay or other properties or have PayPal help them increase their payment volume either online or off-line, we're getting a lot of receptivity. And we're offering to help them get in the mobile world, help them capitalize on the 30 million mobile downloads, help them deal with social commerce, help them deal with some of the challenges that they increasingly have to face. So I would say I'm optimistic about the e-commerce market, and I think maybe these changes play to our direction. If you look at the aggressive moves we're are making around Mobile with buying RedLaser, Critical Path, our actions in PayPal and eBay, the acquisitions around Milo and the work PayPal is doing in the off-line world, I think you're going to see us really ramp up our innovation in this area in 2011 and beyond.

So maybe we'll guess the market growth, but what does your Marketplace kind of -- what's your guidance and bet from a Marketplace GMV growth standpoint? Maybe we'll just figure out the market at that point.

We're not going to go beyond the financial guidance that Bob gave. So you'll have to do the math in that.

Our next questioner in queue is Spencer Wang with Crédit Suisse. Spencer Wang - Crédit Suisse AG: Just a two-part question on PayPal. First, for Bob, just a follow-up on the Durbin comments as we try and quantify the impact. I was wondering if you could just update us on the source of funds mix at PayPal in 2010. And then, second, for John, can you talk a little bit more about the mobile opportunity for PayPal as it relates to the off-line retail opportunity?

I think, as you're aware, we haven't really broken down sources-of-funding mix for a while. I would say that for card transactions, we've said that roughly 55% to 60% of our volume is with card transactions. We haven't broke that down between credit or debit. And we have said that while debit has gotten dramatic traction off-line, it hasn't been as dramatic online. It's a larger component, but not as dramatic. So what we try to give you is more this quarterly pulse on how we're doing in leveraging technology, providing consumer choice and influencing consumers on low-cost rails, which gets reflected in how the transaction expense number that we give you each quarter. And that's the metric that we try to manage over time. And as I indicated, in the short and medium term, our best assets, the ultimate outcome of Durbin, would indicate that, that overall number, all else equal, would go down.

And then, Spencer, on the PayPal mobile opportunity, we really break it into a couple of categories. One is we launched Mobile Express Checkout last year, and what that, in essence, does is any merchant that's implemented PayPal's Express Checkout with the exact same implementation now, integration, has a mobile payments capability, which is relevant, because those merchants want to have their inventory accessible off mobile devices. And we know consumers don't like putting credit cards into mobile devices, and so now PayPal helps them extend their inventory to mobile devices with one simple integration. And then, with respect to mobile in the off-line world, I've got to be honest. This is one where merchants are reaching across, off-line merchants, and really pulling us in. And what's happened is that the, I'll call it the last mile in teleco, there's the last inch in point-of-sale mobile payment technology. And what's happened in the last year is there's a recognition that you don't have to have one standard across NFC or RFID or Bluetooth or using tones and sounds off the Smartphone device, and there's a lot of innovation going on there. So that last inch is being solved, if you will, in multiple ways. So the recognition is that PayPal can not only offer you a mobile payments capability for a merchant; that is, consumer pays at point of sale; but it also offers that merchant an ability to use PayPal to offer coupons, offers, other things that sort of repositions PayPal not from just being a payment mechanism at point of sale, but be a demand generator, if you will, and a customer loyalty engager. And so we're working on some very interesting things with large retailers. Starbucks is, for instance, one we announced at our PayPal X platform event, where the Starbucks integration is not so much to substitute for payments. It's a way to allow their top buyers, their top consumers, to process more quickly through their lines. And so I think you're going to hear a lot more to come on this. And we think there's a -- it's almost opening up a whole new field of opportunity for PayPal that we weren't even thinking about a year ago.

Our next questioner in queue is Doug Anmuth with Barclays Capital.

First, Bob, I was hoping you could clarify the impact of the three acquisitions and the guidance for 2011 on the top line. And then secondly, John, in talking about eBay and PayPal together, you mentioned earlier in the call just how the synergy is still strong between the two, and that sort of echoes what you've said in the past. But what would make you change your mind strategically on whether these two companies need to be together going forward?

In terms of the -- just, I'll use the midpoint of our 2011 guidance of about 14%. Inherent in that is the revenues from the three transactions that we've closed: Milo, Critical Path and brands4friends. The first two are, essentially, inconsequential. The last one is, as we indicated, the largest private sale business in Germany, and I think about it as roughly a little less than 1 1/2% of growth from acquisitions in total. So midpoint of guidance, roughly 12 1/2% organic, another 1 1/2% from the acquisitions that we've announced.

And then, Doug, on synergies. Again, historically, we've identified, really, two sources of synergies. One is that eBay is still a significant source of new customers for PayPal, and as I mentioned, it's increasingly a new source of customers for BML, which helps both PayPal in having BML customers and helps the overall PayPal funding mix or transaction expense. The second source has been eBay's balance sheet. EBay Inc.'s balance sheet has helped us have the capacity to make investments and acquisitions in other areas than PayPal. And frankly, the third area of synergy that has been growing over the past 12 months is some of these areas of innovation. Our Mobile teams, we are out front, we believe, in both mobile commerce and mobile payments. And there's a lot of sharing between those two efforts. In fact, this Critical Path Software company we bought provides us mobile apps capability across both business units. Our efforts on the blurring line between online and off-line, local, when we call upon these merchants, we can offer them multi-channel capabilities as well as payments capabilities. And our platform, opening up our PayPal platform, and increasingly, you'll hear us talk about opening up our overall commerce platform. So we still see synergies. We see those synergies actually strengthening in the areas of innovation. What will change our mind is, quite simply, when one business stops making the other more successful or stronger. And this is not a religious thing for either Bob or I, and I think we demonstrated that with Skype. And so as long as the businesses make each other stronger, we think that's in the best interest of the businesses and shareholders. And if and when that changes, we'll act quite rationally.

Operator, we have time for one more question.

Our final question in queue for today comes from Colin Sebastian with Lazard.

John, I think you alluded to, earlier in the call, changes coming to search on the Marketplace platform. I was curious if you could talk about the timing for that and other changes. And then just a follow-up on Mobile as well. I'm curious if you're able to quantify how much of the Mobile volume is incremental or really a substitution from desktop shopping.

Sure, Colin. On search, and I encourage everyone to come to our Analyst Day in a couple of weeks, because Mark Carges will elaborate on this, but in essence, we built a new search -- Mark and his team built a new search platform. And the first two applications built on top of that were the Fashion experience and the eBay Mobile experience. And so if you've seen the eBay Fashion experience, it's much more customized to the category experience. In that case, it's more visual. It allows you to save your preferences. It allows you to shop in the way you want to shop in that category. In Q4, Mark and his team also rolled that out to a few subcategories, a customized shopping experience for electronics. And in particular, that was for MP3 players, navigation systems and DVDs. So if you haven't seen that, I'd go in and do a search for an iPod or a navigation system, and you'll see a more product-based experience. And so the search roadmap for 2010 has a very heavy focus on vertical shopping experiences. Fashion, electronics, auto parts, home and garden are providing better shopping experiences that allow our enormous inventory to be more easily discoverable and, we believe, will increase conversion over time. There's no doubt that the fashion conversion has improved with these search improvements. So I think you'll see a lot on the vertical front. On Mobile, because the mobile application was built on the new search platform, we've been able to rev that several times. And again, it's adding to our agility and our speed. How much of the Mobile volume is incremental? We don't know. I'm going to guess roughly a third. We're still trying to sort that through. What we're finding -- what's interesting is you have mobile-enabled transactions, which is in some cases, people start on the mobile device, buy on the mobile device and pay on the mobile device. In other cases, people start on a PC-based device and buy on a mobile device. With something like RedLaser, sometimes people are starting off-line and then they're actually buying online, and we're seeing every combination. So as we think about Mobile, both at eBay and PayPal, we're treating Mobile as another device in a what we believe will be increasingly a seamless shopping experience. Again, that's something we're going to talk about in more detail at our Analyst Day in a couple of weeks. All right, thanks, everybody. Again, I'll put our last plug in for joining us here in early February, and we'll look forward to seeing everyone then.

Thank you. Ladies and gentlemen, this does conclude today's program. Thank you for your participation, and have a wonderful day. Attendees, you may now disconnect.