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EBAY > SEC Filings for EBAY > Form 10-Q on 19-Oct-2012All Recent SEC Filings

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Form 10-Q for EBAY INC


19-Oct-2012

Quarterly Report


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

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.
When we refer to "we," "our," "us" or "eBay" in this document, we mean eBay Inc., a Delaware corporation and its California predecessor, as well as all of our consolidated subsidiaries.

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 harnesses the developer community of Magento, an ecommerce platform, by providing technology solutions and eBay Inc. capabilities to merchants of all sizes, supporting eBay Inc.'s 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 September 30, 2012 increased 15% to $3.4 billion, compared to the same period of the prior year, driven primarily by increases in net revenues from each of our business segments. For the three months ended September 30, 2012, our operating margin increased to 20% from 18% in the same period of the prior year due primarily to an increase in operating margins in each of our business segments. For the three months ended September 30, 2012, our diluted earnings per share increased to $0.45, a $0.08 increase compared to the same period of the prior year, driven primarily by strong growth in net revenues, improvement in operating margin and a lower effective tax rate, partially offset by lower investment gains and higher interest expense. For the three months ended September 30, 2012, we generated cash flow from operations of approximately $1.2 billion, compared to $809 million for the same period of the prior year.

Our Marketplaces segment total net revenues increased $153 million, or 9%, for the three months ended September 30, 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 (as defined below) excluding vehicles of 11%, which was attributable to strong growth across all regions, partially offset by the negative impact of foreign currency movements relative to the U.S. dollar. Marketplaces


segment operating margin increased 0.5 percentage points for the three months ended September 30, 2012 compared to the same period of the prior year due primarily to operating leverage, partially offset by investments in technology and marketing.
Our Payments segment total net revenues increased $260 million, or 23%, for the three months ended September 30, 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 (as defined below) of 20% and strong growth in Bill Me Later. Our Payments segment operating margin increased 3.1 percentage points for the three months ended September 30, 2012 compared to the same period of the prior year, due primarily to a higher take rate and lower transaction processing costs.
Our GSI segment total net revenues increased $24 million, or 12%, for the three months ended September 30, 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 GeC Merchandise Sales (as defined below) of 16%. For the three months ended September 30, 2012, GSI had a segment operating margin of 6.1%, a 3.3 percentage point increase compared to the same period of the prior year. 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, Merchant Services net TPV (as defined below), on eBay net TPV (as defined below), 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 (a non-GAAP measure, 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 (also a non-GAAP measure).

We define GMV as the total value of all successfully closed items between users on our eBay Marketplaces trading platforms (excluding eBay's classified websites and Shopping.com) during the applicable period, regardless of whether the buyer and seller actually consummated the transaction. We define net TPV as the total dollar volume of payments, net of payment reversals, successfully completed through our Payments networks, Bill Me Later accounts and Zong during the applicable period, excluding PayPal's payment gateway business. We define Merchant Services net TPV as the total dollar volume of payments, net of payment reversals, successfully completed through our Payments networks, Bill Me Later accounts and Zong during the applicable period, excluding PayPal's payment gateway business and payments for transactions on eBay Marketplaces and GSI platforms. We define on eBay net TPV as the total dollar volume of payments, net of payment reversals, successfully completed through our Payments networks during the applicable period for transactions on eBay Marketplaces or GSI platforms. We define GeC Merchandise Sales as 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 during the applicable period, whether we record the full amount of such transaction as a product sale or a percentage of such transaction as a service fee.

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. (1)

                                  Three Months Ended September
                                              30,                 Percent      Nine Months Ended September 30,      Percent
                                      2012             2011        Change         2012               2011(2)         Change
                                                          (In millions, except percentage changes)
Net Revenues by Type:
Net transaction revenues
Marketplaces                     $    1,490         $   1,354         10 %   $    4,406         $         3,988         10 %
Payments                              1,264             1,032         22 %        3,715                   2,966         25 %
GSI                                     170               148         14 %          516                     165        N/A
Total net transaction revenues        2,925             2,535         15 %        8,637                   7,119         21 %
Marketing services and other
revenues
Marketplaces                            316               299          5 %          942                     882          7 %
Payments                                102                74         37 %          318                     206         54 %
GSI                                      57                54          4 %          168                      62        N/A
Corporate and other                      11                 3        267 %           27                       3        800 %
Total marketing services and
other revenues                          485               431         13 %        1,455                   1,152         26 %
Elimination of inter-segment net
revenue (3)                              (6 )               -        N/A            (13 )                     -        N/A
Total net revenues               $    3,404         $   2,966         15 %   $   10,079         $         8,272         22 %
Net Revenues by Geography:
U.S.                             $    1,637         $   1,428         15 %   $    4,829         $         3,818         26 %
International                         1,767             1,538         15 %        5,250                   4,454         18 %
Total net revenues               $    3,404         $   2,966         15 %   $   10,079         $         8,272         22 %

(1) Certain amounts may not sum due to rounding and may not recalculate using the rounded dollar amounts provided.

(2) Includes data for GSI since June 17, 2011 the date the acquisition of GSI was completed. Accordingly, the percent changes in GSI's revenues between the nine-month periods ended September 30, 2011 and 2012 are not meaningful.

(3) 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 September 30, 2012, foreign currency movements relative to the U.S. dollar negatively impacted net revenues by approximately $80 million (net of a $16 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 September 30, 2012, foreign currency movements relative to the U.S. dollar negatively impacted Marketplaces, Payments and GSI net revenues by approximately $66 million, $14 million and less than $1 million, respectively, in each case compared to the same period of the prior year (net of the impact of hedging activities noted above).

For the nine months ended September 30, 2012, foreign currency movements relative to the U.S. dollar negatively impacted net revenues by approximately $202 million (net of a $42 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 nine months ended September 30, 2012, foreign currency movements relative to the U.S. dollar negatively impacted Marketplaces, Payments and GSI net revenues by approximately $170 million, $31 million and $1 million, respectively, 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. (1)

                                   Three Months Ended                        Nine Months Ended
                                      September 30,          Percent           September 30,         Percent
                                    2012          2011        Change         2012          2011       Change
                                                  (In millions, except percentage changes)
Supplemental Operating Data:
Marketplaces Segment: (2)
GMV excluding vehicles (3)      $   16,281     $ 14,666        11  %     $   48,658     $ 43,842        11  %
GMV vehicles only (4)           $    1,994     $  2,149        (7 )%     $    5,885     $  6,437        (9 )%
Total GMV (5)                   $   18,274     $ 16,815         9  %     $   54,543     $ 50,279         8  %
Payments Segment:
Merchant services net TPV (6)   $   23,704     $ 19,314        23  %     $   69,251     $ 55,741        24  %
On eBay net TPV (7)             $   11,455     $  9,968        15  %     $   34,216     $ 29,645        15  %
Total net TPV (8)               $   35,159     $ 29,282        20  %     $  103,467     $ 85,386        21  %
GSI Segment:
GeC Merchandise Sales (9)       $      698     $    601        16  %     $    2,087     $    677       208  %

(1) Certain amounts may not sum due to rounding and may not recalculate using the rounded dollar amounts provided.

(2) eBay's classifieds websites and Shopping.com are not included in these metrics.

(3) 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.

(4) 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.

(5) 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.

(6) Total dollar volume of payments, net of payment reversals, successfully completed through our Payments networks, Bill Me Later accounts and Zong during the period, excluding PayPal's payment gateway business and payments for transactions on eBay Marketplaces and GSI platforms.

(7) Total dollar volume of payments, net of payment reversals, successfully completed through our Payments networks during the period for transactions on eBay Marketplaces and GSI platforms.

(8) Total dollar volume of payments, net of payment reversals, successfully completed through our Payments networks, Bill Me Later accounts and Zong during the period, excluding PayPal's payment gateway business.

(9) 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 during the period, 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      $ 3,398     $      3,404               -
Percent change from prior quarter      (3 )%         4 %              - %             -

(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 $136 million, or 10%, while GMV excluding vehicles increased 11% during the third 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, partially offset by the negative impact of approximately $47 million in foreign currency movements relative to the U.S. dollar.

Marketplaces net transaction revenues increased $418 million, or 10%, while GMV excluding vehicles increased 11% during the first nine months 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, partially offset by the negative impact of approximately $119 million in foreign currency movements relative to the U.S. dollar.

Marketplaces net transaction revenues earned internationally (i.e., outside the U.S.) totaled $814 million and $2.5 billion during the third quarter and first nine months of 2012, respectively, representing 55% and 56% of total Marketplaces net transaction revenues during those respective periods. Marketplaces net transaction revenues earned internationally totaled $760 million and $2.2 billion during the third quarter and first nine months of 2011, respectively, representing 56% of total Marketplaces net transaction revenues in each period.

Payments Net Transaction Revenues

Payments net transaction revenues increased $232 million, or 22%, during the third quarter of 2012 compared to the same period of the prior year, due primarily to net TPV growth of 20% and a higher take rate. The increase in net TPV was due primarily to growth in consumer and merchant adoption and use of PayPal both on and off eBay. Our Merchant Services net TPV increased 23% during the third quarter of 2012, compared to the same period of the prior year, and represented 67% of PayPal's net TPV in the third quarter of 2012, compared with 66% in the same period of the prior year. On eBay net TPV increased 15% during the third quarter of 2012, compared to the same period of the prior year and represented 33% of PayPal's net TPV in the third quarter of 2012, compared to 34% for the same period in the prior year. The increase in the take rate was driven primarily by foreign exchange income and gains from hedging activities.

Payments net transaction revenues increased $749 million, or 25%, during the first nine months of 2012 compared to the same period of the prior year, due primarily to net TPV growth of 21% and a higher take rate. The increases in net TPV and take rate were due to the same factors described above. Our Merchant Services net TPV increased 24% during the first nine


months of 2012, compared to the same period of the prior year and represented 67% of PayPal's net TPV in the first nine months of 2012, compared with 65% for the same period of the prior year. On eBay net TPV increased 15% during the first nine months of 2012, compared to the same period of the prior year and represented 33% of PayPal's net TPV for the first nine months of 2012, compared to 35% for the same period of the prior year.

Payments net transaction revenues earned internationally totaled $697 million and $2.0 billion during the third quarter and first nine months of 2012, respectively, representing 55% of total Payments net transaction revenues in each period. Payments net transaction revenues earned internationally totaled $545 million and $1.5 billion during the third quarter and first nine months of 2011, respectively, representing 53% and 52% 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 increased $22 million, or 14%, during the third quarter of 2012 compared to the same period of the prior year, due primarily to the 16% increase in GeC Merchandise Sales in the third quarter of 2012 compared to the same period in the prior year.

GSI net transaction revenues were $516 million during the first nine months of 2012, compared to $165 million for the same period of the prior year. Net transaction revenues attributable to the GSI segment for the first nine months of 2011 are reflected from June 17, 2011 (the date the acquisition of GSI was completed). Accordingly, comparisons with GSI's net transaction revenues in the corresponding 2011 period are not meaningful.

Marketing Services and Other Revenues

Marketing services and other revenues increased $54 million, or 13%, during the third quarter of 2012, compared to the same period of the prior year, and represented 14% of total net revenues for the third quarter of 2012. The increase in marketing services and other revenues was due primarily to growth in our Bill Me Later portfolio of receivables from loans, as well as increased revenue from our advertising business.

Marketing services and other revenues increased $303 million, or 26%, during the first nine months of 2012, compared to the same period of the prior year, and represented 14% of total net revenues for the first nine months of 2012. The increase in marketing services and other revenues was due primarily to revenues attributable to GSI and growth in our Bill Me Later portfolio of receivables from loans, as well as increased revenue from our classifieds and advertising businesses.


Summary of Cost of Net Revenues

The following table summarizes changes in cost of net revenues for the periods
presented:
                                                                Change from          Nine Months Ended September          Change from
                       Three Months Ended September 30,        2011 to 2012                      30,                     2011 to 2012
                           2012               2011          in Dollars      in %        2012            2011(1)       in Dollars      in %
                                                                (In millions, except percentages)
Cost of net revenues:
Marketplaces           $     314         $        298     $       16          5 %   $     923         $     897     $       26          3 %
As a percentage of
total Marketplaces net
revenues                    17.4 %               18.0 %                                  17.3 %            18.4 %
Payments                     549                  479             70         15 %       1,589             1,370            219         16 %
As a percentage of
total Payments net
revenues                    40.2 %               43.3 %                                  39.4 %            43.2 %
GSI                          154                  141             13          9 %         446               157            289        N/A
As a percentage of
total GSI net revenues      68.1 %               69.7 %                                  65.2 %            69.4 %
Corporate and other            5                    2              3        150 %          34                 2             32        N/A
Total cost of net
revenues               $   1,022         $        920     $      102         11 %   $   2,992         $   2,426     $      566         23 %
As a percentage of net
revenues                    30.0 %               31.0 %                                  29.7 %            29.3 %

(1) Cost of net revenues attributable to the GSI segment for the nine months ended September 30, 2011 are reflected from June 17, 2011 (the date the acquisition of GSI was completed). Accordingly, the percent changes in GSI's cost of revenues between the nine-month periods ended September 30, 2011 and 2012 are not meaningful.

Cost of Net Revenues

Cost of net revenues consists primarily of costs associated with payment . . .

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