Good day, ladies and gentlemen, and welcome to eBay's Third Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to hand the conference over to Ms. Jennifer Cerran, Vice President of Investor Relations. Ma'am, you may begin.

Thank you, and good afternoon. Thank you for joining us, and welcome to eBay's earnings release conference call for the third quarter of 2011. 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. All gross rates mentioned in Bob and John's prepared remarks represent year-over-year comparisons unless they clarify otherwise. 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 will make forward-looking statements relating to our future performance that are based on the 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 quarter and full year 2011 and the future growth in the Payments, Marketplaces and GSI businesses. Our actual results may differ materially from those discussed in this call for a variety of reasons including, but not limited to, global economic events; changes in political, business and economic conditions; foreign exchange rate fluctuation; our ability to integrate, manage and grow businesses recently acquired or that may be acquired in the future, including GSI; our increasing need to grow revenues from existing users, particularly in more established markets; an increasingly competitive environment for our businesses; the complexity of managing an increasingly large enterprise with a broad range of businesses at different stages of maturities; and our need to manage regulatory tax, IT and litigation risks, including risks specific to PayPal, Bill Me Later and the financial industry; and our need to timely upgrade our technology and customer service infrastructure at reasonable cost or adding new products and features and maintaining site stability and performance. 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 should not rely on any forward-looking statements. All information in this presentation is as of October 19, 2011, and we do not intend and undertake no duty to update this information. With that, let me turn the call over to John

Thanks, Jenny. And good afternoon, everyone, and welcome to our Q3 earnings call. Q3 was another strong quarter for our company. eBay, PayPal and GSI all performed well, and we see significant global growth opportunities and synergies across our portfolio. Before taking a look at our results, I want to take a moment to recap our strategy. Our company is focused on enabling commerce. This means giving consumers a seamless shopping experience across multiple channels, whether they're shopping online, offline or on a mobile device. Consumers want to shop anytime, anywhere. And this requires retailers of all sizes use the ability to engage consumers where, when and how they want to shop. In today's commerce environment, a physical retail store is just another point of access. Location alone can't compete when consumers have shopping malls in their pockets. Retail must be technology-enabled and consumer-led. Global technology platforms increasingly enable commerce, and we have powerful commerce platforms in our core eBay, PayPal and GSI businesses. We're also building valuable commerce capabilities in mobile, local and social. This includes technologies such as Milo, RedLaser and Zong. And last week, we launched X.commerce, our open commerce ecosystem. X.commerce makes our technology and global platforms available to third-party developers, which we believe will accelerate commerce innovation. We believe that technology-led innovation is changing shopping and rapidly influencing customer behavior. We are at an inflection point in global commerce. In fact, we believe we'll see more change in how people shop and pay over the next 3 years than we've seen in the last decade. And as we enter this new wave of global commerce innovation, I feel very good about our ability to compete, win and lead. Now let's take a look at our results in Q3. We had a strong top line and…

Thanks, John. During my discussion, I'll reference our earnings slide presentation that accompanies the webcast. Q3 was another strong quarter. From a growth perspective, we grew the top line 32% and showed strength across all of our businesses. From an execution perspective, operational excellence has increasingly become the way we work. We grew the bottom line 20%, while we invest in operating leverage and accelerating innovation and driving top line growth. From a capital allocation perspective, we generated over $500 million in free cash flow, and we've reinvested approximately $300 million to strengthen our portfolio with the acquisitions of Magento, Zong and The Gifts Project. In the third quarter, our combined businesses generated net revenues of $3 billion, up 32%. Organic revenue growth was up 18%. Foreign currency movements increased growth by roughly 3 points and the inclusion of recently-closed acquisition increased growth by roughly 11 points. Third quarter non-GAAP EPS was $0.48, a 20% increase year-on-year. Solid top line growth drove this increase and our outperformance versus guidance. Non-GAAP operating margin was 25.3%, down 340 basis points from Q3 2010. This was due primarily to the inclusion of recently-completed acquisitions. We generated strong free cash flow of $526 million in the quarter. CapEx came in at roughly 10% of revenue, 3 points higher than the year-ago quarter. The increase was due to investments in product and technology to enhance our platforms, as well as the addition of GSI. We expect CapEx to decline to historical levels in the fourth quarter. Now let's take a closer look at our segment results. PayPal posted another great quarter. Revenue growth accelerated to 32%, the strongest revenue growth in 3 years. Total payment volume increased to $29.3 billion, up 31%. We continue to expand our global footprint. International TPV increased 46% and comprise…

[Operator Instructions] Our first question comes from Gil Luria from Wedbush.

It looks like one of the really interesting initiatives that you have is around bringing PayPal to the point of sale, but this is a very new endeavor for you. Could you talk a little bit about what the rollout strategy is going to be in terms of how much technology investment the retail is going to have to make at the point of sale? Are you going to need an army of salespeople to convert those point of sales? How are you going to price vis-à-vis the existing merchant acquirers? A little bit of a perspective there would be helpful. And if you could also tell us who that retailer you're going to pilot with in the fourth quarter, that would be interesting as well.

Sure, Gil. Let me take that. This has really developed over the last year. We've had a number of offline retailers approach us at PayPal and say they really wanted to bring PayPal to the point of sale because they recognize PayPal was a unique, trusted payments partner for them that could bring great value at it. So our approach to this has been very similar to the approach we took to the Merchant Services business in PayPal 4 or 5 years ago, where we picked a small number of globally-known top tier retailers, and we're working to build a solution that is scalable and that works. And so we have been working with one retailer in particular, where as I said, we'll do what is, in essence, a friends and family pilot here in the fourth quarter. And then, we are working with a number of other retailers in the first -- I mean, the fourth quarter of this year so that in the first half of next year, we'll have a scalable technology that will be able to rollout to these national retailers. And the focus is very much on helping them drive incremental sales, which is the same thing that PayPal has done in the Merchant Services businesses. It's payments as a vehicle to help them get better information about their customers and support them throughout their payment flow. So the -- and it's not dependent. Just as we built Merchant Services so it wasn't dependent on any individual retailer-specific cart because an the airline cart is different than a apparel cart, which is different than a technology retailer's cart. We're building this point of sale so it's not dependent on any form factor. So it doesn't need mobile payments or if it is mobile payments, it…

Our next question comes from Doug Anmuth from JPMorgan. Douglas Anmuth - JP Morgan Chase & Co, Research Division: I just wanted to follow up on Payments. Bob, could you explain that increase in loss rate that you saw during the quarter, in particular maybe a little bit more detail on the new products and strategic decisions that you referenced? And also, are you still comfortable with the 24% to 26% margin that you laid out for 2013?

Yes, in terms of -- as you are familiar with how we manage the business, simply put, driving growth that we believe can generate greater than 60% trends, max [ph] your margins over time. And that's dependent on 3 variables: what we charge, our take rate; what were charged, our transaction expense; and then how we manage risks and that's our losses. In Q2 and in Q3, we've made some decisions, as we always do, as we fine tune our fraud models. And we drive losses down over time. We increase our protections. And by increasing protections, we improve the experience and drive more growth. And in the short term, the effect is it increases our fraud losses. We began that back in the second quarter. Our fraud losses went up in Q2 and Q3. And net-net, it drives more growth for us and we feel good about those kind of trade-offs. In terms of new products and I'll particularly highlight anytime we introduce a new feature or functionality that our fraud models are not familiar with, we learn. We rapidly innovate around the fraud management, and we drive those losses down over time. Example would be mobile. The mobile is a new app for us. It's growing like crazy. The newness of it requires our engines to become familiar with where those consumers are coming from and how we drive losses down over time. So we've seen from new products and decisions we've made to drive better experiences, losses come up in the last couple of quarters. And as I indicated in the prepared remarks, our expectations of those losses will trend down in Q4 going forward, as we get smarter about this new volume we're contending with.

And Doug, it's John. I may just build on that. In a funny way I consider this loss performance in Q3 a good thing because I think it continues to extend PayPal's competitive advantage. There's a lot of talk about mobile payments right now, but mobile payments is a fundamentally risky thing. And PayPal has the best risk models in the world. It's now -- we're now learning based on $3.5 billion of real volume. Our risk models are rapidly learning how to underwrite mobile payments. And we're confident that we're going to be able to provide a great mobile payments solution at very competitive, industry-leading loss performance and that others are going to face those challenges behind us with a lot less experience. And so this is one -- this is the kind of learning that we love to have because we think it extends our competitive position and competitively.

And Doug just to the second component of your question. Yes, we laid out our operating margin expansion for PayPal by 2013 to 24% to 26%. And we are confident that Q3 to Q4 this year, as always, we'll see PayPal segment margins expand. And we will be on our way to generate 24% to 26% segment margins for PayPal in 2013.

Our next question comes from Colin Sebastian from RW Baird. Colin A. Sebastian - Robert W. Baird & Co. Incorporated, Research Division: I guess, first following up on Doug's question on the loss rate. I wonder how much of that calculation is based on perhaps using Bill Me Later proactively to drive a more favorable share of PayPal and bank account transactions and whether you're seeing any shift in the funding mix overall. And then the follow up would be related to your comments about Q3 trends at the end of the quarter. It sounds like you're not seeing an immediate impact from the new advertising campaign. So I guess, my question would be what gives you comfort on raising the revenue guidance range for the quarter?

On the losses, not the Bill Me Later impact. Net charge-offs came down year-on-year. So while net charge-offs are higher than the transaction losses in the core PayPal business, they did come down year-on-year, and it's just not big enough to move the needle in any meaningful way. So it's not having a big impact. In terms of funding mix shifts, as Bill Me Later grows, it is a lower cost funding source in the wallet. And in turn that drives down our processing cost and therefore, drives up our transaction margins. You've seen a little bit of improvement in that over the past couple of quarters. And in Q4, remember Durbin goes into effect on October 1, so the core PayPal business we expect that to come down in Q4.

And then with respect to what gives us confidence in raising guidance in Q3 coming out -- or Q4 coming out of Q3. As Bob said, we saw relative stability coming out of Q3 and into Q4. And I don't think we have a crystal ball about what's going to happen with the economy or what's going to happen with exchange rates. But based on what we see, our planning assumption is a thought set of an okay to solid holiday season. And so that's what we're planning for and that's what we're going to pursue. Lastly, you mentioned eBay advertising. I can't resist. I don't know about you but I love those ads. And the qualitative feedback today has been quite positive. They're clearly cutting through. And they're cutting through the message that we really need to cut through with eBay, which is new merchandise, a new eBay experience. And it's too early to tell although how the material impact on the business. But frankly, they're brand investments that are part of what you all have been asking me about for 2 years now, which is when are we going to begin telling our story to consumers again about the new eBay. And this is really the launch of that. So it's geared to help rebuild our brand and rebuild user growth over the next 3 to 6 to 9 months.

Our next question comes from Matt Nemer from Wells Fargo.

I just wanted to follow up on the marketing campaign. How will you measure success of that campaign in the short term? And can you see any effect on that in terms of either desktop or mobile traffic? And then as a follow-up, I'm just wondering if you can give us any update on the test that you are doing in fulfillments for retail customers?

Well, on the marketing campaign, any time you do a TV brand campaign or an integrated brand campaign, the ultimate goal obviously is to grow your business overtime. But the way we're measuring it is: one, what is brand perception, what's the awareness and unaided brand perception of eBay among consumers; second, obviously, we hope that generates incremental users and traffic, which will in turn generate incremental business. And so the time frame, however, we're looking at it is not just within the quarter. Do I hope it has benefit in the quarter? Yes, I hope it's benefit in the quarter. But the time frame and the way that program was designed was to change the perception and reputation of eBay and make people understand that the new eBay user experience, the new eBay inventory is here. And as I've said earlier, the early feedback has been quite positive on that. On the fulfillment test results...

I think on fulfillment, I mean, obviously with the acquisition of GSI, we play a critical role in enabling our merchants and retailers to get their product to their consumers, either from a warehouse or directly from the store. It's a core competency of the GSI team, and I think this is a competitive advantage that they have. I think, along the way, one of the questions we got, and this maybe what Matt, what triggers your question is, are you going to begin to do fulfillment for smaller sellers within GSI's infrastructure? And our answer on that is that's not our top priority. Our focus is fulfilling GSI's clients' needs with our warehouses and enabling sellers on the eBay platform to connect with their buyers in more efficient ways, but not necessarily in doing fulfillment tests.

One of the interesting things is we mentioned earlier that top-rated sellers represent almost 45% of the GMV on the U.S. site now, U.S. eBay site. And most of our top-rated sellers are reasonably sized businesspeople, and they're not looking for fulfillment support. They actually feel like they've got their fulfillment capabilities and shipping abilities up to retail standard. So it's not a loud crying need we feel with the fastest-growing segment of the eBay seller base.

Our next question comes from Spencer Wang from Credit Suisse. Spencer Wang - Crédit Suisse AG, Research Division: I first want to just go back to the use of cash and M&A strategy, for either John or Bob. Do you guys feel like you have all the pieces in place you need now for the X.commerce platform or the operating system for commerce strategy? And how prominently do you think M&A will figure into the capital allocation plans from here? And then my second question is on mobile payments. I was wondering if you can give us a sense of how mobile users are using PayPal. Is mobile a channel for incremental PayPal users? And is there any sort of difference in terms of source of funds with the traditional business? I'm thinking maybe PayPal balances would be a bigger percent of the total.

I'll grab the first one and John the second. First on just the overall use of cash, in our philosophy, no dramatic change. To remind you, our bias is a conservative balance sheet so we have the inherent flexibility to grow our loan portfolio to expand through M&A and return cash to shareholders through a share repurchase program that offsets dilution. So at the macro level, no change. In terms of strategic M&A to enable X.commerce, I mean, obviously the Magento acquisition that we just completed this quarter is a key component of our X.com platform. Going forward, will there be smaller acquisitions to add in X.commerce? Very possibly. But I would say our focus right now is how do we enable and turbocharge developers to come up with new ways to innovate and let them use the X.commerce fabric itself rather than us necessarily having to own all those capabilities.

And Spencer, on the PayPal Mobile, what's interesting is when we survey consumers on why they use PayPal Mobile, it's like almost a brand advertising that we hear back. They say it's safe and convenient. And safe, they don't feel comfortable entering their credit card information to a mobile phone. And they're concerned that somehow it will get stolen or intercepted at the airwaves. People have all sorts of fears. And then convenience, you don't need your physical wallet with you. You just -- wherever you are, whether you're sitting on a couch, whether you're standing in line at a coffee shop or whether you're in a retail store, one click and you can check it on your mobile device with PayPal. And we're seeing it in -- on eBay. We're seeing it increasingly with Mobile Express Checkout. Retailers are finding when they put Mobile Express Checkout, they're getting a much higher conversion of their mobile sales. So and funding mix, your question. We don't see really any particular shift or change in funding mix one way or another. That's not a factor in the consumer's choice to use PayPal Mobile.

Our next question comes from Scott Devitt from Morgan Stanley.

Two, please. The first one, John, on the large merchant initiative on eBay. I was just wondering if you can quantify the success that you've had there, either maybe in terms of the increasing large merchants SKUs on the site or change in GMV mix between SMB and large branded retailers in the last few quarters. And then secondly, Bob, you mentioned in the Q4 guide, the cross-border. And keeping that in mind in terms of wild swings in currency and you certainly have those in third quarter, so I was wondering if you could tell us if there's any noticeable change in cross-border mix in the third quarter.

Scott, on the large merchant initiative, I would characterize us in the learning phase, where we're bringing large merchants on to eBay and we're able to bring large merchants on to eBay. And we're still learning how to really drive powerful incremental volume for them. And so we had -- an example, in the third quarter, we had a nice promotion with Coach, a luxury brand. And we were able to drive through a combination of, in essence, a flash sale and some other things, some nice incremental volume. We've added Neiman Marcus Last Call, as I mentioned earlier, in our fashion outlet. And we're making working with the Neiman team to really optimize how we take advantage of the 100 million active eBay consumers to drive incremental volume. So I feel good about steady progress on that. I feel good about our ability to sign additional merchants. But I don't -- we're not yet really ready to quantify it other than to say we feel a strong need. We're making a good steady progress, and we want to hit some singles and doubles before we start swinging for the fences.

Scott, on the second question, first, we feel, both at PayPal and eBay, we are uniquely advantaged to capitalize on cross-border trade. It's almost 20% of the business between the 2 business units, so it's a big part of what we do. As currencies move, the buying power in a particular market changes and our cross-border business is usually affected rather quickly. What we saw happen in the third quarter was as the euro weakened throughout the quarter, the cross-border demand from European consumers for product out of greater Asia or out of the U.S. dropped almost -- dropped in line with the value of the European currency. So it was a -- it negatively impacted our growth rates in the third quarter. Obviously, the euro has rebounded quite a bit in the last 10 to 15 days. And our guidance for fourth quarter, we're assuming that the euro -- for translation purposes, as you know, we hedge. So that's not what we're worried about. We're more worried within the quarter about cross-border flows. With the euro strengthening, that headwind that we experienced at the end of the third quarter, we're not anticipating in the fourth quarter.

Our next question comes from Ben Schachter from Macquarie.

A couple of mobile questions here. How do you figure out if mobile sales are really incremental or just cannibalistic? And then on tablets specifically, obviously, you've had a lot of success on the iPad. You did a great form factor particularly for e-commerce. Do you expect the same positive momentum on a lower-cost tablet coming from Amazon? Or are there concerns that Amazon itself will try to use that tablet in some way to funnel users more directly to their site?

Ben, I'm glad you asked this question because I think our perspective on this from the beginning has actually been one of the factors for our success. And the simple truth is we haven't worried about whether it's incremental. Because from the beginning, we recognized that consumers simply view a mobile device as another screen. And they want to use that screen interchangeably with their desktop, their laptop, mobile device, tablet, increasingly TV. And actually as we talked recently also going into a retail store, and we find a large number of consumers use more than one screen in a given shopping experience. They may do research on one screen. They may be identifying the exact product they want on a different screen. They may actually buy it in a store on a screen. They may pay for it on a different screen. And so we do believe our mobile sales are partially incremental, but we've not spent a lot of time on trying to measure that. We spent more time on absolutely trying to drive very aggressive innovation on mobile on all fronts. Even if it's cannibalistic, it's value-enhancing to the consumer. We do know that the consumers that use mobile devices are more than twice as engaged as those that don't. And then with respect to tablets, I think it's really important, on the Amazon part, to separate digital goods from physical goods. We don't really sell digital goods, the primary digital goods market. And Apple and Amazon and others sell those. And that's where the tablet is a closed system. The sale of physical goods, whether it's the Apple iPad or I believe the Amazon tablet over time, consumers want choice. Consumers want seamlessness across their devices, if you will, their screens. And so we hope, believe and anticipate that, that choice will be available and the consumers will demand that over time. So we won't control that, but we're going to continue to drive what is, in essence, a seamless multiscreen shopping experience and increasingly, online and offline seamless multichannel shopping experience.

Our next question comes from Justin Post from Bank of America.

Could you talk about the U.S. GMV? I think it grew 14%, which was flat from last quarter. It looks like you've got a lot of large sellers joining the platform and some of the GSI integrations working, also the marketing program. Can that stay at that level as you look out? Do you think you could continue to grow with the market as you look out to the fourth quarter or next year even in the face of tougher comps? Maybe just give us an update on your market share expectations.

Yes. First, clearly our expectations are to continue to grow in line with or faster than market rates growth with a variety of different formats that we used to connect buyers and sellers. On U.S. GMV, we've had tremendous momentum here over the last 6 months. Going into fourth quarter, I think, the market rates of growth, I guess, my expectation would be given tougher comps at market rates growth, will likely slow here in the fourth quarter, my crystal ball. I don't know, but the expectation is that market rates will slow. In our guidance, we've put in where we see our internal trends in light of the market over the course of the last 6 months, 6 weeks and 6 days and gave you our best view about what is that we think we can do, which is $100 million better revenue over the second half of the year than where we were just 3 months ago.

And Jeff, the other thing I'd add is that as we look into 2012, our focus will continue to be looking at our global business as a portfolio. And we'll have -- we feel very good about the trend in our global business. The global commerce businesses, it's growing. And individual markets may go up or down along the way. The U.K. grew faster than the market last year and sustained that this year. We're delighted that the progress in U.S. this year, and we hope and believe it will extend into next year. But what we're confident, where we're most confident is that the global portfolio we will continue to improve our growth relative to the market.

And our final question for today comes from Mark Mahaney from Citi.

I want to get real specific on Merchant Services and FX-neutral year-over-year growth. I don't want to over extrapolate from a quarter but that 33% growth year-over-year, it was a bit of an outlier if you look at the last 2 years. Is there anything that makes you think -- and I know these results can be lumpy in the quarter. But is there anything that makes you think that, that isn't the negative inflection point? Any color around that would be really helpful.

Yes, Mark, I think a couple of things. One, last year in the second and third quarter of 2010 is when PayPal growth, Merchant Services in particular, really began to accelerate. So first point I would make is that the comps are a little bit tougher. Secondly, 33% growth is roughly in line with what our expectations were, so we feel pretty good about Merchant Services growth here domestically and it's continued strength outside the U.S. The third point, which is an important point that I referenced to earlier, Merchant Services out of Asia, that cross-border trade business is impacted quite a bit by the strength in European currencies. And we saw a fairly significant drop from Q2 through to September of the growth rate of Merchant Services volume going to Europe, and that's the way it works. When euro gets weaker, demand for PayPal merchants coming out of Greater China immediately changes. In this case, it immediately went south. And as European gets stronger relative to -- for the most part U.S. dollar-denominated currencies, all else equal, PayPal Merchant Services on Asia grows. September was a tough month. As the euro weakened, demand out of Asia slowed dramatically, and it did impact Merchant Services' growth. Going into the fourth quarter, 33% top line growth, nice global business; 66% of our overall TPV coming out of Merchant Services with a nice global footprint and getting bigger. We feel pretty good about the prospects.

All right. Thanks, everyone. We'll see you next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect, and have a wonderful day.