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| EBAY > SEC Filings for EBAY > Form 10-K on 20-Feb-2009 | All Recent SEC Filings |
20-Feb-2009
Annual Report
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that involve expectations, plans or intentions (such as those relating to future business or financial results, new features or services, or management strategies). You can identify these forward-looking statements by words such as "may," "will," "would," "should," "could," "expect," "anticipate," "believe," "estimate," "intend," "plan" and other similar expressions. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those discussed in "Item 1A: Risk Factors," of this Annual Report on Form 10-K 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 SEC. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such 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 included in this report.
Overview
We operate three primary business segments: Marketplaces, Payments and Communications. Our Marketplaces segment provides the infrastructure to enable global online commerce on a variety of platforms, including the traditional eBay.com platform, and our other online platforms, such as our online classifieds businesses, our secondary tickets marketplace (StubHub), our online shopping comparison website (Shopping.com), our apartment listing service platform (Rent.com), as well as our fixed price media marketplace (Half.com). Our payments segment is comprised of our online payment solutions - PayPal (which enables individuals and businesses to securely, easily and quickly send and receive payments online in approximately 190 markets worldwide) and Bill Me Later (which we acquired in November 2008 and which enables online U.S. merchants to offer, and U.S. consumers to obtain, transactional credit at the point of sale). Our Communications segment, which consists of Skype, enables VoIP calls between Skype users and provides low-cost connectivity to traditional fixed-line and mobile telephones.
Overall, 2008 revenue increased 11% to $8.5 billion, diluted earnings per share increased from $0.25 to $1.36 and operating cash flow increased 9% to $2.9 billion. PayPal, Classifieds, Advertising (in particular text and graphical advertising) and Skype were the key drivers of growth, with these businesses achieving a revenue growth rate of 25%, 57%, 40% and 44%, respectively. We also achieved an operating margin of 24%, with segment margins flat or better across all three of our business segments despite the deteriorating global economic environment in the latter half of 2008. However, we experienced declining revenue growth rates in total and on a segment basis.
During 2008, two of our key priorities were to reaccelerate the gross merchandise volume (GMV) growth in our Marketplaces core business and to grow our Payments business off the eBay platform (PayPal's merchant services business). In order to reaccelerate growth in GMV, we focused our actions in 2008 on improving eBay's Marketplaces by:
• Expanding selection;
• Improving our trust and safety; and
• Making it easier to find great values.
We will continue to focus on evolving a large and complex marketplace to reaccelerate growth in our core business.
We also made it a priority to expand the presence of PayPal beyond the eBay.com platform to better diversify our revenue sources and reduce our dependence on the eBay.com platform. During the second half of 2008, net total payment volume generated by PayPal's merchant services business exceeded volume on the eBay.com platform. PayPal's merchant services business grew 45% in 2008 as we expanded adoption of PayPal across the Internet. Our acquisition of Bill Me Later in November 2008 is expected to enhance our leadership position in online payment solutions.
Over the last three years, we have expanded our global footprint with approximately 54% of revenues now coming from outside the U.S. and diversified our revenue stream with approximately 45% of revenues now coming from non-Marketplaces transaction revenues.
Some key operating metrics that members of our senior management regularly review to evaluate our financial results include GMV, number of sold items, net total payment volume, Merchant Services net total payment volume, SkypeOut Minutes, free cash flow (operating cash flow less capital expenditures), and revenue, excluding acquisitions and foreign currency impact.
Outlook
The current uncertain economic environment and volatile foreign currency exchange rates make it difficult to identify trends likely to impact our financial results beyond the first quarter of 2009. We expect revenues and net
income in the first quarter of 2009 to be lower than the first quarter of 2008 due primarily to the effect of an anticipated stronger U.S. dollar as well as the negative impact of the economic environment on consumer spending and the challenges associated with reaccelerating growth of GMV in our Marketplaces core business. Although the current economic environment makes it difficult to predict the impact on individual types of expenses, we expect that cost controls, including our previously-announced restructuring that impacts our employee related operating expenses, will partially offset the negative effects of an anticipated year-over-year decline in revenues and our expected investments in our higher growth businesses such as Payments, Classifieds and Communications. We also expect diluted earnings per share will be negatively impacted by lower interest rates and from dilution resulting from recent acquisitions.
Results of Operations
Net Revenues
Our net transaction revenues from our Marketplaces segment are derived primarily from listing and final value fees paid by sellers. For our Payments segment, net transaction revenues are generated primarily by fees paid by merchants for payment processing services. Our Communications segment net transaction revenues are generated primarily from fees charged to users to connect Skype's VoIP product to traditional fixed-line and mobile telephones. These fees are charged on a per-minute basis or on a subscription basis and we refer to these minutes as SkypeOut minutes.
Our marketing services and other revenue are generated from all three of our business segments. Our marketing services are derived principally from the sale of advertisements, revenue sharing arrangements, classifieds fees, lead referral fees. Our other revenues are derived principally from interest earned from banks on certain PayPal customer account balances, interest and fees earned on the Bill Me Later loan portfolio and from contractual arrangements with third parties that provide services to all of our users.
Revenues are attributed to U.S. and international geographies primarily based upon the country in which the seller, payment recipient, customer, Skype user's Internet protocol address, online property that generates advertising, or other service provider, as the case may be, is located. Because we generate the majority of our revenue internationally, fluctuations in foreign currency exchange rates will impact our results of operations. Based on changes in foreign currency rates year over year, total net revenues for the year ended December 31, 2008 were positively impacted by foreign currency translation of approximately $190.9 million compared to the prior year. On a business segment basis, Marketplaces, Payments and Communications total net revenues for the year ended December 31, 2008 were positively impacted by foreign currency translation of approximately $158.8 million, $0.3 million and $31.8 million, respectively. Total net revenues for the year ended December 31, 2007 were positively impacted by foreign currency translation of approximately $276.0 million compared to the prior year. On a business segment basis, Marketplaces, Payments and Communications total net revenues for the year ended December 31, 2007 were positively impacted by foreign currency translation of approximately $222.4 million, $21.4 million and $32.2 million, respectively. Impact of foreign currency translation only includes changes between our functional currencies and our U.S. dollar reporting currency.
The following table sets forth, for the periods presented, the breakdown of net revenues by type, segment and geography. In addition, we have provided a table of certain key operating metrics that we believe are significant factors affecting our net revenues.
Percent Percent
Year Ended Change Year Ended Change Year Ended
December 31, from December 31, from December 31,
2006 2006 to 2007 2007 2007 to 2008 2008
(in thousands, except percent changes)
Net Revenues by Type(1):
Net transaction revenues
Marketplaces $ 3,864,502 21 % $ 4,680,835 1 % $ 4,711,057
Payments 1,401,824 31 % 1,838,539 26 % 2,320,495
Communications 189,110 93 % 364,564 44 % 525,803
Total net transaction revenues 5,455,436 26 % 6,883,938 10 % 7,557,355
Marketing services and other revenues
Marketplaces 469,788 45 % 683,056 28 % 875,694
Payments 38,706 128 % 88,077 (6 )% 83,174
Communications 5,811 197 % 17,258 45 % 25,038
Total marketing services and other
revenues 514,305 53 % 788,391 25 % 983,906
Total net revenues $ 5,969,741 29 % $ 7,672,329 11 % $ 8,541,261
Net Revenues by Segment:
Marketplaces $ 4,334,290 24 % $ 5,363,891 4 % $ 5,586,751
Payments 1,440,530 34 % 1,926,616 25 % 2,403,669
Communications 194,921 96 % 381,822 44 % 550,841
Total net revenues $ 5,969,741 29 % $ 7,672,329 11 % $ 8,541,261
Net Revenues by Geography:
U.S. $ 3,108,986 20 % $ 3,742,670 6 % $ 3,969,482
International 2,860,755 37 % 3,929,659 16 % 4,571,779
Total net revenues $ 5,969,741 29 % $ 7,672,329 11 % $ 8,541,261
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Year Ended December 31,
2006 2007 2008
(in millions)
Supplemental Operating Data:
Marketplaces Segment:
Gross merchandise volume(2) $ 52,474 $ 59,353 $ 59,650
Payments Segment:
Net total payment volume(3) $ 35,800 $ 47,470 $ 60,146
Communications Segment:
Registered Users(4) 171.2 276.3 405.3
SkypeOut Minutes(5) 4,095 5,650 8,374
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(1) Beginning with the first quarter of 2008, we reclassified revenue generated primarily from our Marketplaces non-GMV based businesses (which include Shopping.com, Rent.com and our classified websites) from "Net
Transaction Revenues" to "Marketing Services and Other Revenues" in order to more closely align our net transaction revenue presentation with our key operating metrics. "Marketing Services and Other Revenues" also includes amounts previously reflected under "Advertising and Other Revenue." Prior period amounts have been reclassified to conform to the current presentation. Consolidated net revenues, as well as total segment revenues, are unchanged.
(2) Total value of all successfully closed items between users on eBay Marketplaces trading platforms during the period, regardless of whether the buyer and seller actually consummated the transaction.
(3) Total dollar volume of payments, net of payment reversals, successfully completed through our payments network or on Bill Me Later accounts during the period, excluding the payment gateway business.
(4) Cumulative number of unique user accounts, which includes users who may have registered via non-Skype based websites, as of the end of the period. Users may register more than once and, as a result, may have more than one account.
(5) Cumulative number of minutes that Skype users were connected with Skype's VoIP product to traditional fixed-line and mobile telephones.
Seasonality
The following table sets forth, for the periods presented, our total net
revenues and the sequential quarterly growth of these net revenues.
Quarter Ended
March 31 June 30 September 30 December 31
(in thousands, except percentages)
2006
Net revenues $ 1,390,419 $ 1,410,784 $ 1,448,637 $ 1,719,901
Current quarter vs prior quarter 5 % 1 % 3 % 19 %
2007
Net revenues $ 1,768,074 $ 1,834,429 $ 1,889,220 $ 2,180,606
Current quarter vs prior quarter 3 % 4 % 3 % 15 %
2008
Net revenues $ 2,192,223 $ 2,195,661 $ 2,117,531 $ 2,035,846
Current quarter vs prior quarter 1 % 0 % (4 )% (4 )%
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We expect transaction activity patterns on our websites to mirror general consumer buying patterns and, as such, our fourth quarter has historically been our strongest quarter of sequential revenue growth. However, this was not the case in 2008 due to the impact of the global economic environment and strengthening U.S. dollar, which impacted the fourth quarter in particular.
Marketplaces Net Transaction Revenues
Marketplaces net transaction revenues increased $30.2 million, or 1%, in 2008 compared to 2007, which is consistent with our 0.5% increase in GMV over the same period. GMV generated by our largest category, vehicles, declined 9%. Excluding vehicles, GMV would have increased 3% due primarily to an increase in our second largest category, consumer electronics. Although we achieved growth in the number of sold items on our eBay Marketplaces trading platforms, the average selling price declined primarily as a result of consumer buying patterns in a weakening global economic environment. Expenditures for buyer incentive programs, which are generally recorded as a reduction in revenue, reduced revenue growth by approximately 4% in 2008. In addition, pricing discounts and changes had a negative impact on revenue growth.
Marketplaces net transaction revenues increased $816.3 million, or 21%, in 2007 compared to 2006 due primarily to a 13% increase in GMV during 2007 compared to 2006, and a shift to higher revenue generating categories. GMV growth in 2007 occurred across all major categories, with the vehicles, consumer electronics,
home and garden, clothing and accessories and tickets having the most significant positive dollar impact when compared to 2006.
Marketplaces net transaction revenues earned internationally were $2.5 billion in 2008 and 2007 and $2.0 billion in 2006, representing 54%, 53% and 51% of total Marketplaces net transaction revenues, respectively.
Payments Net Transaction Revenues
Payments net transaction revenues increased $482.0 million, or 26%, in 2008, compared to 2007, which is consistent with our year-over-year increase in net total payment volume (TPV) of 27%. Payments net transaction revenues increased due primarily to growth in our Merchant Services business and the increase in PayPal's penetration of eBay Marketplaces GMV. Our Merchant Services net TPV experienced 49% year-over-year growth in 2008 and represented 49% of PayPal's net TPV in 2008. The increase in our Merchant Services business resulted from more online merchants, both domestically and internationally, adding PayPal as a payment option.
Payments net transaction revenues increased $436.7 million, or 31%, in 2007 compared to 2006, which is consistent with our year-over-year increase in net TPV of 33%. Payments net transaction revenues due primarily to growth in our Merchant Services business and the increase in PayPal's penetration of eBay Marketplaces GMV. Our Merchant Services net TPV experienced 59% year-over-year growth in 2007 and represented 42% of PayPal's net TPV in 2007. The increase in Merchant Services business resulted from more online merchants, both domestically and internationally, adding PayPal as a payment option.
Payments net transaction revenues earned internationally totaled $1.0 billion in 2008, $0.8 billion in 2007, and $0.5 billion in 2006, representing 44%, 42% and 38% of total Payments net transaction revenues, respectively. International growth in our Payments segment continues to benefit from the expansion of our geographical footprint, the increase in the number of currencies supported by PayPal and the increase in cross-border payments, which generate larger fees.
Communications Net Transaction Revenues
Communications net transaction revenues increased $161.2 million, or 44%, in 2008 compared to 2007. The increase in net transaction revenues was due primarily to our year-over-year increase in SkypeOut minutes of 2.7 billion. The increase in SkypeOut minutes was due primarily to the growth in the cumulative number of Skype registered users to 405.3 million at December 31, 2008 from 276.3 million at December 31, 2007. The growth in Skype registered users was primarily due to its marketing activities and strategic partnership initiatives.
Communications net transaction revenues increased $175.5 million, or 93%, in 2007 compared to 2006. The increase in net transaction revenues was due primarily to our year-over-year increase in SkypeOut minutes of 1.6 billion. The increase in SkypeOut minutes was due primarily to the growth in the cumulative number of Skype registered users to 276.3 million at December 31, 2007 from 171.2 million at December 31, 2006.
Net transaction revenues from Communications earned internationally totaled $0.4 billion in 2008, $0.3 billion in 2007 and $0.2 billion in 2006, representing 83%, 84% and 86% of total Communications net transaction revenues, respectively. Skype revenue is primarily generated in Europe.
Marketing Services and Other Revenues
Marketing services and other revenues increased $195.5 million, or 25%, in 2008 compared to 2007 and represented 12% of total net revenues in 2008 compared to 10% of total net revenues in 2007. Marketing services and other revenues growth was due primarily to an increase in text and graphical advertising revenue and an increase in classifieds revenue, partially offset by a decline in Shopping.com revenue due to the impact of rule changes made by third-party search engines that adversely affected click-through traffic to retailers from our Shopping.com website and reduced associated fees. Additionally, a decline in interest rates reduced interest earned from banks on certain U.S. PayPal customer account balances and negatively impacted revenue growth in 2008. The decrease in interest earned on certain U.S. PayPal customer account balances was partially offset by interest income from our Bill Me Later loan portfolio.
Marketing services and other revenues increased $274.1 million, or 53%, in 2007 compared to 2006 and represented 10% of total net revenues compared to 9% of total net revenues in 2006. Marketing services and other revenue growth in 2007 was due primarily to an increase in text and graphical advertising revenue, classifieds revenue, Shopping.com revenue and interest earned from banks on certain U.S. PayPal customer accounts. Prior to the fourth quarter of 2006, these certain U.S. PayPal customer account balances were maintained in non-interest bearing accounts.
Summary of Cost of Net Revenues, Operating Expenses, Non-Operating Items and Provision for Income Taxes
In 2008, we reclassified certain operating expenses related to the provision for transaction losses, customer protection programs and bad debt expense from "Sales and Marketing" and "General and Administrative" expenses to "Provision for Transaction and Loan Losses." Prior period amounts have been reclassified to conform to the current presentation. Consolidated operating expenses, as well as segment direct costs, are unchanged.
The following table summarizes changes in cost of net revenues, operating expenses, non-operating items and provision for income taxes:
Change from Change from
Year Ended December 31, 2006 to 2007 2007 to 2008
2006 2007 2008 in Dollars in % in Dollars in %
(in thousands, except percentages)
Cost of net revenues $ 1,256,792 $ 1,762,972 $ 2,228,069 $ 506,180 40 % $ 465,097 26 %
Sales and marketing 1,587,133 1,882,810 1,881,551 295,677 19 % (1,259 ) (0 )%
Product development 494,695 619,727 725,600 125,032 25 % 105,873 17 %
General and administrative 744,363 904,681 998,871 160,318 22 % 94,190 10 %
Provision for transaction and
loan losses 266,724 293,917 347,453 27,193 10 % 53,536 18 %
Amortization of acquired
intangible assets 197,078 204,104 234,916 7,026 4 % 30,812 15 %
Restructuring - - 49,119 - - 49,119 100 %
Impairment of goodwill - 1,390,938 - 1,390,938 100 % (1,390,938 ) (100 )%
Interest and other income, net 130,017 154,271 115,919 24,254 19 % (38,352 ) (25 )%
Interest expense 5,916 16,600 8,037 10,684 181 % (8,563 ) (52 )%
Provision for income taxes 421,418 402,600 404,090 (18,818 ) (4 )% 1,490 0 %
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Cost of Net Revenues
2006 2007 2008
(in thousands, except percentages)
Cost of net revenues $ 1,256,792 $ 1,762,972 $ 2,228,069
As a percentage of net revenues 21.1 % 23.0 % 26.1 %
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Cost of net revenues consists primarily of costs associated with payment processing, customer support and site operations and Skype telecommunications. Significant components of these costs include bank transaction fees, credit card interchange fees, assessments, Bill Me Later related interest charges, employee compensation, contractor costs, facilities costs, depreciation of equipment and amortization expense.
The increase in cost of net revenues of $465.1 million, or 26%, in 2008 compared to 2007 was due primarily to an increase in customer support and site operations costs, payment processing costs and Skype telecommunication costs. Aggregate customer support and site operations costs increased approximately $205.7 million, or 28%, due primarily to the development and expansion of our customer support and site operations infrastructure to support our growth in transaction volume as demonstrated through the increase in net TPV. Payment processing costs increased approximately $165.2 million, or 24%, due primarily to the 27% increase in net TPV and an increase in
the proportion of customer transactions funded with credit cards, which have higher associated processing costs, offset by a more favorable geographic mix and lower per transaction costs. Skype telecommunications costs increased by $62.9 million, or 28%, due to the increase of SkypeOut minutes. Cost of net revenues increased as a percentage of net revenues primarily as a result of the growth of our lower gross margin businesses, particularly PayPal and Skype.
The increase in cost of net revenues of $506.2 million, or 40%, in 2007 compared to 2006 was due primarily to an increase in payment processing costs, customer support and site operations costs and Skype telecommunications costs. Payment processing costs increased approximately $200.1 million, or 40%, due primarily to the 33% increase in PayPal's net TPV, an increase in the proportion of customer transactions funded with credit cards, which have higher associated . . .
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