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EBAY > SEC Filings for EBAY > Form 10-Q on 18-Oct-2013All Recent SEC Filings

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Form 10-Q for EBAY INC


18-Oct-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, unless otherwise expressly stated or the context otherwise requires.

Overview

We are a global technology company that enables commerce through three reportable business segments: Marketplaces, Payments and Enterprise. 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 Enterprise segment, which we previously referred to as our GSI segment, consists of GSI Commerce, Inc. ("GSI Commerce"), which we acquired in the second quarter of 2011.

Net revenues for the three months ended September 30, 2013 increased 14% to $3.9 billion compared to the same period of the prior year, driven primarily by increases in net revenues from each of our segments. For the three months ended September 30, 2013, our operating margin increased to 21% from 20% in the same period of the prior year due primarily to solid top line growth and operating efficiencies. For the three months ended September 30, 2013, our diluted earnings per share increased to $0.53, a $0.07 increase compared to the same period of the prior year, driven primarily by growth in net revenues and a gain on the sale of our investments in RueLaLa and ShopRunner, partially offset by a higher effective tax rate. For the three months ended September 30, 2013, we generated cash flow from operations of $1.3 billion, compared to $1.2 billion for the same period of the prior year.

Our Marketplaces segment total net revenues increased $221 million, or 12%, for the three months ended September 30, 2013 compared to the same period of the prior year. The increase in total net revenues was driven primarily by an increase in gross merchandise volume (GMV) (as defined below) excluding vehicles of 13% for the three months ended September 30, 2013 compared to the same period of the prior year, which was due primarily to continued growth in the U.S. and internationally. Our Marketplaces segment operating margin decreased slightly by 0.1 percentage points for the three months ended September 30, 2013 compared to the same period of the prior year due primarily to continued investments in our site operations infrastructure and business initiatives, partially offset by marketing program efficiencies.


Our Payments segment total net revenues increased $253 million, or 19%, for the three months ended September 30, 2013 compared to the same period of the prior year. The increase in total net revenues was driven primarily by an increase in net total payment volume (TPV) (as defined below) of 25% for the three months ended September 30, 2013 compared to the same period of the prior year and strong growth in Bill Me Later. Our Payments segment operating margin increased slightly by 0.1 percentage points for the three months ended September 30, 2013 compared to the same period of the prior year due primarily to an increase in operating efficiencies that was partially offset by a lower take rate. Our Enterprise segment total net revenues increased $12 million, or 5%, for the three months ended September 30, 2013 compared to the same period of the prior year. The increase in total net revenues was driven primarily by an increase in Merchandise Sales (as defined below) of 13% for the three months ended September 30, 2013 compared to the same period of the prior year. Our Enterprise segment operating margin decreased 1.1 percentage points for the three months ended September 30, 2013 compared to the same period of the prior year due primarily to a lower take rate on Merchandise Sales as well as continued investment in our Enterprise Commerce Technologies.
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 Enterprise 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 Enterprise platforms. We define 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 our Enterprise Commerce Technologies 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 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 (1).

                                           Three Months Ended September 30,           Nine Months Ended September 30,
                                              2013                   2012                2013                 2012
                                                           (In millions, except percentage changes)
Net Revenues by Type:
Net transaction revenues
Marketplaces                           $         1,668         $         1,490     $        4,913       $        4,406
Payments                                         1,493                   1,264              4,403                3,715
Enterprise                                         185                     170                565                  516
Total net transaction revenues                   3,346                   2,925              9,881                8,637
Marketing services and other revenues
Marketplaces                                       359                     316              1,072                  942
Payments                                           127                     102                389                  318
Enterprise                                          53                      57                155                  168
Corporate and other                                 14                      11                 40                   27
Total marketing services and other
revenues                                           553                     485              1,656                1,455
Elimination of inter-segment net
revenue (2)                                         (7 )                    (6 )              (20 )                (13 )
Total net revenues                     $         3,892         $         3,404     $       11,517       $       10,079
Net Revenues by Geography:
U.S.                                   $         1,873         $         1,637     $        5,532       $        4,829
International                                    2,019                   1,767              5,985                5,250
Total net revenues                     $         3,892         $         3,404     $       11,517       $       10,079

(1) Certain amounts may not add due to rounding.

(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 generated a majority of our net revenues internationally in recent periods, including the three months ended September 30, 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 September 30, 2013, foreign currency movements relative to the U.S. dollar positively impacted net revenues by $15 million (inclusive of a positive impact of approximately $6 million from hedging activities included in Payments net revenue) compared to the same period of the prior year. On a business segment basis, for the three months ended September 30, 2013, foreign currency movements relative to the U.S. dollar positively impacted Marketplaces and Payments net revenues by approximately $11 million and $5 million, respectively, and negatively impacted Enterprise net revenues by less than $1 million, in each case compared to the same period of the prior year (net of the positive impact of hedging activities noted above, in the case of Payments net revenues).

For the nine months ended September 30, 2013, foreign currency movements relative to the U.S. dollar positively impacted net revenues by approximately $15 million (inclusive of a positive impact of approximately $9 million from hedging activities included in Payments net revenue) compared to the same period of the prior year. On a business segment basis, for the nine months ended September 30, 2013, foreign currency movements relative to the U.S. dollar positively impacted Marketplaces and Payments net revenues by approximately $15 million and less than $1 million, respectively, and negatively impacted Enterprise net revenues by less than $1 million, in each case compared to the same period of the prior year (net of the positive 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 (1).

                               Three Months Ended September 30,    Percent     Nine Months Ended September 30,    Percent
                                     2013               2012        Change           2013              2012        Change
                                                        (In millions, except percentage changes)
Supplemental Operating Data:
Marketplaces Segment: (2)
GMV excluding vehicles (3)    $          18,360     $   16,281        13  %   $         54,978     $   48,658        13  %
GMV vehicles only (4)         $           1,765     $    1,994       (11 )%   $          5,256     $    5,885       (11 )%
Total GMV (5)                 $          20,125     $   18,274        10  %   $         60,234     $   54,543        10  %
Payments Segment:
Merchant services net TPV (6) $          30,725     $   23,704        30  %   $         88,619     $   69,251        28  %
On eBay net TPV (7)           $          13,112     $   11,455        14  %   $         39,071     $   34,216        14  %
Total net TPV (8)             $          43,837     $   35,159        25  %   $        127,690     $  103,467        23  %
Enterprise Segment:
Merchandise Sales (9)         $             787     $      698        13  %   $          2,409     $    2,087        15  %

(1) Certain amounts may not add due to rounding.

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

(3) 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.

(4) 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.

(5) 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.

(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 our Marketplaces and Enterprise platforms.

(7) 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 Enterprise 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 our Enterprise Commerce Technologies 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:
                                                    Three Months 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 %              0 %            17 %
2013
Net revenues                      $ 3,748      $ 3,877            3,892               -
Percent change from prior quarter      (6 )%         3 %              0 %             -

(1) Net revenues attributable to the Enterprise segment are reflected from June 17, 2011 (the date the acquisition of GSI Commerce was completed).

We expect transaction activity patterns on our websites to mirror general consumer buying patterns. Our Enterprise segment is highly seasonal. The fourth calendar quarter typically accounts for a higher amount of Enterprise's total annual net revenues because consumers increase their purchases and businesses increase their advertising to consumers during the fourth quarter holiday season. We expect that these trends will continue.

Marketplaces Net Transaction Revenues

Marketplaces net transaction revenues increased $178 million, or 12%, while GMV excluding vehicles increased 13%, during the three months ended September 30, 2013 compared to the same period in the prior year. The increase in net transaction revenue and GMV excluding vehicles was due to continued growth in our businesses in the U.S. and internationally. In addition, seller discounts and buyer loyalty programs had a negative impact on revenue growth. Marketplaces net transaction revenues increased $507 million, or 12%, while GMV excluding vehicles increased 13%, during the nine months ended September 30, 2013 compared to the same period in the prior year. The increase in net transaction revenues and GMV excluding vehicles was due primarily to the same factors noted above.
Marketplaces net transaction revenues earned internationally (i.e., outside the U.S.) totaled $904 million and $2.7 billion during the three and nine months ended September 30, 2013, respectively, representing 54% and 55% of total Marketplaces net transaction revenues during those respective periods. Marketplaces net transaction revenues earned internationally totaled $814 million and $2.5 billion during the three and nine months ended September 30, 2012, respectively, representing 55% and 56% of total Marketplaces net transaction revenues during those respective periods. The decrease in international net transaction revenues as a percentage of total net transaction revenues during the three and nine months ended September 30, 2013 was due primarily to stronger growth in U.S. GMV.

Payments Net Transaction Revenues

Payments net transaction revenues increased $229 million, or 18%, during the three months ended September 30, 2013 compared to the same period of the prior year, due primarily to net TPV growth of 25%, 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 was due primarily to a shift to larger merchants who pay lower rates and a decrease in currency hedging gains. Our Merchant Services net TPV increased 30% during the three months ended September 30, 2013 compared to the same period of the prior year, and represented 70% of PayPal's net TPV in the three months ended September 30, 2013 compared to 67% in the same period of the prior year. On eBay net TPV increased 14% during the three months ended September 30, 2013 compared to the same period of the prior year, and represented 30% of PayPal's net TPV in the three months ended September 30, 2013 compared to 33% in the same period of the prior year.
Payments net transaction revenues increased $688 million or 19%, during the nine months ended September 30, 2013 compared to the same period of the prior year, due primarily to net TPV growth of 23%, partially offset by a lower take rate.


The increases in net TPV and the lower take rate were due primarily to the same factors described above. Our Merchant Services net TPV increased 28% during the nine months ended September 30, 2013 compared to the same period of the prior year, and represented 69% of PayPal's net TPV in the nine months ended September 30, 2013 compared with 67% in the same period of the prior year. On eBay net TPV increased 14% during the nine months ended September 30, 2013 compared to the same period of the prior year, and represented 31% of PayPal's net TPV for the nine months ended September 30, 2013, compared to 33% in the same period of the prior year.
Payments net transaction revenues earned internationally totaled $835 million and $2.4 billion during the three and nine months ended September 30, 2013, respectively, representing 56% of total Payments net transaction revenues in both periods. Payments net transaction revenues earned internationally totaled $697 million and $2.0 billion during the three and nine months ended September 30, 2012, respectively, representing 55% of total Payments net transaction revenues in both periods. The increase in international net transaction revenues during the three and nine months ended September 30, 2013 as a percentage of total Payments net transaction revenues was due primarily to higher growth in Merchant Services net TPV outside the U.S. as we expanded merchant coverage and consumer share of checkout.

Enterprise Net Transaction Revenues

Enterprise net transaction revenues increased $15 million and $49 million, or 9% and 9%, during the three and nine months ended September 30, 2013, respectively, compared to the same periods of the prior year, due primarily to a 13% and 15% increase in Merchandise Sales for those respective periods, partially offset by a lower take rate.

Marketing Services and Other Revenues

Marketing services and other revenues increased $68 million, or 14%, during the three months ended September 30, 2013 compared to the same period of the prior year, and represented 14% of total net revenues for both periods. The increase in marketing services and other revenues during the three months ended September 30, 2013 was due in part 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.

Marketing services and other revenues increased $201 million, or 14%, during the nine months ended September 30, 2013 compared to the same period of the prior year, and represented 14% of total net revenues for both periods. The increase in marketing services and other revenues during the nine months ended September 30, 2013 was attributable to the same factors noted above.

Summary of Cost of Net Revenues

The following table summarizes changes in cost of net revenues for the periods
presented:
                                                                      Change from                                                          Change from
                        Three Months Ended September 30,             2012 to 2013              Nine Months Ended September 30,             2012 to 2013
                           2013                   2012            in Dollars      in %           2013                   2012           in Dollars     in %
                                                                       (In millions, except percentages)
Cost of net
revenues:
Marketplaces        $           378         $           314     $      64          20 %   $         1,101         $           923     $      178       19  %
As a percentage of
total Marketplaces
net revenues                   18.6 %                  17.4 %                                        18.4 %                  17.3 %
Payments                        665                     549           116          21 %             1,928                   1,589            339       21  %
As a percentage of
total Payments net
revenues                       41.0 %                  40.2 %                                        40.2 %                  39.4 %
Enterprise                      175                     154            21          14 %               542                     446             96       22  %
As a percentage of
total Enterprise
net revenues                   73.5 %                  68.1 %                                        75.3 %                  65.2 %
Corporate and
other                             6                       5             1          20 %                16                      34            (18 )    (53 )%
Total cost of net
revenues            $         1,224         $         1,022     $     202          20 %   $         3,587         $         2,992     $      595       20  %
As a percentage of
net revenues                   31.4 %                  30.0 %                                        31.1 %                  29.7 %

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 $64 million and $178 million, or 20% and 19%, during the three and nine months ended September 30, 2013, respectively, compared to the same periods of the prior year. The increases were due primarily to the growth in GMV. Our investment in site operations infrastructure and customer support programs resulted in the cost of net revenues as a percentage of Marketplaces net revenues increasing by 1.2 and 1.1 percentage points during the three and nine months ended September 30, 2013, respectively, compared to the same periods in the prior year.

Payments

Payments cost of net revenues increased $116 million and $339 million, or 21%, . . .

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