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EBAY > SEC Filings for EBAY > Form 10-Q on 18-Jul-2014All Recent SEC Filings

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Form 10-Q for EBAY INC


18-Jul-2014

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 Quarterly Report on Form 10-Q, 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 segments: Marketplaces, Payments and Enterprise. Our Marketplaces segment includes our eBay.com platform and its localized counterparts and our other online platforms, such as our online classifieds sites and StubHub. Our Payments segment is comprised of PayPal and Bill Me Later. Our Enterprise segment includes our Magento business and provides commerce technologies, omnichannel operations and marketing solutions for merchants of all sizes that operate in general merchandise categories.

Net revenues for the three months ended June 30, 2014 increased 13% to $4.4 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 June 30, 2014, our operating margin decreased to 18% from 19% in the same period of the prior year due primarily to a greater proportion of our revenue being derived from our Payments segment, which has lower margins than our Marketplaces segment. For the three months ended June 30, 2014, our diluted earnings per share increased to $0.53, a $0.04 increase compared to the same period of the prior year, driven primarily by growth in net revenues. For the three months ended June 30, 2014, we generated cash flow from operations of $1.5 billion, compared to $1.0 billion for the same period of the prior year.

Our Marketplaces segment total net revenues increased $173 million, or 9%, for the three months ended June 30, 2014 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) of 12% for the three months ended June 30, 2014 compared to the same period of the prior year, which was due primarily to continued growth internationally and in the U.S. and a favorable impact from foreign currency movements relative to the U.S. dollar offset by declines caused by disruption from a cyberattack as discussed below as well as Google search engine algorithm changes. Our Marketplaces segment operating margin decreased by 3.4 percentage points for the three months ended June 30, 2014 compared to the same period of the prior year, due primarily to continued investments in our marketing programs, site operations and business initiatives as well as costs related to a cyberattack as discussed below. During the second quarter of 2014, our Marketplaces segment experienced a cyberattack that compromised an authentication database containing user names, encrypted passwords and other non-financial data of our customers. The attack resulted from a small number of employee log-in credentials that were compromised. The database included eBay Marketplaces customers' name, encrypted password, e-mail address, physical address, phone number and date of birth. The


database did not contain any financial information or other confidential personal information. We have had no indication of increased fraudulent account activity on our Marketplaces platforms as a result of the cyberattack. As a result of this attack we required certain Marketplaces users to reset their passwords in order to access their accounts on our core Marketplaces platform and its localized counterparts. This attack was isolated to our eBay platform and we have seen no evidence of unauthorized access or compromises to personal or financial information of our PayPal users as that data is stored separately on a secure network.
During the second quarter of 2014, we recorded cyberattack-related expenses and customer credits of approximately $46 million, of which approximately $41 million have been reported within our Marketplaces segment. Expenses include costs to investigate and remediate the attack, provide additional customer support and temporarily enhance customer protection as well as additional marketing program costs. Customer credits were voluntarily offered as refunds to sellers during the password reset period, which were recorded as a reduction of revenue. Many of these measures were undertaken to preserve our customers' trust in our Marketplaces businesses.
The disruption arising from this cyberattack adversely affected our second quarter 2014 Marketplaces segment results; however, it is not possible to precisely measure the amount of lost revenue directly attributable to the cyberattack. We are unable to predict the full impact of the cyberattack on Marketplaces users' behavior in the future, including whether a change in our customers' trust could negatively impact user behavior or require us to increase promotional efforts to regain such trust. Accordingly, we are not able to precisely forecast any possible future impact to our revenues or expenses attributable to the cyberattack.
Our Payments segment total net revenues increased $322 million, or 20%, for the three months ended June 30, 2014 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 29% for the three months ended June 30, 2014 compared to the same period of the prior year and growth in Bill Me Later. Our Payments segment operating margin increased by 1.5 percentage points for the three months ended June 30, 2014 compared to the same period of the prior year due primarily to an increase in volume, favorable transaction expense and loss rates, and operating efficiencies that were partially offset by a lower take rate.
Our Enterprise segment total net revenues increased $7 million, or 3%, for the three months ended June 30, 2014 compared to the same period of the prior year. The increase in total net revenues was driven primarily by an increase in Gross Merchandise Sales (as defined below) of 15% for the three months ended June 30, 2014 compared to the same period of the prior year. Our Enterprise segment operating margin increased 0.1 percentage points for the three months ended June 30, 2014 compared to the same period of the prior year, due primarily to a lower take rate that was offset by an increase in operating efficiencies. We define GMV as the total value of all successfully closed transactions between users on Marketplaces platforms (excluding eBay's classifieds websites, brands4friends and Shopping.com) during the period regardless of whether the buyer and seller actually consummated the transaction; excludes vehicles and real estate gross merchandise volume. 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, Venmo and payments processed through Braintree's full stack payments platform during the period; it excludes payments sent or received through PayPal's and Braintree's payment gateway businesses. 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, Venmo and payments processed through Braintree's full stack payments platform during the period; it excludes PayPal's and Braintree's payment gateway businesses and payments for transactions on our Marketplaces platforms. 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 platforms. We define Gross 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; excludes volume transacted through the Magento platform. We define ECV as the total Marketplaces GMV, Payments Merchant Services Net TPV and eBay Enterprise Gross Merchandise Sales not earned on eBay or paid for via PayPal or Bill Me Later during the period; it 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 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 June 30,          Six Months Ended June 30,
                                          2014               2013             2014               2013
                                                                 (In millions)
Net Revenues by Type:
Net transaction revenues
Marketplaces                         $      1,722       $      1,578     $      3,449       $      3,132
Payments                                    1,741              1,475            3,441              2,910
Enterprise                                    207                194              415                380
Total net transaction revenues              3,670              3,247            7,305              6,422
Marketing services and other
revenues
Marketplaces                                  452                423              880                826
Payments                                      205                149              350                262
Enterprise                                     60                 66              121                128
Total marketing services and other
revenues                                      717                638            1,351              1,216
Elimination of inter-segment net
revenue (2)                                   (21 )               (8 )            (28 )              (13 )
Total net revenues                   $      4,366       $      3,877     $      8,628       $      7,625
Net Revenues by Geography:
U.S.                                 $      2,047       $      1,870     $      4,045       $      3,659
International                               2,319              2,007            4,583              3,966
Total net revenues                   $      4,366       $      3,877     $      8,628       $      7,625

(1) During the first quarter of 2014, we changed our reportable segments based upon changes in our organizational structure which reflect the integration of our Magento platform into our Enterprise segment. Prior to this change, Magento was reported in corporate and other. Also during the first quarter of 2014, we revised our internal management reporting of certain Marketplaces transactions to align more closely with our related operating metrics. Related to this change, we reclassified our Marketplaces vehicles and real estate revenues from net transaction revenues to marketing services and other revenues. Prior period amounts have been revised to conform to the current period segment reporting structure.

(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 three months ended June 30, 2014 and 2013, 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 June 30, 2014, foreign currency movements relative to the U.S. dollar positively impacted net revenues by $69 million (inclusive of a negative impact of approximately $23 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 June 30, 2014, foreign currency movements relative to the U.S. dollar positively impacted Marketplaces, Payments, and Enterprise net revenues by approximately $63 million, $5 million, and less than $1 million, respectively, in each case compared to the same period of the prior year (net of the negative impact of hedging activities noted above in the case of Payments net revenues).

For the six months ended June 30, 2014, foreign currency movements relative to the U.S. dollar positively impacted net revenues by $92 million (inclusive of a negative impact of approximately $40 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 six months ended June 30, 2014, foreign currency movements relative to the U.S. dollar positively impacted Marketplaces, Payments, and Enterprise net revenues by approximately $92 million, less than $1 million, and less than $1 million, respectively, in each case compared to the same period of the prior year (net of the negative 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 June 30,      Percent       Six Months Ended June 30,       Percent
                                    2014             2013        Change           2014             2013        Change
                                                      (In millions, except percentage changes)
Supplemental Operating Data:
Marketplaces Segment: (1)
GMV (2)                       $       20,485     $   18,276        12 %     $       41,030     $   36,583        12 %
Payments Segment:
Merchant Services Net TPV (3) $       40,371     $   29,807        35 %     $       77,533     $   57,894        34 %
On eBay Net TPV (4)           $       14,675     $   13,006        13 %     $       29,519     $   25,959        14 %
Net TPV (5)                   $       55,046     $   42,813        29 %     $      107,052     $   83,853        28 %
Enterprise Segment:
Gross Merchandise Sales (6)   $          940     $      815        15 %     $        1,876     $    1,622        16 %

(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 platforms during the period regardless of whether the buyer and seller actually consummated the transaction; excludes vehicles and real estate gross merchandise volume.

(3) Total dollar volume of payments, net of payment reversals, successfully completed through our payments networks, including Bill Me Later, Venmo and payments processed though Braintree's full stack payments platform during the period; excludes PayPal's and Braintree's payment gateway businesses and payments for transactions on our Marketplaces platforms.

(4) 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 platforms.

(5) Total dollar volume of payments, net of payment reversals, successfully completed through our payments networks, including Bill Me Later, Venmo and payments processed through Braintree's full stack payments platform during the period; excludes payments sent or received through PayPal's and Braintree's payment gateway businesses.

(6) 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, whether we record the full amount of such transaction as a product sale or a percentage of such transaction as a service fee; excludes volume transacted through the Magento platform.


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)
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     $     4,530
Percent change from prior quarter      (6 )%         3 %              0 %            16 %
2014
Net revenues                      $ 4,262      $ 4,366                -               -
Percent change from prior quarter      (6 )%         2 %              - %             - %

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 revenues because consumers increase their purchases and businesses increase their advertising to consumers in the fourth quarter holiday season. We expect that these trends will continue.

Marketplaces Net Transaction Revenues

Marketplaces net transaction revenues increased $144 million, or 9%, while GMV increased 12% during the three months ended June 30, 2014 compared to the same period in the prior year. The increase in net transaction revenue during the three months ended June 30, 2014 was due primarily to growth in volume, as well as a benefit from foreign currency movements against the U.S. dollar, partially offset by increased use of buyer coupons and seller incentives, which are accounted for as a reduction in revenue. Our net transaction revenue growth during the three months ended June 30, 2014 was also negatively impacted by the cyberattack described above, changes to Google's search engine algorithms, and pricing changes at our StubHub business.

Marketplaces net transaction revenues increased $317 million, or 10%, while GMV increased 12% during the six months ended June 30, 2014 compared to the same period in the prior year. The increase in net transaction revenues and GMV was due primarily to growth in volume, as well as a benefit from foreign currency movements against the U.S. dollar, partially offset by increased use of buyer coupons and seller incentives, which are accounted for as a reduction in revenue. Our net transaction revenue growth during the six months ended June 30, 2014 was also negatively impacted by the cyberattack described above, Google's search engine algorithm changes, and pricing changes at our StubHub business.

Marketplaces net transaction revenues earned internationally totaled $1.0 billion and $2.0 billion during the three and six months ended June 30, 2014, respectively, representing 58% of total Marketplaces net transaction revenues in both periods. Marketplaces net transaction revenues earned internationally totaled $872 million and $1.7 billion during the three and six months ended June 30, 2013, respectively, representing 55% of total Marketplaces net transaction revenues in both periods. The increase in international net transaction revenues as a percentage of total net transaction revenues during the three and six months ended June 30, 2014 was due primarily to stronger growth in international GMV relative to U.S. GMV, in addition to a favorable impact from foreign currency movements relative to the U.S. dollar.

Payments Net Transaction Revenues

Payments net transaction revenues increased $266 million, or 18%, during the three months ended June 30, 2014 compared to the same period of the prior year, due primarily to an increase in net TPV of 29%, 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 and the impact from the acquisition of Braintree. The lower take rate was due primarily to a shift to larger merchants who pay lower rates and an increase in net TPV generated through our unbranded products such as Braintree. Our Merchant Services Net TPV increased 35% during the three months ended June 30, 2014 compared to the same period of the prior year, and represented 73% of PayPal's net TPV for the three months ended June 30, 2014 compared to 70% in the same period of the prior year. On eBay net TPV increased 13% during the three months ended June 30, 2014 compared to the same period of the prior year, and


represented 27% of PayPal's net TPV for the three months ended June 30, 2014 compared to 30% in the same period of the prior year.

Payments net transaction revenues increased $531 million, or 18%, during the six months ended June 30, 2014 compared to the same period of the prior year, due primarily to an increase in net TPV of 28%, 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 and the impact from the acquisition of Braintree. The lower take rate was due primarily to a shift to larger merchants who pay lower rates and an increase in net TPV generated through our unbranded products such as Braintree. Our Merchant Services Net TPV increased 34% during the six months ended June 30, 2014 compared to the same period of the prior year, and represented 72% of PayPal's net TPV for the six months ended June 30, 2014 compared to 69% in the same period of the prior year. On eBay Net TPV increased 14% during the six months ended June 30, 2014 compared to the same period of the prior year, and represented 28% of PayPal's net TPV in the six months ended June 30, 2014 compared to 31% in the same period of the prior year.

Payments net transaction revenues earned internationally totaled $979 million and $1.9 billion during the three and six months ended June 30, 2014, respectively, representing 56% of total Payments net transaction revenues in both periods. Payments net transaction revenues earned internationally totaled $822 million and $1.6 billion during the three and six months ended June 30, 2013, respectively, representing 56% and 55% of total Payments net transaction revenues in those respective periods. The increase in international net transaction revenues during the three and six months ended June 30, 2014 as a percentage of total Payments net transaction revenues compared to the same period of the prior year 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 $13 million and $35 million, or 7% and 9%, during the three and six months ended June 30, 2014 compared to the same periods of the prior year, due primarily to a 15% and 16% increase in Gross Merchandise Sales for those respective periods, partially offset by a lower take rate.

Marketing Services and Other Revenues

Marketing services and other revenues increased $79 million, or 12%, during the three months ended June 30, 2014 compared to the same period of the prior year, and represented 16% of total net revenues for both periods. The increase in marketing services and other revenues during the three months ended June 30, 2014 was due in part to growth in our Bill Me Later portfolio of consumer receivables, an increase in the revenue share we earn through our current credit program agreement with Synchrony (formerly GE Retail Capital Bank), and increased revenue from our classifieds businesses.

Marketing services and other revenues increased $135 million, or 11%, during the six months ended June 30, 2014 compared to the same period of the prior year, and represented 16% of total net revenues for both periods. The increase in marketing services and other revenues during the six months ended June 30, 2014 was due in part to growth in our Bill Me Later portfolio of consumer receivables, an increase in the revenue share we earn through our current credit program agreement with Synchrony, and increased revenue from our classifieds businesses.

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