- In terms of key operating metrics, global active accounts grew to $65 million for the trailing 12 months, an increase of 19% over last year. On eBay, buyers are increasingly using PayPal as a safer way to pay online. PayPal''s global TPV on eBay grew by 12% year over year as the global penetration rate of addressable GMV was 60%, a six-point increase over third quarter 2007 and a three-point sequential increase.
- Beyond the eBay platform, PayPal merchant services business posted another strong quarter despite the difficult economic environment. Merchant services recorded $7.5 billion of global TPV in the quarter, representing 49% year over year growth and accounting for 51% of total TPV. This marks the first quarter that PayPal''s TPV was larger than eBay''s GPV.
- This is the first quarter that PayPal''s off-eBay volume was larger than its on-eBay volume. PayPal has penetrated 35 of the top 100 online merchants in the U.S. and accounts for 5.3% of U.S. e-commerce, not including eBay.
- PayPal''s global take rate remained flat at 3.89%, while transaction margin improved to 62% sequentially.
- The company announced an agreement to acquire Bill Me Later, online transaction credit provider that is intended to strengthen and extend PayPal''s leadership position in online payments.
Skype posted total revenue of $143 million, an increase of 46% over last year.
- Total registered users grew to an impressive 370 million, representing an increase of 51%.
- Skype to Skype minutes increased to 16 billion, accelerating to 63% growth.
- Skype out minutes increased to 2.2 billion, also an acceleration of growth from last quarter to 54%. Skype continues to invest in the business while expanding its margins to 26%.
On ink level operating expenses and cash position, the company $674 million of non-GAAP operating income, up 14% from last year, and non-GAAP net income of $592 million, up 5%.
- Sales and marketing as a percent of revenue improved by 400 basis points from the year-ago period, due in part to a more efficient online marketing spend and in larger part to investments in buyer loyalty and retention, much of which gets recorded as contra revenue instead of being expensed as sales and marketing.
- Product development came in 30 basis points higher than last year while G&A was up 50 basis points, due to higher fraud losses at PayPal and bad debt expenses.
- The company ended the third quarter with $3.3 billion in cash and cash equivalents, down $400 million from last quarter. At quarter end, $2.9 billion of cash was located outside the U.S. The company repurchased approximately 25 million eBay shares at a cost of $623 million.
Fourth Quarter 2008 Outlook
The company expects to generate net revenue of $2.02 billion to $2.17 billion, and anticipates non-GAAP EPS in the range of 39 cents per share to 41 cents per share.
Fiscal 2008 Outlook
- The company expects revenue to be in the range of $8.525 billion to $8.675 billion, and non-GAAP EPS in the range of $1.69 to $1.71. The reduction in guidance is primarily a function of a stronger U.S. dollar, a tougher economic climate, and dilution from the acquisitions announced last week.
- The company continues to anticipate free cash flow for the year to be $2.35 billion to $2.45 billion, in line with prior guidance.
Key questions from the third quarter earnings call conducted by eBay Inc. on October 15, 2008.
James Mitchell (Goldman Sachs): Your fourth quarter guidance seems to imply no Christmas. Do you see the economic cyclicality hurting the marketplace business or do you also see some impact on the PayPal business?
Robert H. Swan: What we saw during the course of the second quarter, I will characterize as external signs and then internally how it impacted our business. We saw a sharp deceleration in retail sales, in vehicle sales during the course of the quarter. Merchant services, which has a good visibility into what is going on in e-commerce overall decelerated during the course of the third quarter. E-commerce growth rates in the U.S., we do not have as good outside the U.S. but in the U.S. decelerated rather sharply second to third quarter. We felt the effects of that across all aspects of our business. While PayPal had a strong quarter, it did suffer from decelerating growth rates starting in the second and third week of August as it exited the third quarter. We expect those dynamics to impact our business in the fourth quarter.
James Mitchell (Goldman Sachs): On slide 18, you referred to more marketing dollars as part of the reason for the earnings guidance revision for the fourth quarter. Year-to-date, your marketing spend is tracking flat to down. Do you see that turning around sharply in the fourth quarter?
Robert H. Swan: We have generated some improvements in our overall marketing spend during the course of the year. We were 400 basis points down in the third quarter; however, we are spending more on buyer retention programs versus acquisition related programs, through couponing and loyalty programs. Those dollars are impacting revenue in terms of contra revenue as opposed to marketing and expense. We expect in the fourth quarter in this difficult economic environment that we will be spending even more marketing dollars as a percent of revenue than we did in the third quarter that will impact both contra revenue and our marketing, our sales and marketing expense as a percent of total.
John J. Donahoe: The way we are going to spend that is to fight for our sellers. We envision a difficult holiday season and we feel a strong need to get out there and help drive demand on behalf of our sellers, so we will increase Internet marketing, we will increase our couponing, we will increase our cash-back program with Microsoft, promotions, things that we have proven ability to generate returns from.
Youssef Squali (Jefferies & Company): Are you and how long would you wait before considering a potential restructuring of the business as the core continues to weaken?
John J. Donahoe: We are continuing to invest in our areas of strength and we see strong synergies between the core eBay business and the PayPal business, and strong synergies between the eBay business and the other e-commerce formats. I get a question frequently on PayPal of would not we be better off with PayPal being separate? Our sense is no, there are strong synergies between PayPal and eBay, that eBay continues to provide PayPal with new customers, that there is still growth for PayPal left on eBay. We are delighted penetration grew more in the third quarter than it has any quarter in the past. It is now at 60% globally. We think that can go higher. There is nothing about being part of our portfolio that is holding PayPal back -- in fact, the contrary; being part of the overall portfolio allows us to move on an acquisition and opportunity like Bill Me Later. We are focused on trying to take advantage of the synergies. We do not think we have fully realized the synergies between eBay and PayPal and that our classifieds business, advertising, and Stub Hub all have strong synergies with eBay.
Youssef Squali (Jefferies & Company): Could you comment on Skype?
John J. Donahoe: Skype is a great standalone business. The more we let it stand alone, the more it seems to deliver fantastic results. Right now it is not a distraction and we are focusing our attention on eBay and PayPal and the e-commerce businesses and so we will continue to assess its role in the portfolio but right now, it is not a distraction and it is delivering good results.
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