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EBAY > SEC Filings for EBAY > Form 10-Q on 4-Aug-2004All Recent SEC Filings

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Form 10-Q for EBAY INC


4-Aug-2004

Quarterly Report


Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations

FORWARD LOOKING STATEMENTS

This report contains statements that involve expectations, plans or intentions (such as those relating to future business or financial results, new features or services, or management strategies). These statements are forward-looking and are subject to risks and uncertainties, so actual results may vary materially. You can identify these forward-looking statements by words such as "may," "will," "should," "expect," "anticipate," "believe," "estimate," "intend," "plan" and other similar expressions. You should consider our forward- looking statements in light of the risks discussed under the heading "Risk Factors That May Affect Results of Operations and Financial Condition" below, as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements.

You should read the following Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this document.

Overview

About eBay

We pioneered online trading by developing an Internet-based marketplace in which a community of buyers and sellers are brought together in an entertaining, intuitive, easy-to-use environment to browse, buy and sell an enormous variety of items. Through our PayPal service, we enable any business or consumer with email to send and receive online payments securely, conveniently and cost-effectively.

Executive Operating and Financial Summary

Our focus is on understanding our key operating and financial metrics

Members of our senior management team regularly review key operating metrics such as new users, active users, listings and gross merchandise volume (which is a measure of the total value of all successfully closed listings on our global marketplace) as well as new user accounts, total payment volume and merchant services transactions processed by our wholly-owned PayPal subsidiary. Members of our senior management also regularly review key financial information including net revenues, operating income margins, earnings per share, cash flows from operations and free cash flows, which we define as operating cash flows less purchases of property and equipment. These operating and financial measures allow us to monitor the health and vibrancy of our marketplace and the profitability of our business and to evaluate the effectiveness of investments that we have made and continue to make in the areas of international expansion, customer support, product development, marketing and site operations. We believe that an understanding of these key operating and financial measures and how they change over time is important to investors, analysts and other parties analyzing our business results and future market opportunities.

Our expectations for growth

We expect that our growth in net revenues during 2004 will result primarily from net transaction revenues across our U.S., International, and Payments segments, with a potentially more significant effect of downward pressures from seasonality on our revenues during the third quarter. The expected future growth in our Payments segment net revenues will also cause downward pressure on our gross margin and operating profit margin as a result of our Payments segment's lower gross margins. We continue to make investments in our business and infrastructure to help us achieve our long-term growth objectives. We expect to continue our investments in the areas of international expansion, customer support, site operations, product development, marketing and various corporate infrastructure areas. We believe these investments are necessary to support the long-term demands of our growing business as well as to build the infrastructure necessary to support long-term growth. In addition, to the extent that the U.S. dollar strengthens or weakens against foreign currencies,


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and, in particular, the Euro, the translation of these foreign currency denominated transactions into U.S. dollars will negatively or positively impact our consolidated net revenues, operating expenses and net income.

The detailed discussion of our financial condition and results of operations contained herein is intended to provide information to assist investors, analysts and other parties reading this report in understanding the key operating and financial measures summarized above as well as the changes in our results of operations from period to period, the primary factors that accounted for those changes and how certain accounting principles, policies, judgments, and estimates affect our consolidated financial statements.

 Seasonality


      The following table sets forth, for the periods presented, our total net
revenues and the sequential quarterly growth of these net revenues.


                                          March 31            June 30            September 30             December 31
                                       ---------------    ---------------    ---------------------    -------------------

                                                               (In thousands, except percentages)
2002
   Net revenues                          $ 245,106          $ 266,287            $    288,779            $   413,928 *
   Current quarter vs prior quarter             12 %                9 %                     8 %                   43 %

2003
   Net revenues                          $ 476,492          $ 509,269            $    530,942            $   648,393
   Current quarter vs prior quarter             15 %                7 %                     4 %                   22 %

2004
   Net revenues                          $ 756,239          $ 773,412                     N/A                    N/A
   Current quarter vs prior quarter             17 %                2 %




* Includes revenue from PayPal subsequent to our acquisition on October 3, 2002.

As our business matures, consumer activity patterns on our websites increasingly mirror general consumer patterns, both online and offline. In the second quarter of 2004 we experienced anticipated seasonal patterns that have become, and we believe will continue to become, amplified. This gradual development has translated into, and we believe will continue to translate into, periods of increasingly stronger sequential growth for us in the first and fourth quarters of the year, followed by periods of weaker or no sequential growth in the second and third quarters of the year.


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Results of Operations

      The following table sets forth, for the periods presented, certain data
from our condensed consolidated statement of income as a percentage of net
revenues. This information should be read in conjunction with our condensed
consolidated financial statements and notes thereto included elsewhere in this
report.



                                                                       Three Months Ended
                                 -----------------------------------------------------------------------------------------------
                                   June 30,         September 30,           December 31,           March 31,         June 30,
                                     2003                2003                   2003                 2004              2004
                                 ------------    --------------------    -------------------    ---------------    -------------
Net revenues                         100.0 %               100.0 %                100.0 %             100.0 %          100.0 %
Cost of net revenues                  19.5                  20.6                   17.8                17.8             18.9
                                     -----            ----------              ---------             -------            -----
       Gross profit                   80.5                  79.4                   82.2                82.2             81.1
                                     -----            ----------              ---------             -------            -----
Operating expenses:
   Sales and marketing                26.4                  25.7                   26.6                25.5             24.5
   Product development                 7.6                   7.5                    7.2                 7.0              7.8
   General and administrative         13.6                  14.0                   14.8                12.0             13.3
   Patent litigation expense           5.9                     -                      -                   -                -
   Payroll tax on employee
   stock options                       0.6                   0.3                    0.2                 0.7              0.7
   Amortization of acquired
   intangible assets                   2.4                   2.6                    2.0                 1.8              2.0
                                     -----            ----------              ---------             -------            -----
       Total operating
       expenses                       56.5                  50.0                   50.8                47.0             48.3
                                     -----            ----------              ---------             -------            -----
Income from operations                24.0                  29.4                   31.3                35.3             32.8
Interest and other income,
net                                    2.1                   1.5                    1.8                 3.1              2.9
Interest expense                      (0.0 )                (0.4 )                 (0.3 )              (0.3 )           (0.3 )
Impairment of certain equity
investments                              -                     -                   (0.2 )                 -                -
                                     -----            ----------              ---------             -------            -----
Income before cumulative
effect of accounting change,
income taxes and minority
interests                             26.1                  30.4                   32.6                38.1             35.4
Provision for income taxes            (7.8 )                (9.6 )                (10.3 )             (11.3 )          (10.5 )
Minority interests                    (0.3 )                (0.3 )                 (0.3 )              (0.3 )           (0.3 )
                                     -----            ----------              ---------             -------            -----
Net income before cumulative
effect of accounting change           18.0                  20.5                   22.0                26.5             24.6
Cumulative effect of
accounting change, net of tax            -                  (1.0 )                    -                   -                -
                                     -----            ----------              ---------             -------            -----
Net income                            18.0 %                19.5 %                 22.0 %              26.5 %           24.6 %
                                     -----            ----------              ---------             -------            -----



Our net revenues are derived primarily from listing, feature and final value fees paid by sellers and fees from payment processing services. Our net revenues have continued to grow year-over-year, primarily as a result of increased auction and fixed-price transaction activity, reflected in the growth in the number of our confirmed registered users, user activity, listings, user gross merchandise volume and payment transactions processed by PayPal. We believe these increases are largely the result of our promotional efforts and our emphasis on enhancing the online trading experience of our user community, both domestically and internationally, through the introduction of new site features and functionality and expanded trust and safety programs.

We have continued to invest in international expansion, customer support, site operations, corporate infrastructure, product development and marketing. The cost of these investments has been offset, partially, by operational and cost efficiencies.


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 Net Revenues Summary



                                 Three Months                        Three Months            Six Months                           Six Months
                                     Ended            Percent            Ended                  Ended            Percent             Ended
                                 June 30, 2003        Change         June 30, 2004          June 30, 2003        Change          June 30, 2004
                              -------------------    ---------    -------------------    -------------------    ---------    ---------------------

                                                                     (In thousands, except percent changes)
Net Revenues by Segment:
      U.S.                       $    251,159             33 %       $    334,481           $    493,628             36 %       $     673,051
      International                   156,587             77 %            277,444                295,404             82 %             536,934
      Payments                        101,523             59 %            161,487                196,729             62 %             319,666
                                   ----------                          ----------             ----------                          -----------
         Total net
         revenues                $    509,269             52 %       $    773,412           $    985,761             55 %       $   1,529,651
                                   ----------                          ----------             ----------                          -----------
Net Revenues by Type:
   Transaction net
   revenues U.S.                 $    242,385             32 %       $    319,119           $    477,261             35 %       $     645,336
      International                   155,155             76 %            273,740                292,659             81 %             530,830
      Payments                         99,363             60 %            158,815                192,542             63 %             314,328
                                   ----------                          ----------             ----------                          -----------
         Total transaction
         net revenues                 496,903             51 %            751,674                962,462             55 %           1,490,494
   Advertising and other
   non-transaction net
   revenues                            12,366             76 %             21,738                 23,299             68 %              39,157
                                   ----------                          ----------             ----------                          -----------
         Total net
         revenues                $    509,269             52 %       $    773,412           $    985,761             55 %       $   1,529,651
                                   ----------                          ----------             ----------                          -----------
Net Revenues by Geography:
   U.S.                          $    331,322             36 %       $    449,571           $    650,492             39 %       $     904,926
   International                      177,947             82 %            323,841                335,269             86 %             624,725
                                   ----------                          ----------             ----------                          -----------
         Total net
         revenues                $    509,269             52 %       $    773,412           $    985,761             55 %       $   1,529,651
                                   ----------                          ----------             ----------                          -----------



Net revenues are allocated between U.S. and International geographies based upon the country in which the seller, payment recipient, advertiser or service provider is located.

                                 Three Months                       Three Months           Six Months                          Six Months
                                    Ended            Percent           Ended                  Ended            Percent            Ended
                                June 30, 2003        Change        June 30, 2004          June 30, 2003        Change         June 30, 2004
                              ------------------    ---------    ------------------    -------------------    ---------    -------------------

                                                                     (In millions, except percentages)
Supplemental Operating
Data:
U.S. and International
Segments(1):
   Confirmed registered
   users(2)                             75.3             51 %             114.0                   75.3             51 %              114.0
   Active users(3)                      34.1             41 %              48.0                   34.1             41 %               48.0
   Number of listings(4)               225.0             48 %             332.3                  444.7             48 %              660.0
   Gross merchandise
   volume(5)                     $     5,635             42 %       $     8,012           $     10,952             47 %       $     16,051
Payments Segment:
   Total accounts(6)                    31.1             62 %              50.4                   31.1             62 %               50.4
   Active accounts(7)                   10.2             52 %              15.5                   10.2             52 %               15.5
   Number of payments(8)                53.7             45 %              77.7                  104.2             51 %              156.9
   Total payment volume(9)       $     2,843             53 %       $     4,350           $      5,471             58 %       $      8,671





(1) mobile.de, our classified vehicle advertising platform in Germany, is not included in these metrics.

(2) Cumulative total of all users who have completed their registration process on one of eBay's trading platforms.

(3) All users, excluding Half.com, EachNet, Internet Auction and mobile.de users, who bid on, bought, listed, or sold an item within the previous 12-month period.

(4) All listings on eBay's trading platforms, including new eBay Stores inventory listings, during the period, regardless of whether the listing subsequently closed successfully.

(5) Total value of all successfully closed listings between users on eBay's trading platforms during the period, regardless of whether the buyer and seller actually consummated the transaction.


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(6) Cumulative total of all personal, premier, or business accounts opened, excluding accounts that have been closed or locked.

(7) All accounts that sent or received at least one payment through the PayPal system during the period.

(8) Total number of payments initiated through the PayPal system during the period, regardless of whether the payment was actually sent successfully, or was reversed, rejected, or pending at the end of the period.

(9) Total dollar volume of payments initiated through the PayPal system during the period, regardless of whether the payment was actually sent successfully, or was reversed, rejected, or was pending at the end of the period.

The U.S. segment includes our U.S. online marketplace trading platforms, other than our PayPal and Billpoint subsidiaries. The International segment includes our international online marketplace trading platforms excluding those of our PayPal and Billpoint subsidiaries. The Payments segment includes our global payments platform consisting of our PayPal and Billpoint subsidiaries. We completed our planned wind-down of Billpoint in the first half of 2003.

Our net revenues result from fees associated with our transaction, advertising and other services in our U.S., International and Payments segments. Transaction net revenues are derived primarily from listing, feature and final value fees paid by sellers and fees from payment processing services. Net revenues from advertising are derived principally from the sale of online banner and sponsorship advertisements for cash and through barter arrangements. Other net revenues are derived principally from contractual arrangements with third parties that provide transaction services to eBay and PayPal users.

U.S. and International Segments Net Transaction Revenues

Total net transaction revenues from the U.S. and International segments in aggregate increased 49% during the second quarter of 2004, compared to the same period in the prior year and 53% during the first six months of 2004, compared to the same period in the prior year. The growth in both U.S. and International segment net transaction revenues was primarily the result of increased auction transaction activity, reflected in the growth of the number of registered users, listings and gross merchandise volume. Gross merchandise volume from the U.S. and International segments increased 42% and 47% during the second quarter and first six months of 2004, respectively, compared to the same periods of the prior year. eBay net transaction revenues as a percentage of user gross merchandise volume was 7.4% and 7.3% during the second quarter and first six months of 2004, respectively, compared to 7.1% and 7.0% during the same periods in the prior year, reflecting the impact of our fee increases in addition to the first time inclusion of net revenues from mobile.de classified listings, which do not have a corresponding gross merchandise volume component because classified transactions do not close on our platform. In addition, our users experienced gross merchandise volume growth across all major categories with motors, clothing & accessories, books, movies & music, consumer electronics, home & garden, sports, jewelry and watches, and business & industrial making the most significant year-over-year impact for both the second quarter and first six months of 2004.

U.S. Segment

U.S. segment transaction net revenues increased 32% during the second quarter of 2004, compared to the same period in the prior year, and 35% during the first six months of 2004, compared to the same period in the prior year. Gross merchandise volume from the U.S. segment increased 26% and 31% during the second quarter and first six months of 2004, respectively, compared to the same periods of the prior year. Our U.S. operations have, as expected, experienced more pronounced seasonality during the second quarter of 2004, due to lower levels of activity on the Internet, and specifically during the month of June, which has resulted in a slight decline in sequential quarter-over-quarter user gross merchandise volume and net revenues for these operations. This decline has been the most significant in the more seasonally sensitive categories, such as textbooks, collectibles and clothing and accessories.

We expect our U.S. segment net transaction revenues to continue to grow, but with a more pronounced seasonal impact. In addition, we expect that the sequential growth rate in the third quarter in this segment will


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be substantially less than the historical growth rates we experienced in the fourth quarter of 2003 and the first quarter of 2004, and relatively comparable with the growth rate experienced in the second quarter of 2004.

International Segment

International segment net transaction revenues increased 76% during the second quarter of 2004, compared to the same period in the prior years and 81% during the first six months of 2004, compared to the same period in the prior year. International segment transaction net revenues as a percentage of total transaction net revenues was 36% during the second quarter and first six months of 2004 compared to 31% and 30% in the same periods in the prior year. The growth in our International segment net transaction revenues, both in absolute terms and as a percentage of total net transaction revenues is primarily the result of solid performances in the United Kingdom and South Korea offset, in part, by the impact of seasonality, particularly on our German operations. The relative strength of foreign currencies, primarily the Euro, against the U.S. dollar, resulted in increased net revenues of approximately $24.2 million and $70.3 million during the second quarter and first six months of 2004, respectively, when compared to the results if the weighted-average foreign currency exchange rates used in the preparation of our consolidated financial statements in the same periods in the prior year were used.

eBay collects value-added taxes, or VAT, on the fees we charge certain sellers in the European Union, or EU. We continue to work with the relevant tax authorities to clarify our obligations under these new regulations. There have been and will continue to be substantial ongoing costs associated with complying with the VAT rules throughout the EU. We also believe that changes in foreign currency rates will impact our operations, and to the extent that the U.S. dollar strengthens, our foreign currency denominated transaction net revenues will be negatively impacted.

We expect our International segment net transaction revenues to continue to grow, but with a more pronounced seasonal impact. In particular, we expect seasonality to have a relatively pronounced impact in our largest markets, such as Germany. In addition, we expect that the sequential growth rate in the third quarter in these markets will be substantially less than the historical growth rates we experienced in the fourth quarter of 2003 and the first quarter of 2004, and relatively comparable with the growth rate experienced in the second quarter of 2004.

Payments Segment Net Transaction Revenues

Payments segment net transaction revenues increased 60% and 63% during the second quarter and first six months of 2004, respectively, compared to the same periods in the prior year. Payments segment net transaction revenues as a percentage of total net transaction revenues was 21% during the second quarter and first six months of 2004, respectively, compared to 20% in the same periods in the prior year. The growth in our Payments segment net transaction revenues, both in absolute terms and as a percentage of total net transaction revenues is primarily the result of increases in transaction volume.

Our Payments segment net transaction revenues as a percentage of payment volume was 3.7% and 3.6% during the second quarter and first six months of 2004, respectively, compared to 3.5% during the same periods in the prior year. The growth in Payments net transaction revenues was also positively affected by PayPal's continued penetration of eBay transactions in the U.S. and the U.K., growth in our cross border international payment transactions and growth in the . . .

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