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EBAY > SEC Filings for EBAY > Form 10-Q on 19-Apr-2013All Recent SEC Filings

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Form 10-Q for EBAY INC


19-Apr-2013

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 the current Delaware corporation (eBay Inc.) and its California predecessor, as well as all of our consolidated subsidiaries.

Overview

We are a global technology company that enables commerce through 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"), which we acquired in the second quarter of 2011.

Net revenues for the three months ended March 31, 2013 increased 14% to $3.7 billion compared to the same period of the prior year, driven primarily by increases in net revenues from our Marketplaces and Payments segments. For the three months ended March 31, 2013, our operating margin increased to 21% from 20% in the same period of the prior year due primarily to an increase in operating margin in our Marketplaces segment offset in part by declines in operating margins in our Payments and GSI segments. For the three months ended March 31, 2013, our diluted earnings per share increased to $0.51, a $0.07 increase compared to the same period of the prior year, driven primarily by growth in net revenues and a lower effective tax rate, partially offset by higher interest expense. For the three months ended March 31, 2013, we generated cash flow from operations of $937 million, compared to $531 million for the same period of the prior year.

Our Marketplaces segment total net revenues increased $229 million, or 13%, for the three months ended March 31, 2013 compared to the same period of the prior year. The increase in total net revenues was driven primarily by an increase in GMV (as defined below) excluding vehicles of 13% for the three months ended March 31, 2013 compared to the same period of the prior year, which was attributable to strong growth in the U.S. as well as in our advertising business. Our Marketplaces segment operating margin increased 3.3 percentage points for the three months ended March 31, 2013 compared to the same period of the prior year, due primarily to efficiencies in marketing spend, partially offset by continued investments in new initiatives.
Our Payments segment total net revenues increased $239 million, or 18%, for the three months ended March 31, 2013 compared to the same period of the prior year. The increase in total net revenues was driven primarily by an increase in net TPV (as defined below) of 21% for the three months ended March 31, 2013 compared to the same period of the prior year and strong growth in Bill Me Later. Our Payments segment operating margin decreased 2.2 percentage points for the three months ended March 31, 2013 compared to the same period of the prior year, due primarily to a decrease in foreign currency gains, a shift to large merchants with lower take rates and investments in consumer awareness and product initiatives.


Our GSI segment total net revenues decreased $1 million for the three months ended March 31, 2013 compared to the same period of the prior year. Our GSI segment operating margin decreased 6.7 percentage points for the three months ended March 31, 2013 compared to the same period of the prior year, due primarily to a lower take rate on GeC Merchandise Sales (as defined below) as well as continued investment in our commerce platform.
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, penetration rates, active registered accounts, funding mix (the mix of payments vehicles, such as credit cards, debit cards, bank accounts, Bill Me Later accounts and PayPal accounts, used by customers to make payments through our Payments networks), global ecommerce (GeC) Merchandise Sales, same store sales, enabled commerce volume (ECV), free cash flow (a non-GAAP measure, which we define as net cash provided by operating activities less purchases of property and equipment) 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 Marketplaces trading platforms (excluding eBay's classifieds websites, brands4friends 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 our 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 and Bill Me Later accounts during the applicable period for transactions on our Marketplaces and 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. We define ECV as the total commerce and payment volume across all three segments consisting of GMV, Merchant Services net TPV and GeC Merchandise Sales.

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,
                                                                 2013                      2012
                                                           (In millions, except percentage changes)
Net Revenues by Type:
Net transaction revenues
Marketplaces                                            $            1,608         $            1,425
Payments                                                             1,435                      1,216
GSI                                                                    186                        182
Total net transaction revenues                                       3,229                      2,823
Marketing services and other revenues
Marketplaces                                                           349                        303
Payments                                                               113                         93
GSI                                                                     50                         55
Corporate and other                                                     12                          6
Total marketing services and other revenues                            524                        457
Elimination of inter-segment net revenue (1)                            (5 )                       (3 )
Total net revenues                                      $            3,748         $            3,277
Net Revenues by Geography:
U.S.                                                    $            1,789         $            1,581
International                                                        1,959                      1,696
Total net revenues                                      $            3,748         $            3,277

(1) 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 generated a majority of our net revenues internationally in recent periods, including the three months ended March 31, 2013 and 2012, 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, 2013, foreign currency movements relative to the U.S. dollar negatively impacted net revenues by approximately $1 million (net of a positive impact from hedging activities included in PayPal's net revenue of less than $1 million) compared to the same period of the prior year. On a business segment basis, for the three months ended March 31, 2013, foreign currency movements relative to the U.S. dollar positively impacted Marketplaces net revenues by approximately $2 million and negatively impacted Payments and GSI net revenues by approximately $3 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, in the case of Payments net revenues).


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
                                          2013                  2012       Change
                                    (In millions, except percentage changes)
Supplemental Operating Data:
Marketplaces Segment: (1)
GMV excluding vehicles (2)    $        18,326                 $ 16,206       13  %
GMV vehicles only (3)         $         1,686                 $  1,871      (10 )%
Total GMV (4)                 $        20,012                 $ 18,077       11  %
Payments Segment:
Merchant services net TPV (5) $        28,087                 $ 22,433       25  %
On eBay net TPV (6)           $        12,953                 $ 11,424       13  %
Total net TPV (7)             $        41,040                 $ 33,857       21  %
GSI Segment:
GeC Merchandise Sales (8)     $           807                 $    715       13  %

(1) eBay's classifieds websites, brands4friends and Shopping.com are not included in these metrics.

(2) Total value of all successfully closed items between users on our 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 our 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 our 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, Bill Me Later accounts and Zong during the period, excluding PayPal's payment gateway business and payments for transactions on our Marketplaces and GSI platforms.

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

(7) 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.

(8) 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)
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     $     3,992
Percent change from prior quarter      (3 )%         4 %              - %            17 %
2013
Net revenues                      $ 3,748            -                -           -
Percent change from prior quarter      (6 )%         -                -           -

(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 $183 million, or 13%, consistent with the increase in GMV excluding vehicles of 13%, in each case during the first quarter of 2013 compared to the same period in the prior year. The increase in net transaction revenue and GMV excluding vehicles was due primarily to growth both in the U.S. and internationally.

Marketplaces net transaction revenues earned internationally (i.e., outside the U.S.) totaled $888 million during the first quarter of 2013, representing 55% of total Marketplaces net transaction revenues during the period. Marketplaces net transaction revenues earned internationally totaled $789 million during the first quarter of 2012, representing 55% of total Marketplaces net transaction revenues in the period. The increase in international net transaction revenues was due primarily to growth in our existing international markets.

Payments Net Transaction Revenues

Payments net transaction revenues increased $219 million, or 18%, during the first quarter of 2013 compared to the same period of the prior year, due primarily to net TPV growth of 21%, partially offset by a lower take rate. The increase in net TPV was due primarily to growth in consumer and merchant use of PayPal both on and off eBay. The lower take rate is due primarily to a decrease in currency hedging gains and a shift to larger merchants who pay lower rates based on volume. Our Merchant Services net TPV increased 25% during the first quarter of 2013 compared to the same period of the prior year and represented 68% of PayPal's net TPV in the first quarter of 2013 compared to 66% in the same period of the prior year. On eBay net TPV increased 13% during the first quarter of 2013 compared to the same period of the prior year and represented 32% of PayPal's net TPV in the first quarter of 2013 compared to 34% for the same period in the prior year.

Payments net transaction revenues earned internationally totaled $791 million during the first quarter of 2013, representing 55% of total Payments net transaction revenues in the period. Payments net transaction revenues earned internationally totaled $658 million during the first quarter of 2012, representing 54% of total Payments net transaction revenues during the period. The increase in international net transaction revenues was due primarily to the growth of our Merchant Services business outside the U.S.


GSI Net Transaction Revenues

GSI net transaction revenues increased $4 million, or 2%, during the first quarter of 2013 compared to the same period of the prior year, due primarily to the 13% increase in GeC Merchandise Sales, offset by a lower take rate.

Marketing Services and Other Revenues

Marketing services and other revenues increased $67 million, or 15%, during the first quarter of 2013 compared to the same period of the prior year, and represented 14% of total net revenues for both the first quarter of 2013 and 2012, respectively. 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 and lead referral fees.

Summary of Cost of Net Revenues

The following table summarizes changes in cost of net revenues for the periods
presented:
                                                                                                    Change from
                                                                                            First Quarter 2012 to First
                                                        Three Months Ended March 31,                Quarter 2013
                                                          2013                  2012          in Dollars          in %
                                                                     (In millions, except percentages)
Cost of net revenues:
Marketplaces                                       $           356         $        299     $       57             19  %
As a percentage of total Marketplaces net revenues            18.2 %               17.3 %
Payments                                                       617                  515            102             20  %
As a percentage of total Payments net revenues                39.9 %               39.3 %
GSI                                                            175                  145             30             21  %
As a percentage of total GSI net revenues                     74.2 %               61.2 %
Corporate and other                                              4                   24            (20 )          (83 )%
Total cost of net revenues                         $         1,152         $        983     $      169             17  %
As a percentage of net revenues                               30.7 %               30.0 %

Cost of net revenues consists primarily of costs associated with payment processing, interest expense on borrowings incurred to finance Bill Me Later's portfolio of loan receivables, customer support, site operations and fulfillment. 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 loan receivables related to Bill Me Later accounts, employee compensation, contractor costs, facilities costs, depreciation of equipment and amortization expense.

Marketplaces

Marketplaces cost of net revenues increased $57 million, or 19%, during the first quarter of 2013 compared to the same period of the prior year, due primarily to investment in site operations infrastructure and customer support programs, which resulted in the cost of net revenues as a percentage of Marketplaces net revenues increasing by 0.9 percentage points year over year.

Payments

Payments cost of net revenues increased $102 million, or 20%, during the first quarter of 2013 compared to the same period of the prior year, due primarily to the impact of growth in net TPV, which resulted in the cost of net revenues as a percentage of Payments net revenues increasing by 0.6 percentage points year over year.


GSI

GSI cost of net revenues increased $30 million, or 21%, during the first quarter of 2013 compared to the same period of the prior year, due primarily to the increase in GeC merchandise sales volume as well as continued investment in GSI's commerce platform, which resulted in the cost of net revenues as a percentage of GSI net revenues increasing by 13 percentage points year over year.

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
                                                                                      First Quarter 2012 to First
                                                Three Months Ended March 31,                 Quarter 2013
                                                  2013                 2012             in Dollars           in %
                                                           (In millions, except percentage changes)
Sales and marketing                         $         697         $         677     $          20              3  %
Product development                                   434                   374                60             16  %
General and administrative                            408                   372                36             10  %
Provision for transaction and loan losses             175                   134                41             31  %
Amortization of acquired intangible assets             82                    84                (2 )           (2 )%
Interest and other, net                                 9                    31               (22 )          (71 )%
Provision for income taxes                           (132 )                (114 )             (18 )           16  %

The following table summarizes operating expenses, non-operating items and provision for income taxes as a percentage of net revenues for the periods presented:

                                               Three Months Ended March 31,
                                                2013                 2012
Sales and marketing                             19  %                21  %
Product development                             12  %                11  %
General and administrative                      11  %                11  %
Provision for transaction and loan losses        5  %                 4  %
Amortization of acquired intangible assets       2  %                 3  %
Interest and other, net                          -  %                 1  %

Provision for income taxes (4 )% (3 )%

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 $20 million, or 3%, during the first quarter of 2013 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), partially offset by a decrease in marketing program costs. Sales and . . .

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