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EBAY > SEC Filings for EBAY > Form 10-K on 31-Jan-2014All Recent SEC Filings

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Form 10-K for EBAY INC


31-Jan-2014

Annual Report


ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that involve expectations, plans or intentions (such as those relating to future business, 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 "Item 1A: Risk Factors" of this Annual Report on Form 10-K, as well as in our consolidated financial statements, related notes, and the other information appearing elsewhere in this report and our other filings with the SEC. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. You should read the following Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the consolidated financial statements and the related notes included in this report.

Overview

We have 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 and Bill Me Later. Our Enterprise segment was added upon the completion of our acquisition of GSI Commerce, Inc. (GSI) on June 17, 2011. The results of our Enterprise segment have been included in our consolidated results of operations from the acquisition date.
In 2013, net revenues increased 14% to $16.0 billion compared to $14.1 billion in 2012, driven primarily by increases in net revenues from each of our business segments. We achieved an operating margin of 21% in each of 2013 and 2012. Our diluted earnings per share increased to $2.18 in 2013, a $0.19 increase per share compared to 2012, driven primarily by growth in 2013 net revenues partially offset by a higher effective tax rate. We generated cash flow from operations of approximately $5.0 billion in 2013 compared to $3.8 billion in 2012.

Our Marketplaces segment total net revenues increased $886 million, or 12%, in 2013 compared to 2012. The increase in total net revenues was driven primarily by an increase in GMV (as defined below) excluding vehicles of 13%, which was due to continued growth in the U.S. and internationally. Our Marketplaces segment operating margin increased 0.7 percentage points in 2013 compared to 2012 due primarily to marketing program efficiencies that were partially offset by continued investments in our site operations infrastructure and business initiatives.
Our Payments segment total net revenues increased $1.1 billion, or 19%, in 2013 compared to 2012. The increase in total net revenues was driven primarily by an increase in net TPV (as defined below) of 24% and strong growth in Bill Me Later. Our Payments segment operating margin decreased 0.4 percentage points in 2013 compared to 2012, due primarily to a lower take rate partially offset by operating efficiencies.
Our Enterprise segment total net revenues increased $29 million, or 3%, in 2013 compared to 2012. The increase in total net revenues was driven primarily by an increase in Merchandise Sales (as defined below) of 14% in 2013 compared to 2012. Our Enterprise segment operating margin decreased 3.6 percentage points for 2013 compared to 2012 due primarily to a lower take rate on Merchandise Sales as well as continued investment in our Enterprise commerce technologies. In 2012, net revenues increased 21% to $14.1 billion compared to $11.7 billion in 2011, driven primarily by increases in net revenues from each of our business segments. We achieved an operating margin of 21% in 2012 compared to 20% in 2011. Our diluted earnings per share decreased to $1.99 in 2012, a $0.47 decrease per share compared to 2011, driven primarily by the gain resulting from the sale of our remaining 30% equity interest in Skype in 2011, offset in part by growth in 2012 net revenues and a lower effective tax rate. We generated cash flow from operations of approximately $3.8 billion in 2012 compared to $3.3 billion in 2011.


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, including Bill Me Later, during the 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, including Bill Me Later, during the period, excluding PayPal's payment gateway business and payments for transactions on our Marketplaces platform. We define on eBay net TPV as the total dollar volume of payments, net of payment reversals, successfully completed through our Payments networks, including Bill Me Later, during the period for transactions on our Marketplaces platform. 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 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, PayPal Merchant Services TPV and Merchandise Sales not earned on eBay or paid for via PayPal or Bill Me later during the period. ECV excludes volume transacted through the Magento platform.

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 and final value fees (which are fees payable on transactions closed 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.

                                                                    Year Ended December 31,
                                                            2013                2012            2011(1)
                                                           (In millions, except percentage changes)
Net Revenues by Type:
Net transaction revenues
Marketplaces                                          $       6,795       $       6,078       $   5,431
Payments                                                      6,096               5,146           4,123
Enterprise                                                      898                 850             460
Total net transaction revenues                               13,789              12,074          10,014
Marketing services and other revenues
Marketplaces                                                  1,489               1,320           1,211
Payments                                                        532                 428             289
Enterprise                                                      214                 233             130
Corporate and other                                              55                  39               8
Total marketing services and other revenues                   2,290               2,020           1,638
Elimination of inter-segment net revenue (2)                    (32 )               (22 )             -
Total net revenues                                    $      16,047       $      14,072       $  11,652
Net Revenues by Geography:
U.S.                                                  $       7,712       $       6,778       $   5,484
International                                                 8,335               7,294           6,168
Total net revenues                                    $      16,047       $      14,072       $  11,652

(1) Includes data for Enterprise since June 17, 2011, the date the acquisition of GSI was completed.

(2) Represents net 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 years ended December 31, 2013, 2012 and 2011, we are subject to the risks of doing business in foreign countries as discussed under "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 year ended December 31, 2013, foreign currency movements relative to the U.S. dollar positively impacted net revenues by approximately $24 million (inclusive of a $4 million negative impact from hedging activities relating to PayPal's net revenue) compared to the prior year. Foreign currency movements relative to the U.S. dollar for the year ended December 31, 2013 positively impacted Marketplaces net revenues by approximately $36 million and negatively impacted Payments and Enterprise net revenues by approximately $11 million and less than $1 million, respectively, compared to the prior year (inclusive of the impact of hedging activities, noted above, in the case of Payments net revenues).

For the year ended December 31, 2012, foreign currency movements relative to the U.S. dollar negatively impacted net revenues by approximately $206 million (inclusive of a $44 million positive impact from hedging activities relating to PayPal's net revenue) compared to the prior year. Foreign currency movements relative to the U.S. dollar for the year ended December 31, 2012 negatively impacted Marketplaces, Payments, and Enterprise net revenues by approximately $172 million, $33 million and $1 million, respectively, compared to the prior year (inclusive 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.

                                                                            Percent Change    Percent Change
                                          Year Ended December 31,                from              from
                                     2013          2012          2011        2012 to 2013      2011 to 2012
                                                   (In millions, except percentage changes)
Supplemental Operating Data:
Marketplaces Segment: (1)
GMV excluding vehicles (2)        $  76,495     $  67,763     $  60,332               13  %             12  %
GMV vehicles only (3)                 6,835         7,613         8,301              (10 )%             (8 )%
Total GMV (4)                     $  83,330     $  75,376     $  68,633               11  %             10  %
Payments Segment:
Merchant Services net TPV (5)     $ 125,281     $  97,277     $  77,700               29  %             25  %
On eBay net TPV (6)               $  54,382     $  47,660     $  41,058               14  %             16  %
Net TPV (7)                       $ 179,663     $ 144,937     $ 118,758               24  %             22  %
Enterprise Segment:
Merchandise Sales (8)             $   4,180     $   3,682     $   2,046               14  %            N/A

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

(2) Total value of all successfully closed transactions between users on Marketplaces trading platforms during the period regardless of whether the buyer and seller actually consummated the transaction, excluding vehicles gross merchandise volume.

(3) Total value of all successfully closed vehicle transactions between users on 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, including Bill Me Later, during the period, excluding PayPal's payment gateway business and payments for transactions on our Marketplaces platform.

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

(7) Total dollar volume of payments, net of payment reversals, successfully completed through our PayPal payments networks, including Bill Me Later during the period; excludes payments sent or received through PayPal's payment gateway business.

(8) 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, whether we record the full amount of such transaction as a product sale or a percentage of such transaction as a service fee. Includes data for Enterprise since June 17, 2011, the date the acquisition of GSI was completed. Accordingly, the percent change in Enterprise's metrics between 2011 and 2012 is not meaningful.


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      $ 3,877     $      3,892     $     4,530
Percent change from prior quarter      (6 )%         3 %              - %            16 %

(1) Net revenues attributable to the Enterprise segment are reflected beginning 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 Enterprise segment is highly seasonal. The fourth calendar quarter typically accounts for a disproportionate amount of Enterprise's total annual revenue because consumers increase their purchases and businesses increase their advertising to consumers during the fourth quarter holiday season. We expect these trends to continue.

Marketplaces Net Transaction Revenues
Marketplaces net transaction revenues increased $717 million, or 12%, in 2013 compared to 2012, consistent with the increase in GMV excluding vehicles of 13% in 2013 compared to 2012. The increase in net transaction revenues and GMV excluding vehicles was due to continued growth in active users, mobile and the continued improvements in the customer experience. In addition, seller discounts and buyer loyalty programs had a negative impact on revenue growth.

Marketplaces net transaction revenues increased $647 million, or 12%, in 2012 compared to 2011, consistent with the increase in GMV excluding vehicles of 12% in 2012 compared to 2011. The increases in net transaction revenue and GMV excluding vehicles were due primarily to strong growth across all regions, partially offset by the negative impact of approximately $118 million in foreign currency movements relative to the U.S. dollar.
Marketplaces net transaction revenues earned internationally totaled $3.8 billion, $3.4 billion and $3.1 billion in 2013, 2012 and 2011, respectively, representing 55%, 56% and 56% of total Marketplaces net transaction revenues in the respective periods. The decrease in international net transaction revenues as a percentage of total net transaction revenues during 2013 was due primarily to stronger growth in U.S. GMV relative to international GMV.

Payments Net Transaction Revenues

Payments net transaction revenues increased $950 million, or 18%, during 2013 compared to 2012, due primarily to net TPV growth of 24% offset by a lower take rate and the impact of foreign currency movements and hedging. The increase in net TPV was due primarily to growth in consumer and merchant adoption and use of PayPal both on and off eBay, while the lower take rate was due primarily to a shift to larger merchants who pay lower rates. Our Merchant Services net TPV increased 29% during 2013 compared to 2012 and represented 70% of PayPal's net TPV in 2013, compared with 67% in 2012. On eBay net TPV increased 14% during 2013 compared to 2012, and represented 30% of PayPal's net TPV in 2013.


Payments net transaction revenues increased $1 billion, or 25%, during 2012 compared to 2011, due primarily to net TPV growth of 22% 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 25% during 2012 compared to 2011, and represented 67% of PayPal's net TPV in 2012 compared with 65% in 2011. On eBay net TPV increased 16% during 2012 compared to 2011, and represented 33% of PayPal's net TPV in 2012. The increase in the take rate was driven primarily by foreign exchange income, gains from hedging activities and the full year impact from our acquisition of Zong (acquired in August 2011).
Payments net transaction revenues earned internationally totaled $3.4 billion, $2.8 billion and $2.2 billion in 2013, 2012 and 2011, representing 56%, 55% and 53% of total Payments net transaction revenues, respectively. The increase in international net transaction revenues 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 $48 million, or 6%, in 2013 compared to 2012, due primarily to an increase in Merchandise Sales of 14%, partially offset by a lower take rate.

Enterprise net transaction revenues were $850 million in 2012 and $460 million in 2011. Net transaction revenues attributable to the Enterprise segment for 2011 are reflected from June 17, 2011 (the date the acquisition of GSI was completed). Accordingly, comparisons of Enterprise's net transaction revenues for 2012 to 2011 are not meaningful.

Marketing Services and Other Revenues

Marketing services and other revenues increased $270 million, or 13%, in 2013 compared to 2012, and represented 14% of total net revenues for both periods. 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 $382 million, or 23%, in 2012 compared to 2011, and represented 14% of total net revenues for both periods. 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.

Summary of Cost of Net Revenues

The following table summarizes changes in cost of net revenues for the periods
presented:
                                                                       Change from               Change from
                                  Year Ended December 31,              2012 to 2013              2011 to 2012
                               2013         2012        2011       in Dollars     in %       in Dollars      in %
                                                       (In millions, except percentages)
Cost of net revenues:
Marketplaces                 $ 1,520     $  1,273     $ 1,210     $      247       19  %   $       63           5 %
As a percentage of total
Marketplaces net revenues       18.3 %       17.2 %      18.2 %
Payments                       2,675        2,209       1,866            466       21  %          343          18 %
As a percentage of total
Payments net revenues           40.4 %       39.6 %      42.3 %
Enterprise (1)                   821          696         374            125       18  %          322         N/A
As a percentage of total
Enterprise net revenues         73.8 %       64.2 %      63.4 %
Corporate and other               20           38          11            (18 )    (47 )%           27         N/A
Total cost of net revenues   $ 5,036     $  4,216     $ 3,461     $      820       19  %   $      755          22 %
As a percentage of net
revenues                        31.4 %       30.0 %      29.7 %

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


Cost of net revenues consists primarily of costs associated with payment processing, customer support, site operations, fulfillment and interest expense on borrowings incurred to finance Bill Me Later's portfolio of loan receivables. 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 $247 million, or 19%, in 2013 compared to 2012. The increase was due primarily to the growth in GMV. Marketplaces cost of net revenues as a percentage of Marketplaces net revenues increased by 1.1 percentage points during 2013 compared to 2012 due primarily to our investment in site operations infrastructure and customer support programs.

Marketplaces cost of net revenues increased $63 million, or 5%, in 2012 compared to 2011. The increase was due primarily to increases in our customer support costs and site operations associated with our GMV growth. Marketplaces cost of net revenues as a percentage of Marketplaces net revenues decreased during 2012 compared to the prior year due primarily to improved operating leverage in our site operations infrastructure, partially offset by investment in customer support programs.

Payments

Payments cost of net revenues increased $466 million, or 21%, in 2013 compared to 2012 due primarily to the impact of growth in net TPV and growth in our customer support initiatives. Payments cost of net revenues as a percentage of Payments net revenues increased by 0.8 percentage points during 2013 compared to 2012 due primarily to these same factors.

Payments cost of net revenues increased $343 million, or 18%, in 2012 compared to 2011 due primarily to the impact of growth in net TPV. Payments cost of net revenues as a percentage of Payments net revenues decreased during 2012 compared to 2011 due primarily to a lower transaction expense rate driven largely by the impact of certain regulatory changes, primarily the Durbin amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Enterprise

Enterprise cost of net revenues increased $125 million, or 18%, during 2013 compared to 2012 due primarily to the impact of growth in Merchandise Sales as well as amortization expense driven by the initial roll out of the new suite of commerce technologies. Enterprise cost of net revenues as a percentage of Enterprise net revenues increased by 9.6 percentage points during 2013 compared to 2012 due primarily to these same factors.

Enterprise cost of net revenues were $696 million during 2012 and $374 million in 2011. Cost of net revenues attributable to the Enterprise segment for 2011 are reflected from June 17, 2011 (the date the acquisition of GSI was completed). Accordingly, comparisons with Enterprise's cost of revenues for 2012 to 2011 are not meaningful.

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              Change from
                                 Year Ended December 31,               2012 to 2013              2011 to 2012
                              2013         2012         2011       in Dollars      in %      in Dollars     in %
                                                 (In millions, except percentage changes)
Sales and marketing        $  3,060     $  2,913     $  2,435     $       147        5  %   $      478       20  %
Product development           1,768        1,573        1,235             195       12  %          338       27  %
. . .
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