e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
June 30, 2006.
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Or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
000-24821
eBay Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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77-0430924
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(State or other jurisdiction
of
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(I.R.S. Employer
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incorporation or
organization)
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Identification Number)
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2145 Hamilton Avenue
San Jose, California
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95125
(Zip Code)
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(Address of principal executive
offices)
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(408) 376-7400
(Registrants telephone
number, including area code)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of July 21, 2006, there were 1,415,394,158 shares
of the registrants common stock, $0.001 par value,
outstanding, which is the only class of common or voting stock
of the registrant issued.
TABLE OF CONTENTS
PART I: FINANCIAL
INFORMATION
Item 1: Financial
Statements
eBay
Inc.
CONDENSED CONSOLIDATED BALANCE SHEET
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December 31,
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June 30,
|
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|
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2005
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|
2006
|
|
|
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(In thousands, except
|
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par value amounts)
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(Unaudited)
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ASSETS
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Current assets:
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|
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|
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Cash and cash equivalents
|
|
$
|
1,313,580
|
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|
$
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2,634,381
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|
Short-term investments
|
|
|
774,650
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|
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|
720,115
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Accounts receivable, net
|
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|
322,788
|
|
|
|
310,039
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|
Funds receivable from customers
|
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|
255,282
|
|
|
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219,864
|
|
Restricted cash and investments
|
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29,702
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33,420
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Other current assets
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487,235
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|
|
|
628,410
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|
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|
|
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Total current assets
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3,183,237
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4,546,229
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Long-term investments
|
|
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825,667
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|
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622,862
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|
Property and equipment, net
|
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801,602
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|
|
|
942,437
|
|
Goodwill
|
|
|
6,120,079
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|
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6,355,466
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Intangible assets, net
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823,280
|
|
|
|
758,521
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Other assets
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|
|
35,121
|
|
|
|
24,736
|
|
|
|
|
|
|
|
|
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|
Total assets
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|
$
|
11,788,986
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|
|
$
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13,250,251
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|
|
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LIABILITIES AND
STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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55,692
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|
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$
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134,193
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Funds payable and amounts due to
customers
|
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|
586,651
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665,117
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Accrued expenses and other current
liabilities
|
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578,557
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|
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|
608,370
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|
Deferred revenue and customer
advances
|
|
|
81,940
|
|
|
|
106,082
|
|
Income taxes payable
|
|
|
182,095
|
|
|
|
205,643
|
|
|
|
|
|
|
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|
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Total current liabilities
|
|
|
1,484,935
|
|
|
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1,719,405
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Deferred tax liabilities, net
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215,682
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206,822
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Other liabilities
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40,388
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40,552
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|
|
|
|
|
|
|
|
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Total liabilities
|
|
|
1,741,005
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|
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1,966,779
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|
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|
|
|
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Stockholders equity:
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Common stock, $0.001 par
value; 3,580,000 shares authorized; 1,404,183 and
1,415,197 shares issued and outstanding
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1,404
|
|
|
|
1,415
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|
Additional paid-in capital
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7,272,476
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7,680,573
|
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Unearned stock-based compensation
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(45,540
|
)
|
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Retained earnings
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|
2,716,511
|
|
|
|
3,214,787
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Accumulated other comprehensive
income
|
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|
103,130
|
|
|
|
386,697
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|
|
|
|
|
|
|
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Total stockholders equity
|
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|
10,047,981
|
|
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11,283,472
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|
|
|
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Total liabilities and
stockholders equity
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|
$
|
11,788,986
|
|
|
$
|
13,250,251
|
|
|
|
|
|
|
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|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
eBay
Inc.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
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Three Months Ended
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Six Months Ended
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June 30,
|
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June 30,
|
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2005
|
|
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2006
|
|
|
2005
|
|
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2006
|
|
|
|
(In thousands, except per share amounts)
|
|
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(Unaudited)
|
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Net revenues
|
|
$
|
1,086,303
|
|
|
$
|
1,410,784
|
|
|
$
|
2,118,027
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|
|
$
|
2,801,203
|
|
Cost of net revenues(1)
|
|
|
191,840
|
|
|
|
292,479
|
|
|
|
378,209
|
|
|
|
571,047
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Gross profit
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|
894,463
|
|
|
|
1,118,305
|
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|
|
1,739,818
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|
|
2,230,156
|
|
|
|
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|
|
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|
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|
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Operating expenses(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Sales and marketing
|
|
|
287,144
|
|
|
|
398,000
|
|
|
|
558,493
|
|
|
|
798,562
|
|
Product development
|
|
|
71,639
|
|
|
|
123,972
|
|
|
|
145,428
|
|
|
|
243,042
|
|
General and administrative
|
|
|
130,900
|
|
|
|
222,923
|
|
|
|
273,020
|
|
|
|
440,597
|
|
Amortization of acquired
intangible assets
|
|
|
25,794
|
|
|
|
61,996
|
|
|
|
48,317
|
|
|
|
113,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
515,477
|
|
|
|
806,891
|
|
|
|
1,025,258
|
|
|
|
1,596,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income from operations
|
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|
378,986
|
|
|
|
311,414
|
|
|
|
714,560
|
|
|
|
634,038
|
|
Interest and other income, net
|
|
|
32,525
|
|
|
|
25,630
|
|
|
|
54,928
|
|
|
|
51,390
|
|
Interest expense
|
|
|
(405
|
)
|
|
|
(929
|
)
|
|
|
(2,125
|
)
|
|
|
(1,676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income before income taxes and
minority interests
|
|
|
411,106
|
|
|
|
336,115
|
|
|
|
767,363
|
|
|
|
683,752
|
|
Provision for income taxes
|
|
|
(119,518
|
)
|
|
|
(86,120
|
)
|
|
|
(219,466
|
)
|
|
|
(185,474
|
)
|
Minority interests
|
|
|
(28
|
)
|
|
|
(1
|
)
|
|
|
(46
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
291,560
|
|
|
$
|
249,994
|
|
|
$
|
547,851
|
|
|
$
|
498,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.22
|
|
|
$
|
0.18
|
|
|
$
|
0.41
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.21
|
|
|
$
|
0.17
|
|
|
$
|
0.40
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,351,375
|
|
|
|
1,411,925
|
|
|
|
1,347,429
|
|
|
|
1,409,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
1,379,088
|
|
|
|
1,435,757
|
|
|
|
1,380,736
|
|
|
|
1,438,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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(1) Includes stock-based
compensation as follows
(2006 increases are due primarily to the
adoption of FAS 123(R)):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenues
|
|
$
|
|
|
|
$
|
7,631
|
|
|
$
|
78
|
|
|
$
|
17,107
|
|
Sales and marketing
|
|
$
|
|
|
|
$
|
27,063
|
|
|
$
|
|
|
|
$
|
51,784
|
|
Product development
|
|
$
|
(721
|
)
|
|
$
|
22,991
|
|
|
$
|
(399
|
)
|
|
$
|
43,692
|
|
General and administrative
|
|
$
|
771
|
|
|
$
|
27,723
|
|
|
$
|
3,967
|
|
|
$
|
56,643
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
eBay
Inc.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
|
(Unaudited)
|
|
|
Net income
|
|
$
|
291,560
|
|
|
$
|
249,994
|
|
|
$
|
547,851
|
|
|
$
|
498,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
(68,560
|
)
|
|
|
154,848
|
|
|
|
(82,247
|
)
|
|
|
282,381
|
|
Unrealized gains (losses) on
investments, net
|
|
|
4,546
|
|
|
|
2,417
|
|
|
|
(272
|
)
|
|
|
5,010
|
|
Unrealized gains (losses) on cash
flow hedges
|
|
|
3,729
|
|
|
|
(1,347
|
)
|
|
|
5,143
|
|
|
|
(2,912
|
)
|
Estimated tax provision on above
items
|
|
|
(3,295
|
)
|
|
|
(442
|
)
|
|
|
(1,981
|
)
|
|
|
(912
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in accumulated other
comprehensive income (loss)
|
|
|
(63,580
|
)
|
|
|
155,476
|
|
|
|
(79,357
|
)
|
|
|
283,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
227,980
|
|
|
$
|
405,470
|
|
|
$
|
468,494
|
|
|
$
|
781,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
eBay
Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
|
(Unaudited)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
547,851
|
|
|
$
|
498,276
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
and authorized credits
|
|
|
44,721
|
|
|
|
51,874
|
|
Provision for transaction losses
|
|
|
31,135
|
|
|
|
49,906
|
|
Depreciation and amortization
|
|
|
164,965
|
|
|
|
265,712
|
|
Stock-based compensation related
to stock options and employee stock purchases
|
|
|
3,646
|
|
|
|
169,226
|
|
Tax benefit on the exercise of
stock options
|
|
|
110,599
|
|
|
|
90,524
|
|
Excess tax benefits from
stock-based compensation
|
|
|
|
|
|
|
(60,973
|
)
|
Minority interests
|
|
|
28
|
|
|
|
2
|
|
Changes in assets and liabilities,
net of acquisition effects:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(71,382
|
)
|
|
|
(37,598
|
)
|
Funds receivable from customers
|
|
|
(74,154
|
)
|
|
|
33,810
|
|
Other current assets
|
|
|
(12,556
|
)
|
|
|
(133,491
|
)
|
Other non-current assets
|
|
|
(8,750
|
)
|
|
|
8,777
|
|
Deferred tax liabilities, net
|
|
|
67,428
|
|
|
|
(13,300
|
)
|
Accounts payable
|
|
|
2,999
|
|
|
|
75,292
|
|
Funds payable and amounts due to
customers
|
|
|
181,825
|
|
|
|
80,015
|
|
Accrued expenses and other
liabilities
|
|
|
(13,731
|
)
|
|
|
(25,724
|
)
|
Deferred revenue and customer
advances
|
|
|
(6,595
|
)
|
|
|
24,664
|
|
Income taxes payable
|
|
|
23,922
|
|
|
|
22,725
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
991,951
|
|
|
|
1,099,717
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
Purchases of property and
equipment, net
|
|
|
(170,063
|
)
|
|
|
(282,008
|
)
|
Purchases of investments
|
|
|
(654,621
|
)
|
|
|
(491,224
|
)
|
Maturities and sales of investments
|
|
|
793,640
|
|
|
|
761,159
|
|
Acquisitions, net of cash acquired
|
|
|
(526,614
|
)
|
|
|
(45,505
|
)
|
Other
|
|
|
(1,953
|
)
|
|
|
(1,245
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(559,611
|
)
|
|
|
(58,823
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common
stock, net
|
|
|
259,666
|
|
|
|
175,001
|
|
Excess tax benefits from
stock-based compensation
|
|
|
|
|
|
|
60,973
|
|
Payment of headquarters lease
facility obligation
|
|
|
(126,390
|
)
|
|
|
|
|
Principal payments on long-term
obligations
|
|
|
(1,849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
131,427
|
|
|
|
235,974
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
(38,163
|
)
|
|
|
43,933
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
|
525,604
|
|
|
|
1,320,801
|
|
Cash and cash equivalents at
beginning of period
|
|
|
1,330,045
|
|
|
|
1,313,580
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of period
|
|
$
|
1,855,649
|
|
|
$
|
2,634,381
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
33,735
|
|
|
$
|
92,357
|
|
Non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
Common stock issued for acquisition
|
|
$
|
|
|
|
$
|
15,686
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
eBay
Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Note 1
The Company and Summary of Significant Accounting
Policies
The
Company
eBay Inc. (eBay) was incorporated in California in
May 1996, and reincorporated in Delaware in April 1998. eBay,
together with its subsidiaries, pioneers new communities around
the world, built on commerce, sustained by trust, and inspired
by opportunity. eBay brings together millions of buyers and
sellers every day on a local, national and international basis
through an array of websites. eBay provides online marketplaces
for the sale of goods and services, online payment services and
online communication offerings to a diverse community of
individuals and businesses.
eBay currently has three primary businesses: the eBay
Marketplaces, Payments and Communications. The eBay Marketplaces
segments, comprised of U.S. Marketplaces and International
Marketplaces, provide the infrastructure to enable online
commerce in a variety of formats, including the traditional
auction platform, along with our other online platforms, such as
Rent.com, Shopping.com, Kijiji, mobile.de, and Marktplaats.nl.
The Payments segment, which consists of our PayPal, Inc.
(PayPal) business, enables individuals or businesses
to securely, easily and quickly send and receive payments
online. The Communications segment, which consists of our Skype
Technologies S.A. (Skype) business, enables Voice
over Internet Protocol (VoIP) calls between Skype
users, and provides low-cost connectivity to traditional
fixed-line and mobile telephones.
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.
Use of
estimates
The preparation of condensed consolidated financial statements
in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the condensed consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. On
an ongoing basis, we evaluate our estimates, including those
related to provisions for doubtful accounts and authorized
credits, the provision for transaction losses, legal
contingencies, income taxes, advertising and other
non-transaction revenues, stock-based compensation expense and
goodwill and intangible assets. We base our estimates on
historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. Actual results
could differ from those estimates.
Principles
of consolidation and basis of presentation
The accompanying financial statements are consolidated and
include the financial statements of eBay and our majority-owned
subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
The condensed consolidated financial statements include 100% of
the assets and liabilities of these majority-owned subsidiaries
and the ownership interests of minority investors are recorded
as minority interests. Investments in entities where we
generally hold more than a 20% but less than a 50% ownership
interest and have the ability to significantly influence the
operations of the investee are accounted for using the equity
method of accounting and the investment balance is included in
long-term investments, while our share of the investees
results of operations is included in interest and other income,
net. For the three and six months ended June 30, 2005 and
2006, the equity method income recorded in interest and other
income, net were not material to our operating results.
Investments in entities in which we hold less than a 20%
ownership interest and do not have the ability to significantly
influence the operations of the investee are accounted for using
the cost method of accounting and are included in long-term
investments.
6
eBay
Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
These unaudited interim financial statements reflect our
condensed consolidated financial position as of
December 31, 2005 and June 30, 2006. These statements
also show our condensed consolidated statement of income and
condensed consolidated statement of comprehensive income for the
three and six months ended June 30, 2005 and 2006 and our
condensed consolidated statement of cash flows for the six
months ended June 30, 2005 and 2006. These statements
include all normal recurring adjustments that we believe are
necessary to fairly state our financial position, operating
results and cash flows. Because all of the disclosures required
by U.S. generally accepted accounting principles for annual
consolidated financial statements are not included herein, these
interim financial statements should be read in conjunction with
the audited financial statements and the notes thereto for the
year ended December 31, 2005, included in our Annual Report
on
Form 10-K
filed with the Securities and Exchange Commission on
February 23, 2006. The condensed consolidated statements of
income and cash flows for the periods presented are not
necessarily indicative of results that we expect for any future
period.
Certain prior period balances have been reclassified to conform
to the current period presentation.
Stock-based
compensation
On January 1, 2006, we adopted Financial Accounting
Standards No. 123 (revised 2004), Share-Based
Payment (FAS 123(R)), which requires companies to
recognize in the statement of operations all share-based
payments to employees, including grants of employee stock
options, based on their fair value. The statement eliminates the
ability to account for share-based compensation transactions, as
we formerly did, using the intrinsic value method as prescribed
by Accounting Principles Board, or APB, Opinion No. 25,
Accounting for Stock Issued to Employees.
We adopted FAS 123(R) using the modified prospective
method, which requires the application of the accounting
standard as of January 1, 2006. Our condensed consolidated
financial statements as of and for the three and six months
ended June 30, 2006 reflect the impact of adopting
FAS 123(R). In accordance with the modified prospective
method, the condensed consolidated financial statements for
prior periods have not been restated to reflect, and do not
include, the impact of FAS 123(R). See Note 7
Stock-based Benefit Plans for further details.
Stock-based compensation expense recognized during the period is
based on the value of the portion of stock-based payment awards
that is ultimately expected to vest. Stock-based compensation
expense recognized in the condensed consolidated statement of
operations during the three and six months ended June 30,
2006 included compensation expense for stock-based payment
awards granted prior to, but not yet vested, as of
January 1, 2006 based on the grant date fair value
estimated in accordance with the pro forma provisions of
FAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosures
(FAS 148) and compensation expense for the stock-based
payment awards granted subsequent to December 31, 2005,
based on the grant date fair value estimated in accordance with
FAS 123(R). As stock-based compensation expense recognized
in the statement of income for the three and six months ended
June 30, 2006 is based on awards ultimately expected to
vest, it has been reduced for estimated forfeitures.
FAS 123(R) requires forfeitures to be estimated at the time
of grant and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates. In the pro forma
information required under FAS 148 for the periods prior to
2006, we accounted for forfeitures as they occurred.
Recent
Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an Interpretation of
FASB Statement No. 109 (FIN 48), which clarifies
the accounting for uncertainty in tax positions. This
Interpretation requires that we recognize in our financial
statements the impact of a tax position if that position is more
likely than not of being sustained on audit, based on the
technical merits of the position. The provisions of FIN 48
are effective as of the beginning of our 2007 fiscal year, with
the cumulative effect, if any, of the change in accounting
principle recorded as an adjustment to opening retained
earnings. We are currently evaluating the impact of adopting
FIN 48 on our condensed consolidated financial statements.
7
eBay
Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 2
Net Income Per Share
Basic net income per share is computed by dividing the net
income for the period by the weighted average number of common
shares outstanding during the period. Diluted net income per
share is computed by dividing the net income for the period by
the weighted average number of shares of common stock and
potentially dilutive common stock outstanding during the period.
The dilutive effect of outstanding options and nonvested stock
is reflected in diluted earnings per share by application of the
treasury stock method, which in 2006 includes consideration of
stock-based compensation required by FAS 123(R). The
following table sets forth the computation of basic and diluted
net income per share for the periods indicated (in thousands,
except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
291,560
|
|
|
$
|
249,994
|
|
|
$
|
547,851
|
|
|
$
|
498,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
1,351,415
|
|
|
|
1,412,408
|
|
|
|
1,347,469
|
|
|
|
1,409,478
|
|
Weighted average nonvested common
stock subject to forfeiture/repurchase
|
|
|
(40
|
)
|
|
|
(483
|
)
|
|
|
(40
|
)
|
|
|
(288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic calculation
|
|
|
1,351,375
|
|
|
|
1,411,925
|
|
|
|
1,347,429
|
|
|
|
1,409,190
|
|
Weighted average effect of
dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average nonvested common
stock subject to forfeiture/repurchase
|
|
|
40
|
|
|
|
483
|
|
|
|
40
|
|
|
|
288
|
|
Employee stock options
|
|
|
27,673
|
|
|
|
23,349
|
|
|
|
33,267
|
|
|
|
29,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted calculation
|
|
|
1,379,088
|
|
|
|
1,435,757
|
|
|
|
1,380,736
|
|
|
|
1,438,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.22
|
|
|
$
|
0.18
|
|
|
$
|
0.41
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.21
|
|
|
$
|
0.17
|
|
|
$
|
0.40
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The calculation of diluted net income per share excludes all
anti-dilutive shares. For the three months ended June 30,
2005 and 2006, the number of anti-dilutive shares issuable upon
exercise of options that were excluded, as calculated based on
the weighted average closing price of our common stock for the
periods, amounted to approximately 33.6 million and
80.0 million shares, respectively. For the six months ended
June 30, 2005 and 2006, the number of anti-dilutive shares
issuable upon exercise of options that were excluded, as
calculated based on the weighted average closing price of our
common stock for the periods, amounted to approximately
24.4 million and 54.8 million shares, respectively.
Note 3
Business Combinations, Goodwill and Intangible Assets
Acquisition
of Tradera.com
On April 24, 2006, we acquired all of the outstanding
equity securities of Tradera.com, an online auction-style
marketplace in Sweden for a total purchase price of
approximately $52.3 million, including approximately
$0.6 million in estimated acquisition-related expenses.
This acquisition allows us to expand our online auction-style
marketplace in Sweden to bring more online trading opportunities
to Swedish buyers and sellers. We accounted for the acquisition
as a taxable purchase transaction, and accordingly, the purchase
price has been allocated to the tangible and intangible assets
acquired and liabilities assumed on the basis of their
respective estimated fair values on the acquisition date.
8
eBay
Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our preliminary allocation of the purchase price is summarized
below (in thousands):
|
|
|
|
|
Net assets acquired
|
|
$
|
2,949
|
|
Developed technology
|
|
|
600
|
|
Trade name
|
|
|
1,000
|
|
User base
|
|
|
4,600
|
|
Goodwill
|
|
|
43,120
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
52,269
|
|
|
|
|
|
|
The estimated useful economic lives on the identifiable
intangible assets acquired in the acquisition are four years for
user base and one year for developed technology and trade name.
The final purchase price allocation will depend upon the
completion of our integration plan.
The results of operations for the acquired business have been
included in our condensed consolidated statement of income for
the period subsequent to our acquisition of Tradera.com.
Tradera.coms results of operations for periods prior to
this acquisition were not material to our condensed consolidated
statement of income and, accordingly, pro forma results of
operations have not been presented.
Goodwill
The following table presents goodwill balances and the movements
for each of our reportable segments during the six months ended
June 30, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Goodwill
|
|
|
|
|
|
June 30,
|
|
|
|
2005
|
|
|
Acquired
|
|
|
Adjustments
|
|
|
2006
|
|
|
Reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S Marketplaces
|
|
$
|
961,081
|
|
|
$
|
|
|
|
$
|
(6,849
|
)
|
|
$
|
954,232
|
|
International Marketplaces
|
|
|
1,525,789
|
|
|
|
43,120
|
|
|
|
65,143
|
|
|
|
1,634,052
|
|
Payments
|
|
|
1,348,385
|
|
|
|
|
|
|
|
127
|
|
|
|
1,348,512
|
|
Communications
|
|
|
2,312,184
|
|
|
|
|
|
|
|
133,846
|
|
|
|
2,446,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,147,439
|
|
|
$
|
43,120
|
|
|
$
|
192,267
|
|
|
$
|
6,382,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to goodwill during the six months ended
June 30, 2006, resulted primarily from foreign currency
translation adjustments and purchase price adjustments related
to deferred tax assets.
Investments accounted for under the equity method of accounting
are classified on our balance sheet as long-term investments.
Such investments include identifiable intangible assets,
deferred tax liabilities and goodwill. As of December 31,
2005 and June 30, 2006, the goodwill related to our equity
investments included above totaled approximately
$27.4 million.
In accordance with Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets
(FAS 142), goodwill is subject to at least an annual
assessment for impairment, applying a fair-value based test. We
conduct our annual impairment test as of August 31 of each
year. Based on our last impairment test as of August 31,
2005 we determined there was no impairment. There were no events
or circumstances from that date through June 30, 2006
indicating that a further assessment was necessary.
9
eBay
Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Intangible
Assets
The components of acquired identifiable intangible assets are as
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
June 30, 2006
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Weighted
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Weighted
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Average Useful
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Average Useful
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Economic Life
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Economic Life
|
|
|
|
|
|
|
|
|
|
|
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
(Years)
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists and user base
|
|
$
|
526,657
|
|
|
$
|
(145,397
|
)
|
|
$
|
381,260
|
|
|
|
6
|
|
|
$
|
538,019
|
|
|
$
|
(194,156
|
)
|
|
$
|
343,863
|
|
|
|
6
|
|
Trademarks and trade names
|
|
|
443,565
|
|
|
|
(75,571
|
)
|
|
|
367,994
|
|
|
|
5
|
|
|
|
462,652
|
|
|
|
(122,342
|
)
|
|
|
340,310
|
|
|
|
5
|
|
Developed technologies
|
|
|
101,971
|
|
|
|
(45,882
|
)
|
|
|
56,089
|
|
|
|
4
|
|
|
|
102,213
|
|
|
|
(54,538
|
)
|
|
|
47,675
|
|
|
|
4
|
|
All other
|
|
|
36,450
|
|
|
|
(14,761
|
)
|
|
|
21,689
|
|
|
|
4
|
|
|
|
49,332
|
|
|
|
(19,485
|
)
|
|
|
29,847
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,108,643
|
|
|
$
|
(281,611
|
)
|
|
$
|
827,032
|
|
|
|
|
|
|
$
|
1,152,216
|
|
|
$
|
(390,521
|
)
|
|
$
|
761,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of our acquired identifiable intangible assets are subject
to amortization. As of December 31, 2005 and June 30,
2006, the net carrying amount of intangible assets related to
our equity investments included above totaled approximately
$3.8 million and $3.2 million, respectively. Aggregate
amortization expense for intangible assets totaled
$27.3 million and $63.3 million for the three months
ended June 30, 2005 and 2006, respectively. Aggregate
amortization expense for intangible assets totaled
$51.2 million and $116.7 million for the six months
ended June 30, 2005 and 2006, respectively. Included in
amortization of intangibles for the six months ended
June 30, 2006 is a charge of $10.4 million for
in-process research and development related to an acquisition
completed during the period.
As of June 30, 2006, expected future intangible asset
amortization was as follows (in thousands):
|
|
|
|
|
Fiscal Years:
|
|
|
|
|
2006 (remaining six months)
|
|
$
|
101,369
|
|
2007
|
|
|
195,965
|
|
2008
|
|
|
187,672
|
|
2009
|
|
|
166,687
|
|
2010
|
|
|
92,471
|
|
Thereafter
|
|
|
17,531
|
|
|
|
|
|
|
|
|
$
|
761,695
|
|
|
|
|
|
|
Note 4
Segments
Reporting segments are based upon our internal organization
structure, the manner in which our operations are managed, the
criteria used by our chief operating decision-maker to evaluate
segment performance, the availability of separate financial
information, and overall materiality considerations.
The U.S. Marketplaces segment includes our U.S. online
marketplaces commerce platforms. The International Marketplaces
segment includes our international online marketplaces commerce
platforms. The Payments segment includes our global payments
platform, consisting of our PayPal subsidiary. The
Communications segment includes the VoIP offerings provided by
our Skype subsidiary. Results from our Communications segment
reflect Skype operations since October 14, 2005, the date
we acquired Skype.
Direct contribution consists of revenues less direct costs.
Direct costs include specific costs of net revenues, sales and
marketing expenses, and general and administrative expenses over
which segment managers have direct
10
eBay
Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
discretionary control, such as advertising and marketing
programs, customer support expenses, bank charges, transaction
expenses, provisions for doubtful accounts, authorized credits
and transaction losses. Expenses over which segment managers do
not currently have discretionary control, such as certain
general and administrative costs, amortization of acquired
intangible assets and stock-based compensation expenses, are
monitored by management through shared cost centers and are not
evaluated in the measurement of segment performance. Prior
period amounts have been reclassified to reflect the current
management of site operations cost and product development
expenses as direct costs.
The following table summarizes our financial performance (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2005
|
|
|
|
U.S.
|
|
|
International
|
|
|
|
|
|
|
|
|
|
Marketplaces
|
|
|
Marketplaces
|
|
|
Payments
|
|
|
Consolidated
|
|
|
Net revenues from external
customers
|
|
$
|
423,565
|
|
|
$
|
418,839
|
|
|
$
|
243,899
|
|
|
$
|
1,086,303
|
|
Direct costs
|
|
|
261,804
|
|
|
|
195,326
|
|
|
|
159,781
|
|
|
|
616,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct contribution
|
|
$
|
161,761
|
|
|
$
|
223,513
|
|
|
$
|
84,118
|
|
|
$
|
469,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses and indirect
costs of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
378,986
|
|
Interest and other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,525
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
411,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2006
|
|
|
|
U.S.
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplaces
|
|
|
Marketplaces
|
|
|
Payments
|
|
|
Communications
|
|
|
Consolidated
|
|
|
Net revenues from external
customers
|
|
$
|
509,277
|
|
|
$
|
518,258
|
|
|
$
|
339,091
|
|
|
$
|
44,158
|
|
|
$
|
1,410,784
|
|
Direct costs
|
|
|
327,661
|
|
|
|
247,766
|
|
|
|
260,468
|
|
|
|
52,118
|
|
|
|
888,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct contribution
|
|
$
|
181,616
|
|
|
$
|
270,492
|
|
|
$
|
78,623
|
|
|
$
|
(7,960
|
)
|
|
$
|
522,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses and indirect
costs of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
211,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
311,414
|
|
Interest and other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,630
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(929
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
336,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
eBay
Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2005
|
|
|
|
U.S.
|
|
|
International
|
|
|
|
|
|
|
|
|
|
Marketplaces
|
|
|
Marketplaces
|
|
|
Payments
|
|
|
Consolidated
|
|
|
Net revenues from external
customers
|
|
$
|
828,413
|
|
|
$
|
812,631
|
|
|
$
|
476,983
|
|
|
$
|
2,118,027
|
|
Direct costs
|
|
|
506,396
|
|
|
|
389,650
|
|
|
|
319,750
|
|
|
|
1,215,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct contribution
|
|
$
|
322,017
|
|
|
$
|
422,981
|
|
|
$
|
157,233
|
|
|
$
|
902,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses and indirect
costs of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
187,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
714,560
|
|
Interest and other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,928
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
767,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2006
|
|
|
|
U.S.
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplaces
|
|
|
Marketplaces
|
|
|
Payments
|
|
|
Communications
|
|
|
Consolidated
|
|
|
Net revenues from external
customers
|
|
$
|
1,036,497
|
|
|
$
|
1,011,231
|
|
|
$
|
674,157
|
|
|
$
|
79,318
|
|
|
$
|
2,801,203
|
|
Direct costs
|
|
|
637,499
|
|
|
|
498,229
|
|
|
|
519,126
|
|
|
|
96,126
|
|
|
|
1,750,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct contribution
|
|
$
|
398,998
|
|
|
$
|
513,002
|
|
|
$
|
155,031
|
|
|
$
|
(16,808
|
)
|
|
$
|
1,050,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses and indirect
costs of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
416,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
634,038
|
|
Interest and other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,390
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
683,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
eBay
Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 5
Balance Sheet Components
At December 31, 2005 and June 30, 2006, short and
long-term investments were classified as
available-for-sale
securities, except for restricted cash and investments, and were
reported at fair value as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash and investments
|
|
$
|
29,670
|
|
|
$
|
32
|
|
|
$
|
|
|
|
$
|
29,702
|
|
Corporate debt securities
|
|
|
362,438
|
|
|
|
4
|
|
|
|
(2,679
|
)
|
|
|
359,763
|
|
Government and agency securities
|
|
|
371,537
|
|
|
|
|
|
|
|
(3,198
|
)
|
|
|
368,339
|
|
Time deposits and other
|
|
|
46,548
|
|
|
|
|
|
|
|
|
|
|
|
46,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
810,193
|
|
|
$
|
36
|
|
|
$
|
(5,877
|
)
|
|
$
|
804,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash and investments
|
|
$
|
1,065
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,065
|
|
Corporate debt securities
|
|
|
665,418
|
|
|
|
115
|
|
|
|
(1,921
|
)
|
|
|
663,612
|
|
Government and agency securities
|
|
|
110,450
|
|
|
|
|
|
|
|
(1,409
|
)
|
|
|
109,041
|
|
Equity instruments and equity
method investments
|
|
|
51,949
|
|
|
|
|
|
|
|
|
|
|
|
51,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
828,882
|
|
|
$
|
115
|
|
|
$
|
(3,330
|
)
|
|
$
|
825,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash and investments
|
|
$
|
33,377
|
|
|
$
|
43
|
|
|
$
|
|
|
|
$
|
33,420
|
|
Corporate debt securities
|
|
|
535,786
|
|
|
|
40
|
|
|
|
(2,489
|
)
|
|
|
533,337
|
|
Government and agency securities
|
|
|
188,135
|
|
|
|
|
|
|
|
(1,357
|
)
|
|
|
186,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
757,298
|
|
|
$
|
83
|
|
|
$
|
(3,846
|
)
|
|
$
|
753,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash and investments
|
|
$
|
1,699
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,699
|
|
Corporate debt securities
|
|
|
540,258
|
|
|
|
219
|
|
|
|
(167
|
)
|
|
|
540,310
|
|
Government and agency securities
|
|
|
22,446
|
|
|
|
7
|
|
|
|
(15
|
)
|
|
|
22,438
|
|
Equity instruments and equity
method investments
|
|
|
58,415
|
|
|
|
|
|
|
|
|
|
|
|
58,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
622,818
|
|
|
$
|
226
|
|
|
$
|
(182
|
)
|
|
$
|
622,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
eBay
Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
Current Assets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Customer accounts
|
|
$
|
324,595
|
|
|
$
|
440,796
|
|
Prepaid expenses
|
|
|
44,610
|
|
|
|
48,921
|
|
Deferred tax asset, net
|
|
|
59,274
|
|
|
|
67,624
|
|
Other
|
|
|
58,756
|
|
|
|
71,069
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
487,235
|
|
|
$
|
628,410
|
|
|
|
|
|
|
|
|
|
|
Customer accounts include liquid assets set aside for certain
customer liabilities as required in conjunction with
PayPals Electronic Money Institution license from the
United Kingdoms Financial Services Authority. The customer
accounts represent claims on PayPals U.K. subsidiary and
may be invested only in specified types of liquid assets. These
assets are included on our balance sheet as current assets with
an offsetting current liability in funds payable and amounts due
to customers. All customer funds held by PayPal as an agent or
custodian are for the benefit of its customers and, accordingly,
are not reflected in our condensed consolidated balance sheet.
These balances include funds held in the U.S. that are
deposited in accounts insured by the Federal Deposit Insurance
Corporation.
Note 6
Litigation and Other Contingencies
Litigation
and Other Legal Matters
In April 2001, two of our European subsidiaries, eBay GmbH and
eBay International AG, were sued by Montres Rolex S.A. and
certain of its affiliates in the regional court of Cologne,
Germany. The suit subsequently was transferred to the regional
court in Düsseldorf, Germany. Rolex alleged that our
subsidiaries were infringing Rolexs trademarks as a result
of users selling counterfeit Rolex watches through our German
website. The suit also alleged unfair competition. Rolex sought
an order enjoining the sale of Rolex-branded watches on the
website as well as damages. In December 2002, a trial was held
in the matter and the court ruled in favor of eBay on all causes
of action. Rolex appealed the ruling to the Higher Regional
Court of Düsseldorf, and the appeal was heard in October
2003. In February 2004, the court rejected Rolexs appeal
and ruled in our favor. Rolex has appealed the ruling to the
German Federal Supreme Court, and a hearing is expected in
December 2006. In September 2004, the German Federal Supreme
Court issued its written opinion in favor of Rolex in a case
involving an unrelated company, ricardo.de AG, but somewhat
comparable legal theories. Although it is not yet clear what the
ultimate effect of the reasoning of the German Federal Supreme
Courts ricardo.de decision will have when applied to eBay,
we believe the Courts decision has resulted in an increase
in similar litigation against us in Germany, although we do not
currently believe that it will require a significant change in
our business practices.
In September 2001, MercExchange LLC filed a complaint against
us, our Half.com subsidiary and ReturnBuy, Inc. in the
U.S. District Court for the Eastern District of Virginia
(No. 2:01-CV-736)
alleging infringement of three patents (relating to online
consignment auction technology, multiple database searching and
electronic consignment systems) and seeking a permanent
injunction and damages (including treble damages for willful
infringement). In October 2002, the court granted in part our
summary judgment motion, effectively invalidating the patent
related to online auction technology and rendering it
unenforceable. This ruling left only two patents in the case.
Following a trial, in May 2003 the jury returned a verdict
finding that eBay had willfully infringed one and Half.com had
willfully infringed both of the patents in the suit, awarding
$35 million in compensatory damages. Both parties filed
post-trial motions, and in August 2003, the court entered
judgment for MercExchange in the amount of approximately
$30 million plus pre-judgment interest and post-judgment
interest in an amount to be determined, while denying
MercExchanges request for an injunction and
attorneys fees. We appealed the verdict and judgment
14
eBay
Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
in favor of MercExchange and MercExchange filed a cross-appeal
of the granting in part of our summary judgment motion and the
denial of its request for an injunction and attorneys fees.
In March 2005, the U.S. Court of Appeals for the Federal
Circuit issued a ruling in the appeal of the MercExchange patent
litigation suit which, among other things (1) invalidated
all claims asserted against eBay and Half.com arising out of the
multiple database search patent and reduced the verdict amount
by $4.5 million; (2) upheld the electronic consignment
system patent; (3) affirmed the district courts
refusal to award attorneys fees or enhanced damages
against us; (4) reversed the district courts order
granting summary judgment in our favor regarding the auction
patent; and (5) reversed the district courts refusal
to grant an injunction and remanded that issue to the district
court for further proceedings. The decision was stayed pending
U.S. Supreme Court review of the injunction issue. In May
2006, the U.S. Supreme Court reversed the Court of
Appeals decision on whether an injunction should have been
issued and remanded the case back to the district court for
further action. In parallel with the federal court proceedings,
at our request, the U.S. Patent and Trademark Office is
actively reexamining each of the patents in suit, having found
that substantial questions exist regarding the validity of the
claims contained in them. In January 2005, the Patent and
Trademark Office issued an initial ruling rejecting all of the
claims contained in the patent that related to online auctions;
in March 2005, the Patent and Trademark Office issued an initial
ruling rejecting all of the claims contained in the patent that
related to electronic consignment systems; and in May 2005, the
Patent and Trademark Office issued an initial ruling rejecting
all of the claims contained in the patent that related to
multiple database searching. In March 2006, the Patent and
Trademark Office affirmed its earlier ruling rejecting the
claims contained in the patent that related to electronic
consignment systems. Even if successful, our litigation of these
matters will continue to be costly. In addition, as a
precautionary measure, we have modified certain functionality of
our websites and business practices in a manner which we believe
would avoid any further infringement. For this reason, we
believe that any injunction that might be issued by the district
court will not have any impact on our business. We also believe
we have appropriate reserves for this litigation. Nonetheless,
if the district court were to issue an injunction on remand, and
if the modifications to the functionality of our websites and
business practices are not sufficient to make them
non-infringing, we would likely be forced to pay significant
additional damages and licensing fees
and/or
modify our business practices in an adverse manner.
In February 2005, eBay was sued in Superior Court of the State
of California, County of Santa Clara (No. 105CV035930)
in a purported class action alleging that certain bidding
features of our site constitute shill bidding for
the purpose of artificially inflating bids placed by buyers on
the site. The complaint alleges violations of Californias
Auction Act, Californias Consumer Remedies Act, and unfair
competition. The complaint seeks injunctive relief, damages, and
a constructive trust. In April 2005, we filed a demurrer seeking
to dismiss the complaint, and a hearing on the demurrer was held
in February 2006. In March 2006, the parties reached tentative
agreement on the terms of a settlement. The court must approve
the terms of the settlement in order for it to become final. The
estimated settlement was accrued in our consolidated income
statement for the year ended December 31, 2005.
In March 2005, eBay, PayPal, and an eBay seller were sued in
Supreme Court of the State of New York, County of Kings
(No. 6125/05) in a purported class action alleging that
certain disclosures regarding PayPals Buyer Protection
Policy, users chargeback rights, and the effects of
users choice of funding mechanism are deceptive
and/or
misleading. The complaint alleged misrepresentation on the part
of eBay and PayPal, breach of contract and deceptive trade
practices by PayPal, and that PayPal and eBay have jointly
violated the civil RICO statute (18 U.S.C.
Section 1961(4)). In April 2005, eBay and PayPal removed
the case to the U.S. District Court for the Eastern
District of New York and the plaintiffs filed an amended
complaint in the U.S. District Court
(No. 05-CV-01720)
repeating the allegations of the initial complaint but dropping
the civil RICO allegations. The complaint seeks injunctive
relief, compensatory damages, and punitive damages. Following
several mediation sessions, the parties reached a tentative
settlement in December 2005 and executed a Memorandum of
Understanding in March 2006. The parties are engaged in the
process of finalizing the settlement documentation. The court
must approve the terms of the settlement in order for it to
become final. The estimated settlement was accrued in our
consolidated income statement for the year ended
December 31, 2005.
15
eBay
Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In June 2006, Net2Phone, Inc. filed a lawsuit in the
U.S. District Court for the District of New Jersey
(No. 06-2469)
alleging that eBay Inc., Skype Technologies S.A., and Skype Inc.
infringed five patents owned by Net2Phone relating to
point-to-point
internet protocol. The suit seeks an injunction against
continuing infringement, unspecified damages, including treble
damages for willful infringement, and interest, expenses, and
fees. This case is at a very early stage and we have not
received a schedule from the court, or filed any responsive
pleadings. We believe that we have meritorious defenses and
intend to defend ourselves vigorously.
Other third parties have from time to time claimed, and others
may claim in the future, that we have infringed their
intellectual property rights. We have been notified of several
potential patent disputes, and expect that we will increasingly
be subject to patent infringement claims as our services expand
in scope and complexity. In particular, we expect to face
additional patent infringement claims involving services we
provide, including various aspects of our Payments and
Communications businesses. We have in the past been forced to
litigate such claims. We may also become more vulnerable to
third-party claims as laws such as the Digital Millennium
Copyright Act, the Lanham Act and the Communications Decency Act
are interpreted by the courts and as we expand geographically
into jurisdictions where the underlying laws with respect to the
potential liability of online intermediaries like ourselves are
either unclear or less favorable. These claims, whether
meritorious or not, could be time consuming and costly to
resolve, cause service upgrade delays, require expensive changes
in our methods of doing business, or could require us to enter
into costly royalty or licensing agreements.
From time to time, we are involved in other disputes or
regulatory inquiries that arise in the ordinary course of
business. The number and significance of these disputes and
inquiries are increasing as our business expands and our company
grows larger. Any claims or regulatory actions against us,
whether meritorious or not, could be time consuming, result in
costly litigation, require significant amounts of management
time, and result in the diversion of significant operational
resources.
Indemnification
Provisions
In the ordinary course of business, we have included limited
indemnification provisions in certain of our agreements with
parties with whom we have commercial relations, including our
standard marketing, promotions and
application-programming-interface license agreements. Under
these contracts, we generally agree to indemnify, hold harmless,
and reimburse the indemnified party for losses suffered or
incurred by the indemnified party in connection with claims by
any third party with respect to our domain names, trademarks,
logos and other branding elements to the extent that such marks
are applicable to our performance under the subject agreement.
In a limited number of agreements, we have provided an indemnity
for other types of third-party claims, substantially all of
which are indemnities related to our copyrights, trademarks, and
patents. In our PayPal business, we have provided an indemnity
to our payment processors in the event of certain third-party
claims or card association fines against the processor arising
out of conduct by PayPal. To date, no significant costs have
been incurred, either individually or collectively, in
connection with our indemnification provisions.
Note 7
Stock-based Benefit Plans
Employee
Stock Purchase Plan
We have an employee stock purchase plan for all eligible
employees. Under the plan, shares of our common stock may be
purchased over an offering period with a maximum duration of two
years at 85% of the lower of the fair market value on the first
day of the applicable offering period or on the last day of the
six-month purchase period. Employees may purchase shares having
a value not exceeding 10% of their gross compensation during an
offering period. During the three and six months ended
June 30, 2006, employees purchased approximately
790,000 shares at an average price of $27.62 per
share. During the same period in 2005, employees purchased
approximately 696,000 shares at an average price of
$24.93 per share. At June 30, 2006, approximately
6.4 million shares were reserved for future issuance. Our
employee stock purchase plan contains an evergreen
provision that
16
eBay
Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
automatically increases, on each January 1, the number of
shares reserved for issuance under the employee stock purchase
plan by the number of shares purchased under this plan in the
preceding calendar year.
Stock
Unit Plan
We have a deferred stock unit plan under which deferred stock
units have been granted to new non-employee directors elected to
our Board of Directors after December 31, 2002. Under this
plan, each new director receives a one-time grant of deferred
stock units equal to the result of dividing $150,000 by the fair
market value of our common stock on the date of grant. Each
deferred stock unit constitutes an unfunded and unsecured
promise by us to deliver one share of our common stock (or the
equivalent value thereof in cash or property at our election).
Each deferred stock unit award granted to a new non-employee
director upon election to the Board vests 25% one year from the
date of grant, and at a rate of 2.08% per month thereafter.
If the services of the director are terminated at any time, all
rights to the unvested deferred stock units shall also
terminate. In addition, directors may elect to receive, in lieu
of annual retainer and committee chair fees and at the time
these fees would otherwise be payable (i.e., on a quarterly
basis in arrears for services provided), fully vested deferred
stock units with an initial value equal to the amount of these
fees. Deferred stock units are payable following the termination
of a directors tenure as a director. All eBay officers,
directors and employees are eligible to receive awards under the
plan, although, to date, awards have been made only to new
non-employee directors. As of June 30, 2006,
31,152 units have been awarded under this plan.
Other
Equity Incentive Plans
We have equity incentive plans for directors, officers,
employees and non-employees. Stock options granted under these
plans generally vest 25% one year from the date of grant (or
12.5% six months from the date of grant for grants to existing
employees) and the remainder vest at a rate of 2.08% per
month thereafter, and generally expire 7 to 10 years from
the date of grant. Stock options issued prior to June 1998, were
exercisable immediately, subject to repurchase rights held by
us, that lapsed over the vesting period. At June 30, 2006,
584.8 million shares were authorized under our stock option
plans. Shares of nonvested stock issued under these plans are
subject to forfeiture, lapsing over the vesting period, which is
typically four or five years. At June 30, 2006,
74.8 million shares were available for future grant under
our equity incentive plans.
Stock-Based
Compensation
We adopted FAS 123(R) using the modified prospective
transition method beginning January 1, 2006. Accordingly,
during the six-month period ended June 30, 2006, we
recorded stock-based compensation expense for awards granted
prior to, but not yet vested, as of January 1, 2006, as if
the fair value method required for pro forma disclosure under
FAS 123 were in effect for expense recognition purposes,
adjusted for estimated forfeitures. For these awards, we have
continued to recognize compensation expense using the
accelerated amortization method under FIN 28. For
stock-based awards granted after January 1, 2006, we have
recognized compensation expense based on the estimated grant
date fair value method using the Black-Scholes valuation model.
For these awards, we have recognized compensation expense using
a straight-line amortization method. As FAS 123(R) requires
that stock-based compensation expense be based on awards that
are ultimately expected to vest, stock-based compensation for
the three and six month period ended June 30, 2006 has been
reduced for estimated forfeitures. When estimating forfeitures,
we consider voluntary termination behaviors as well as trends of
actual option forfeitures.
17
eBay
Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The impact on our results of operations of recording stock-based
compensation for the three and six month period ended
June 30, 2006 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2006
|
|
|
Cost of net revenues
|
|
$
|
7,631
|
|
|
$
|
17,107
|
|
Sales and marketing
|
|
|
27,063
|
|
|
|
51,784
|
|
Product development
|
|
|
22,991
|
|
|
|
43,692
|
|
General and administrative
|
|
|
27,723
|
|
|
|
56,643
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
85,408
|
|
|
$
|
169,226
|
|
|
|
|
|
|
|
|
|
|
Prior to adopting FAS 123(R), we presented all tax benefits
resulting from the exercise of stock options as operating cash
flows in our statements of cash flows. FAS 123(R) requires
cash flows resulting from excess tax benefits to be classified
as a part of cash flows from financing activities. Excess tax
benefits are realized tax benefits from tax deductions for
exercised options in excess of the deferred tax asset
attributable to stock compensation costs for such options. As a
result of adopting FAS 123(R), $61.0 million of excess
tax benefits for the six months ended June 30, 2006 have
been classified as a financing cash inflow. Cash received from
option exercises under all share-based payment arrangements for
the six month periods ended June 30, 2005 and 2006, was
$259.7 million and $175.0 million, respectively. The
total income tax benefit recognized in the income statement for
stock-based compensation costs was $25.1 million and
$50.5 million for the three and six month periods ended
June 30, 2006, respectively. No income tax benefit was
recognized during 2005. Total stock-based compensation costs
capitalized as part of an asset was $2.3 million and
$4.5 million for the three and six month periods ended
June 30, 2006, respectively. There was no stock-based
compensation costs capitalized as part of an asset during 2005.
Prior to the adoption of FAS 123(R), the intrinsic value of
Skypes and Shopping.coms unvested common stock
options assumed in the acquisition were recorded as unearned
stock-based compensation. Upon the adoption of FAS 123(R)in
January 2006, the unearned stock-based compensation balance of
approximately $45.5 million was reclassified to
additional-paid-in-capital.
Such unearned compensation will be recognized over the vesting
period of the related stock options.
Valuation
Assumptions
We calculated the fair value of each option award on the date of
grant using the Black-Scholes option pricing model. The
following assumptions were used for each respective period:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
Risk-free interest
rates stock options
|
|
3.7%
|
|
4.6%-5.0%
|
|
3.5%
|
|
4.6%-5.0%
|
Expected life stock
options
|
|
3 years
|
|
3.1-4.9 years
|
|
3 years
|
|
3.1-4.9 years
|
Dividend yield stock
options
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
Expected volatility
stock options
|
|
35%
|
|
34%-37%
|
|
36%
|
|
34%-38%
|
Weighted average volatility
|
|
|
|
35%
|
|
|
|
35%
|
Our computation of expected volatility for the three and six
months ended June 30, 2006 was based on a combination of
historical and market-based implied volatility from traded
options on our stock. Prior to 2006, our computation of expected
volatility was based on historical volatility. Our computation
of expected life in 2006 was determined based on historical
experience of similar awards, giving consideration to the
contractual terms of the stock-based awards, vesting schedules
and expectations of future employee behavior. The range provided
above results from the behavior patterns of separate groups of
employees that have similar historical experience. The
18
eBay
Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
interest rate for periods within the contractual life of the
award is based on the U.S. Treasury yield curve in effect
at the time of grant.
Stock-based
Payment Award Activity
The following table summarizes stock option activity under our
equity incentive plans as of and for the six months ended
June 30, 2006 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
(in years)
|
|
|
Value
|
|
|
Outstanding at January 1, 2006
|
|
|
129,109
|
|
|
$
|
28.19
|
|
|
|
|
|
|
|
|
|
Granted and assumed
|
|
|
23,578
|
|
|
|
39.38
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(9,311
|
)
|
|
|
16.45
|
|
|
|
|
|
|
|
|
|
Forfeited/expired/cancelled
|
|
|
(5,247
|
)
|
|
|
36.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006
|
|
|
138,129
|
|
|
$
|
30.56
|
|
|
|
7.10
|
|
|
$
|
688,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at
June 30, 2006
|
|
|
128,690
|
|
|
$
|
29.97
|
|
|
|
7.06
|
|
|
$
|
660,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at
June 30, 2006
|
|
|
67,971
|
|
|
$
|
24.08
|
|
|
|
6.52
|
|
|
$
|
571,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value was calculated as the difference
between the exercise price of the underlying awards and the
quoted price of our common stock for the 55.8 million
options that were
in-the-money
at June 30, 2006. During the three months ended
June 30, 2005 and 2006, the aggregate intrinsic value of
options exercised under our stock option plans was
$72.4 million and $79.3 million, respectively,
determined as of the date of option exercise. During the six
months ended June 30, 2005 and 2006, the aggregate
intrinsic value of options exercised under our stock option
plans was $311.0 million and $191.7 million,
respectively, determined as of the date of option exercise. As
of June 30, 2006, there was approximately $452 million
of total unrecognized compensation cost related to unvested
share-based compensation arrangements granted under our stock
awards plans. That cost is expected to be recognized over a
weighted-average period of two years. The weighted average
grant-date fair value of options granted in three month period
ended June 30, 2005 and 2006 was $8.98 and $10.04,
respectively. The weighted average grant-date fair value of
options granted in six month period ended June 30, 2005 and
2006 was $11.95 and $12.08, respectively.
A summary of the status of and changes in nonvested shares
granted under our equity incentive plans and assumed in
acquisitions as of and during the six months ended June 30,
2006 is presented below (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested at January 1, 2006
|
|
|
40
|
|
|
$
|
43.82
|
|
Granted
|
|
|
431
|
|
|
$
|
38.83
|
|
Vested
|
|
|
(17
|
)
|
|
$
|
38.09
|
|
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2006
|
|
|
454
|
|
|
$
|
39.29
|
|
|
|
|
|
|
|
|
|
|
Pro
forma Information for Periods Prior to the Adoption of
FAS 123R
Prior to the adoption of FAS No. 123(R), we provided
the disclosures required under FAS No. 123, as amended
by FAS No. 148. Employee stock-based compensation
expense recognized under FAS 123(R) was not reflected in
19
eBay
Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
our results of operations for the three and six month periods
ended June 30, 2005 for employee stock option awards as all
options were granted with an exercise price equal to the market
value of the underlying common stock on the date of grant. Our
ESPP was deemed non-compensatory under the provisions of APB
No. 25. Forfeitures of awards were recognized as they
occurred for the period prior to the adoption. Previously
reported amounts have not been restated.
The pro forma information for the three and six months ended
June 30, 2005 was as follows (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2005
|
|
|
2005
|
|
|
Net income, as reported
|
|
$
|
291,560
|
|
|
$
|
547,851
|
|
Add: Amortization of stock-based
compensation expense determined under the intrinsic value method
(net of cancellations)
|
|
|
(685
|
)
|
|
|
(403
|
)
|
Deduct: Total stock-based
compensation expense determined under fair value based method,
net of tax
|
|
|
(61,263
|
)
|
|
|
(124,704
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
229,612
|
|
|
$
|
422,744
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic Reported
|
|
$
|
0.22
|
|
|
$
|
0.41
|
|
Pro forma
|
|
$
|
0.17
|
|
|
$
|
0.31
|
|
Diluted Reported
|
|
$
|
0.21
|
|
|
$
|
0.40
|
|
Pro forma
|
|
$
|
0.17
|
|
|
$
|
0.31
|
|
Note 8
Subsequent Event
During the third quarter of 2006, eBays Board of Directors
authorized the repurchase of up to $2.0 billion of the
companys common stock within the next two years. The stock
repurchase program may be limited or terminated at any time
without prior notice. Stock repurchases under this program may
be made through open market and privately negotiated
transactions at times and in such amounts as management deems
appropriate and will be funded using the companys working
capital. The timing and actual number of shares repurchased will
depend on a variety of factors including corporate and
regulatory requirements, price and other market conditions. The
program will be designed to comply with the volume, timing and
other limitations set forth in
Rule 10b-18
under the Securities Exchange Act of 1934.
20
|
|
Item 2:
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
FORWARD
LOOKING STATEMENTS
This report contains statements that involve expectations,
plans or intentions (such as those relating to future business
or financial results, new features or services, or management
strategies). These statements are forward-looking and are
subject to risks and uncertainties, so actual results may vary
materially. You can identify these forward-looking statements by
words such as may, should,
expect, anticipate, believe,
estimate, intend, plan and
other similar expressions. You should consider our forward-
looking statements in light of the risks discussed under the
heading Risk Factors below, as well as our condensed
consolidated financial statements, related notes, and the other
financial information appearing elsewhere in this report and our
other filings with the Securities and Exchange Commission. We
assume no obligation to update any forward-looking
statements.
You should read the following Managements 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.
Overview
About
eBay
Our purpose is to pioneer new communities around the world built
on commerce, sustained by trust, and inspired by opportunity. We
bring together millions of buyers and sellers every day on a
local, national and international basis through an array of
websites. We provide online marketplaces for the sale of goods
and services, online payments services and online communication
offerings to a diverse community of individuals and businesses.
We currently have three primary businesses: eBay Marketplaces,
Payments and Communications. Our eBay Marketplaces provide the
infrastructure to enable online commerce in a variety of
formats, including the traditional auction platform, along with
our other online platforms, such as Rent.com, Shopping.com,
Kijiji, mobile.de, and Marktplaats.nl. Our Payments business,
which consists of our PayPal business, enables individuals or
businesses to securely, easily and quickly send and receive
payments online. Our Communications business, which consists of
our Skype business, enables VoIP calls between Skype users, and
provides low-cost connectivity to traditional fixed-line and
mobile telephones.
Executive
Operating and Financial Summary
Our focus
is on understanding our key operating and financial
metrics
Members of our senior management team regularly review key
operating metrics such as new users, new user accounts, active
users, listings and gross merchandise volume, as well as total
payment volume processed by our wholly owned PayPal subsidiary
and number of users registered with our wholly owned Skype
subsidiary. Members of our senior management also regularly
review key financial information including net revenues,
operating income margins, earnings per share, cash flows from
operations and free cash flows, which we define as operating
cash flows less purchases of property and equipment, net. These
operating and financial measures allow us to monitor the health
and vibrancy of our Marketplaces, Payments, and Communications
platforms and the profitability of our business and to evaluate
the effectiveness of investments that we have made and continue
to make in the areas of international expansion, customer
support, product development, marketing and site operations. We
believe that an understanding of these key operating and
financial measures and how they change over time is important to
investors, analysts and other parties analyzing our business
results and future market opportunities.
Financial
summary
Consolidated net revenues for the three month period ended
June 30, 2006 was $1.411 billion, representing a
growth rate of 30% year over year, which was primarily due to
continued Marketplaces and Payments growth and acquisitions made
in the past 12 months, including Shopping.com and Skype.
Net income for the three-month period ended June 30, 2006
was $250.0 million, or $0.17 earnings per diluted share,
decreasing 14% year over year.
21
This decrease was primarily due to the impact of FAS 123(R)
stock-based compensation of $60 million (net of tax
effects), or $0.04 earnings per diluted share, as well as
intangible asset amortization from acquisitions made in the past
12 months.
Our
expectations for growth
We expect that our growth in net revenues in 2006 compared to
2005 will result primarily from increased net transaction
revenues across our U.S. Marketplaces, International
Marketplaces, Payments and Communications segments. We continue
to make investments in our business and infrastructure to help
us achieve our long-term growth objectives. Accordingly, we
expect to continue our investments in the areas of international
expansion for our eBay Marketplaces, Payments and Communications
businesses, as well as customer support, site operations,
marketing and various corporate infrastructure areas. We believe
these investments are necessary to support the long-term demands
of our growing business and to build the infrastructure
necessary to support long-term growth. In addition, to the
extent that the U.S. dollar strengthens against foreign
currencies, and, in particular, the Euro, British pound and
Korean won, the remeasurement of these foreign currency
denominated transactions into U.S. dollars will negatively
impact our consolidated net revenues and, to the extent that
they are not hedged, our net income.
The discussion of our consolidated financial results contained
herein is intended to assist investors, analysts and other
parties reading this report to better understand the key
operating and financial measures summarized above as well as the
changes in our consolidated results of operations from year to
year, and the primary factors that accounted for those changes.
Stock-based
Compensation
Beginning on January 1, 2006, we began accounting for
stock-based compensation under the provisions of Financial
Accounting Standards No. 123 (revised 2004),
Share-Based Payment (FAS 123(R)), which
requires the recognition of the fair value of stock-based
compensation. Under the fair value recognition provisions for
FAS 123(R), stock-based compensation cost is estimated at
the grant date based on the fair value of the awards expected to
vest and recognized as expense ratably over the requisite
service period of the award. We have used the Black-Scholes
valuation model, or BSM, to estimate fair value of our
stock-based awards which requires various judgmental assumptions
including estimating stock price volatility, forfeiture rates,
and expected life. Our computation of expected volatility is
based on a combination of historical and market-based implied
volatility. In addition, we consider many factors when
estimating expected forfeitures and expected life, including
types of awards, employee class, and historical experience. If
any of the assumptions used in the BSM model change
significantly, stock-based compensation expense may differ
materially in the future from that recorded in the current
period.
We adopted FAS 123(R) using the modified prospective method
which requires the application of the accounting standard as of
January 1, 2006. Our condensed consolidated financial
statements as of and for the three and six months ended
June 30, 2006 reflect the impact of FAS 123(R). In
accordance with the modified prospective method, the condensed
consolidated financial statements for prior periods have not
been restated to reflect, and do not include, the impact of
FAS 123(R).
22
Seasonality
The following table sets forth, for the periods presented, our
total net revenues and the sequential quarterly growth of these
net revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(In thousands, except percentages)
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
756,239
|
|
|
$
|
773,412
|
|
|
$
|
805,876
|
|
|
$
|
935,782
|
|
Current quarter vs prior quarter
|
|
|
17
|
%
|
|
|
2
|
%
|
|
|
4
|
%
|
|
|
16
|
%
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
1,031,724
|
|
|
$
|
1,086,303
|
|
|
$
|
1,105,515
|
|
|
$
|
1,328,859
|
|
Current quarter vs prior quarter
|
|
|
10
|
%
|
|
|
5
|
%
|
|
|
2
|
%
|
|
|
20
|
%
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
1,390,419
|
|
|
$
|
1,410,784
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Current quarter vs prior quarter
|
|
|
5
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
We have historically experienced our strongest quarters of
sequential growth in the first and fourth fiscal quarters. We
expect transaction activity patterns on our websites to
increasingly mirror general consumer buying patterns, both
online and offline, as our business matures. Our expectation is
that Skypes business will experience seasonally slower
growth during holiday periods.
Results
of Operations
The following table sets forth, for the periods presented,
certain data from our condensed consolidated statement of income
as a percentage of net revenues. This information should be read
in conjunction with our condensed consolidated financial
statements and notes thereto included elsewhere in this
report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
Net revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100
|
%
|
Cost of net revenues(1)
|
|
|
17.7
|
|
|
|
18.1
|
|
|
|
18.0
|
|
|
|
20.0
|
|
|
|
20.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
82.3
|
|
|
|
81.9
|
|
|
|
82.0
|
|
|
|
80.0
|
|
|
|
79.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
26.4
|
|
|
|
26.6
|
|
|
|
28.5
|
|
|
|
28.8
|
|
|
|
28.2
|
|
Product development
|
|
|
6.6
|
|
|
|
7.1
|
|
|
|
7.8
|
|
|
|
8.6
|
|
|
|
8.8
|
|
General and administrative
|
|
|
12.1
|
|
|
|
13.3
|
|
|
|
13.9
|
|
|
|
15.7
|
|
|
|
15.8
|
|
Amortization of acquired
intangible assets
|
|
|
2.4
|
|
|
|
2.6
|
|
|
|
3.9
|
|
|
|
3.7
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
47.5
|
|
|
|
49.6
|
|
|
|
54.1
|
|
|
|
56.8
|
|
|
|
57.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
34.9
|
|
|
|
32.3
|
|
|
|
27.9
|
|
|
|
23.2
|
|
|
|
22.1
|
|
Interest and other income, net
|
|
|
3.0
|
|
|
|
2.8
|
|
|
|
1.9
|
|
|
|
1.9
|
|
|
|
1.8
|
|
Interest expense
|
|
|
(0.0
|
)
|
|
|
(0.0
|
)
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
minority interests
|
|
|
37.8
|
|
|
|
35.0
|
|
|
|
29.7
|
|
|
|
25.0
|
|
|
|
23.8
|
|
Provision for income taxes
|
|
|
(11.0
|
)
|
|
|
(11.9
|
)
|
|
|
(8.7
|
)
|
|
|
(7.1
|
)
|
|
|
(6.1
|
)
|
Minority interests
|
|
|
(0.0
|
)
|
|
|
(0.0
|
)
|
|
|
(0.0
|
)
|
|
|
(0.0
|
)
|
|
|
(0.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
26.8
|
%
|
|
|
23.1
|
%
|
|
|
21.0
|
%
|
|
|
17.9
|
%
|
|
|
17.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
(1) |
|
Includes stock-based compensation as follows
(2006 increases are due primarily to the adoption of
FAS 123(R)): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenues
|
|
|
0.0
|
%
|
|
|
0
|
.0
|
%
|
|
|
0.1
|
%
|
|
|
0.7
|
%
|
|
|
0.5
|
%
|
Sales and marketing
|
|
|
0.0
|
%
|
|
|
0
|
.1
|
%
|
|
|
0.6
|
%
|
|
|
1.8
|
%
|
|
|
1.9
|
%
|
Product development
|
|
|
0.1
|
%
|
|
|
0
|
.1
|
%
|
|
|
0.4
|
%
|
|
|
1.5
|
%
|
|
|
1.6
|
%
|
General and administrative
|
|
|
(0.1
|
)%
|
|
|
0
|
.3
|
%
|
|
|
0.6
|
%
|
|
|
2.0
|
%
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
|
0.0
|
%
|
|
|
0
|
.5
|
%
|
|
|
1.7
|
%
|
|
|
6.0
|
%
|
|
|
6.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Revenues Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
Percent
|
|
|
June 30,
|
|
|
June 30,
|
|
|
Percent
|
|
|
June 30,
|
|
|
|
2005
|
|
|
Change
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
2006
|
|
|
|
(In thousands, except percent changes)
|
|
|
Net Revenues by Type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Marketplaces
|
|
$
|
408,452
|
|
|
|
20%
|
|
|
$
|
490,440
|
|
|
$
|
797,211
|
|
|
|
25%
|
|
|
$
|
997,752
|
|
International Marketplaces
|
|
|
411,671
|
|
|
|
23%
|
|
|
|
506,681
|
|
|
|
798,858
|
|
|
|
24%
|
|
|
|
989,896
|
|
Payments
|
|
|
237,217
|
|
|
|
39%
|
|
|
|
330,684
|
|
|
|
464,314
|
|
|
|
42%
|
|
|
|
658,834
|
|
Communications
|
|
|
|
|
|
|
n/a
|
|
|
|
44,158
|
|
|
|
|
|
|
|
n/a
|
|
|
|
79,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net transaction revenues
|
|
|
1,057,340
|
|
|
|
30%
|
|
|
|
1,371,963
|
|
|
|
2,060,383
|
|
|
|
32%
|
|
|
|
2,725,800
|
|
Advertising and other non-
transaction net revenues
|
|
|
28,963
|
|
|
|
34%
|
|
|
|
38,821
|
|
|
|
57,644
|
|
|
|
31%
|
|
|
|
75,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
1,086,303
|
|
|
|
30%
|
|
|
$
|
1,410,784
|
|
|
$
|
2,118,027
|
|
|
|
32%
|
|
|
$
|
2,801,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by
Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Marketplaces
|
|
$
|
423,565
|
|
|
|
20%
|
|
|
$
|
509,277
|
|
|
$
|
828,413
|
|
|
|
25%
|
|
|
$
|
1,036,497
|
|
International Marketplaces
|
|
|
418,839
|
|
|
|
24%
|
|
|
|
518,258
|
|
|
|
812,631
|
|
|
|
24%
|
|
|
|
1,011,231
|
|
Payments
|
|
|
243,899
|
|
|
|
39%
|
|
|
|
339,091
|
|
|
|
476,983
|
|
|
|
41%
|
|
|
|
674,157
|
|
Communications
|
|
|
|
|
|
|
n/a
|
|
|
|
44,158
|
|
|
|
|
|
|
|
n/a
|
|
|
|
79,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
1,086,303
|
|
|
|
30%
|
|
|
$
|
1,410,784
|
|
|
$
|
2,118,027
|
|
|
|
32%
|
|
|
$
|
2,801,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by
Geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
581,851
|
|
|
|
25%
|
|
|
$
|
724,699
|
|
|
$
|
1,138,097
|
|
|
|
29%
|
|
|
$
|
1,472,835
|
|
International
|
|
|
504,452
|
|
|
|
36%
|
|
|
|
686,085
|
|
|
|
979,930
|
|
|
|
36%
|
|
|
|
1,328,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
1,086,303
|
|
|
|
30%
|
|
|
$
|
1,410,784
|
|
|
$
|
2,118,027
|
|
|
|
32%
|
|
|
$
|
2,801,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our net revenues are derived primarily from listing, feature and
final value fees paid by sellers on our eBay Marketplaces and
fees from payment processing services on our PayPal platform.
Our net revenues have continued to grow each year, primarily as
a result of increased auction and fixed-price transaction
activity, reflected in the growth in the number of our confirmed
registered users, user activity, listings, user gross
merchandise volume on our eBay Marketplaces platforms and
payment transactions both on and off the eBay Marketplaces
processed by PayPal. We believe these increases are largely the
result of our promotional efforts and our emphasis on enhancing
the online commerce experience of our user community, both
domestically and internationally, through the introduction of
new site features and functionality and expanded trust and
safety programs.
Marketplaces net revenues are attributed to U.S. and
International geographies based upon the country in which the
seller, payment recipient, advertiser or
end-to-end
service provider is located. Our Payments and Communications net
revenues include amounts earned internationally.
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
Percent
|
|
|
June 30,
|
|
|
June 30,
|
|
|
Percent
|
|
|
June 30,
|
|
|
|
2005
|
|
|
Change
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
2006
|
|
|
|
(In millions, except percentages)
|
|
|
Supplemental Operating
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and International
Marketplaces Segments(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Confirmed registered users(2)
|
|
|
157.3
|
|
|
|
29%
|
|
|
|
202.7
|
|
|
|
157.3
|
|
|
|
29%
|
|
|
|
202.7
|
|
Active users(3)
|
|
|
64.6
|
|
|
|
20%
|
|
|
|
77.7
|
|
|
|
64.6
|
|
|
|
20%
|
|
|
|
77.7
|
|
Number of non-stores listings(4)
|
|
|
402.2
|
|
|
|
22%
|
|
|
|
490.5
|
|
|
|
802.0
|
|
|
|
22%
|
|
|
|
981.3
|
|
Number of stores listings(4)
|
|
|
37.9
|
|
|
|
178%
|
|
|
|
105.5
|
|
|
|
69.9
|
|
|
|
172%
|
|
|
|
190.1
|
|
Gross merchandise volume(5)
|
|
$
|
10,884
|
|
|
|
18%
|
|
|
$
|
12,896
|
|
|
$
|
21,486
|
|
|
|
18%
|
|
|
$
|
25,400
|
|
Payments Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accounts(6)
|
|
|
78.9
|
|
|
|
44%
|
|
|
|
113.7
|
|
|
|
78.9
|
|
|
|
44%
|
|
|
|
113.7
|
|
Active accounts(7)
|
|
|
22.9
|
|
|
|
29%
|
|
|
|
29.5
|
|
|
|
22.9
|
|
|
|
29%
|
|
|
|
29.5
|
|
Number of payments(8)
|
|
|
113.2
|
|
|
|
27%
|
|
|
|
143.3
|
|
|
|
223.6
|
|
|
|
31%
|
|
|
|
292.5
|
|
Total payment volume(9)
|
|
$
|
6,471
|
|
|
|
37%
|
|
|
$
|
8,856
|
|
|
$
|
12,704
|
|
|
|
39%
|
|
|
$
|
17,625
|
|
Communications
Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered users(10)
|
|
|
|
|
|
|
n/a
|
|
|
|
113.1
|
|
|
|
|
|
|
|
n/a
|
|
|
|
113.1
|
|
|
|
|
(1) |
|
Rent.com, Shopping.com, and our classifieds websites are not
included in these metrics. |
|
(2) |
|
Cumulative total of all users who have completed the
registration process on one of eBays trading platforms. |
|
(3) |
|
All users, excluding users of Half.com, Internet Auction,
Rent.com, Shopping.com, Tradera, and our classifieds websites,
who bid on, bought, or listed an item within the previous
12-month
period. |
|
(4) |
|
All listings on eBays trading platforms during the period,
regardless of whether the listing subsequently closed
successfully. |
|
(5) |
|
Total value of all successfully closed items between users on
eBays trading platforms during the period, regardless of
whether the buyer and seller actually consummated the
transaction. |
|
(6) |
|
Cumulative total of all accounts opened, including users who
made payments using PayPal but have not registered, excluding
accounts that have been closed or locked and excluding payment
gateway business accounts. |
|
(7) |
|
All accounts, and users whether registered or not, that sent or
received at least one payment through the PayPal system within
the previous three month period. |
|
(8) |
|
Total number of payments initiated through the PayPal system
during the period, excluding the payment gateway business,
regardless of whether the payment was actually sent
successfully, or was reversed, rejected, or pending at the end
of the period. |
|
(9) |
|
Total U.S. dollar volume of payments initiated through the
PayPal system during the period, excluding the payment gateway
business, regardless of whether the payment was actually sent
successfully, or was reversed, rejected, or was pending at the
end of the period. |
|
(10) |
|
Communications registered users represent the cumulative number
of unique user accounts created on Skype. |
The U.S. Marketplaces segment includes our
U.S. marketplaces commerce platforms, other than our PayPal
subsidiary. The International Marketplaces segment includes our
international marketplaces commerce platforms excluding our
PayPal and Skype subsidiaries. The Payments segment includes our
global payments platform, consisting of our PayPal subsidiary.
The Communications segment consists of our VoIP offerings from
our Skype subsidiary subsequent to our acquisition of Skype on
October 14, 2005.
Our net revenues result from fees associated with our
transaction, referral fees, advertising and other services in
our U.S. Marketplaces, International Marketplaces,
Payments, and Communications segments. Net transaction
25
revenues are derived primarily from listing, feature and final
value fees paid by sellers and fees from payment processing
services. Net revenues from advertising are derived principally
from the sale of banner and sponsorship advertisements for cash
and through barter arrangements. Other non- transaction net
revenues are derived principally from contractual arrangements
with third parties that provide transaction services to eBay and
PayPal users.
Marketplaces
Net Transaction Revenues
Total net transaction revenues from our Marketplaces segment
increased 22% and 25% in the aggregate during the second quarter
and first six months of 2006, respectively, compared to the same
periods in the prior year. The growth in both domestic and
international net transaction revenues was primarily the result
of increased transaction activity, reflected in the growth of
the number of registered users, active users and gross
merchandise volume. Gross merchandise volume from Marketplaces
increased 18% during both the second quarter of 2006 and the
first six months of 2006, respectively, compared to the same
periods of the prior year. During the second quarter and first
six months of 2006, there was gross merchandise volume growth
across all major categories, with our motors, consumer
electronics, computers, sports, clothing & accessories,
home & garden and business and industrial categories
contributing most of such
year-over-year
growth.
U.S. Marketplaces
U.S. Marketplaces net transaction revenues increased 20%
and 25% during the second quarter and first six months of 2006,
respectively, compared to the same periods in the prior year.
Net transaction revenues derived from the U.S. Marketplaces
represented 36% of the total net transaction revenues in the
second quarter of 2006, compared to 39% in the same period of
the prior year and 37% in the first six months of 2006, compared
to 39% in the same period of the prior year. Gross merchandise
volume from the U.S. Marketplaces increased 15% and 16%
during the second quarter and first six months of 2006,
respectively, compared to the same periods of the prior year.
The U.S. Marketplaces is our most developed business. We
expect net transaction revenues from our U.S. Marketplaces
segment to increase in 2006 compared to 2005, but to decrease as
a percentage of total eBay Marketplaces net transaction revenues
as the International Marketplaces segment grows in significance.
In addition, even as the U.S. Marketplaces segment
continues to grow in absolute terms, we expect its growth rate
in 2006 to be lower than that of 2005. These expectations are
subject to additional uncertainties related to the impact of
changes to the store inventory format (including store inventory
format pricing and product changes), as well as consumer
protection initiatives and the recent rollout of eBay Express.
International
Marketplaces
International Marketplaces net transaction revenues increased
23% and 24% during the second quarter and first six months of
2006, respectively, compared to the same periods of the prior
year. International Marketplaces net transaction revenues as a
percentage of total net transaction revenues was 37% during the
second quarter of 2006, compared to 39% in the same period of
the prior year. International Marketplaces net transaction
revenues as a percentage of total net transaction revenues was
36% during the first six months of 2006, compared to 39% in the
same period of the prior year. Gross merchandise volume from the
International Marketplaces increased 22% and 20% during the
second quarter and first six months of 2006, respectively,
compared to the same periods of the prior year. The growth in
our International Marketplaces net transaction revenues was
primarily the result of strong performances in Germany and the
United Kingdom as well as significant increases in certain of
our less established markets, particularly Australia, France and
Italy. We expect that the growth rates of our International
Marketplaces segment transaction net revenues will decline in
2006 compared to 2005, although we expect such revenues to grow
in significance relative to our total eBay Marketplaces as we
continue to develop and deploy our global online commerce
platform during 2006. These expectations are subject to
additional uncertainties related to the impact of changes to the
store inventory format (including store inventory format pricing
and product changes), as well as consumer protection initiatives
and the launch of eBay Express in Germany and the United Kingdom.
26
Payments
Segment Net Transaction Revenues
Payments segment net transaction revenues increased 39% and 42%
during the second quarter and first six months of 2006,
respectively, compared to the same periods of the prior year.
Payments segment net transaction revenues as a percentage of
total net transaction revenues was 24% during the second quarter
of 2006, compared to 22% in the same period of the prior year.
Payment segment net transaction revenues as a percentage of
total net transaction revenues was 24% during the first six
months of 2006, compared to 23% in the same period of the prior
year. The growth in Payments segment net transaction revenues
was positively affected by PayPals continued penetration
of eBay Marketplaces transactions, particularly in the United
States and the United Kingdom.
In addition, revenues increased as a result of an increase in
total payment volume for our PayPal merchant services
transactions and the inclusion of the payment gateway business.
The total payment volume for our PayPal merchant services
transactions was approximately $3.1 billion and
$6.0 billion in the second quarter and first six months of
2006, respectively, which represents 35% and 34% of
PayPals total payment volume. The total payment volume for
our PayPal merchant services transactions was approximately
$1.9 billion and $3.8 billion in the second quarter
and first six months of 2005, respectively, which represents 30%
of PayPals total payment volume for both periods. Our
Payments segment net transaction revenues as a percentage of
total payment volume remained consistent at 3.7% during the
second quarter and first six months of 2005 and 2006.
Net transaction revenues from the Payments segment earned
internationally totaled $125.2 million and
$243.8 million during the second quarter and first six
months of 2006, respectively, representing 38% and 37% of total
Payments segment net transaction revenue during those periods.
This is compared to net transaction revenues from the Payments
segment earned internationally of $85.6 million and
$167.3 million during the second quarter and first six
months of 2005, respectively, representing 36% of total Payments
segment net transaction revenue during both those periods. We
expect the Payments segment net transaction revenues to increase
in total, and as a percentage of total net transaction revenues
in 2006 compared to 2005. This growth will be driven by our
Payments segments expanding on-eBay presence and merchant
services business.
Communications
Segment Net Transaction Revenues
Communications net transaction revenues were $44.2 million
and $79.3 million in the second quarter and first six
months of 2006, respectively. These segment revenues represent
the revenues generated from VoIP offerings from our recent
acquisition of Skype on October 14, 2005. A large majority
of this revenue is generated from Skype fees charged to users
that connect Skypes VoIP network to traditional
telecommunication networks. We expect the Communications segment
net transaction revenues to increase in total and as a
percentage of total net transactions revenues during the
remainder of 2006.
Advertising
and Other Non-Transaction Net Revenues
Advertising and other non-transaction net revenues increased
during the second quarter and first six months of 2006 as
compared to the same periods in 2005. Advertising and other
non-transaction net revenues represented 2.8% and 2.7% of total
net revenues during the second quarter of 2006 and of 2005.
Advertising and other non-transaction net revenues represented
2.7% of total net revenues during the first six months of 2006
and of 2005. We continue to view our business as primarily
transaction-revenue driven and we expect advertising and other
net revenues to continue to represent a relatively small
proportion of total net revenues in 2006.
Cost
of Net Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Three Months
|
|
Six Months
|
|
|
|
Six Months
|
|
|
Ended
|
|
|
|
Ended
|
|
Ended
|
|
|
|
Ended
|
|
|
June 30,
|
|
Percent
|
|
June 30,
|
|
June 30,
|
|
Percent
|
|
June 30,
|
|
|
2005
|
|
Change
|
|
2006
|
|
2005
|
|
Change
|
|
2006
|
|
|
(In thousands, except percentages)
|
|
Cost of net revenues
|
|
$
|
191,840
|
|
|
|
52
|
%
|
|
$
|
292,479
|
|
|
$
|
378,209
|
|
|
|
51
|
%
|
|
$
|
571,047
|
|
As a percentage of net revenues
|
|
|
17.7
|
%
|
|
|
|
|
|
|
20.7
|
%
|
|
|
17.9
|
%
|
|
|
|
|
|
|
20.4
|
%
|
27
Cost of net revenues consists primarily of costs associated with
payment processing, site operations, and certain types of
customer support. Significant cost components include bank
charges, credit card interchange and assessments, other payment
processing costs, employee compensation and facilities costs for
our customer support and site operations, depreciation of
equipment and amortization of required capitalization of major
site product development costs and telecommunication costs.
The increase in cost of net revenues during the second quarter
and first six months of 2006, compared to the same periods in
the prior year, was primarily due to an increase in payment
processing costs, the volume of transactions on our Marketplaces
and Payments websites, development and expansion of our customer
support and site operations infrastructure, telecommunication
costs and stock-based compensation. Payment processing costs
increased by $24.0 million and $49.5 million during
the second quarter and first six months of 2006, respectively,
compared to the same periods of the prior year. These increases
reflect the increase in PayPals total payment volume and
increased payment processing costs offset by reduced contractual
payment processing rates. Aggregate customer support and site
operations costs increased by approximately $36.1 million
and $66.1 million during the second quarter and first six
months of 2006, respectively, compared to the same periods of
the prior year. Telecommunications costs increased by
$32.3 million and $58.9 million during the second
quarter and first six months of 2006, respectively, compared to
the same periods of the prior year, due to the inclusion of such
costs since our acquisition of Skype in October 2005.
Stock-based compensation expense included in cost of net
revenues in the second quarter and first six months of 2006 was
$7.6 million and $17.1 million, respectively. Cost of
net revenues prior to fiscal 2006 did not include
FAS 123(R) stock-based compensation expense. Cost of net
revenues are expected to increase in total and as a percentage
of net revenues in 2006 compared to 2005, due to the expected
growth of our Payments and Communications businesses which have
structurally lower gross margins, as well as FAS 123(R)
stock-based compensation expense offset by our expected
operational efficiency in our site operations and transaction
expense leverage.
Operating
Expenses
Sales and
Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Three Months
|
|
Six Months
|
|
|
|
Six Months
|
|
|
Ended
|
|
|
|
Ended
|
|
Ended
|
|
|
|
Ended
|
|
|
June 30,
|
|
Percent
|
|
June 30,
|
|
June 30,
|
|
Percent
|
|
June 30,
|
|
|
2005
|
|
Change
|
|
2006
|
|
2005
|
|
Change
|
|
2006
|
|
|
(In thousands, except percentages)
|
|
Sales and marketing
|
|
$
|
287,144
|
|
|
|
39
|
%
|
|
$
|
398,000
|
|
|
$
|
558,493
|
|
|
|
43
|
%
|
|
$
|
798,562
|
|
As a percentage of net revenues
|
|
|
26.4
|
%
|
|
|
|
|
|
|
28.2
|
%
|
|
|
26.4
|
%
|
|
|
|
|
|
|
28.5
|
%
|
Sales and marketing expenses consist primarily of advertising,
tradeshow and other promotional costs, employee compensation for
our category development and marketing staff and certain trust
and safety programs.
The increase in sales and marketing expenses in the second
quarter and first six months of 2006, compared to the same
periods in the prior year was primarily due to a
$27.1 million and $51.8 million, respectively,
increase in stock-based compensation expense recognized as sales
and marketing expenses from the adoption of FAS 123(R) and
our continued investment in growing our global user base.
Advertising and marketing costs increased by $52.5 million
and $120.5 million during the second quarter and first six
months of 2006 due to our integrated marketing campaigns
globally and search engine marketing expenses in our
Shopping.com business. Employee-related costs, not including
stock-based compensation expense, increased by approximately
$24.3 million and $51.7 million during the second
quarter and first six months of 2006 as compared to the same
periods of the prior year. Sales and marketing expenses are
expected to increase in total and as a percentage of net
revenues in 2006 compared to 2005, primarily due to
FAS 123(R) stock-based compensation expense and as
Shopping.com has higher sales and marketing expenses as a
percentage of net revenues than our other businesses, offset by
the structurally lower sales and marketing expense incurred by
our Payments and Communications segments.
28
Product
Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Three Months
|
|
Six Months
|
|
|
|
Six Months
|
|
|
Ended
|
|
|
|
Ended
|
|
Ended
|
|
|
|
Ended
|
|
|
June 30,
|
|
Percent
|
|
June 30,
|
|
June 30,
|
|
Percent
|
|
June 30,
|
|
|
2005
|
|
Change
|
|
2006
|
|
2005
|
|
Change
|
|
2006
|
|
|
(In thousands, except percentages)
|
|
Product development
|
|
$
|
71,639
|
|
|
|
73
|
%
|
|
$
|
123,972
|
|
|
$
|
145,428
|
|
|
|
67
|
%
|
|
$
|
243,042
|
|
As a percentage of net revenues
|
|
|
6.6
|
%
|
|
|
|
|
|
|
8.8
|
%
|
|
|
6.9
|
%
|
|
|
|
|
|
|
8.7
|
%
|
Product development expenses consist primarily of employee
compensation, consultancy costs, facilities costs and
depreciation on equipment used for development. Product
development expenses are net of required capitalization of major
site and other product development efforts. These capitalized
costs totaled $17.4 million and $35.4 million in the
second quarter and first six months of 2006, respectively, and
are reflected as a cost of net revenues when amortized in future
periods. During the second quarter and first six months of 2005,
capitalized costs for major site and other product development
efforts totaled $9.1 million and $18.7 million,
respectively. We anticipate that we will continue to devote
significant resources to product development in the future as we
add new products, features and functionality to our Marketplaces
and Payments businesses.
The increase in product development expenses in the second
quarter and first six months of 2006, compared to the same
periods in the prior year was primarily due to a
$23.0 million and $43.7 million increase in
stock-based compensation expense recognized as product
development expenses from the adoption of FAS 123(R) and
increased headcount to support various platform development
initiatives in our Marketplaces and Payments segments.
Employee-related costs, not including stock-based compensation
expense, increased by approximately $14.0 million and
$28.8 million during the second quarter and first six
months of 2006, respectively, compared to the same period in the
prior year. Product development expenses are expected to
increase in total and as a percentage of net revenues in 2006
compared to 2005, primarily due to FAS 123(R) stock-based
compensation expense, as well as development of new features and
functionality and continued improvement and expansion of
operations across all platforms.
General
and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Three Months
|
|
Six Months
|
|
|
|
Six Months
|
|
|
Ended
|
|
|
|
Ended
|
|
Ended
|
|
|
|
Ended
|
|
|
June 30,
|
|
Percent
|
|
June 30,
|
|
June 30,
|
|
Percent
|
|
June 30,
|
|
|
2005
|
|
Change
|
|
2006
|
|
2005
|
|
Change
|
|
2006
|
|
|
(In thousands, except percentages)
|
|
General and administrative
|
|
$
|
130,900
|
|
|
|
70
|
%
|
|
$
|
222,923
|
|
|
$
|
273,020
|
|
|
|
61
|
%
|
|
$
|
440,597
|
|
As a percentage of net revenues
|
|
|
12.1
|
%
|
|
|
|
|
|
|
15.8
|
%
|
|
|
12.9
|
%
|
|
|
|
|
|
|
15.7
|
%
|
General and administrative expenses consist primarily of
employee compensation, transaction loss expense associated with
our Payments segment, depreciation of equipment, provision for
doubtful accounts, insurance, professional fees and certain
trust and safety programs.
The increase in general and administrative expenses in the
second quarter and first six months of 2006, compared to the
same period of the prior year was primarily due to a
$27.7 million and $56.6 million increase in
stock-based compensation expense recognized as general and
administrative expenses as a result of our adoption of
FAS 123(R), employee-related costs, and facilities costs.
PayPal transaction loss expenses as a percentage of net payment
revenues increased in the second quarter and first six months of
2006, compared to the same period of the prior year. In
addition, we have increased our investment in our infrastructure
to support an increasingly complex and global business.
Employee-related costs, not including stock-based compensation
expense, increased by approximately $28.6 million and
$53.0 million during the second quarter and first six
months of 2006, compared to the same periods of the prior year.
The increases in employee related costs primarily resulted from
continued headcount growth, particularly from increases in
headcount related to consumer protection programs. PayPals
payment transaction loss expense increased approximately
$11.7 million and $18.8 million during the second
quarter and first six months of 2006, respectively, as compared
to same periods of the prior year. PayPals payment
transaction loss rate, which is the transaction loss expense as
a percentage of PayPals total payment volume, increased to
0.27% and 0.28% during the second quarter and first six months
of 2006, respectively, compared to
29
0.19% and 0.25% during the second quarter and first six months
of 2005, respectively. General and administrative expenses are
expected to increase in total and as a percentage of net
revenues in 2006 compared to 2005, primarily due to
FAS 123(R) stock-based compensation expense as well as
continued investment across all areas of our business with a
focus on expanding our consumer protection programs.
Amortization
of Acquired Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Three Months
|
|
Six Months
|
|
|
|
Six Months
|
|
|
Ended
|
|
|
|
Ended
|
|
Ended
|
|
|
|
Ended
|
|
|
June 30,
|
|
Percent
|
|
June 30,
|
|
June 30,
|
|
Percent
|
|
June 30,
|
|
|
2005
|
|
Change
|
|
2006
|
|
2005
|
|
Change
|
|
2006
|
|
|
(In thousands, except percentages)
|
|
Amortization of acquired
intangible assets
|
|
$
|
25,794
|
|
|
|
140
|
%
|
|
$
|
61,996
|
|
|
$
|
48,317
|
|
|
|
136
|
%
|
|
$
|
113,917
|
|
As a percentage of net revenues
|
|
|
2.4
|
%
|
|
|
|
|
|
|
4.4
|
%
|
|
|
2.3
|
%
|
|
|
|
|
|
|
4.1
|
%
|
From time to time we have purchased, and we expect to continue
purchasing, assets or businesses to accelerate product and
geographic expansion, increase the features, formats and
services available to our users and maintain a leading role in
online
e-commerce.
These purchase transactions generally result in the creation of
acquired intangible assets and lead to a corresponding
amortization expense in future periods. The increase in
amortization of acquired intangibles during the second quarter
and first six months of 2006 compared to the same periods of the
prior year is due primarily to the business acquisitions we
consummated during the second half of 2005 and the second
quarter of 2006. Included in amortization of intangibles for the
second quarter and first six months of 2006 is an expense of
$10.4 million for in-process research and development
related to an acquisition completed during the period.
Intangible assets include purchased customer lists and user
base, trademarks and trade names, developed technologies, and
other intangible assets. We amortize intangible assets,
excluding goodwill, using the straight-line method over
estimated useful lives ranging from one to eight years. We
believe the straight-line method of amortization best
approximates the distribution of the economic value of the
identifiable intangible assets.
Goodwill represents the excess of the purchase price over the
fair value of the net tangible and identifiable intangible
assets acquired in a business combination. We evaluate goodwill,
at a minimum, on an annual basis and whenever events and changes
in circumstances suggest that the carrying amount may not be
recoverable. Impairment of goodwill is tested at the reporting
unit level by comparing the reporting units carrying
amount, including goodwill, to the fair value of the reporting
unit, which may be for a discrete business within a particular
reportable segment. The fair values of the reporting units are
estimated using a combination of the income, or discounted cash
flows, approach and the market approach, which utilizes
comparable companies data. If the carrying amount of the
reporting unit exceeds its fair value, goodwill is considered
impaired and a second step is performed to measure the amount of
impairment loss, if any. We conduct our annual impairment test
as of August 31 of each year. Based on our last impairment
test as of August 31, 2005 we determined there was no
impairment. There were no events or circumstances from that date
through June 30, 2006 indicating that a further assessment
was necessary.
We expect amortization of acquired intangible assets to increase
in 2006 compared to 2005, as a result of the intangible assets
associated with our acquisitions in 2005 and in the first
six months of 2006. Amortization of acquired intangible
assets may increase further should we make additional
acquisitions in the future or estimated useful lives are reduced.
30
Non-Operating
Items
Interest
and Other Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Three Months
|
|
Six Months
|
|
|
|
Six Months
|
|
|
Ended
|
|
|
|
Ended
|
|
Ended
|
|
|
|
Ended
|
|
|
June 30,
|
|
Percent
|
|
June 30,
|
|
June 30,
|
|
Percent
|
|
June 30,
|
|
|
2005
|
|
Change
|
|
2006
|
|
2005
|
|
Change
|
|
2006
|
|
|
(In thousands, except percentages)
|
|
Interest and other income, net
|
|
$
|
32,525
|
|
|
|
(21
|
)%
|
|
$
|
25,630
|
|
|
$
|
54,928
|
|
|
|
(6
|
)%
|
|
$
|
51,390
|
|
As a percentage of net revenues
|
|
|
3.0
|
%
|
|
|
|
|
|
|
1.8
|
%
|
|
|
2.6
|
%
|
|
|
|
|
|
|
1.8
|
%
|
Interest and other income, net consists of interest earned on
cash, cash equivalents and investments as well as foreign
exchange transaction gains and losses, settlement of hedging
contracts and other miscellaneous non-operating transactions.
Our interest and other income, net, decreased during the second
quarter and first six months of 2006 as compared to the same
periods of the prior year, primarily attributable to a loss
realized upon settlement of foreign exchange hedging contracts,
offset by higher interest income due to higher interest rates.
The weighted-average interest rate of our portfolio was
approximately 3.7% and 3.6% in the second quarter and first six
months of 2006, respectively, compared to 2.8% and 2.6% in the
second quarter and first six months of the prior year. We expect
that interest and other income, net, will remain consistent as a
percentage of net revenues during 2006 compared to 2005, but may
be lower depending on the timing of future acquisitions or stock
repurchases. See
Note 8-
Subsequent Events for additional discussion of our
recently announced $2 billion stock repurchase program.
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Three Months
|
|
Six Months
|
|
|
|
Six Months
|
|
|
Ended
|
|
|
|
Ended
|
|
Ended
|
|
|
|
Ended
|
|
|
June 30,
|
|
Percent
|
|
June 30,
|
|
June 30,
|
|
Percent
|
|
June 30,
|
|
|
2005
|
|
Change
|
|
2006
|
|
2005
|
|
Change
|
|
2006
|
|
|
(In thousands, except percentages)
|
|
Interest expense
|
|
$
|
405
|
|
|
|
129
|
%
|
|
$
|
929
|
|
|
$
|
2,125
|
|
|
|
(21
|
)%
|
|
$
|
1,676
|
|
As a percentage of net revenues
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
|
|
|
|
|
|
0.1
|
%
|
Interest expense in 2005 consisted of interest charges related
to our San Jose headquarters lease facilities, capital
leases, and mortgage notes.
Interest expense increased during the second quarter of 2006 as
compared to the same period of the prior year due to the
continued interest on certain tax and legal accruals. Interest
expense decreased during the first six months of 2006 as
compared to the same period of the prior year primarily due to
the payment of the lease obligation for our San Jose
headquarters facility on March 1, 2005. We expect our
interest expense will decrease both in total and as a percentage
of net revenue during 2006 compared to 2005.
Provision
for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
Percent
|
|
|
June 30,
|
|
|
June 30,
|
|
|
Percent
|
|
|
June 30,
|
|
|
|
2005
|
|
|
Change
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
2006
|
|
|
|
(In thousands, except percentages)
|
|
|
Provision for income taxes
|
|
$
|
119,518
|
|
|
|
(28
|
)%
|
|
$
|
86,120
|
|
|
$
|
219,466
|
|
|
|
(15
|
)%
|
|
$
|
185,474
|
|
As a percentage of net revenues
|
|
|
11.0
|
%
|
|
|
|
|
|
|
6.1
|
%
|
|
|
10.4
|
%
|
|
|
|
|
|
|
6.6
|
%
|
Effective tax rate
|
|
|
29
|
%
|
|
|
|
|
|
|
26
|
%
|
|
|
29
|
%
|
|
|
|
|
|
|
27
|
%
|
The provision for income taxes differs from the amount computed
by applying the statutory U.S. federal rate principally due
to state taxes, subsidiary losses for which we have not provided
a benefit and other factors that increase the effective tax
rate, offset by decreases resulting from foreign income with
lower effective tax rates and from tax credits.
31
The lower effective tax rates for the second quarter and first
six months of 2006, compared to the same periods of the prior
year, primarily reflect changes in our forecasted geographic mix
of business.
We received tax deductions from the gains realized by employees
on the exercise of certain non-qualified stock options for which
the benefit was recognized in prior periods as additional
paid-in-capital.
These tax deductions from prior periods were fully utilized in
2005. Beginning in January 2006, due to the adoption of
FAS 123(R), the estimated tax benefit expected from
stock-based compensation is recognized when the compensation
expense is reflected in our financial statements.
Impact of
Foreign Currency Translation
During the second quarter and first six months of 2006, our
international net revenues, based upon the country in which the
seller, payment recipient, advertiser or other service provider
is located, accounted for approximately 49% and 47% of our
consolidated net revenues, as compared to approximately 46% of
our net revenues in the same periods in the prior year. The
growth in our international operations has increased our
exposure to foreign currency fluctuations. Net revenues and
related expenses generated from international locations are
denominated in the functional currencies of the local countries,
and primarily include Euros, British pounds, Korean won,
Canadian dollars, Taiwanese dollars, Australian dollars, Chinese
renminbi, and Indian rupee. Our results of operations and
certain of our inter-company balances associated with our
international locations are exposed to foreign exchange rate
fluctuations. The statements of income of our international
operations are translated into U.S. dollars at the average
exchange rates in each applicable period. If the
U.S. dollar weakens against foreign currencies, the
translation of these foreign-currency-denominated transactions
will result in increased consolidated net revenues, operating
expenses, and net income. Similarly, our net revenues, operating
expenses, and net income will decrease if the U.S. dollar
strengthens against foreign currencies.
Net revenues were negatively impacted by foreign currency
translation of approximately $0.6 million and
$50.8 million, respectively, in the second quarter and
first six months of 2006 as compared to the same periods of the
prior year. Operating income was negatively impacted by foreign
currency translation of approximately $3.1 million and
$28.2 million in the second quarter and first six months of
2006, respectively, as compared to the same periods of the prior
year.
We expect our international operations will continue to grow in
significance as we develop and deploy our global marketplaces
and global payments platform. As a result, the impact of foreign
currency fluctuations in future periods could become more
significant and may have a negative impact on our consolidated
net revenues and net income in the event the U.S. dollar
strengthens relative to other currencies. See the information in
Item 3 under Foreign Currency Risk for
additional discussion of the impact of foreign currency
translation and related hedging activities.
Foreign
Exchange Hedging Policy
We are a rapidly growing company, with an increasing proportion
of our operations outside the United States. Accordingly, our
foreign currency exposures have increased substantially and are
expected to continue to grow. The objective of our foreign
exchange exposure management program is to identify material
foreign currency exposures and to manage these exposures to
minimize the potential effects of currency fluctuations on our
reported condensed consolidated cash flow, and results of
operations.
Our primary foreign currency exposures are transaction, economic
and translation:
Transaction Exposure: Around the world, we
have certain assets and liabilities, primarily receivables,
investments and accounts payable (including inter-company
transactions) that are denominated in currencies other than the
relevant entitys functional currency. In certain
circumstances, changes in the functional currency value of these
assets and liabilities create fluctuations in our reported
consolidated financial position, results of operations and cash
flows. We may enter into foreign exchange forward contracts or
other instruments to minimize the short-term foreign currency
fluctuations on such assets and liabilities. The gains and
losses on the foreign exchange forward contracts offset the
transaction gains and losses on certain foreign currency
receivables, investments and payables recognized in earnings.
32
Economic Exposure: We also have anticipated
and unrecognized future cash flows, including revenues and
expenses, denominated in currencies other than the relevant
entitys functional currency. Our primary economic
exposures include future royalty receivables, customer
collections, and vendor payments. Changes in the relevant
entitys functional currency value will cause fluctuations
in the cash flows we expect to receive when these cash flows are
realized or settled. We may enter into foreign exchange forward
contracts or other derivatives to hedge the value of a portion
of these cash flows. We account for these foreign exchange
contracts as cash flow hedges. The effective portion of the
derivatives gain or loss is initially reported as a
component of accumulated other comprehensive income (loss) and
subsequently reclassified into earnings when the transaction is
settled.
Earnings Translation Exposure: As our
international operations grow, fluctuations in the foreign
currencies create volatility in our reported results of
operations because we are required to consolidate the results of
operations of our foreign denominated subsidiaries. We may
decide to purchase forward exchange contracts or other
instruments to offset the earnings impact of currency
fluctuations. Such contracts will be
marked-to-market
on a monthly basis and any unrealized gain or loss will be
recorded in interest and other income, net.
Recent
Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an Interpretation of
FASB Statement No. 109 (FIN 48), which clarifies
the accounting for uncertainty in tax positions. This
Interpretation requires that we recognize in our financial
statements the impact of a tax position if that position is more
likely than not of being sustained on audit, based on the
technical merits of the position. The provisions of FIN 48
are effective as of the beginning of our 2007 fiscal year, with
the cumulative effect, if any, of the change in accounting
principle recorded as an adjustment to opening retained
earnings. We are currently evaluating the impact of adopting
FIN 48 on our condensed consolidated financial statements.
Employees
As of June 30, 2006, eBay Inc. and its consolidated
subsidiaries employed approximately 12,900 people (including
approximately 600 temporary employees), of whom approximately
7,400 were located in the United States (including
approximately 300 temporary employees).
Liquidity
and Capital Resources
Cash
Flows
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
991,951
|
|
|
$
|
1,099,717
|
|
Investing activities
|
|
|
(559,611
|
)
|
|
|
(58,823
|
)
|
Financing activities
|
|
|
131,427
|
|
|
|
235,974
|
|
Effect of exchange rates on cash
and cash equivalents
|
|
|
(38,163
|
)
|
|
|
43,933
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
$
|
525,604
|
|
|
$
|
1,320,801
|
|
|
|
|
|
|
|
|
|
|
We generated cash from operating activities in amounts greater
than net income in the six months ended June 30, 2005 and
2006, mainly due to non-cash charges to earnings. Non-cash
charges to earnings included depreciation and amortization on
our long-term assets, stock-based compensation expense related
to employee stock options and purchases, tax benefits on the
exercise of employee stock options, provision for doubtful
accounts and authorized credits resulting from increasing
revenues and the provision for transaction losses resulting from
increased total payment volumes processed by our PayPal
subsidiary.
33
Prior to adopting FAS 123(R), we presented all tax benefits
resulting from the exercise of stock options as operating cash
flows in the Statement of Cash Flows. FAS 123(R) requires
cash flows resulting from excess tax benefits to be classified
as a part of cash flows from financing activities. Excess tax
benefits represent tax benefits related to exercised options in
excess of the associated deferred tax asset for such options. As
a result of adopting FAS 123(R), $61.0 million of
excess tax benefits for the six months ended June 30, 2006
have been reported as a cash inflow from financing activities.
In addition, as a substantial portion of the companys net
operating losses and carryforward credits have now been
utilized, cash will be required for tax payments in the
U.S. going forward. Total U.S. and foreign income tax
payments will be dependent on our taxable income and are
estimated to be in excess of $190 million in 2006.
Net cash used in investing activities during the first six
months of 2006 consisted primarily of net purchases of property
and equipment of $282.0 million and acquisitions completed
during the quarter of $45.5 million, net of cash acquired,
offset by $270.0 million of net maturities and sales of
investments. These purchases related mainly to computer
equipment and software and facilities improvements to support
our site operations, customer support and international
expansion. Net cash used in investing activities during the
first six months of 2005 consisted primarily of the cash payment
for the acquisition of Rent.com of approximately
$435.4 million and of the cash payment for the acquisition
of certain international websites of approximately
$81.6 million. Purchases of property and equipment totaled
$170.1 million during the first six months of 2005 and
related mainly to purchases of computer equipment and software
to support our site operations, customer support and
international expansion.
The net cash flows provided by financing activities during the
first six months of 2006 consisted primarily of proceeds from
stock option exercises of $175.0 million and excess tax
benefits from stock-based compensation of $61.0 million.
Our future cash flows from the exercise of stock options are
difficult to project as such amounts are a function of our stock
price, the number of options outstanding, and the decisions by
employees to exercise stock options. In general, we expect
proceeds from stock option exercises to increase during periods
in which our stock price is high relative to historic levels.
The positive effect of exchange rates on cash and cash
equivalents during the six months ended June 30, 2006 was
due to the weakening of the U.S. dollar during the six
month period against other foreign currencies, primarily the
Euro. The negative effect of exchange rates on cash and cash
equivalents during the six months ended June 30, 2005 was
due to the strengthening of the U.S. dollar during the
quarter against other foreign currencies, primarily the Euro.
During our third quarter of 2006, eBays Board of Directors
authorized the repurchase of up to $2.0 billion of the
companys common stock within the next two years. The
timing and actual number of shares repurchased will depend on a
variety of factors including corporate and regulatory
requirements, price and other market conditions. See
Note 8 Subsequent Event for
additional discussion of our recently announced
$2.0 billion stock repurchase program.
We believe that our cash, cash equivalents and investments,
together with any cash generated from operations, will be
sufficient to fund our operating activities, capital
expenditures, stock repurchase program, and other obligations
for the foreseeable future. However, if during that period or
thereafter we are not successful in generating sufficient cash
flows from operations or in raising additional capital when
required in sufficient amounts and on terms acceptable to us,
our business could suffer.
Off-Balance
Sheet Arrangements
As of June 30, 2006, we had no off-balance sheet
arrangements that have, or are reasonably likely to have, a
current or future material effect on our consolidated financial
condition, results of operations, liquidity, capital
expenditures or capital resources.
Indemnification
Provisions
In the ordinary course of business, we have included limited
indemnification provisions in certain of our agreements with
parties with whom we have commercial relations, including our
standard marketing, promotions and
application-programming-interface license agreements. Under
these contracts, we generally indemnify, hold
34
harmless, and agree to reimburse the indemnified party for
losses suffered or incurred by the indemnified party in
connection with claims by any third party with respect to our
domain names, trademarks, logos and other branding elements to
the extent that such marks are applicable to our performance
under the subject agreement. In a limited number of agreements,
we have provided an indemnity for other types of third-party
claims, substantially all of which are indemnities related to
our copyrights, trademarks, and patents. In our PayPal business,
we have provided an indemnity to our payment processors in the
event of certain third-party claims or card association fines
against the processor arising out of conduct by PayPal. To date,
no significant costs have been incurred, either individually or
collectively, in connection with our indemnification provisions.
Item 3: Quantitative
and Qualitative Disclosures About Market Risk
Interest
Rate Risk
The primary objective of our investment activities is to
preserve principal while at the same time maximizing yields
without significantly increasing risk. To achieve this
objective, we maintain our portfolio of cash equivalents and
short-term and long-term investments in a variety of securities,
including government and corporate securities and money market
funds. These securities are classified as available for sale and
consequently are recorded on the balance sheet at fair value
with unrealized gains or losses reported as a separate component
of accumulated other comprehensive income (loss), net of
estimated tax.
Investments in both fixed-rate and floating-rate
interest-earning instruments carry varying degrees of interest
rate risk. The fair market value of our fixed-rate securities
may be adversely impacted due to a rise in interest rates. In
general, securities with longer maturities are subject to
greater interest-rate risk than those with shorter maturities.
While floating rate securities generally are subject to less
interest-rate risk than fixed-rate securities, floating-rate
securities may produce less income than expected if interest
rates decrease. Due in part to these factors, our investment
income may fall short of expectations or we may suffer losses in
principal if securities are sold that have declined in market
value due to changes in interest rates. As of June 30,
2006, our fixed-income investments earned a pretax yield of
approximately 3.7%, with a weighted average maturity of
1 month. If interest rates were to instantaneously increase
(decrease) by 100 basis points, the fair market value of
our total investment portfolio could decrease (increase) by
approximately $4.0 million.
Equity
Price Risk
We are exposed to equity price risk on the marketable portion of
equity instruments and equity method investments we hold,
typically as the result of strategic investments in third
parties that are subject to considerable market risk due to
their volatility. We typically do not attempt to reduce or
eliminate our market exposure in these equity investments. We
did not record an impairment charge during either of the three
and six months ended June 30, 2006 or 2005 relating to the
other-than-temporary
impairment in the fair value of equity investments. At
June 30, 2006, the total carrying value of our equity
instruments and equity method investments was $58.4 million.
Foreign
Currency Risk
International net revenues result from transactions by our
foreign operations and are typically denominated in the local
currency of each country. These operations also incur most of
their expenses in the local currency. Accordingly, our foreign
operations use the local currency, which is primarily the Euro,
and to a lesser extent, the British pound, as their functional
currency. Our international operations are subject to risks
typical of international operations, including, but not limited
to, differing economic conditions, changes in political climate,
differing tax structures, other regulations and restrictions,
and foreign exchange rate volatility. Accordingly, our future
results could be materially adversely impacted by changes in
these or other factors. In addition, at June 30, 2006, we
held balances in cash, cash equivalents and investments outside
the U.S. totaling approximately $1.4 billion.
Transaction
Exposure:
As of June 30, 2006, we had outstanding forward foreign
exchange hedge contracts with notional values equivalent to
approximately $134.0 million. The hedge contracts are used
to offset changes in the functional currency value of assets and
liabilities denominated in foreign currencies as a result of
currency fluctuations.
35
Transaction gains and losses on the contracts and the assets and
liabilities are recognized each period in our condensed
consolidated statement of income.
Translation
Exposure:
Foreign exchange rate fluctuations may adversely impact our
consolidated financial position as well as our consolidated
results of operations. Foreign exchange rate fluctuations may
adversely impact our financial position as the assets and
liabilities of our foreign operations are translated into
U.S. dollars in preparing our condensed consolidated
balance sheet. The effect of foreign exchange rate fluctuations
on our consolidated financial position for the six months ended
June 30, 2006, was a net translation gain of approximately
$282.4 million. This gain is recognized as an adjustment to
stockholders equity through accumulated other
comprehensive income. Additionally, foreign exchange rate
fluctuations may adversely impact our consolidated results of
operations as exchange rate fluctuations on transactions
denominated in currencies other than our functional currencies
result in gains and losses that are reflected in our condensed
consolidated statement of income.
We consolidate our international subsidiaries by converting them
into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52, Foreign Currency
Translation (FAS 52). The results of operations and
our financial position will fluctuate when there is a change in
foreign currency exchange rates. From time to time, we enter
into transactions to hedge portions of our foreign currency
denominated earnings translation exposure using both foreign
currency options and forward contracts. All contracts that hedge
translation exposure mature ratably over the quarter in which
they are executed. During the three and six months ended
June 30, 2006, the realized gains and losses related to
these hedges were not significant.
Economic
Exposure:
We currently charge our international subsidiaries on a monthly
basis for their use of intellectual property and technology and
for certain corporate services provided by eBay and PayPal.
These charges are denominated in Euros and these forecasted
inter-company transactions represent a foreign currency cash
flow exposure. To reduce foreign exchange risk relating to these
forecasted inter-company transactions, we entered into forward
foreign exchange contracts during the three months ended
June 30, 2006. The objective of the forward contracts is to
ensure that the U.S. dollar-equivalent cash flows are not
adversely affected by changes in the U.S. dollar/Euro
exchange rate. Pursuant to Statement of Financial Accounting
Standards No. 133 Accounting for Derivative
Instruments and Hedging Activities (FAS 133), we
expect the hedge of certain of these forecasted transactions
using the forward contracts to be highly effective in offsetting
potential changes in cash flows attributed to a change in the
U.S. dollar/Euro exchange rate. Accordingly, we record as a
component of other comprehensive income all unrealized gains and
losses related to the forward contracts that receive hedge
accounting treatment. We record all unrealized gains and losses
in interest and accumulated other income, net, related to the
forward contracts that do not receive hedge accounting treatment
pursuant to FAS 133. During the three and six months ended
June 30, 2005 and 2006, the realized gains and losses
related to these hedges were not significant. The notional
amount of our economic hedges receiving hedge accounting
treatment and the loss, net of gains, recorded to accumulated
other comprehensive income as of June 30, 2006 were
$67.7 million and $2.9 million, respectively.
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|
Item 4:
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Controls
and Procedures
|
(a) Evaluation of disclosure controls and
procedures. Based on the evaluation of our
disclosure controls and procedures (as defined in Securities
Exchange Act of 1934
Rules 13a-15(e)
and
15d-15(e))
required by Securities Exchange Act
Rules 13a-15(b)
or
15d-15(b),
our Chief Executive Officer and our Chief Financial Officer have
concluded that as of the end of the period covered by this
report, our disclosure controls and procedures were effective.
(b) Changes in internal controls. There
were no changes in our internal control over financial reporting
that occurred during our most recent fiscal quarter that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
36
PART II: OTHER
INFORMATION
|
|
Item 1:
|
Legal
Proceedings
|
In April 2001, two of our European subsidiaries, eBay GmbH and
eBay International AG, were sued by Montres Rolex S.A. and
certain of its affiliates in the regional court of Cologne,
Germany. The suit subsequently was transferred to the regional
court in Düsseldorf, Germany. Rolex alleged that our
subsidiaries were infringing Rolexs trademarks as a result
of users selling counterfeit Rolex watches through our German
website. The suit also alleged unfair competition. Rolex sought
an order enjoining the sale of Rolex-branded watches on the
website as well as damages. In December 2002, a trial was held
in the matter and the court ruled in favor of eBay on all causes
of action. Rolex appealed the ruling to the Higher Regional
Court of Düsseldorf, and the appeal was heard in October
2003. In February 2004, the court rejected Rolexs appeal
and ruled in our favor. Rolex has appealed the ruling to the
German Federal Supreme Court, and a hearing is expected in
December 2006. In September 2004, the German Federal Supreme
Court issued its written opinion in favor of Rolex in a case
involving an unrelated company, ricardo.de AG, but somewhat
comparable legal theories. Although it is not yet clear what the
ultimate effect of the reasoning of the German Federal Supreme
Courts ricardo.de decision will have when applied to eBay,
we believe the Courts decision has resulted in an increase
in similar litigation against us in Germany, although we do not
currently believe that it will require a significant change in
our business practices.
In September 2001, MercExchange LLC filed a complaint against
us, our Half.com subsidiary and ReturnBuy, Inc. in the
U.S. District Court for the Eastern District of Virginia
(No. 2:01-CV-736)
alleging infringement of three patents (relating to online
consignment auction technology, multiple database searching and
electronic consignment systems) and seeking a permanent
injunction and damages (including treble damages for willful
infringement). In October 2002, the court granted in part our
summary judgment motion, effectively invalidating the patent
related to online auction technology and rendering it
unenforceable. This ruling left only two patents in the case.
Following a trial, in May 2003 the jury returned a verdict
finding that eBay had willfully infringed one and Half.com had
willfully infringed both of the patents in the suit, awarding
$35 million in compensatory damages. Both parties filed
post-trial motions, and in August 2003, the court entered
judgment for MercExchange in the amount of approximately
$30 million plus pre-judgment interest and post-judgment
interest in an amount to be determined, while denying
MercExchanges request for an injunction and
attorneys fees. We appealed the verdict and judgment in
favor of MercExchange and MercExchange filed a cross-appeal of
the granting in part of our summary judgment motion and the
denial of its request for an injunction and attorneys fees.
In March 2005, the U.S. Court of Appeals for the Federal
Circuit issued a ruling in the appeal of the MercExchange patent
litigation suit which, among other things (1) invalidated
all claims asserted against eBay and Half.com arising out of the
multiple database search patent and reduced the verdict amount
by $4.5 million; (2) upheld the electronic consignment
system patent; (3) affirmed the district courts
refusal to award attorneys fees or enhanced damages
against us; (4) reversed the district courts order
granting summary judgment in our favor regarding the auction
patent; and (5) reversed the district courts refusal
to grant an injunction and remanded that issue to the district
court for further proceedings. The decision was stayed pending
U.S. Supreme Court review of the injunction issue. In May
2006, the U.S. Supreme Court reversed the Court of
Appeals decision on whether an injunction should have been
issued and remanded the case back to the district court for
further action. In parallel with the federal court proceedings,
at our request, the U.S. Patent and Trademark Office is
actively reexamining each of the patents in suit, having found
that substantial questions exist regarding the validity of the
claims contained in them. In January 2005, the Patent and
Trademark Office issued an initial ruling rejecting all of the
claims contained in the patent that related to online auctions;
in March 2005, the Patent and Trademark Office issued an initial
ruling rejecting all of the claims contained in the patent that
related to electronic consignment systems; and in May 2005, the
Patent and Trademark Office issued an initial ruling rejecting
all of the claims contained in the patent that related to
multiple database searching. In March 2006, the Patent and
Trademark Office affirmed its earlier ruling rejecting the
claims contained in the patent that related to electronic
consignment systems. Even if successful, our litigation of these
matters will continue to be costly. In addition, as a
precautionary measure, we have modified certain functionality of
our websites and business practices in a manner which we believe
would avoid any further infringement. For this reason, we
believe that any injunction that might be issued by the district
court will not have any impact on our business. We also believe
we have appropriate reserves for this litigation.
37
Nonetheless, if the district court were to issue an injunction
on remand, and if the modifications to the functionality of our
websites and business practices are not sufficient to make them
non-infringing, we would likely be forced to pay significant
additional damages and licensing fees
and/or
modify our business practices in an adverse manner.
In February 2005, eBay was sued in Superior Court of the State
of California, County of Santa Clara (No. 105CV035930)
in a purported class action alleging that certain bidding
features of our site constitute shill bidding for
the purpose of artificially inflating bids placed by buyers on
the site. The complaint alleges violations of Californias
Auction Act, Californias Consumer Remedies Act, and unfair
competition. The complaint seeks injunctive relief, damages, and
a constructive trust. In April 2005, we filed a demurrer seeking
to dismiss the complaint, and a hearing on the demurrer was held
in February 2006. In March 2006, the parties reached tentative
agreement on the terms of a settlement. The court must approve
the terms of the settlement in order for it to become final. The
estimated settlement was accrued in our consolidated income
statement for the year ended December 31, 2005.
In March 2005, eBay, PayPal, and an eBay seller were sued in
Supreme Court of the State of New York, County of Kings
(No. 6125/05) in a purported class action alleging that
certain disclosures regarding PayPals Buyer Protection
Policy, users chargeback rights, and the effects of
users choice of funding mechanism are deceptive
and/or
misleading. The complaint alleged misrepresentation on the part
of eBay and PayPal, breach of contract and deceptive trade
practices by PayPal, and that PayPal and eBay have jointly
violated the civil RICO statute (18 U.S.C.
Section 1961(4)). In April 2005, eBay and PayPal removed
the case to the U.S. District Court for the Eastern
District of New York and the plaintiffs filed an amended
complaint in the U.S. District Court
(No. 05-CV-01720)
repeating the allegations of the initial complaint but dropping
the civil RICO allegations. The complaint seeks injunctive
relief, compensatory damages, and punitive damages. Following
several mediation sessions, the parties reached a tentative
settlement in December 2005 and executed a Memorandum of
Understanding in March 2006. The parties are engaged in the
process of finalizing the settlement documentation. The court
must approve the terms of the settlement in order for it to
become final. The estimated settlement was accrued in our
consolidated income statement for the year ended
December 31, 2005.
In June 2006, Net2Phone, Inc. filed a lawsuit in the
U.S. District Court for the District of New Jersey
(No. 06-2469)
alleging that eBay Inc., Skype Technologies S.A., and Skype Inc.
infringed five patents owned by Net2Phone relating to
point-to-point
internet protocol. The suit seeks an injunction against
continuing infringement, unspecified damages, including treble
damages for willful infringement, and interest, expenses, and
fees. This case is at a very early stage and we have not
received a schedule from the court, or filed any responsive
pleadings. We believe that we have meritorious defenses and
intend to defend ourselves vigorously.
Other third parties have from time to time claimed, and others
may claim in the future, that we have infringed their
intellectual property rights. We have been notified of several
potential patent disputes, and expect that we will increasingly
be subject to patent infringement claims as our services expand
in scope and complexity. In particular, we expect to face
additional patent infringement claims involving services we
provide, including various aspects of our Payments and
Communications businesses. We have in the past been forced to
litigate such claims. We may also become more vulnerable to
third-party claims as laws such as the Digital Millennium
Copyright Act, the Lanham Act and the Communications Decency Act
are interpreted by the courts and as we expand geographically
into jurisdictions where the underlying laws with respect to the
potential liability of online intermediaries like ourselves are
either unclear or less favorable. These claims, whether
meritorious or not, could be time consuming and costly to
resolve, cause service upgrade delays, require expensive changes
in our methods of doing business, or could require us to enter
into costly royalty or licensing agreements.
From time to time, we are involved in other disputes or
regulatory inquiries that arise in the ordinary course of
business. The number and significance of these disputes and
inquiries are increasing as our business expands and our company
grows larger. Any claims or regulatory actions against us,
whether meritorious or not, could be time consuming, result in
costly litigation, require significant amounts of management
time, and result in the diversion of significant operational
resources.
38
Risk
Factors That May Affect Results of Operations and Financial
Condition
The risks and uncertainties described below are not the only
ones facing us. Other events that we do not currently anticipate
or that we currently deem immaterial also may affect our results
of operations and financial condition.
Our
operating results may fluctuate.
Our operating results have varied on a quarterly basis during
our operating history. Our operating results may fluctuate
significantly as a result of a variety of factors, many of which
are outside our control. Factors that may affect our operating
results include the following:
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|
|
our ability to retain an active user base, to attract new users,
and to encourage existing users to list items for sale, purchase
items through our websites, or use our payment service or
communication software and products;
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|
the volume, size, timing, and completion rate of transactions
using our websites or technology;
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|
the amount and timing of operating costs and capital
expenditures relating to the maintenance and expansion of our
businesses, operations, and infrastructure;
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|
our ability to integrate, manage, and profitably expand our
newly-acquired Skype business;
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|
our ability to successfully integrate and manage other recent
and prospective acquisitions;
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|
regulatory actions imposing obligations on our businesses
(including Skype) or our users;
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|
the actions of our competitors, including the introduction of
new sites, services, and products;
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|
consumer confidence in the safety and security of transactions
using our websites or technology and our ability to manage the
costs of our consumer protection programs;
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the cost and availability of online and traditional advertising,
and the success of our brand building and marketing campaigns;
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new laws or regulations, or interpretations of existing laws or
regulations, that harm our business models or restrict the
Internet, electronic commerce, online payments, or online
communications;
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|
our ability to comply with the requirements of entities whose
services are required for our operations, such as credit card
associations;
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|
our ability to upgrade and develop our systems, infrastructure,
and customer service capabilities to accommodate growth and to
improve our websites at a reasonable cost while maintaining 24/7
operations;
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|
technical difficulties or service interruptions involving our
websites or services provided to us or our users by third
parties;
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the costs and results of litigation that involves us;
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our ability to increase the acceptance of PayPal by online
merchants outside of the eBay marketplaces;
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our ability to expand PayPals product offerings outside of
the U.S. (including our ability to obtain any necessary
regulatory approvals);
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our ability to develop product enhancements at a reasonable cost
and to develop programs and features in a timely manner;
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our ability to manage PayPals transaction loss and credit
card chargeback rates and payment funding mix;
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the success of our geographic and product expansions;
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our ability to attract new personnel in a timely and effective
manner and to retain key employees;
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39
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the continued financial strength of our technology suppliers and
other parties with whom we have commercial relations;
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continued consumer acceptance of the Internet as a medium for
commerce and communication in the face of increasing publicity
about fraud, spoofing, viruses, and other dangers of the
Internet;
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|
general economic conditions and those economic conditions
specific to the Internet and
e-commerce
industries; and
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|
geopolitical events such as war, threat of war, or terrorist
actions.
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The increased variety of services offered on our websites makes
it difficult for us to forecast the level or source of our
revenues or earnings accurately. In view of the rapidly evolving
nature of our business and our limited operating history, we
believe that
period-to-period
comparisons of our operating results may not be meaningful, and
you should not rely upon them as an indication of future
performance. We do not have backlog, and substantially all of
our net revenues each quarter come from transactions involving
sales or payments during that quarter. Due to the inherent
difficulty in forecasting revenues it is also difficult to
forecast income statement expenses as a percentage of net
revenues. Quarterly and annual income statement expenses as a
percentage of net revenues may be significantly different from
historical or projected rates. Our operating results in one or
more future quarters may fall below the expectations of
securities analysts and investors. In that event, the trading
price of our common stock would almost certainly decline.
We may
not maintain our level of profitability or rates of
growth.
We believe that our continued profitability and growth will
depend in large part on our ability to do the following:
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attract new users, keep existing users active on our websites,
and increase the activity levels of our active users;
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react to changes in consumer use of the Internet and develop new
sources of monetization for some of our services;
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manage the costs of our business, including the costs associated
with maintaining and developing our websites, customer support,
transaction and chargeback rates, consumer protection programs,
and international and product expansion;
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maintain sufficient transaction volume to attract buyers and
sellers;
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increase the awareness of our brands; and
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provide our customers with superior community, customer support,
and trading, communication, and payment experiences.
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We invest heavily in marketing and promotion, customer support,
and further development of the operating infrastructure for our
core and recently acquired operations. Some of this investment
entails long-term contractual commitments. As a result, we may
be unable to adjust our spending rapidly enough to compensate
for any unexpected revenue shortfall, which may harm our
profitability. In addition, we are spending in advance of
anticipated growth, which may also harm our profitability.
Growth rates in our most established markets, such as Germany
and the U.S., have declined over time and may continue to do so
as the existing base of users and transactions becomes larger.
Because a large percentage of PayPal transactions originate on
the eBay platform, any decline in growth rates in major eBay
Marketplace markets would also have an adverse effect on
PayPals growth rate. The expected future growth of our
PayPal, Skype and Shopping.com businesses may also cause
downward pressure on our profit margin because those businesses
have lower gross margins than our eBay trading platforms.
There
are many risks associated with our international
operations.
Our international expansion has been rapid and we have only
limited experience in many of the countries in which we now do
business. Our international business, especially in Germany, the
U.K., and South Korea, has also
40
become critical to our revenues and profits. Net revenues
outside the United States accounted for approximately 46% and
47%, respectively, of our net revenues in 2005 and the first six
months of 2006. Expansion into international markets requires
management attention and resources and requires us to localize
our service to conform to local cultures, standards, and
policies. The commercial, Internet, and transportation
infrastructure in lesser-developed countries may make it
difficult for us to replicate our business model. In many
countries, we compete with local companies who understand the
local market better than we do, and we may not benefit from
first-to-market
advantages. We may not be successful in expanding into
particular international markets or in generating revenues from
foreign operations. For example, in 2002 we withdrew our eBay
marketplace offering from the Japanese market. Even if we are
successful, we expect the costs of operating new sites to exceed
our net revenues for at least 12 months in most countries.
As we continue to expand internationally, including through the
expansion of PayPal, Skype, and Shopping.com, we are subject to
risks of doing business internationally, including the following:
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regulatory requirements, including regulation of Internet
services, telecommunications, auctioneering, professional
selling, distance selling, communications, banking, and money
transmitting, that may limit or prevent the offering of our
services in some jurisdictions, prevent enforceable agreements
between sellers and buyers, prohibit the listing of certain
categories of goods, require product changes, require special
licensure, subject us to special taxes, or limit the transfer of
information between eBay and our affiliates;
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legal uncertainty regarding our liability for the listings and
other content provided by our users, including uncertainty as a
result of less Internet-friendly legal systems, unique local
laws, and lack of clear precedent or applicable law;
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difficulties in integrating with local payment providers,
including banks, credit and debit card associations, and
electronic fund transfer systems or with the local
telecommunications infrastructure;
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differing levels of retail distribution, shipping, and
communications infrastructures;
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different employee/employer relationships and the existence of
workers councils and labor unions;
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difficulties in staffing and managing foreign operations;
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longer payment cycles, different accounting practices, and
greater problems in collecting accounts receivable;
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potentially adverse tax consequences, including local taxation
of our fees or of transactions on our websites;
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higher telecommunications and Internet service provider costs;
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strong local competitors;
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different and more stringent consumer protection, data
protection, and other laws;
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cultural ambivalence towards, or non-acceptance of, online
trading;
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seasonal reductions in business activity;
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expenses associated with localizing our products, including
offering customers the ability to transact business in the local
currency;
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laws and business practices that favor local competitors or
prohibit foreign ownership of certain businesses;
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profit repatriation restrictions, foreign currency exchange
restrictions, and exchange rate fluctuations;
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volatility in a specific countrys or regions
political or economic conditions; and
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differing intellectual property laws.
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Some of these factors may cause our international costs of doing
business to exceed our comparable domestic costs. As we expand
our international operations and have additional portions of our
international revenues denominated in foreign currencies, we
also could become subject to increased difficulties in
collecting accounts receivable, repatriating money without
adverse tax consequences, and risks relating to foreign currency
exchange
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rate fluctuations. The impact of currency exchange rate
fluctuations is discussed in more detail under We are
exposed to fluctuations in currency exchange rates, below.
We are continuing to expand PayPals services
internationally. We have limited experience with the payments
business outside of the U.S. In some countries, expansion
of PayPals business may require a close commercial
relationship with one or more local banks or a shared ownership
interest with a local entity. We do not know if these or other
factors may prevent, delay, or limit PayPals expansion or
reduce its profitability. Any limitation on our ability to
expand PayPal internationally could harm our business.
We maintain a portion of Shopping.coms research and
development facilities and personnel in Israel, and as a result,
political, economic and military conditions in Israel affect
those operations. Increased hostilities or terrorism within
Israel or armed hostilities between Israel and neighboring
states could make it more difficult for us to continue our
operations in Israel, which could increase our costs. In
addition, many of Shopping.coms employees in Israel could
be required to serve in the military for extended periods of
time under emergency circumstances. Recent hostilities in Israel
and Lebanon have resulted in the call up of some Israeli reserve
units; Shopping.com personnel could be among those required to
serve. Shopping.coms Israeli operations could be disrupted
by the absence of employees due to military service, which could
adversely affect its business.
We are
exposed to fluctuations in currency exchange
rates.
Because we conduct a significant and growing portion of our
business outside the United States but report our results in
U.S. dollars, we face exposure to adverse movements in
currency exchange rates. In connection with its multi-currency
service, PayPal fixes exchange rates twice per day, and may face
financial exposure if it incorrectly fixes the exchange rate or
if exposure reports are delayed. PayPal also holds some
corporate and customer funds in
non-U.S. currencies,
and thus its financial results are affected by the translation
of these
non-U.S. currencies
into U.S. dollars. In addition, the results of operations
of our internationally focused websites are exposed to foreign
exchange rate fluctuations as the financial results of the
applicable subsidiaries are translated from the local currency
into U.S. dollars upon consolidation. If the
U.S. dollar weakens against foreign currencies, the
translation of these foreign-currency-denominated transactions
will result in increased net revenues, operating expenses, and
net income. Similarly, our net revenues, operating expenses, and
net income will decrease if the U.S. dollar strengthens
against foreign currencies. Net revenues were negatively
impacted by foreign currency translation of approximately
$0.6 million and $50.8 million in the second quarter
and first six months of 2006 as compared to the same periods of
the prior year. Operating income was negatively impacted by
foreign currency translation of approximately $3.1 million
and $28.2 million in the second quarter and first six
months of 2006, respectively, as compared to the same periods of
the prior year. As exchange rates vary, net sales and other
operating results, when translated, may differ materially from
expectations. In particular, to the extent the U.S. dollar
strengthens against the Euro and British Pound, our European
revenues and profits will be reduced as a result of these
translation adjustments. In addition, to the extent the
U.S. dollar strengthens against the Euro and the British
Pound, cross-border trade related to purchases of
dollar-denominated goods by
non-U.S. purchasers
may decrease, and that decrease may not be offset by a
corresponding increase in cross-border trade involving purchases
by U.S. buyers of goods denominated in other currencies.
While we from time to time enter into transactions to hedge
portions of our foreign currency translation exposure, it is
impossible to perfectly predict or completely eliminate the
effects of this exposure.
Skype
depends on key technology that is licensed from third
parties.
Skype licenses technology underlying certain components of its
software from third parties it does not control, including the
technology underlying its
peer-to-peer
architecture and firewall traversal technology, and the audio
and video compression/decompression used to provide high sound
and video quality. All of these technologies are key to the
software Skype provides. In addition, various other technologies
used by Skype are licensed from third parties. Although Skype
has contracts in place with its third party technology
providers, there can be no assurance that the licensed
technology or other technology that we may seek to license in
the future will continue to be available on commercially
reasonable terms, or at all. The loss of, or inability to
maintain, existing licenses could result in delays, a decrease
in service quality, or a complete failure of Skypes
product until equivalent technology or suitable alternatives can
be developed, identified, licensed and integrated. While we
believe Skype has the ability to
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either extend these licenses on commercially reasonable terms or
identify and obtain or develop suitable alternative products,
the costs associated with licensing or developing such products
could be high. Any failure to maintain these licenses on
commercially reasonable terms or to license or develop
alternative technologies would harm Skypes business.
Acquisitions
could result in operating difficulties, dilution, and other
harmful consequences.
We have acquired a number of businesses in the past, and we
expect to continue to evaluate and consider a wide array of
potential strategic transactions, including business
combinations, acquisitions and dispositions of businesses,
technologies, services, products and other assets. At any given
time we may be engaged in discussions or negotiations with
respect to one or more of these types of transactions. Any of
these transactions could be material to our financial condition
and results of operations. The process of integrating any
acquired business may create unforeseen operating difficulties
and expenditures and is itself risky. The areas where we may
face difficulties include:
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diversion of management time, as well as a shift of focus from
operating the businesses to issues related to integration and
administration, particularly given the large number and size and
varying scope of our recent acquisitions, and, in the case of
Skype, the complex earn-out structure associated with the
transaction;
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declining employee morale and retention issues resulting from
changes in, or acceleration of, compensation, or changes in
reporting relationships, future prospects, or the direction of
the business;
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the need to integrate each companys accounting,
management, information, human resource and other administrative
systems to permit effective management, and the lack of control
if such integration is delayed or not implemented;
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the need to implement controls, procedures and policies
appropriate for a larger public company at companies that prior
to acquisition had lacked such controls, procedures and
policies; and
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in some cases, including in connection with PayPals recent
acquisition of VeriSigns payment gateway business, the
need to transition operations, users,
and/or
customers onto our existing platforms.
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Foreign acquisitions involve special risks, including those
related to integration of operations across different cultures
and languages, currency risks, and the particular economic,
political, and regulatory risks associated with specific
countries. Moreover, we may not realize the anticipated benefits
of any or all of our acquisitions. Future acquisitions or
mergers may result in a need to issue additional equity
securities, spend our cash, or incur debt, liabilities, or
amortization expenses related to intangible assets, any of which
could reduce our profitability and harm our business.
System
failures could harm our business.
We have experienced system failures from time to time, and any
interruption in the availability of our websites will reduce our
current revenues and profits, could harm our future revenues and
profits, and could subject us to regulatory scrutiny.
eBays primary website has been interrupted for periods of
up to 22 hours, and our PayPal site suffered intermittent
unavailability over a five-day period in October 2004. Any
unscheduled interruption in our services results in an
immediate, and possibly substantial, loss of revenues. Frequent
or persistent interruptions in our services could cause current
or potential users to believe that our systems are unreliable,
leading them to switch to our competitors or to avoid our sites,
and could permanently harm our reputation and brands. These
interruptions increase the burden on our engineering staff,
which, in turn, could delay our introduction of new features and
services on our sites. Because PayPal is a regulated financial
entity, frequent or persistent site interruptions could lead to
regulatory inquiries. These inquiries could result in fines,
penalties, or mandatory changes to PayPals business
practices, and ultimately could cause PayPal to lose existing
licenses it needs to operate or prevent it from obtaining
additional licenses that it needs to expand. Finally, because
our customers may use our products for critical transactions,
any system failures could result in damage to our
customers businesses. These customers could seek
significant compensation from us for their losses. Even if
unsuccessful, this type of claim likely would be time consuming
and costly for us to address.
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Although our systems have been designed around industry-standard
architectures to reduce downtime in the event of outages or
catastrophic occurrences, they remain vulnerable to damage or
interruption from earthquakes, floods, fires, power loss,
telecommunication failures, terrorist attacks, computer viruses,
computer
denial-of-service
attacks, and similar events. Some of our systems, including our
Shopping.com and Skype websites, are not fully redundant, and
our disaster recovery planning is not sufficient for all
eventualities. Our systems are also subject to break-ins,
sabotage, and intentional acts of vandalism. Despite any
precautions we may take, the occurrence of a natural disaster, a
decision by any of our third-party hosting providers to close a
facility we use without adequate notice for financial or other
reasons, or other unanticipated problems at our hosting
facilities could result in lengthy interruptions in our
services. We do not carry business interruption insurance
sufficient to compensate us for losses that may result from
interruptions in our service as a result of system failures.
Our
growth will depend on our ability to develop our brands, and
these efforts may be costly.
Our historical growth has been largely attributable to word of
mouth, and to frequent and high visibility national and local
media coverage. We believe that continuing to strengthen our
brands will be critical to achieving widespread acceptance of
our services, and will require an increased focus on active
marketing efforts across all of our brands, including PayPal.
The demand for and cost of online and traditional advertising
have been increasing, and may continue to increase. Accordingly,
we will need to spend increasing amounts of money on, and devote
greater resources to, advertising, marketing, and other efforts
to create and maintain brand loyalty among users. During 2004
and 2005, we significantly increased the number of brands we are
supporting, adding Rent.com, Shopping.com, Kijiji, and Skype,
among others. Each of these brands requires its own resources,
increasing the costs of our branding efforts. Brand promotion
activities may not yield increased revenues, and even if they
do, any increased revenues may not offset the expenses incurred
in building our brands. If we do attract new users to our
services, they may not conduct transactions using our services
on a regular basis. If we fail to promote and maintain our
brands, or if we incur substantial expenses in an unsuccessful
attempt to promote and maintain our brands, our business would
be harmed.
Our
business and users may be subject to sales tax and other
taxes.
The application of indirect taxes (such as sales and use tax,
value added tax, or VAT, goods and services tax, business tax,
and gross receipt tax) to
e-commerce
businesses such as eBay and our users is a complex and evolving
issue. Many of the fundamental statutes and regulations that
impose these taxes were established before the growth of the
Internet and
e-commerce.
In many cases, it is not clear how existing statutes apply to
the Internet or
e-commerce.
In addition, some jurisdictions have implemented or may
implement laws specifically addressing the Internet or some
aspect of
e-commerce.
The application of existing, new, or future laws could have
adverse effects on our business.
Several proposals have been made at the U.S. state and
local level that would impose additional taxes on the sale of
goods and services through the Internet. These proposals, if
adopted, could substantially impair the growth of
e-commerce,
and could diminish our opportunity to derive financial benefit
from our activities. The U.S. federal governments
moratorium on states and other local authorities imposing access
or discriminatory taxes on the Internet is scheduled to expire
in November 2007. This moratorium does not prohibit federal,
state, or local authorities from collecting taxes on our income
or from collecting taxes that are due under existing tax rules.
In conjunction with the Streamlined Sales Tax
Project an ongoing, multi-year effort by U.S.,
state, and local governments to require collection and
remittance of distant sales tax by
out-of-state
sellers bills have been introduced in the
U.S. Congress to overturn the Supreme Courts Quill
decision, which limits the ability of state governments to
require sellers outside of their own state to collect and remit
sales taxes on goods purchased by in-state residents. An
overturning of the Quill decision would harm our users
and our business.
We do not collect taxes on the goods or services sold by users
of our services. One or more states or foreign countries may
seek to impose a tax collection or reporting or record-keeping
obligation on companies such as eBay that engage in or
facilitate
e-commerce.
Such an obligation could be imposed if eBay were ever deemed to
be the legal agent of eBay sellers by a jurisdiction in which
eBay operates. A successful assertion by one or more states or
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foreign countries that we should collect taxes on the exchange
of merchandise or services on our websites would harm our
business.
In July 2003, in compliance with the changes brought about by
the European Union (EU) VAT directive on electronically
supplied services, eBay began collecting VAT on the fees
charged to EU sellers on eBay sites catering to EU residents.
eBay also pays input VAT to suppliers within the various
countries the company operates. In most cases, eBay is entitled
to reclaim input VAT from the various countries with regard to
our own payments to suppliers or vendors. However, because of
our unique business model, the application of the laws and rules
that allow such reclamation is sometimes uncertain. A successful
assertion by one or more countries that eBay is not entitled to
reclaim VAT would harm our business.
We continue to work with the relevant tax authorities and
legislators to clarify eBays obligations under new and
emerging laws and regulations. Passage of new legislation and
the imposition of additional tax requirements could harm eBay
sellers and our business. There have been, and will continue to
be, substantial ongoing costs associated with complying with the
various indirect tax requirements in the numerous markets in
which eBay conducts or will conduct business.
Failure
to deal effectively with fraudulent transactions and customer
disputes would increase our loss rate and harm our
business.
PayPals highly automated and liquid payment service makes
PayPal an attractive target for fraud. In configuring its
service, PayPal faces an inherent trade-off between customer
convenience and security. Identity thieves and those committing
fraud using stolen credit card or bank account numbers can
potentially steal large amounts of money from businesses such as
PayPal. We believe that several of PayPals current and
former competitors in the electronic payments business have gone
out of business or significantly restricted their businesses
largely due to losses from this type of fraud. While PayPal uses
advanced anti-fraud technologies, we expect that technically
knowledgeable criminals will continue to attempt to circumvent
PayPals anti-fraud systems. In addition, PayPals
service could be subject to employee fraud or other internal
security breaches, and PayPal would be required to reimburse
customers for any funds stolen as a result of such breaches.
Merchants could also request reimbursement, or stop using
PayPal, if they are affected by buyer fraud.
PayPal incurs substantial losses from merchant fraud, including
claims from customers that merchants have not performed or that
their goods or services do not match the merchants
description. PayPal also incurs losses from claims that the
customer did not authorize the purchase, from buyer fraud, from
erroneous transmissions, and from customers who have closed bank
accounts or have insufficient funds in them to satisfy payments.
In addition to the direct costs of such losses, if they are
related to credit card transactions and become excessive they
could result in PayPal losing the right to accept credit cards
for payment. If PayPal were unable to accept credit cards, the
velocity of trade on eBay could decrease, in which case our
business would further suffer. PayPal has been assessed
substantial fines for excess charge-backs in the past, and
excessive charge-backs may arise in the future. PayPal has taken
measures to detect and reduce the risk of fraud, but these
measures may not be effective against new forms of fraud. If
these measures do not succeed, our business will suffer.
PayPal offers a buyer protection program that refunds to buyers
up to $1,000 in certain eBay transactions if they do not receive
the goods they purchased or if the goods differ significantly
from what was described by the seller. If PayPal makes such a
refund, it seeks to collect reimbursement from the seller, but
may not be able to receive any funds from the seller. The PayPal
buyer protection program has increased PayPals loss rate
and could cause future fluctuations in PayPals loss rate.
For the year ended December 31, 2005 and the first six
months of 2006, PayPals transaction loss totaled
$73.8 million and $49.9 million, representing 0.27%
and 0.28% of PayPals total payment volume, respectively.
eBay faces similar risks with respect to fraudulent activities
on its websites. eBay periodically receives complaints from
users who may not have received the goods that they had
purchased. In some cases individuals have been arrested and
convicted for fraudulent activities using our websites. eBay
also receives complaints from sellers who have not received
payment for the goods that a buyer had contracted to purchase.
Non-payment may occur because of miscommunication, because a
buyer has changed his or her mind and decided not to honor the
contract to purchase the item, or because the buyer bid on the
item maliciously, in order to harm either the seller or eBay. In
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some European jurisdictions, buyers may also have the right to
withdraw from a sale made by a professional seller within a
specified time period.
While eBay can suspend the accounts of users who fail to fulfill
their payment or delivery obligations to other users, eBay does
not have the ability to require users to make payment or deliver
goods, or otherwise make users whole other than through our
limited buyer protection programs. Other than through these
programs, eBay does not compensate users who believe they have
been defrauded by other users, although users who pay through
PayPal may have reimbursement rights from their credit card
company or bank, which in turn will seek reimbursement from
PayPal. eBay also periodically receives complaints from buyers
as to the quality of the goods purchased. We expect to continue
to receive communications from users requesting reimbursement or
threatening or commencing legal action against us if no
reimbursement is made. Our liability for these sort of claims is
only beginning to be clarified and may be higher in some
non-U.S. jurisdictions
than it is in the U.S. Litigation involving liability for
third-party actions could be costly for us, divert management
attention, result in increased costs of doing business, lead to
adverse judgments, or otherwise harm our business. In addition,
affected users will likely complain to regulatory agencies that
could take action against us, including imposing fines or
seeking injunctions.
Negative publicity and user sentiment generated as a result of
fraudulent or deceptive conduct by users of our eBay and PayPal
services could damage our reputation, reduce our ability to
attract new users or retain our current users, and diminish the
value of our brand names.
Changes
to credit card association fees, rules, or practices could harm
PayPals business.
Because PayPal is not a bank, it cannot belong to or directly
access credit card associations, such as Visa and MasterCard. As
a result, PayPal must rely on banks or payment processors to
process transactions, and must pay a fee for this service. From
time to time, credit card associations may increase the
interchange fees that they charge for each transaction using one
of their cards. MasterCard and Visa each implemented increases
in their interchange fees for credit cards in April 2005.
PayPals credit card processors have the right to pass any
increases in interchange fees on to PayPal as well as increase
their own fees for processing. These increased fees increase
PayPals operating costs and reduce its profit margins.
PayPal is also required by its processors to comply with credit
card association operating rules, and PayPal has agreed to
reimburse its processors for any fines they are assessed by
credit card associations as a result of any rule violations by
PayPal. The credit card associations and their member banks set
and interpret the credit card rules. Some of those member banks
compete with PayPal. Visa, MasterCard, American Express, or
Discover could adopt new operating rules or re-interpret
existing rules that PayPal or its processors might find
difficult or even impossible to follow. As a result, PayPal
could lose its ability to give customers the option of using
credit cards to fund their payments. If PayPal were unable to
accept credit cards, its business would be seriously damaged. In
addition, the velocity of trade on eBay could decrease and our
business would further suffer.
PayPal is required to comply with credit card associations
special operating rules for Internet payment services. PayPal
and its credit card processors have implemented specific
business processes for merchant customers in order to comply
with these rules, but any failure to comply could result in
fines, the amount of which would be within Visas and
MasterCards discretion. PayPal also could be subject to
fines from MasterCard and Visa if it fails to detect that
merchants are engaging in activities that are illegal or
activities that are considered high risk, primarily
the sale of certain types of digital content. For high
risk merchants, PayPal must either prevent such merchants
from using PayPal or register such merchants with MasterCard and
Visa and conduct additional monitoring with respect to such
merchants. PayPal has incurred fines from its credit card
processor relating to PayPals failure to detect the use of
its service by high risk merchants. The amount of
these fines has not been material, but any additional fines in
the future would likely be for larger amounts, could become
material, and could result in a termination of PayPals
ability to accept credit cards or changes in PayPals
process for registering new customers, which would seriously
damage PayPals business.
Changes
in PayPals funding mix could adversely affect
PayPals results.
PayPal pays significant transaction fees when senders fund
payment transactions using credit cards, nominal fees when
customers fund payment transactions by electronic transfer of
funds from bank accounts, and no fees
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when customers fund payment transactions from an existing PayPal
account balance. Senders fund a significant portion of
PayPals payment volume using credit cards, and
PayPals financial success will remain highly sensitive to
changes in the rate at which its senders fund payments using
credit cards. Senders may prefer funding using credit cards
rather than bank account transfers for a number of reasons,
including the ability to dispute and reverse charges if
merchandise is not delivered or is not as described, the ability
to earn frequent flier miles or other incentives offered by
credit cards, the ability to defer payment, or a reluctance to
provide bank account information to PayPal. PayPal has received
inquiries regarding its disclosure practices with regard to
funding mechanisms from the attorneys general of a number of
states, and in March 2005, a complaint seeking class action
status was filed alleging, among other things, that
PayPals disclosure regarding the effects of users
choice of funding mechanism is deceptive. While we believe
PayPals disclosure is legal and accurate, any required
change to our disclosure practices could result in increased use
of credit card funding, damaging PayPals business.
If
PayPal were found to be subject to or in violation of any
U.S. laws or regulations governing banking, money
transmission, or electronic funds transfers, it could be subject
to liability and forced to change its business
practices.
A number of U.S. states have enacted legislation regulating
money transmitters. To date, PayPal has obtained licenses in 33
of these jurisdictions and interpretations in nine states that
licensing is not required under their existing statutes. As a
licensed money transmitter, PayPal is subject to bonding
requirements, restrictions on its investment of customer funds,
reporting requirements, and inspection by state regulatory
agencies. In July 2005, PayPal entered into a settlement
agreement and agreed to pay $225,000 to the California
Department of Financial Institutions in connection with alleged
violations of the California Financial Code relating to the use
of a receipt form for international payments that had not been
pre-approved by the Department, and incomplete reporting to the
Department. If PayPal were found to be in violation of other
money services laws or regulations, PayPal could be subject to
liability, forced to cease doing business with residents of
certain states, or forced to change its business practices. Any
change to PayPals business practices that makes the
service less attractive to customers or prohibits its use by
residents of a particular jurisdiction could decrease the
velocity of trade on eBay, which would further harm our
business. Even if PayPal is not forced to change its business
practices, it could be required to obtain additional licenses or
regulatory approvals that could impose a substantial cost on
PayPal.
We believe that the licensing or approval requirements of the
U.S. Office of the Comptroller of the Currency, the Federal
Reserve Board, and other federal or state agencies that regulate
banks, bank holding companies, or other types of providers of
e-commerce
services do not apply to PayPal, except for certain money
transmitter licenses mentioned above. However, PayPal has
received written communications in the past from state
regulatory authorities expressing the view that its service
might constitute an unauthorized banking business. PayPal has
taken steps to address these states concerns. However, we
cannot guarantee that the steps PayPal has taken to address
these regulatory concerns will be effective in all states, and
one or more states may conclude that PayPal is engaged in an
unauthorized banking business. If PayPal is found to be engaged
in an unauthorized banking business in one or more states, it
might be subject to monetary penalties and adverse publicity and
might be required to cease doing business with residents of
those states. Even if the steps it has taken to resolve these
states concerns are deemed sufficient by the state
regulatory authorities, PayPal could be subject to fines and
penalties for its prior activities. The need to comply with
state laws prohibiting unauthorized banking activities could
also limit PayPals ability to enhance its services in the
future. Any change to PayPals business practices that
makes the service less attractive to customers or prohibits its
use by residents of a particular jurisdiction could decrease the
velocity of trade on eBay, which would further harm our business.
Although there have been no definitive interpretations to date,
PayPal has assumed that its service is subject to the Electronic
Fund Transfer Act and Regulation E of the Federal
Reserve Board. As a result, among other things, PayPal must
provide advance disclosure of changes to its service, follow
specified error resolution procedures and absorb losses above
$50 from transactions not authorized by the consumer. In
addition, PayPal is subject to the financial privacy provisions
of the Gramm-Leach-Bliley Act, state financial privacy laws, and
related regulations. As a result, some customer financial
information that PayPal receives is subject to limitations on
reuse and disclosure. Existing and potential future privacy laws
may limit PayPals ability to develop new products and
services that make use of data gathered through its service. The
provisions of these laws and related regulations are
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complicated, and PayPal does not have extensive experience in
complying with them. Even technical violations of these laws can
result in penalties of up to $1,000 for each non-compliant
transaction. PayPal processed an average of approximately
1.6 million transactions per day during the first six
months of 2006, and any violations could expose PayPal to
significant liability. Any negative change in the publics
perception of PayPals compliance with privacy laws and
policies could also negatively impact PayPals business.
PayPals
status under banking or financial services laws or other laws in
markets outside the U.S. is unclear.
PayPal currently allows its customers with credit cards to send
payments from 55 markets, and to receive payments in 42 of those
markets. In 25 of these 42 markets, customers can withdraw funds
to local bank accounts, and in eight of these markets customers
can withdraw funds by receiving a bank draft in the mail. PayPal
offers customers the ability to send or receive payments
denominated in U.S. dollars, British pounds, Euros,
Canadian dollars, Japanese yen, and Australian dollars. We act
in cooperation with a local company in the Peoples
Republic of China, or PRC, which offers PRC residents the
ability to send or receive payments denominated in renminbi.
25 of the 55 markets whose residents can use the
PayPal service are members of the European Union, and PayPal
provides localized versions of its service to customers in the
EU through PayPal (Europe) Ltd., a wholly-owned subsidiary of
PayPal that is licensed in the United Kingdom to operate as an
Electronic Money Institution. PayPal (Europe) implements its
localized services in EU countries through an expedited
passport notification process through the UK
regulator to regulators in other EU member states, pursuant to
EU Directives. PayPal (Europe) has completed the
passport notice process in all EU member countries.
The regulators in these countries could notify PayPal (Europe)
of local consumer protection laws that will apply to its
business, in addition to UK consumer protection law. Any such
responses from these regulators could increase the cost of, or
delay, PayPals plans for expanding its business. PayPal
(Europe) is subject to significant fines or other enforcement
action if it violates the disclosure, reporting, anti-money
laundering, capitalization, funds management or other
requirements imposed on electronic money institutions.
In many markets outside of the U.S. and the European Union, it
is not clear whether PayPals
U.S.-based
service is subject to local law or, if it is subject to local
law, whether such local law requires a payment processor like
PayPal to be licensed as a bank or financial institution or
otherwise. Even if PayPal is not currently required to obtain a
license in those countries, future localization or targeted
marketing of PayPals service in those countries could
require licensure and other laws of those countries (such as
data protection and anti-money laundering laws) may apply. If
PayPal were found to be subject to and in violation of any
foreign laws or regulations, it could be subject to liability,
forced to change its business practices or forced to suspend
providing services to customers in one or more countries.
Alternatively, PayPal could be required to obtain licenses or
regulatory approvals that could impose a substantial cost on it
and involve considerable delay to the provision or development
of its product. Delay or failure to receive such a license would
require PayPal to change its business practices or features in
ways that would adversely affect PayPals international
expansion plans and could require PayPal to suspend providing
services to customers in one or more countries.
The
current regulatory environment for Voice over Internet Protocol
(VoIP) is unclear, and Skypes business could be harmed by
new regulations or the application of existing regulations to
its products.
The current regulatory environment for VoIP is unclear and
rapidly changing. Skypes voice communications products are
currently subject to very few, if any, of the same regulations
that apply to traditional telephony and to
VoIP-based
telephone replacement services. VoIP companies are generally
subject to different regulatory regimes in different countries,
and in most cases are subject to lower, or no, regulatory fees
and lesser, or no, specific regulatory requirements. Governments
may impose new or increased fees, taxes, and administrative
burdens on VoIP companies. Increased fees could include
interconnection fees and access charges payable to local
exchange carriers to carry and terminate traffic, contributions
to the Universal Service Fund in the United States and
elsewhere, and other charges. New laws and regulations may
require Skype to meet various emergency service requirements,
disability access requirements, consumer protection
requirements, number assignment and portability requirements,
and interception or wiretapping requirements, such as the
Communications Assistance for Law Enforcement Act. Such
regulations could result in substantial costs depending on the
technical changes required to
48
accommodate the requirements, and any increased costs could
erode Skypes pricing advantage over competing forms of
communication. Regulations that decrease the degree of privacy
for users of Skypes products could also slow its adoption.
The increasing growth and popularity of the VoIP telephony and
Internet communications market heighten the risk that
governments will seek to regulate VoIP and Internet
communications. Competitors, including the incumbent telephone
companies, may devote substantial lobbying efforts to seek
greater protection for their existing businesses and increased
regulation of VoIP. In the United States, various state
legislatures are considering legislation to impose their own
requirements and taxes on VoIP. Increased regulatory
requirements on VoIP would increase Skypes costs, and, as
a result, our business would suffer.
Regulatory agencies may require Skype to conform to rules that
are unsuitable for its communications technologies, that are
difficult or impossible to comply with due to the nature of IP
routing, or that are unnecessary or unreasonable in light of the
manner in which Skypes products are offered to customers.
For example, while suitable alternatives may be developed in the
future, the current IP network does not enable Skype to identify
the geographic origin of the traffic traversing the Internet or
to provide detailed calling information about
computer-to-computer
communications, either of which may make complying with future
regulatory requirements, such as emergency service requirements,
difficult or impossible. If Skype were subject to regulations
that are costly or impossible for it to comply with given its
technology, its business would be adversely affected.
In many countries in which Skype operates or provides VoIP
products, the laws that may relate to its offerings are unclear.
We cannot be certain that Skype or its customers are currently
in full compliance with regulatory or other legal requirements
in all countries in which Skype is used, that Skype or its
customers will be able to comply with existing or future
requirements, or that Skype or its customers will continue in
full compliance with any requirements. Skypes failure or
the failure of those with whom Skype transacts business to
comply with these requirements could materially adversely affect
our business, financial condition and results of operations.
New rules and regulations with respect to VoIP are being
considered in various countries around the world. Such new rules
and regulations could increase our costs of doing business or
prevent us from delivering our products and offerings over the
Internet, which could adversely affect Skypes customer
base, and thus its revenue.
Our
businesses depend on continued and unimpeded access to the
Internet. Internet service providers may be able to block,
degrade, or charge us or our users additional fees for our
offerings.
Our customers rely on access to the Internet to use our products
and services. In many cases that access is provided by companies
that compete with at least some of our offerings, including
incumbent telephone companies, cable companies, mobile
communications companies, and large Internet service providers.
Some of these providers have stated that they may take measures
that could degrade, disrupt, or increase the cost of
customers use of Skype and possibly our other
offerings by restricting or prohibiting the use of
their lines for our offerings, by filtering, blocking or
delaying the packets containing the data associated with our
products, or by charging increased fees to us or our users for
use of their lines to provide our offerings. These activities
are technically feasible and may be permitted in the
U.S. after recent regulatory changes, including recent
decisions by the U.S. Supreme Court and Federal
Communications Commission. In addition, Internet service
providers could attempt to charge us each time our customers use
our offerings, or could charge us for delivery of email to our
customers. Worldwide, a number of companies have announced plans
to take such actions or are selling products designed to
facilitate such actions. Interference with our offerings or
higher charges for access to our offerings, whether paid by us
or by our customers, could cause us to lose existing customers,
impair our ability to attract new customers, and harm our
revenue and growth.
New
and existing regulations could harm our business.
We are subject to the same foreign and domestic laws as other
companies conducting business on and off the Internet. Today,
there are still relatively few laws specifically directed
towards online services. However, due to the increasing
popularity and use of the Internet and online services, many
laws relating to the Internet are being debated at all levels of
government around the world and it is possible that such laws
and regulations will be adopted. These laws and regulations
could cover issues such as user privacy, freedom of expression,
pricing, fraud, content and quality of products and services,
taxation, advertising, intellectual property rights, and
information
49
security. It is not clear how existing laws governing issues
such as property ownership, copyrights and other intellectual
property issues, taxation, libel and defamation, obscenity, and
personal privacy apply to online businesses. The majority of
these laws were adopted prior to the advent of the Internet and
related technologies and, as a result, do not contemplate or
address the unique issues of the Internet and related
technologies. Those laws that do reference the Internet, such as
the U.S. Digital Millennium Copyright Act and the European
Unions Directive on Distance Selling and Electronic
Commerce have begun to be interpreted by the courts and
implemented by the EU Member States, but their applicability and
scope remain somewhat uncertain. As our activities and the types
of goods listed on our website expand, regulatory agencies or
courts may claim or hold that we or our users are either subject
to licensure or prohibited from conducting our business in their
jurisdiction, either with respect to our services in general, or
in order to allow the sale of certain items, such as real
estate, event tickets, cultural goods, boats, and automobiles.
Numerous states and foreign jurisdictions, including the State
of California, where our headquarters are located, have
regulations regarding auctions and the handling of
property by secondhand dealers or
pawnbrokers. No final legal determination has been
made as to whether the California regulations apply to our
business (or that of our users) and little precedent exists in
this area. Several states and some foreign jurisdictions have
attempted, and may attempt in the future, to impose such
regulations upon us or our users. Attempted enforcement of these
laws against some of our users appears to be increasing and such
attempted enforcements could harm our business. In 2002,
Illinois amended its auction law to provide for a special
regulatory regime for Internet auction listing
services, and we have registered as an Internet auction
listing service in Illinois. Although this registration has not
had a negative impact on our business to date, other regulatory
and licensure claims could result in costly litigation or could
require us to change the way we or our users do business in ways
that increase costs or reduce revenues or force us to prohibit
listings of certain items for some locations. We could also be
subject to fines or other penalties, and any of these outcomes
could harm our business.
In addition, because our services are accessible worldwide, and
we facilitate sales of goods to users worldwide, foreign
jurisdictions may claim that we are required to comply with
their laws. For example, the Australian high court has ruled
that a U.S. website in certain circumstances must comply
with Australian laws regarding libel. As we expand and localize
our international activities, we become obligated to comply with
the laws of the countries in which we operate. Laws regulating
Internet companies outside of the U.S. may be less
favorable than those in the U.S., giving greater rights to
consumers, content owners, and users. Compliance may be more
costly or may require us to change our business practices or
restrict our service offerings relative to those in the
U.S. Our failure to comply with foreign laws could subject
us to penalties ranging from criminal prosecution to bans on our
services.
Our
business is subject to online security risks, including security
breaches and identity theft.
To succeed, online commerce and communications must provide a
secure transmission of confidential information over public
networks. Our security measures may not prevent security
breaches that could harm our business. Currently, a significant
number of our users authorize us to bill their credit card
accounts directly for all transaction fees charged by us.
PayPals users routinely provide credit card and other
financial information. We rely on encryption and authentication
technology licensed from third parties to provide the security
and authentication to effect secure transmission of confidential
information, including customer credit card numbers. Advances in
computer capabilities, new discoveries in the field of
cryptography or other developments may result in a compromise or
breach of the technology used by us to protect transaction data.
In addition, any party who is able to illicitly obtain a
users password could access the users transaction
data. An increasing number of websites have reported breaches of
their security. Any compromise of our security could harm our
reputation and, therefore, our business. In addition, a party
who is able to circumvent our security measures could
misappropriate proprietary information, or cause interruptions
in our operations, damage our computers or those of our users,
or otherwise damage our reputation and business.
Our servers are also vulnerable to computer viruses, physical or
electronic break-ins, and similar disruptions, and we have
experienced
denial-of-service
type attacks on our system that have made all or portions of our
websites unavailable for periods of time. We may need to expend
significant resources to protect against security breaches or to
address problems caused by breaches. These issues are likely to
become more difficult as we expand the number of places where we
operate. Security breaches could damage our reputation and
expose us to a risk of
50
loss or litigation and possible liability. Our insurance
policies carry low coverage limits, which may not be adequate to
reimburse us for losses caused by security breaches.
Our users, as well as those of other prominent Internet
companies, have been and will continue to be targeted by parties
using fraudulent emails to misappropriate passwords, credit card
numbers, or other personal information or to introduce viruses
through trojan horse programs to our users
computers. These emails appear to be legitimate emails sent by
eBay, PayPal, Skype, or a user of one of those businesses, but
direct recipients to fake websites operated by the sender of the
email or request that the recipient send a password or other
confidential information via email or download a program. We
actively pursue the parties responsible for these attempts at
misappropriation, and we have developed tools to detect, and
help users detect, fake websites and unauthorized access to
customer accounts and we encourage our users to divulge
sensitive information only after they have verified that they
are on our legitimate websites, but we cannot entirely eliminate
these types of activities.
Some businesses and security consultants have expressed concern
over the potential for Skypes software to create security
vulnerabilities on its users computers. While we believe
Skypes software is safe and does not pose a security risk
to its users, the perception that Skypes software is
unsafe could hamper its adoption, and any actual security breach
could damage Skypes reputation and expose us to a risk of
loss or litigation and possible liability.
PayPals
failure to manage customer funds properly would harm its
business.
PayPals ability to manage and account accurately for
customer funds requires a high level of internal controls.
PayPal has neither an established operating history nor proven
management experience in maintaining, over a long term, these
internal controls. As PayPals business continues to grow,
it must strengthen its internal controls accordingly.
PayPals success requires significant public confidence in
its ability to handle large and growing transaction volumes and
amounts of customer funds. Any failure to maintain necessary
controls or to manage accurately customer funds could diminish
customer use of PayPals product severely.
Our
failure to manage growth could harm our business.
We are currently expanding our headcount, facilities, and
infrastructure in the U.S. and internationally. We anticipate
that further expansion will be required as we continue to expand
into new lines of business and geographic areas. This expansion
has placed, and we expect it will continue to place, a
significant strain on our management, operational, and financial
resources. The areas that are put under strain by our growth
include the following:
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Our Websites. We must constantly add new
hardware, update software and add new engineering personnel to
accommodate the increased use of our and our subsidiaries
websites and the new products and features we regularly
introduce. This upgrade process is expensive, and the increased
complexity of our websites and the need to support multiple
platforms as our portfolio of brands grows increases the cost of
additional enhancements. Failure to upgrade our technology,
features, transaction processing systems, security
infrastructure, or network infrastructure to accommodate
increased traffic or transaction volume could harm our business.
Adverse consequences could include unanticipated system
disruptions, slower response times, degradation in levels of
customer support, impaired quality of users experiences of
our services, impaired quality of services for third-party
application developers using our externally accessible
Application Programming Interface, or API, and delays in
reporting accurate financial information. We may be unable to
effectively upgrade and expand our systems in a timely manner or
smoothly integrate any newly developed or purchased technologies
or businesses with our existing systems, and any failure to do
so could result in problems on our sites. For example, in
October 2004, we experienced unscheduled downtime on the PayPal
website over a period of five days related to system upgrades.
Despite our efforts to increase site scalability and
reliability, our infrastructure could prove unable to handle a
larger volume of customer transactions. Some of our more
recently acquired businesses may be particularly subject to this
risk given their shorter histories and, in some cases, higher
growth rates. Any failure to accommodate transaction growth
could impair customer satisfaction, lead to a loss of customers,
impair our ability to add customers, or increase our costs, all
of which would harm our business. Further, steps to increase the
reliability and
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redundancy of our systems are expensive, reduce our margins, and
may not be successful in reducing the frequency or duration of
unscheduled downtime.
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Customer Account Billing. Our revenues
depend on prompt and accurate billing processes. In 2004, we
completed a significant project to enhance our billing software.
Problems with the conversion to the new billing system during
the second and third quarters of 2004 caused incorrect account
balance totals to be displayed for some users. While these
problems have been corrected and we believe that no users were
overcharged, our failure to grow our transaction-processing
capabilities to accommodate the increasing number of
transactions that must be billed on any of our websites would
harm our business and our ability to collect revenue.
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Customer Support. We are expanding our
customer support operations to accommodate the increased number
of users and transactions on our websites and the increased
level of trust and safety activity we provide worldwide. If we
are unable to provide these operations in a cost-effective
manner, users of our websites may have negative experiences,
current and future revenues could suffer, and our operating
margins may decrease.
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We must continue to hire, train, and manage new employees at a
rapid rate. If our new hires perform poorly, if we are
unsuccessful in hiring, training, managing, and integrating
these new employees, or if we are not successful in retaining
our existing employees, our business may be harmed. To manage
the expected growth of our operations and personnel, we will
need to improve our transaction processing, operational and
financial systems, procedures, and controls. This is a special
challenge as we acquire new operations with different systems.
Our current and planned personnel, systems, procedures, and
controls may not be adequate to support our future operations.
The additional headcount and capital investments we are adding
increase our cost base, which will make it more difficult for us
to offset any future revenue shortfalls by expense reductions in
the short term.
Our
operations in China are subject to risks and uncertainties
relating to the laws and regulations of the Peoples
Republic of China.
Our operations in the Peoples Republic of China, or PRC,
are conducted through our EachNet subsidiary and through a
PayPal subsidiary. EachNet and PayPal are Delaware corporations
and foreign persons under the laws of the PRC are subject to
many of the risks of doing business internationally described
above in There are many risks associated with our
international operations. The PRC currently regulates its
Internet sector through regulations restricting the scope of
foreign investment and through the enforcement of content
restrictions on the Internet. While many aspects of these
regulations remain unclear, they purport to limit and require
licensing of various aspects of the provision of Internet
information services. These regulations have created substantial
uncertainties regarding the legality of foreign investments in
PRC Internet companies, including EachNet and PayPal, and the
business operations of such companies. In order to meet local
ownership and regulatory licensing requirements, the eBay
EachNet website is operated through a foreign-owned enterprise
indirectly owned by eBays European operating entity, which
acts in cooperation with a local PRC company owned by certain
local employees. The PayPal China website is operated through a
foreign-owned enterprise owned by PayPals International
headquarters entity, which acts in cooperation with a local PRC
company owned by certain local employees. We believe
EachNets and PayPals current ownership structures
comply with all existing PRC laws, rules, and regulations. There
are, however, substantial uncertainties regarding the
interpretation of current PRC laws and regulations, and it is
possible that the PRC government will ultimately take a view
contrary to ours. The Peoples Bank of China, or PBOC, has
recently proposed guidelines for payment settlement
organizations which, may require PayPal to act in cooperation
with a different local PRC entity and obtain approval from the
PBOC. There are also uncertainties regarding EachNets and
PayPals ability to enforce contractual relationships they
have entered into with respect to management and control of the
companys business. If EachNet or PayPal were found to be
in violation of any existing or future PRC laws or regulations,
it could be subject to fines and other financial penalties, have
its business and Internet content provider licenses revoked, or
be forced to discontinue its business entirely. In addition, any
finding of a violation by EachNet or PayPal of PRC laws or
regulations could make it more difficult for us to launch new or
expanded services in the PRC.
52
Although Skype does not conduct operations in the PRC directly,
it makes its software available through a joint venture and its
software is used by residents of the PRC. PRC regulations
surrounding VoIP telephony are unclear and the PRC or one or
more of its provinces may adopt regulations or enforce exiting
regulations that restrict or prohibit the use of Skypes
software.
Our
business is adversely affected by anything that causes our users
to spend less time on their computers, including seasonal
factors and national events.
Anything that diverts our users from their customary level of
usage of our websites could adversely affect our business. We
would therefore be adversely affected by geopolitical events
such as war, the threat of war, or terrorist activity, and
natural disasters, such as hurricanes or earthquakes. Similarly,
our results of operations historically have been seasonal
because many of our users reduce their activities on our
websites with the onset of good weather during the summer
months, and on and around national holidays.
We
depend on the continued growth of online commerce and
communications.
The business of selling goods over the Internet, particularly
through online trading, is dynamic and relatively new. Concerns
about fraud, privacy, and other problems may discourage
additional consumers from adopting the Internet as a medium of
commerce. In countries such as the U.S. and Germany, where our
services and online commerce generally have been available for
some time and the level of market penetration of our services is
high, acquiring new users for our services may be more difficult
and costly than it has been in the past. In order to expand our
user base, we must appeal to and acquire consumers who
historically have used traditional means of commerce to purchase
goods. If these consumers prove to be less active than our
earlier users, and we are unable to gain efficiencies in our
operating costs, including our cost of acquiring new customers,
our business could be adversely impacted.
The success of Skype depends on continued growth in its number
of users, which in turn depends on wider public acceptance of
VoIP. The VoIP communications medium is in its early stages, and
it may not develop a broad audience. Potential new users may
view VoIP as unattractive relative to traditional telephone
services for a number of reasons, including the need to purchase
computer headsets, the need to leave a personal computer on in
order to communicate with Skype, or the perception that the
price advantage for VoIP is insufficient to justify the
perceived inconvenience. Potential users may also view more
familiar online communication methods, such as
e-mail or
instant messaging, as sufficient for their communications needs.
Managers of some large private branch exchange, or PBX, systems
in businesses, universities, government agencies, and other
institutions may refuse to allow the use of Skype due to
concerns over security, server usage, or for other reasons. If
VoIP does not achieve wide public acceptance, our Skype business
will be adversely affected.
Use of
our services for illegal purposes could harm our
business.
The law relating to the liability of providers of online
services for the activities of their users on their service is
currently unsettled in the United States and internationally. We
are aware that certain goods, such as weapons, adult material,
tobacco products, alcohol, and other goods that may be subject
to regulation, have been listed and traded on our service. We
may be unable to prevent our users from selling unlawful goods
or selling goods in an unlawful manner, and we may be subject to
allegations of civil or criminal liability for unlawful
activities carried out by users through our service. We have
been subject to several lawsuits based upon such allegations. In
December 2004, an executive of Baazee.com, our Indian
subsidiary, was arrested in connection with a users
listing of a pornographic video clip on that site. Similarly,
our Korean subsidiary and one of its employees were found
criminally liable for listings on the Korean subsidiarys
website. In order to reduce our exposure to this liability, we
have prohibited the listing of certain items and increased the
number of personnel reviewing questionable items. In the future,
we may implement other protective measures that could require us
to spend substantial resources or discontinue certain service
offerings. Any costs incurred as a result of potential liability
relating to the sale of unlawful goods or the unlawful sale of
goods could harm our business. In addition, we have received
significant and continuing media attention relating to the
listing or sale of unlawful goods using our services. This
negative publicity could damage our reputation and diminish the
value of our brand names. It also could make users reluctant to
continue to use our services.
53
PayPals payment system is also susceptible to potentially
illegal or improper uses. These may include illegal online
gambling, fraudulent sales of goods or services, illicit sales
of prescription medications or controlled substances, piracy of
software and other intellectual property, money laundering, bank
fraud, child pornography trafficking, prohibited sales of
alcoholic beverages or tobacco products, and online securities
fraud. PayPals acceptable use policy enables PayPal to
fine users in certain jurisdictions up to $500 or take legal
action to recover its losses for certain violations of that
policy, including online gambling and illegal sales of
prescription medications. Despite measures PayPal has taken to
detect and lessen the risk of this kind of conduct, illegal
activities could still be funded using PayPal.
PayPal is subject to anti-money laundering laws and regulations
that prohibit, among other things, its involvement in
transferring the proceeds of criminal activities. Although
PayPal has adopted a program to comply with these laws and
regulations, any errors or failure to implement the program
properly could lead to lawsuits, administrative action, and
prosecution by the government. In July 2003, PayPal agreed with
the U.S. Attorney for the Eastern District of Missouri that
it would pay $10 million as a civil forfeiture to settle
allegations that its provision of services to online gambling
merchants violated provisions of the USA PATRIOT Act and further
agreed to have its compliance program reviewed by an independent
audit firm. PayPal is also subject to regulations that require
it to report suspicious activities involving transactions of
$2,000 or more and may be required to obtain and keep more
detailed records on the senders and recipients in certain
transfers of $3,000 or more. The interpretation of suspicious
activities in this context is uncertain. Future regulations
under the USA PATRIOT Act may require PayPal to revise the
procedures it uses to verify the identity of its customers and
to monitor international transactions more closely. As PayPal
localizes its service in other countries, additional
verification and reporting requirements could apply. These
regulations could impose significant costs on PayPal and make it
more difficult for new customers to join its network. PayPal
could be required to learn more about its customers before
opening an account, to obtain additional verification of
customers and to monitor its customers activities more
closely. These requirements, as well as any additional
restrictions imposed by credit card associations, could raise
PayPals costs significantly and reduce the attractiveness
of its product. Failure to comply with federal, state or foreign
country money laundering laws could result in significant
criminal and civil lawsuits, penalties, and forfeiture of
significant assets.
We are
subject to intellectual property and other
litigation.
In April 2001, two of our European subsidiaries, eBay GmbH and
eBay International AG, were sued by Montres Rolex S.A. and
certain of its affiliates in the regional court of Cologne,
Germany. The suit subsequently was transferred to the regional
court in Düsseldorf, Germany. Rolex alleged that our
subsidiaries were infringing Rolexs trademarks as a result
of users selling counterfeit Rolex watches through our German
website. The suit also alleged unfair competition. Rolex sought
an order enjoining the sale of Rolex-branded watches on the
website as well as damages. In December 2002, a trial was held
in the matter and the court ruled in favor of eBay on all causes
of action. Rolex appealed the ruling to the Higher Regional
Court of Düsseldorf, and the appeal was heard in October
2003. In February 2004, the court rejected Rolexs appeal
and ruled in our favor. Rolex has appealed the ruling to the
German Federal Supreme Court, and a hearing is expected in
December 2006. In September 2004, the German Federal Supreme
Court issued its written opinion in favor of Rolex in a case
involving an unrelated company, ricardo.de AG, but somewhat
comparable legal theories. Although it is not yet clear what the
ultimate effect of the reasoning of the German Federal Supreme
Courts ricardo.de decision will have when applied to eBay,
we believe the Courts decision has resulted in an increase
in similar litigation against us in Germany, although we do not
currently believe that it will require a significant change in
our business practices.
In September 2001, MercExchange LLC filed a complaint against
us, our Half.com subsidiary and ReturnBuy, Inc. in the
U.S. District Court for the Eastern District of Virginia
(No. 2:01-CV-736)
alleging infringement of three patents (relating to online
consignment auction technology, multiple database searching and
electronic consignment systems) and seeking a permanent
injunction and damages (including treble damages for willful
infringement). In October 2002, the court granted in part our
summary judgment motion, effectively invalidating the patent
related to online auction technology and rendering it
unenforceable. This ruling left only two patents in the case.
Following a trial, in May 2003 the jury returned a verdict
finding that eBay had willfully infringed one and Half.com had
willfully infringed both of the patents in the suit, awarding
$35 million in compensatory damages. Both parties
54
filed post-trial motions, and in August 2003, the court entered
judgment for MercExchange in the amount of approximately
$30 million plus pre-judgment interest and post-judgment
interest in an amount to be determined, while denying
MercExchanges request for an injunction and
attorneys fees. We appealed the verdict and judgment in
favor of MercExchange and MercExchange filed a cross-appeal of
the granting in part of our summary judgment motion and the
denial of its request for an injunction and attorneys fees.
In March 2005, the U.S. Court of Appeals for the Federal
Circuit issued a ruling in the appeal of the MercExchange patent
litigation suit which, among other things (1) invalidated
all claims asserted against eBay and Half.com arising out of the
multiple database search patent and reduced the verdict amount
by $4.5 million; (2) upheld the electronic consignment
system patent; (3) affirmed the district courts
refusal to award attorneys fees or enhanced damages
against us; (4) reversed the district courts order
granting summary judgment in our favor regarding the auction
patent; and (5) reversed the district courts refusal
to grant an injunction and remanded that issue to the district
court for further proceedings. The decision was stayed pending
U.S. Supreme Court review of the injunction issue. In May
2006, the U.S. Supreme Court reversed the Court of
Appeals decision on whether an injunction should have been
issued and remanded the case back to the district court for
further action. In parallel with the federal court proceedings,
at our request, the U.S. Patent and Trademark Office is
actively reexamining each of the patents in suit, having found
that substantial questions exist regarding the validity of the
claims contained in them. In January 2005, the Patent and
Trademark Office issued an initial ruling rejecting all of the
claims contained in the patent that related to online auctions;
in March 2005, the Patent and Trademark Office issued an initial
ruling rejecting all of the claims contained in the patent that
related to electronic consignment systems; and in May 2005, the
Patent and Trademark Office issued an initial ruling rejecting
all of the claims contained in the patent that related to
multiple database searching. In March 2006, the Patent and
Trademark Office affirmed its earlier ruling rejecting the
claims contained in the patent that related to electronic
consignment systems. Even if successful, our litigation of these
matters will continue to be costly. In addition, as a
precautionary measure, we have modified certain functionality of
our websites and business practices in a manner which we believe
would avoid any further infringement. For this reason, we
believe that any injunction that might be issued by the district
court will not have any impact on our business. We also believe
we have appropriate reserves for this litigation. Nonetheless,
if the district court were to issue an injunction on remand, and
if the modifications to the functionality of our websites and
business practices are not sufficient to make them
non-infringing, we would likely be forced to pay significant
additional damages and licensing fees
and/or
modify our business practices in an adverse manner.
In February 2005, eBay was sued in Superior Court of the State
of California, County of Santa Clara (No. 105CV035930)
in a purported class action alleging that certain bidding
features of our site constitute shill bidding for
the purpose of artificially inflating bids placed by buyers on
the site. The complaint alleges violations of Californias
Auction Act, Californias Consumer Remedies Act, and unfair
competition. The complaint seeks injunctive relief, damages, and
a constructive trust. In April 2005, we filed a demurrer seeking
to dismiss the complaint, and a hearing on the demurrer was held
in February 2006. In March 2006, the parties reached tentative
agreement on the terms of a settlement. The court must approve
the terms of the settlement in order for it to become final. The
estimated settlement was accrued in our consolidated income
statement for the year ended December 31, 2005.
In March 2005, eBay, PayPal, and an eBay seller were sued in
Supreme Court of the State of New York, County of Kings
(No. 6125/05) in a purported class action alleging that
certain disclosures regarding PayPals Buyer Protection
Policy, users chargeback rights, and the effects of
users choice of funding mechanism are deceptive
and/or
misleading. The complaint alleged misrepresentation on the part
of eBay and PayPal, breach of contract and deceptive trade
practices by PayPal, and that PayPal and eBay have jointly
violated the civil RICO statute (18 U.S.C.
Section 1961(4)). In April 2005, eBay and PayPal removed
the case to the U.S. District Court for the Eastern
District of New York and the plaintiffs filed an amended
complaint in the U.S. District Court
(No. 05-CV-01720)
repeating the allegations of the initial complaint but dropping
the civil RICO allegations. The complaint seeks injunctive
relief, compensatory damages, and punitive damages. Following
several mediation sessions, the parties reached a tentative
settlement in December 2005 and executed a Memorandum of
Understanding in March 2006. The parties are engaged in the
process of finalizing the settlement documentation. The court
must approve the terms of the settlement in order for it to
become final. The estimated settlement was accrued in our
consolidated income statement for the year ended
December 31, 2005.
55
In June 2006, Net2Phone, Inc. filed a lawsuit in the
U.S. District Court for the District of New Jersey
(No. 06-2469)
alleging that eBay Inc., Skype Technologies S.A., and Skype Inc.
infringed five patents owned by Net2Phone relating to
point-to-point
internet protocol. The suit seeks an injunction against
continuing infringement, unspecified damages, including treble
damages for willful infringement, and interest, expenses, and
fees. This case is at a very early stage and we have not
received a schedule from the court, or filed any responsive
pleadings. We believe that we have meritorious defenses and
intend to defend ourselves vigorously.
Other third parties have from time to time claimed, and others
may claim in the future, that we have infringed their
intellectual property rights. We have been notified of several
potential patent disputes, and expect that we will increasingly
be subject to patent infringement claims as our services expand
in scope and complexity. In particular, we expect to face
additional patent infringement claims involving services we
provide, including various aspects of our Payments and
Communications businesses. We have in the past been forced to
litigate such claims. We may also become more vulnerable to
third-party claims as laws such as the Digital Millennium
Copyright Act, the Lanham Act and the Communications Decency Act
are interpreted by the courts and as we expand geographically
into jurisdictions where the underlying laws with respect to the
potential liability of online intermediaries like ourselves are
either unclear or less favorable. These claims, whether
meritorious or not, could be time consuming and costly to
resolve, cause service upgrade delays, require expensive changes
in our methods of doing business, or could require us to enter
into costly royalty or licensing agreements.
From time to time, we are involved in other disputes or
regulatory inquiries that arise in the ordinary course of
business. The number and significance of these disputes and
inquiries are increasing as our business expands and our company
grows larger. Any claims or regulatory actions against us,
whether meritorious or not, could be time consuming, result in
costly litigation, require significant amounts of management
time, and result in the diversion of significant operational
resources.
Government
inquiries may lead to charges or penalties.
A large number of transactions occur on our
websites. We believe that government regulators have
received a substantial number of consumer complaints about both
eBay and PayPal, which, while small as a percentage of our total
transactions, are large in aggregate numbers. As a result, we
have from time to time been contacted by various foreign and
domestic governmental regulatory agencies that have questions
about our operations and the steps we take to protect our users
from fraud. PayPal has received inquiries regarding its
restriction and disclosure practices from the Federal Trade
Commission and these and other business practices from the
attorneys general of a number of states. If PayPals
processes are found to violate federal or state law on consumer
protection and unfair business practices, it could be subject to
an enforcement action or fines. If PayPal becomes subject to an
enforcement action, it could be required to restructure its
business processes in ways that would harm its business, and to
pay substantial fines. Even if PayPal is able to defend itself
successfully, an enforcement action could cause damage to its
reputation, could consume substantial amounts of its
managements time and attention, and could require PayPal
to change its customer service and operations in ways that could
increase its costs and decrease the effectiveness of its
anti-fraud program. Both eBay and PayPal are likely to receive
additional inquiries from regulatory agencies in the future,
which may lead to action against either company. We have
responded to all inquiries from regulatory agencies by
describing our current and planned antifraud efforts, customer
support procedures, operating procedures and disclosures. If one
or more of these agencies is not satisfied with our response to
current or future inquiries, we could be subject to fines or
other penalties, or forced to change our operating practices in
ways that could harm our business.
We are subject to laws relating to the use and transfer of
personally identifiable information about our users, especially
for financial information and for users located outside of the
U.S. New laws in this area have been passed by several
jurisdictions, and other jurisdictions are considering imposing
additional restrictions. Violation of these laws, which in many
cases apply not only to third-party transactions but also to
transfers of information between ourselves and our subsidiaries,
and between ourselves, our subsidiaries, and other parties with
which we have commercial relations, could subject us to
significant penalties and negative publicity and could adversely
affect us.
56
The
listing or sale by our users of pirated or counterfeit items may
harm our business.
We have received in the past, and we anticipate receiving in the
future, communications alleging that certain items listed or
sold through our service by our users infringe third-party
copyrights, trademarks and trade names, or other intellectual
property rights. Although we have sought to work actively with
the owners of intellectual property rights to eliminate listings
offering infringing items on our websites, some rights owners
have expressed the view that our efforts are insufficient.
Content owners and other intellectual property rights owners
have been active in defending their rights against online
companies, including eBay. Allegations of infringement of
intellectual property rights have resulted in litigation against
us from time to time, including litigation brought by
Tiffany & Co. and Robespierre, Inc. (doing business as
Nanette Lepore) in the U.S., Rolex S.A. in Germany, and a number
of other owners of intellectual property rights. In both the
Tiffany and Nanette Lepore cases, the plaintiffs seek to hold
eBay liable for counterfeit items listed on our sites by third
parties. Tiffany seeks, among other things, an injunction that
would require eBay to prevent sellers from listing 5 or more
Tiffany items, as well as damages. Nanette Lepore seeks, among
other things, to require eBay to block all listings offering
Nanette Lepore items, as well as damages. We anticipate that a
trial in the Tiffany case will be scheduled for late 2006 or
early 2007. Recently, eBay successfully prevented Nanette Lepore
from obtaining a preliminary injunction. In the ruling, the
court found that eBays process for addressing the listing
of counterfeit items by third parties on its site was both
reasonable and adequate. Nanette Lepore has appealed the ruling.
While we have been largely successful to date in defending
against such litigation, more recent cases have been based, at
least in part, on different legal theories than those of earlier
cases, and there is no guarantee that we will continue to be
successful in our defense. In addition, a public perception that
counterfeit or pirated items are commonplace on our site could
damage our reputation and our business. Litigation and negative
publicity may increase as our sites gain prominence in markets
outside of the U.S., where the laws may be unsettled or less
favorable to us. Such litigation is costly for us, could result
in damage awards or increased costs of doing business through
adverse judgment or settlement, could require us to change our
business practices in expensive ways, or could otherwise harm
our business. Litigation against other online companies could
result in interpretations of the law that could also require us
to change our business practices or otherwise increase our costs.
We are
subject to risks associated with information disseminated
through our service.
The law relating to the liability of online services companies
for information carried on or disseminated through their
services is currently unsettled. Claims could be made against
online services companies under both U.S. and foreign law for
defamation, libel, invasion of privacy, negligence, copyright or
trademark infringement, or other theories based on the nature
and content of the materials disseminated through their
services. Several private lawsuits seeking to impose liability
upon us under a number of these theories have been brought
against us. In addition, domestic and foreign legislation has
been proposed that would prohibit or impose liability for the
transmission over the Internet of certain types of information.
Our service features a Feedback Forum, which includes
information from users regarding other users. Although all such
feedback is generated by users and not by us, claims of
defamation or other injury have been made in the past and could
be made in the future against us for content posted in the
Feedback Forum. Several recent court decisions have narrowed the
scope of the immunity provided to Internet service providers
like us under the Communications Decency Act. This trend, if
continued, may increase our potential liability to third parties
for the user-provided content on our site. Our liability for
such claims may be higher in jurisdictions outside the
U.S. where laws governing Internet transactions are
unsettled. If we become liable for information provided by our
users and carried on our service in any jurisdiction in which we
operate, we could be directly harmed and we may be forced to
implement new measures to reduce our exposure to this liability.
This may require us to expend substantial resources or to
discontinue certain service offerings, which would negatively
affect our financial results. In addition, the increased
attention focused upon liability issues as a result of these
lawsuits and legislative proposals could harm our reputation or
otherwise impact the growth of our business. Any costs incurred
as a result of this potential liability could harm our business.
Customer
complaints or negative publicity about our customer service
could diminish use of our services.
Customer complaints or negative publicity about our customer
service could severely diminish consumer confidence in and use
of our services. Measures we sometimes take to combat risks of
fraud and breaches of privacy
57
and security can damage relations with our customers. These
measures heighten the need for prompt and accurate customer
service to resolve irregularities and disputes. Effective
customer service requires significant personnel expense, and
this expense, if not managed properly, could significantly
impact our profitability. Failure to manage or train our
customer service representatives properly could compromise our
ability to handle customer complaints effectively. If we do not
handle customer complaints effectively, our reputation may
suffer and we may lose our customers confidence.
Because it is providing a financial service and operating in a
more regulated environment, PayPal, unlike eBay, must provide
telephone as well as email customer service and must resolve
certain customer contacts within shorter time frames. As part of
PayPals program to reduce fraud losses, it may temporarily
restrict the ability of customers to withdraw their funds if
those funds or the customers account activity are
identified by PayPals anti-fraud models as suspicious.
PayPal has in the past received negative publicity with respect
to its customer service and account restrictions, and has been
the subject of purported class action lawsuits and state
attorney general inquiries alleging, among other things, failure
to resolve account restrictions promptly. If PayPal is unable to
provide quality customer support operations in a cost-effective
manner, PayPals users may have negative experiences,
PayPal may receive additional negative publicity, its ability to
attract new customers may be damaged, and it could become
subject to additional litigation. Current and future revenues
could suffer, or its operating margins may decrease. In
addition, negative publicity about or experiences with
PayPals customer support could cause eBays
reputation to suffer or affect consumer confidence in the eBay
brands as a whole.
Problems
with third parties who provide services to us or to our users
could harm our business.
A number of parties provide services to us or to our users that
benefit us. Such services include seller tools that automate and
manage listings, merchant tools that manage listings and
interface with inventory management software, storefronts that
help our users list items, and caching services that make our
sites load faster, among others. In some cases we have
contractual agreements with these companies that give us a
direct financial interest in their success, while in other cases
we have none. In either circumstance, financial, regulatory, or
other problems that prevent these companies from providing
services to us or our users could reduce the number of listings
on our websites or make completing transactions on our websites
more difficult, and thereby harm our business. Any security
breach at one of these companies could also affect our customers
and harm our business. Although we generally have been able to
renew or extend the terms of contractual arrangements with these
third party service providers on acceptable terms, there can be
no assurance that we will continue to be able to do so in the
future.
We
depend on key personnel.
Our future performance depends substantially on the continued
services of our senior management and other key personnel and
our ability to retain and motivate them. The loss of the
services of any of our executive officers or other key employees
could harm our business. We do not have long-term employment
agreements with any of our key personnel, we do not maintain any
key person life insurance policies, and our Chief
Executive Officer and many other members of our senior
management team have fully vested the vast majority of their
in-the-money
equity incentives. Our new businesses all depend on attracting
and retaining key personnel. Our future success also will depend
on our ability to attract, train, retain and motivate highly
skilled technical, managerial, marketing, and customer support
personnel. Competition for these personnel is intense, and we
may be unable to successfully attract, integrate, or retain
sufficiently qualified personnel. In making employment
decisions, particularly in the Internet and high-technology
industries, job candidates often consider the value of the stock
options they are to receive in connection with their employment.
Fluctuations in our stock price may make it more difficult to
retain and motivate employees whose stock option strike prices
are substantially above current market prices. Similarly,
decreases in the number of unvested
in-the-money
stock options held by existing employees, whether because our
stock price has declined, options have vested, or because the
size of follow-on option grants have declined, may make it more
difficult to retain and motivate employees.
Skypes future success depends substantially upon the
continued services of its senior management and key personnel,
and the loss of their services could harm our business. Several
key members of Skypes engineering team are consultants,
not full time employees, who provide services to us and third
parties. Many of Skypes employees had equity in Skype
prior to its acquisition by eBay. Skype equity holders were
given the option of receiving their
58
portion of the acquisition consideration in the form of a
lump-sum up-front payment or receiving a lower up-front payment
in exchange for the possibility of receiving additional
consideration in the form of potential earn-out payments tied to
the achievement of certain performance targets prior to
June 30, 2009. Several key members of Skypes senior
management and key employees chose to receive less up-front
consideration in exchange for the possibility of receiving the
performance-based earn-out payments. Although eligible Skype
employees have also been granted eBay stock options, the
earn-out payments are not tied to continued employment with
Skype or eBay, and key Skype employees may choose to depart
because of differences in corporate culture, because they
believe the earn-out targets will be achieved without their
contributions, or because they believe the earn-out targets are
not achievable. The loss of the services of any of Skypes
senior management or key personnel could delay the development
and introduction of new features and products, and could harm
our ability to grow Skypes business.
Our
industry is intensely competitive, and other companies or
governmental agencies may allege that our behavior is
anti-competitive.
Marketplaces
eBays Marketplaces businesses currently or potentially
compete with a number of companies providing both particular
categories of goods and broader ranges of goods. The Internet
provides new, rapidly evolving and intensely competitive
channels for the sale of all types of goods. We expect
competition to intensify in the future. The barriers to entry
into these channels are relatively low, and current offline and
new competitors can easily launch online sites at a nominal cost
using commercially available software or partnering with any one
of a number of successful
e-commerce
companies.
Our broad-based competitors include the vast majority of
traditional department, warehouse, discount, and general
merchandise stores (as well as the online operations of these
traditional retailers), emerging online retailers, online
classified services, and other shopping channels such as offline
and online home shopping networks. These include most
prominently: Wal-Mart, Target, Sears, Macys, JC Penney,
Costco, Office Depot, Staples, OfficeMax, Sams Club,
Amazon.com, Buy.com, AOL.com, Yahoo! Shopping, MSN, QVC, and
Home Shopping Network.
A number of companies have launched a variety of services that
provide new channels for buyers to find and buy items from
sellers of all sizes, including online aggregation and
classifieds sites such as Oodle.com, Google Base, and Microsoft
Live Expo. In 2005, we acquired Shopping.com Ltd., an online
shopping comparison site. Shopping.com competes with sites such
as Buy.com, Googles Froogle, In-Store.com, MySimon.com,
Nextag.com, Pricegrabber.com, Shopzilla, and Yahoo! Product
Search, which offer shopping search engines that allow consumers
to search the Internet for specified products. Similarly,
sellers are increasingly acquiring new customers by paying for
search-related advertisements on search engine sites such as
Google and Yahoo!. We use product search engines and paid search
advertising to channel users to our sites, but these services
also have the potential to divert users to other online shopping
destinations.
We also compete with many local, regional, and national
specialty retailers and exchanges in each of the major
categories of products offered on our site. For example,
category-specific competitors to offerings in our
Clothing & Accessories category include
Abercrombie & Fitch, AE.com, Bloomingdales,
Bluefly.com, Coldwater-Creek.com, Delias.com, Dockers.com, DSW,
Eddie Bauer, eBags, eLuxury, The Gap, J. Crew, Kohls,
Lands End, Lane Bryant, The Limited, LL Bean, Macys,
The Mens Wearhouse, Neiman-Marcus, Nordstrom, Old Navy,
Overstock.com, Payless, Ross, Saks Fifth Avenue, Shoes.com,
Urban Outfitters, Victorias Secret, Yoox.com, and
Zappos.com. In addition, many competitors have been successful
at establishing online marketplaces that cater to a particular
retail category, such as vehicles, tickets, or sporting goods.
Our international Marketplaces websites compete with similar
online and offline channels in each of their vertical categories
in most countries. In addition, they compete with general online
e-commerce
sites, such as Quelle and Otto in Germany, Yahoo-Kimo in Taiwan,
Daum and Gmarket in South Korea, TaoBao and 1pai, a partnership
between Sina.com and Yahoo! in China, and Amazon in the U.K. and
other countries. In some of these countries, there are online
sites that have much larger customer bases and greater brand
recognition than we do, and in certain of these jurisdictions
there are competitors that may have a better understanding of
local culture and commerce than we do.
59
The principal competitive factors for eBay Marketplaces include
the following:
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ability to attract buyers and sellers;
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volume of transactions and price and selection of goods;
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customer service; and
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brand recognition.
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With respect to our online competition, additional competitive
factors include:
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community cohesion, interaction and size;
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system reliability;
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reliability of delivery and payment;
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website convenience and accessibility;
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level of service fees; and
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quality of search tools.
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Some current and potential competitors have longer operating
histories, larger customer bases and greater brand recognition
in other business and Internet sectors than we do. Other online
trading services may be acquired by, receive investments from,
or enter into other commercial relationships with larger,
well-established and well-financed companies. As a result, some
of our competitors with other revenue sources may be able to
devote more resources to marketing and promotional campaigns,
adopt more aggressive pricing policies and devote substantially
more resources to website and systems development than we can.
Some of our competitors have offered services for free and
others may do this as well. We may be unable to compete
successfully against current and future competitors. In
addition, certain offline competitors may encourage
manufacturers to limit or cease distribution of their products
to dealers who sell through online channels such as eBay, or may
attempt to use existing or future government regulation to
prohibit or limit online commerce in certain categories of goods
or services. The adoption by manufacturers or government
authorities of policies or regulations discouraging the sales of
goods or services over the Internet could force eBay users to
stop selling certain products on our websites. Increased
competition or anti-Internet distribution policies or
regulations may result in reduced operating margins, loss of
market share and diminished value of our brand.
Conversely, other companies and government agencies have in the
past and may in the future allege that our actions violate the
antitrust or competition laws of the U.S. or other
countries, or otherwise constitute unfair competition. Such
claims, even if without foundation, typically are very expensive
to defend, involve negative publicity and diversion of
management time and effort, and could result in significant
judgments against us.
In order to respond to changes in the competitive environment,
we may, from time to time, make pricing, service or marketing
decisions or acquisitions that could harm our profitability. For
example, we have implemented a buyer protection program that
generally insures items up to a value of $200, with a $25
deductible, for users with a non-negative feedback rating at no
cost to the user. PayPal has implemented a similar buyer
protection program covering losses from selected eBay sellers up
to $1,000, with no deductible. Depending on the amount and size
of claims we receive under these programs, these product
offerings could harm our profitability. Similarly, we recently
announced pricing and product changes related to our store
inventory format that may reduce the revenue and profits of that
format. In addition, certain competitors may offer or continue
to offer free shipping or other transaction related services,
which could be impractical or inefficient for eBay users to
match. New technologies may increase the competitive pressures
by enabling our competitors to offer a lower cost service.
Although we have established Internet traffic arrangements with
several large online services and search engine companies, these
arrangements may not be renewed on commercially reasonable terms
or these companies may decide to promote competitive services.
Even if these arrangements are renewed, they may not result in
increased usage of our services. In addition, companies that
control user access to transactions through network access,
Internet browsers, or search engines, could promote our
competitors, channel current or potential users to
60
their vertically integrated electronic commerce sites or their
advertisers sites, attempt to restrict our access, or
charge us substantial fees for inclusion.
PayPal
The market for PayPals product is emerging, intensely
competitive, and characterized by rapid technological change.
PayPal competes with existing online and off-line payment
methods, including, among others:
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credit card merchant processors that offer their services to
online merchants, including Cardservice International, Chase
Paymentech, First Data, iPayment and Wells Fargo; and payment
gateways, including CyberSource and Authorize.net;
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money remitters such as MoneyGram and Western Union, a
subsidiary of First Data;
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bill payment services, including CheckFree;
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processors that provide online merchants the ability to offer
their customers the option of paying for purchases from their
bank account, including Certegy, PayByTouch and TeleCheck, a
subsidiary of First Data, or to pay on credit, including Bill Me
Later;
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providers of traditional payment methods, particularly credit
cards, checks, money orders, and Automated Clearing House
transactions;
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issuers of stored value targeted at online payments, including
VisaBuxx, NetSpend and Next Estate; and
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Google Checkout, which enables the online payment of merchants
using credit cards.
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Some of these competitors have longer operating histories,
significantly greater financial, technical, marketing, customer
service and other resources, greater name recognition, or a
larger base of customers in affiliated businesses than PayPal.
PayPals competitors may respond to new or emerging
technologies and changes in customer requirements faster and
more effectively than PayPal. They may devote greater resources
to the development, promotion, and sale of products and services
than PayPal, and they may offer lower prices. PayPal may be
forced to lower its prices in response. Competing services tied
to established banks and other financial institutions may offer
greater liquidity and engender greater consumer confidence in
the safety and efficacy of their services than PayPal.
Overseas, PayPal faces competition from similar channels and
payment methods. In each country, numerous banks provide
standard online credit card acquiring and processing services,
and these banks typically have leading market share. In
addition, PayPal faces competition from Visas Visa Direct,
MasterCards MoneySend, and Royal Bank of Scotlands
World Pay and Webpay Internationals Click & Buy
in the European Community, NOCHEX, Moneybookers, NETeller and
FirePay in the U.K., CertaPay and HyperWallet in Canada, Paymate
in Australia, Alipay and 99Bill in China and Inicis in South
Korea. In addition, in certain countries, such as Germany and
Australia, electronic funds transfer is a leading method of
payment for both online and offline transactions. As in the
U.S., established banks and other financial institutions that do
not currently offer online payments could quickly and easily
develop such a service.
Skype
The market for Skypes products is also emerging, intensely
competitive, and characterized by rapid technological change.
Many traditional telecommunications carriers and cable providers
offer, or have indicated that they plan to offer, VoIP products
or services that compete with the software Skype provides. In
addition, many Internet companies, including AOL, Google,
Microsoft, and Yahoo! offer, or have indicated that they plan to
offer in the near future, products that are similar to
Skypes. We expect competitors to continue to improve the
performance of their current products and introduce new
products, software, services, and technologies. If Skypes
competitors successfully introduce new products or enhance their
existing products, this could reduce the market for Skypes
products, increase price competition, or make Skypes
products obsolete. For example, Skypes competitors may
integrate more traditional methods of online communication that
do not involve VoIP technology, such as instant messaging, with
content and functionality that Skype does not have, or that is
superior to Skypes, which
61
could lower Skypes adoption rates, decrease its ability to
attract new users or cause its current users to migrate to a
competing company. In addition, some of Skypes
competitors, such as telecommunications carriers and cable
television providers, may be able to bundle services and
products that Skype does not offer. These could include various
forms of wireless communications, voice and data services,
Internet access, and cable television. This form of bundling
would put Skype at a competitive disadvantage if these providers
can combine a variety of service offerings at a single
attractive price. Furthermore, competitors may choose to make
their services interoperable with one another, rather than
proprietary, which could increase the attractiveness of their
services relative to Skype and decrease the value of
Skypes network of users.
Many of Skypes current and potential competitors have
longer operating histories, are substantially larger, and have
greater financial, marketing, technical, and other resources.
Some also have greater name recognition and a larger installed
base of customers than Skype has. As a result of their greater
resources, many current and potential competitors may be able to
lower their prices substantially, thereby eroding some or all of
Skypes cost advantage.
Our
business depends on the development and maintenance of the
Internet infrastructure.
The success of our services will depend largely on the
development and maintenance of the Internet infrastructure. This
includes maintenance of a reliable network backbone with the
necessary speed, data capacity, and security, as well as timely
development of complementary products, for providing reliable
Internet access and services. The Internet has experienced, and
is likely to continue to experience, significant growth in the
numbers of users and amount of traffic. The Internet
infrastructure may be unable to support such demands. In
addition, increasing numbers of users, increasing bandwidth
requirements, or problems caused by viruses,
worms, and similar programs may harm the performance
of the Internet. The backbone computers of the Internet have
been the targets of such programs. The Internet has experienced
a variety of outages and other delays as a result of damage to
portions of its infrastructure, and it could face outages and
delays in the future. These outages and delays could reduce the
level of Internet usage generally as well as the level of usage
of our services.
We may
be unable to protect or enforce our own intellectual property
rights adequately.
We regard the protection of our trademarks, copyrights, patents,
domain names, trade dress, and trade secrets as critical to our
success. We aggressively protect our intellectual property
rights by relying on a combination of trademark, copyright,
patent, trade dress and trade secret laws, and through the
domain name dispute resolution system. We also rely on
contractual restrictions to protect our proprietary rights in
products and services. We have entered into confidentiality and
invention assignment agreements with our employees and
contractors, and confidentiality agreements with parties with
whom we conduct business in order to limit access to and
disclosure of our proprietary information. These contractual
arrangements and the other steps we have taken to protect our
intellectual property may not prevent misappropriation of our
technology or deter independent development of similar
technologies by others. We pursue the registration of our domain
names, trademarks, and service marks in the U.S. and
internationally. Effective trademark, copyright, patent, domain
name, trade dress, and trade secret protection is very expensive
to maintain and may require litigation. We must protect our
trademarks, patents, and domain names in an increasing number of
jurisdictions, a process that is expensive and may not be
successful in every location. For example, Skype is in the
process of applying to register the Skype name as a trademark
worldwide. In the EU, Skypes application is being opposed.
If this opposition to Skypes application were to be
successful, Skype might be forced to apply for trademark
registration in each individual EU country, resulting in
increased expenditures and damage to its business if its
application were rejected in individual countries. We have
licensed in the past, and expect to license in the future,
certain of our proprietary rights, such as trademarks or
copyrighted material, to others. These licensees may take
actions that diminish the value of our proprietary rights or
harm our reputation.
62
We are
subject to the risks of owning real property.
We own real property including land and buildings related to our
operations. We have little experience in managing real property.
Ownership of this property subjects us to risks, including:
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the possibility of environmental contamination and the costs
associated with fixing any environmental problems;
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adverse changes in the value of these properties, due to
interest rate changes, changes in the neighborhoods in which the
properties are located, or other factors;
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the possible need for structural improvements in order to comply
with zoning, seismic, disability act, or other
requirements; and
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possible disputes with tenants, neighboring owners, or others.
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Some
anti-takeover provisions may affect the price of our common
stock.
Our Board of Directors has the authority to issue up to
10,000,000 shares of preferred stock and to determine the
preferences, rights and privileges of those shares without any
further vote or action by the stockholders. The rights of the
holders of common stock may be harmed by rights granted to the
holders of any preferred stock that may be issued in the future.
Some provisions of our certificate of incorporation and bylaws
could have the effect of making it more difficult for a
potential acquirer to acquire a majority of our outstanding
voting stock. These include provisions that provide for a
classified board of directors, prohibit stockholders from taking
action by written consent and restrict the ability of
stockholders to call special meetings. We are also subject to
provisions of Delaware law that prohibit us from engaging in any
business combination with any interested stockholder for a
period of three years from the date the person became an
interested stockholder, unless certain conditions are met. This
restriction could have the effect of delaying or preventing a
change of control.
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Item 2:
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Unregistered
Sales of Equity Securities and Use of Proceeds
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On April 10, 2006, eBay issued 699,541 shares of its
common stock pursuant to a Share Purchase Agreement, dated as of
April 10, 2006, by and among eBay, Sonorit Holding AS, or
Sonorit, certain former shareholders of Sonorit, and Aril Resen,
as representative of such shareholders, and Share Purchase
Agreements, dated as of April 10, 2006, by and among eBay,
Sonorit and the other former shareholders of Sonorit. Such
shares were issued in exchange for all of the outstanding shares
of Sonorit. The shares were issued in reliance upon the
exemptions from the registration requirements under the
Securities Act of 1933, as amended, pursuant to
Regulation D and Regulation S thereunder. The shares
were subsequently registered for public resale on a
Form S-3ASR
filed with the SEC on April 12, 2006.
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Item 3:
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Defaults
Upon Senior Securities
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Not applicable.
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Item 4:
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Submission
of Matters to a Vote of Security Holders
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eBay held its Annual Meeting of Stockholders on June 13,
2006. The following is a brief description of each matter voted
upon at the meeting and the number of votes cast for, withheld,
or against, the number of abstentions and the number of broker
non-votes with respect to each matter. The four directors
proposed by eBay for re-election were elected to new, three-year
terms by the following vote:
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Director Name
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Shares Voted For
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Shares Withheld
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William C. Ford, Jr.
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1,200,255,225
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61,141,164
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Dawn G. Lepore
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1,248,960,585
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12,435,804
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Pierre M. Omidyar
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1,235,559,541
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25,836,848
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Richard T. Schlosberg, III
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1,248,637,158
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12,759,232
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63
In addition to the four directors re-elected at the meeting,
seven other directors continued in office following the meeting:
Fred D. Anderson, Edward W. Barnholt, Philippe Bourguignon,
Scott D. Cook, Robert C. Kagle, Thomas J. Tierney, and Margaret
C. Whitman.
The stockholders approved an amendment to our 2001 Equity
Incentive Plan to increase by 30,000,000 the number of shares of
common stock that may be issued under our 2001 Equity Incentive
Plan: shares voted for: 853,657,502; shares voted against:
249,022,885; shares abstaining: 6,392,115; and broker non-votes:
152,323,887.
The stockholders approved the appointment of
PricewaterhouseCoopers, LLP, as our independent registered
accounting firm: shares voted for: 1,233,953,571; shares voted
against: 21,366,694; and shares abstaining: 6,076,123.
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Item 5:
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Other
Information
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Audit
Committee Pre-Approvals of Non-Audit Engagements
The Audit Committee of our Board of Directors has adopted a
policy requiring the pre-approval of any non-audit engagement of
PricewaterhouseCoopers LLP, or PwC, our independent registered
public accounting firm. In the event that we wish to engage PwC
to perform accounting, technical, diligence or other permitted
services not related to the services performed by PwC as our
independent registered public accounting firm, our internal
finance personnel will prepare a summary of the proposed
engagement, detailing the nature of the engagement, the reasons
why PwC is the preferred provider of such services and the
estimated duration and cost of the engagement. The report will
be provided to our Audit Committee or a designated committee
member, who will evaluate whether the proposed engagement will
interfere with the independence of PwC in the performance of its
auditing services. We intend to disclose all approved non-audit
engagements in the appropriate quarterly report on
Form 10-Q
or annual report on
Form 10-K.
During the quarter ended June 30, 2006, our Audit Committee
approved the non-audit engagement of PwC to perform due
diligence services related to certain potential acquisitions.
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Exhibit 10
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.01
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2001 Equity Incentive Plan, as
amended.+
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Exhibit 31
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.01
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Certification of eBays Chief
Executive Officer, as required by Section 302 of the
Sarbanes-Oxley Act of 2002.
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Exhibit 31
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.02
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Certification of eBays Chief
Financial Officer, as required by Section 302 of the
Sarbanes-Oxley Act of 2002.
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Exhibit 32
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.01
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Certification of eBays Chief
Executive Officer, as required by Section 906 of the
Sarbanes-Oxley Act of 2002.
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Exhibit 32
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.02
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Certification of eBays Chief
Financial Officer, as required by Section 906 of the
Sarbanes-Oxley Act of 2002.
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+ |
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Indicates a management contract or compensatory plan or
arrangement. |
64
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
eBay Inc.
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By:
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/s/ Margaret
C. Whitman
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Margaret C. Whitman
President and Chief Executive Officer
Date: July 26, 2006
Principal Financial Officer:
Robert H. Swan
Senior Vice President and Chief Financial Officer
Date: July 26, 2006
Principal Accounting Officer:
Douglas Jeffries
Vice President, Chief Accounting Officer
Date: July 26, 2006
65
INDEX TO
EXHIBITS
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Exhibit 10
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.01
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2001 Equity Incentive Plan, as
amended.+
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Exhibit 31
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.01
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Certification of eBays Chief
Executive Officer, as required by Section 302 of the
Sarbanes-Oxley Act of 2002.
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Exhibit 31
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.02
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Certification of eBays Chief
Financial Officer, as required by Section 302 of the
Sarbanes-Oxley Act of 2002.
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Exhibit 32
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.01
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Certification of eBays Chief
Executive Officer, as required by Section 906 of the
Sarbanes-Oxley Act of 2002.
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Exhibit 32
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.02
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Certification of eBays Chief
Financial Officer, as required by Section 906 of the
Sarbanes-Oxley Act of 2002.
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+ |
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Indicates a management contract or compensatory plan or
arrangement. |