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| EBAY > SEC Filings for EBAY > Form 10-Q on 20-Apr-2012 | All Recent SEC Filings |
20-Apr-2012
Quarterly Report
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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, future results of operations or financial condition, new or planned 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"Part II - Item 1A: Risk Factors" of this Quarterly Report on Form 10-Q as well as in our condensed consolidated financial statements, related notes, and the other information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission, or 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 unaudited condensed consolidated financial statements and the related notes that appear elsewhere in this report.
Overview
eBay is a global commerce platform and payments leader. We enable commerce through eBay, the world's largest online marketplace, which allows users to buy and sell in nearly every country on earth; through PayPal, which enables individuals and businesses to securely, easily and quickly send and receive online payments; and through GSI, which facilitates ecommerce, multichannel retailing and interactive marketing for global enterprises. X.commerce brings together the technology assets and developer communities of eBay, PayPal and Magento, an ecommerce storefront platform, to support our mission of enabling commerce. We also reach millions of people through specialized marketplaces such as StubHub, the world's largest ticket marketplace, and eBay classifieds sites, which together have a presence in more than 1,000 cities around the world.
We have three reportable business segments: Marketplaces, Payments and GSI. Our Marketplaces segment includes our eBay.com platform and its localized counterparts and our other online trading platforms, such as our online classifieds sites and StubHub. Our Payments segment is comprised of PayPal, Bill Me Later and Zong. Our GSI segment consists of GSI Commerce, Inc. ("GSI"), and was added upon the completion of our acquisition of GSI on June 17, 2011. The results of our GSI segment have been included in our consolidated results of operations from the acquisition date.
Net revenues for the three months ended March 31, 2012 increased 29% to $3.3 billion, compared to the same period of the prior year, driven primarily by a 24% increase in PayPal net total payment volume (TPV), a 12% increase in Marketplaces gross merchandise volume (GMV) excluding vehicles and net revenues of $237 million from GSI. For the three months ended March 31, 2012, our operating margin decreased to 20% from 22% in the same period of the prior year, driven primarily by the impact of acquisitions and business mix. For the three months ended March 31, 2012, our diluted earnings per share increased to $0.44, a $0.08 increase compared to the same period of the prior year, driven primarily by solid top-line growth, higher interest and other, net and lower outstanding shares, partially offset by a lower operating margin. For the three months ended March 31, 2012, we generated cash flow from operations of approximately $531 million, compared to $700 million for the same period of the prior year. The decrease in cash flow from operations was due primarily to cash paid for income taxes of $432 million in the three months ended March 31, 2012, associated primarily with the gain on the sale of our remaining equity interest in Skype in October 2011, compared to $24 million in the same period of the prior year.
Our Marketplaces segment total net revenues increased $175 million, or 11%, for the three months ended March 31, 2012 compared to the same period of the prior year. The increase in total net revenues was driven primarily by a year-over-year increase in GMV excluding vehicles of 12%, which was due primarily to strong growth in all regions and continued growth at StubHub. Marketplaces segment operating margin decreased 1.8 percentage points for the three months ended March 31, 2012 compared to the same period of the prior year due to investments in our marketing and product development efforts.
Our Payments segment total net revenues increased $316 million, or 32%, for the
three months ended March 31, 2012 compared to the same period of the prior year.
The increase in total net revenues was driven primarily by a year-over-year
increase in net TPV of 24%, a higher take rate due primarily to growth in Bill
Me Later revenue, foreign exchange fees associated with cross-border
transactions and a favorable impact from our foreign currency hedging
activities. Our Payments segment operating margin increased 4.1 percentage
points for the three months ended March 31, 2012 compared to the same period of
the prior year, due primarily to improvement in funding mix, lower processing
costs and operating leverage.
Our GSI segment was formed as a result of our acquisition of GSI in June 2011.
For the three months ended March 31, 2012, GSI contributed $237 million in
revenue and had a segment operating margin of 9.5%.
Some key operating metrics that members of our senior management regularly
review to evaluate our financial results include net promoter score (NPS),
market share, GMV, GMV excluding vehicles, number of sold items, net TPV, net
number of payments, global ecommerce (GeC) merchandise sales, penetration rates,
active registered accounts, same store sales, funding mix (the mix of payments
vehicles such as credit cards, debit cards, bank accounts and PayPal accounts,
used by customers to make payments through our Payments networks), free cash
flow (which we define as net cash provided by operating activities less
purchases of property and equipment, net) and revenue excluding acquisitions and
foreign currency impact.
Outlook
We expect our Payments business in the second quarter of 2012 to continue its strong performance from expanded consumer and merchant adoption. In addition, we expect solid performance in the second quarter of 2012 from our Marketplaces business in its core markets driven by strength in ecommerce and mobile and our continued investment in marketing and technology. Finally, we expect our GSI business to continue to perform well, driven by operational improvements and the realization of synergies. We expect to continue to invest in all of our platforms and new products.
Results of Operations
Summary of Net Revenues
We generate two types of net revenues: net transaction revenues and marketing services and other revenues. Our net transaction revenues are derived principally from listing fees, final value fees (which are fees payable on transactions completed on our Marketplaces trading platforms), fees paid by merchants for payment processing services and ecommerce service fees. Our marketing services revenues are derived principally from the sale of advertisements, revenue sharing arrangements, classifieds fees, marketing service fees and lead referral fees. Other revenues are derived principally from interest and fees earned on the Bill Me Later portfolio of receivables from loans, interest earned on certain PayPal customer account balances and fees from contractual arrangements with third parties that provide services to our users.
The following table sets forth the breakdown of net revenues by type and
geography for the periods presented.
Three Months Ended March 31, Percent
2012 2011(1) Change
(In millions, except percentage changes)
Net Revenues by Type:
Net transaction revenues
Marketplaces $ 1,425 $ 1,284 11 %
Payments 1,216 943 29 %
GSI 182 - N/A
Total net transaction revenues 2,823 2,227 27 %
Marketing services and other revenues
Marketplaces 303 269 13 %
Payments 93 50 86 %
GSI 55 - N/A
Corporate and other 6 - N/A
Total marketing services and other revenues 457 319 43 %
Elimination of inter-segment net revenue (2) (3 ) - N/A
Total net revenues $ 3,277 $ 2,546 29 %
Net Revenues by Geography:
U.S. $ 1,581 $ 1,141 39 %
International 1,696 1,405 21 %
Total net revenues $ 3,277 $ 2,546 29 %
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(1) Excludes data for GSI, which was acquired in June 2011.
(2) Represents revenue generated between our reportable segments.
Revenues are attributed to U.S. and international geographies based primarily upon the country in which the seller, payment recipient, customer, website that displays advertising, or other service provider, as the case may be, is located.
Because we generate substantial net revenues internationally, we are subject to the risks of doing business in foreign countries as discussed under "Part II - Item 1A - Risk Factors." In that regard, fluctuations in foreign currency exchange rates impact our results of operations. We have a foreign exchange risk management program that is designed to reduce our exposure to fluctuations in foreign currencies; however, the effectiveness of this program in mitigating the impact of foreign currency fluctuations on our results of operations varies from period to period, and in any given period, our operating results are usually affected, sometimes significantly, by changes in currency exchange rates. Fluctuations in exchange rates also directly affect our cross-border revenue. We calculate the year-over-year impact of foreign currency movements on our business using prior period foreign currency rates applied to current year transactional currency amounts.
For the three months ended March 31, 2012, foreign currency movements relative to the U.S. dollar negatively impacted net revenues by approximately $23 million (net of a $12 million positive impact from hedging activities included in PayPal's net revenue) compared to the same period of the prior year. On a business segment basis for the three months ended March 31, 2012, foreign currency movements relative to the U.S. dollar negatively impacted Marketplaces net revenues by approximately $24 million and positively impacted Payments net revenues by approximately $1 million, in each case compared to the same period of the prior year (net of the impact of hedging activities, noted above).
The following table sets forth, for the periods presented, certain key operating metrics that we believe are significant factors affecting our net revenues.
Three Months Ended March 31, Percent
2012 2011 Change
(In millions, except percentage changes)
Supplemental Operating Data:
Marketplaces Segment: (1)
GMV excluding vehicles (2) 16,206 14,496 12 %
GMV vehicles only (3) 1,871 2,050 (9 )%
Total GMV (4) 18,077 16,546 9 %
Payments Segment:
Net TPV (5) 33,857 27,362 24 %
GSI Segment:
GeC Merchandise Sales (6) 715 - N/A
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(1) eBay's classifieds websites and Shopping.com are not included in these metrics.
(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, excluding vehicles GMV.
(3) Total value of all successfully closed vehicle transactions between users on eBay Marketplaces trading platforms during the period, regardless of whether the buyer and seller actually consummated the transaction.
(4) 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.
(5) Total dollar volume of payments, net of payment reversals, successfully completed through our Payments networks and Zong, excluding PayPal's payment gateway business, and on Bill Me Later accounts during the period.
(6) Represents the retail value of all sales transactions, inclusive of freight charges and net of allowance for returns and discounts, which flow through the GSI ecommerce services platform, whether we record the full amount of such transaction as a product sale or a percentage of such transaction as a service fee.
Seasonality
The following table sets forth, for the periods presented, our total net
revenues and the sequential quarterly movements of these net revenues:
Quarter Ended
March 31 June 30 September 30 December 31
(In millions, except percentage changes)
2010
Net revenues $ 2,196 $ 2,215 $ 2,249 $ 2,495
Percent change from prior quarter (7 )% 1 % 2 % 11 %
2011(1)
Net revenues $ 2,546 $ 2,760 $ 2,966 $ 3,380
Percent change from prior quarter 2 % 8 % 7 % 14 %
2012
Net revenues $ 3,277 - - -
Percent change from prior quarter (3 )% - - -
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(1) Net revenues attributable to the GSI segment are reflected from June 17, 2011 (the date the acquisition of GSI was completed).
We expect transaction activity patterns on our websites to mirror general consumer buying patterns. Our GSI segment is highly seasonal. The fourth calendar quarter typically accounts for a disproportionate amount of GSI's total annual revenue because consumers increase their purchases and businesses increase their advertising to consumers during the fourth quarter holiday season.
Marketplaces Net Transaction Revenues
Marketplaces net transaction revenues increased $141 million, or 11%, while GMV excluding vehicles increased 12% during the first quarter of 2012 compared to the same period in the prior year. The increase in net transaction revenue and GMV excluding vehicles was due primarily to strong growth across all regions and continued growth at StubHub.
Marketplaces net transaction revenues earned internationally (i.e., outside the U.S.) totaled $789 million and $725 million during the first quarter of 2012 and 2011, respectively, representing 55% of total Marketplaces net transaction revenues for both periods. The increase in international net transaction revenues was due primarily to growth in our existing international markets, partially offset by the impact of foreign currency movements relative to the U.S. dollar.
Payments Net Transaction Revenues
Payments net transaction revenues increased $273 million, or 29%, during the first quarter of 2012 compared to the same period of the prior year, due primarily to net TPV growth of 24%, and a higher take rate due primarily to foreign exchange fees associated with cross-border transactions, as well as a favorable impact from our foreign currency hedging activities. The increase in net TPV was due primarily to growth in consumer and merchant adoption of PayPal. Our Merchant Services net TPV increased 28% during the first quarter of 2012, compared to the same period of the prior year, and represented 66% of PayPal's net TPV in the first quarter of 2012, compared with 64% in the first quarter of 2011. Net TPV on our eBay.com platform and its localized counterparts increased 17% during the first quarter of 2012 compared to the same period of the prior year.
Payments net transaction revenues earned internationally totaled $658 million and $476 million during the first quarter of 2012 and 2011, respectively, representing 54% and 50% of total Payments net transaction revenues during those respective periods. The increase in international net transaction revenues was due primarily to the growth of our Merchant Services business and increased penetration on eBay Marketplaces platforms internationally.
GSI Net Transaction Revenues
GSI net transaction revenues were $182 million during the first quarter of 2012.
Marketing Services and Other Revenues
Marketing services and other revenues increased $138 million, or 43%, during the first quarter of 2012 compared to the same period of the prior year, and represented 14% and 13% of total net revenues during those respective periods. The increase in marketing services and other revenues during the first quarter of 2012 was due primarily to revenues attributable to GSI and growth in our Bill Me Later (BML) portfolio of receivables from loans as well as increased revenue from our classifieds and advertising business.
Summary of Cost of Net Revenues
The following table summarizes changes in cost of net revenues for the periods
presented:
Change from
Three Months Ended March 31, 2011 to 2012
2012 2011(1) in Dollars in %
(In millions, except percentages)
Cost of net revenues:
Marketplaces $ 299 $ 296 $ 3 1 %
As a percentage of total Marketplaces net revenues 17.3 % 19.0 %
Payments 515 433 82 19 %
As a percentage of total Payments net revenues 39.3 % 43.6 %
GSI 145 - 145 N/A
As a percentage of total GSI net revenues 61.2 % -
Corporate and other 24 - 24 N/A
Total cost of net revenues $ 983 $ 729 $ 254 35 %
As a percentage of net revenues 30.0 % 28.6 %
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(1) Excludes data for GSI, which was acquired in June 2011.
Cost of Net Revenues
Cost of net revenues consists primarily of costs associated with payment processing, customer support, site operations, fulfillment and inventory. Significant components of these costs include bank transaction fees, credit card interchange and assessment fees, interest expense on indebtedness incurred to finance the purchase of consumer loans receivable by Bill Me Later, employee compensation, contractor costs, facilities costs, depreciation of equipment and amortization expense.
Marketplaces
Marketplaces cost of net revenues increased $3 million, or 1%, during the first quarter of 2012, compared to the same period of the prior year.
Marketplaces cost of net revenues as a percentage of Marketplaces net revenues decreased 1.7 percentage points during the first quarter of 2012 compared to the same period of the prior year due primarily to improved operating leverage in our site operation infrastructure.
Payments
Payments cost of net revenues increased $82 million, or 19%, during the first quarter of 2012, compared to the same period of the prior year. The increase in Payments cost of net revenues was due primarily to the impact of growth in net TPV.
Payments cost of net revenues as a percentage of Payments net revenues decreased 4.3 percentage points during the first quarter of 2012, compared to the same period of the prior year due primarily to a lower transaction expense rate. The improvement in our transaction expense rate was driven primarily by improvement in funding mix and lower processing costs.
GSI
GSI cost of net revenues was $145 million during the first quarter of 2012.
Summary of Operating Expenses, Non-Operating Items and Provision for Income
Taxes
The following table summarizes changes in operating expenses, non-operating
items and provision for income taxes for the periods presented:
Change from
Three Months Ended March 31, 2011 to 2012
2012 2011 in Dollars in %
(In millions, except percentage changes)
Sales and marketing $ 677 $ 533 $ 144 27 %
Product development 374 275 99 36 %
General and administrative 372 293 79 27 %
Provision for transaction and loan losses 134 107 27 25 %
Amortization of acquired intangible assets 84 44 40 91 %
Interest and other, net 31 3 28 933 %
Provision for income taxes (114 ) (92 ) (22 ) 24 %
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Sales and Marketing
Sales and marketing expenses consist primarily of advertising costs and marketing programs (both online and offline), employee compensation, contractor costs, facilities costs and depreciation on equipment. Online marketing expenses represent traffic acquisition costs in various channels such as paid search, affiliates marketing and display advertising. Offline advertising includes brand campaigns, buyer/seller communications and general public relations expenses. A significant portion of our sales and marketing expense is attributable to our online marketing programs, primarily paid search, which include keyword advertising and third party lead generation costs, in order to drive traffic to our Marketplaces and Payments websites.
Sales and marketing expenses increased $144 million, or 27%, during the first quarter of 2012, compared to the same period of the prior year. The increase in sales and marketing expense was due primarily to higher employee-related expenses (including consultant costs, facility costs and equipment-related costs), marketing program costs (including our brand campaign and product launches), and the impact from acquisitions, primarily GSI.
Product Development
Product development expenses consist primarily of employee compensation, contractor costs, facilities costs and depreciation on equipment. Product development expenses are net of required capitalization of major site and other product development efforts, including the development of our next generation platform architecture, migration of certain platforms, seller tools and Payments services projects. Our top technology priorities involve search, catalog, mobile, platform and user experience. Capitalized site and product development costs were $47 million in the first quarter of 2012, compared to $37 million in the first quarter of 2011, and are primarily reflected as a cost of net revenues when amortized in future periods.
Product development expenses increased $99 million, or 36%, during the first quarter of 2012, compared to the same period of the prior year. The increase was due primarily to higher employee-related costs (including consultant costs, facility costs and equipment-related costs) driven by increased investment in our top technology priorities and the impact from acquisitions, primarily GSI.
General and Administrative
General and administrative expenses consist primarily of employee compensation, contractor costs, facilities costs, depreciation of equipment, employer payroll taxes on stock-based compensation, legal expenses, insurance premiums and professional fees. Our legal expenses, including those related to various ongoing legal proceedings, may fluctuate substantially from period to period.
General and administrative expenses increased $79 million, or 27%, during the first quarter of 2012, compared to the same periods of the prior year. The increase was due primarily to an increase in payroll and related expenses and the impact of acquisitions, primarily GSI.
Provision for Transaction and Loan Losses
Provision for transaction and loan losses consists primarily of transaction loss
expense associated with our customer protection programs, fraud, chargebacks,
and merchant credit losses; bad debt expense associated with our accounts
receivable balance; and loan loss reserves associated with our principal loan
receivable balance. We expect our provision for transaction and loan loss
expense to fluctuate depending on many factors, including macroeconomic
conditions, our customer protection programs and the impact of regulatory
changes.
Provision for transaction and loan losses increased $27 million, or 25%, during
the first quarter of 2012, compared to the same period of the prior year. This
increase was due primarily to higher transaction volume and growth in our BML
portfolio of receivables from loans. The increase was partially offset by a
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