e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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|
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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 September 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 |
Commission file number 000-24821
eBay Inc.
(Exact name of registrant as specified in its charter)
|
|
|
Delaware |
|
77-0430924 |
(State or other jurisdiction of
incorporation or organization) |
|
(I.R.S. Employer
Identification Number) |
|
2145 Hamilton Avenue
San Jose, California |
|
95125
(Zip Code) |
(Address of principal executive offices) |
|
|
(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 October 20, 2006, there were
1,394,107,971 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
2
PART I: FINANCIAL
INFORMATION
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|
Item 1: |
Financial Statements |
eBay Inc.
CONDENSED CONSOLIDATED BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
September 30, | |
|
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
|
(In thousands, except par value | |
|
|
amounts) | |
|
|
(Unaudited) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
1,313,580 |
|
|
$ |
2,482,257 |
|
|
Short-term investments
|
|
|
774,650 |
|
|
|
741,655 |
|
|
Accounts receivable, net
|
|
|
322,788 |
|
|
|
366,631 |
|
|
Funds receivable from customers
|
|
|
255,282 |
|
|
|
307,154 |
|
|
Restricted cash and investments
|
|
|
29,702 |
|
|
|
33,078 |
|
|
Other current assets
|
|
|
487,235 |
|
|
|
843,908 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
3,183,237 |
|
|
|
4,774,683 |
|
Long-term investments
|
|
|
825,667 |
|
|
|
538,875 |
|
Property and equipment, net
|
|
|
801,602 |
|
|
|
999,214 |
|
Goodwill
|
|
|
6,120,079 |
|
|
|
6,407,973 |
|
Intangible assets, net
|
|
|
823,280 |
|
|
|
719,302 |
|
Other assets
|
|
|
35,121 |
|
|
|
23,071 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
11,788,986 |
|
|
$ |
13,463,118 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
55,692 |
|
|
$ |
122,287 |
|
|
Funds payable and amounts due to customers
|
|
|
586,651 |
|
|
|
973,541 |
|
|
Accrued expenses and other current liabilities
|
|
|
578,557 |
|
|
|
620,078 |
|
|
Deferred revenue and customer advances
|
|
|
81,940 |
|
|
|
117,791 |
|
|
Income taxes payable
|
|
|
182,095 |
|
|
|
386,988 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,484,935 |
|
|
|
2,220,685 |
|
Deferred tax liabilities, net
|
|
|
215,682 |
|
|
|
102,122 |
|
Other liabilities
|
|
|
40,388 |
|
|
|
37,444 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,741,005 |
|
|
|
2,360,251 |
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 3,580,000 shares
authorized; 1,404,183 and 1,393,764 shares outstanding
|
|
|
1,412 |
|
|
|
1,426 |
|
Additional paid-in capital
|
|
|
7,272,742 |
|
|
|
7,811,005 |
|
Unearned stock-based compensation
|
|
|
(45,540 |
) |
|
|
|
|
Treasury stock at cost; 7,531 and 31,511 shares
|
|
|
(274 |
) |
|
|
(666,815 |
) |
Retained earnings
|
|
|
2,716,511 |
|
|
|
3,495,683 |
|
Accumulated other comprehensive income
|
|
|
103,130 |
|
|
|
461,568 |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
10,047,981 |
|
|
|
11,102,867 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
11,788,986 |
|
|
$ |
13,463,118 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2006 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
|
|
(Unaudited) | |
Net revenues
|
|
$ |
1,105,515 |
|
|
$ |
1,448,637 |
|
|
$ |
3,223,542 |
|
|
$ |
4,249,840 |
|
Cost of net revenues(1)
|
|
|
200,375 |
|
|
|
315,717 |
|
|
|
578,584 |
|
|
|
886,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
905,140 |
|
|
|
1,132,920 |
|
|
|
2,644,958 |
|
|
|
3,363,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
293,746 |
|
|
|
394,820 |
|
|
|
852,239 |
|
|
|
1,193,382 |
|
|
Product development
|
|
|
78,881 |
|
|
|
120,405 |
|
|
|
224,309 |
|
|
|
363,447 |
|
|
General and administrative
|
|
|
146,578 |
|
|
|
227,188 |
|
|
|
419,598 |
|
|
|
667,785 |
|
|
Amortization of acquired intangible assets
|
|
|
29,199 |
|
|
|
51,474 |
|
|
|
77,516 |
|
|
|
165,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
548,404 |
|
|
|
793,887 |
|
|
|
1,573,662 |
|
|
|
2,390,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
356,736 |
|
|
|
339,033 |
|
|
|
1,071,296 |
|
|
|
973,071 |
|
Interest and other income, net
|
|
|
30,657 |
|
|
|
41,231 |
|
|
|
85,585 |
|
|
|
92,621 |
|
Interest expense
|
|
|
(431 |
) |
|
|
(553 |
) |
|
|
(2,556 |
) |
|
|
(2,229 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests
|
|
|
386,962 |
|
|
|
379,711 |
|
|
|
1,154,325 |
|
|
|
1,063,463 |
|
Provision for income taxes
|
|
|
(131,989 |
) |
|
|
(98,814 |
) |
|
|
(351,455 |
) |
|
|
(284,288 |
) |
Minority interests
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(48 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
254,971 |
|
|
$ |
280,896 |
|
|
$ |
802,822 |
|
|
$ |
779,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.19 |
|
|
$ |
0.20 |
|
|
$ |
0.59 |
|
|
$ |
0.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.18 |
|
|
$ |
0.20 |
|
|
$ |
0.58 |
|
|
$ |
0.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,357,239 |
|
|
|
1,406,382 |
|
|
|
1,350,836 |
|
|
|
1,405,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
1,387,038 |
|
|
|
1,426,112 |
|
|
|
1,383,024 |
|
|
|
1,433,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes stock-based compensation as follows
(2006 increases are due primarily to the adoption of
FAS 123(R)): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenues
|
|
$ |
201 |
|
|
$ |
8,001 |
|
|
$ |
279 |
|
|
$ |
25,108 |
|
Sales and marketing
|
|
$ |
396 |
|
|
$ |
23,149 |
|
|
$ |
396 |
|
|
$ |
74,933 |
|
Product development
|
|
$ |
1,224 |
|
|
$ |
19,010 |
|
|
$ |
825 |
|
|
$ |
62,702 |
|
General and administrative
|
|
$ |
3,504 |
|
|
$ |
23,359 |
|
|
$ |
7,471 |
|
|
$ |
80,002 |
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2006 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
(Unaudited) | |
Net income
|
|
$ |
254,971 |
|
|
$ |
280,896 |
|
|
$ |
802,822 |
|
|
$ |
779,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
(13,934 |
) |
|
|
72,159 |
|
|
|
(96,181 |
) |
|
|
354,540 |
|
|
Unrealized gains (losses) on investments, net
|
|
|
(20 |
) |
|
|
2,153 |
|
|
|
(292 |
) |
|
|
7,162 |
|
|
Unrealized gains (losses) on cash flow hedges, net
|
|
|
(2,319 |
) |
|
|
2,213 |
|
|
|
2,824 |
|
|
|
(698 |
) |
|
Estimated tax provision on above items
|
|
|
937 |
|
|
|
(1,654 |
) |
|
|
(1,044 |
) |
|
|
(2,566 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in accumulated other comprehensive income (loss)
|
|
|
(15,336 |
) |
|
|
74,871 |
|
|
|
(94,693 |
) |
|
|
358,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$ |
239,635 |
|
|
$ |
355,767 |
|
|
$ |
708,129 |
|
|
$ |
1,137,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
|
(In thousands) | |
|
|
(Unaudited) | |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
802,822 |
|
|
$ |
779,172 |
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts and authorized credits
|
|
|
65,653 |
|
|
|
74,193 |
|
|
|
|
Provision for transaction losses
|
|
|
46,956 |
|
|
|
81,696 |
|
|
|
|
Depreciation and amortization
|
|
|
256,867 |
|
|
|
400,936 |
|
|
|
|
Stock-based compensation related to stock options and employee
stock purchases
|
|
|
8,971 |
|
|
|
242,745 |
|
|
|
|
Tax benefit on the exercise of stock options
|
|
|
172,164 |
|
|
|
108,790 |
|
|
|
|
Excess tax benefits from stock-based compensation
|
|
|
|
|
|
|
(77,263 |
) |
|
|
|
Minority interests
|
|
|
|
|
|
|
3 |
|
|
|
|
Changes in assets and liabilities, net of acquisition effects:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(83,235 |
) |
|
|
(117,031 |
) |
|
|
|
|
Funds receivable from customers
|
|
|
(84,692 |
) |
|
|
(54,372 |
) |
|
|
|
|
Other current assets
|
|
|
(23,667 |
) |
|
|
(339,278 |
) |
|
|
|
|
Other non-current assets
|
|
|
(6,564 |
) |
|
|
10,869 |
|
|
|
|
|
Accounts payable
|
|
|
(5,238 |
) |
|
|
63,901 |
|
|
|
|
|
Funds payable and amounts due to customers
|
|
|
192,877 |
|
|
|
387,466 |
|
|
|
|
|
Accrued expenses and other liabilities
|
|
|
(3,276 |
) |
|
|
(50,233 |
) |
|
|
|
|
Deferred revenue and customer advances
|
|
|
(4,394 |
) |
|
|
36,664 |
|
|
|
|
|
Income taxes payable
|
|
|
18,586 |
|
|
|
205,029 |
|
|
|
|
|
Deferred tax liabilities, net
|
|
|
129,824 |
|
|
|
(131,457 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1,483,654 |
|
|
|
1,621,830 |
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment, net
|
|
|
(240,534 |
) |
|
|
(418,875 |
) |
|
Proceeds from sale of corporate aircraft
|
|
|
28,290 |
|
|
|
|
|
|
Purchases of investments
|
|
|
(849,851 |
) |
|
|
(547,413 |
) |
|
Maturities and sales of investments
|
|
|
1,335,128 |
|
|
|
882,279 |
|
|
Acquisitions, net of cash acquired
|
|
|
(1,118,744 |
) |
|
|
(45,505 |
) |
|
Other
|
|
|
(2,575 |
) |
|
|
(8,796 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(848,286 |
) |
|
|
(138,310 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net
|
|
|
384,384 |
|
|
|
209,075 |
|
|
Repurchases of common stock
|
|
|
|
|
|
|
(666,541 |
) |
|
Excess tax benefits from stock-based compensation
|
|
|
|
|
|
|
77,263 |
|
|
Payment of headquarters lease facility obligation
|
|
|
(126,390 |
) |
|
|
|
|
|
Principal payments on long-term obligations
|
|
|
(1,849 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
256,145 |
|
|
|
(380,203 |
) |
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(40,960 |
) |
|
|
65,360 |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
850,553 |
|
|
|
1,168,677 |
|
Cash and cash equivalents at beginning of period
|
|
|
1,330,045 |
|
|
|
1,313,580 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
2,180,598 |
|
|
$ |
2,482,257 |
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$ |
33,032 |
|
|
$ |
107,368 |
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
Common stock options assumed pursuant to acquisition
|
|
$ |
43,232 |
|
|
$ |
|
|
|
|
Common stock issued for acquisition
|
|
$ |
|
|
|
$ |
15,686 |
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 The Company and Summary of
Significant Accounting Policies
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 operating segments: Marketplaces,
Payments and Communications. The Marketplaces segment provides
the infrastructure to enable online commerce in a variety of
formats, including our 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 and 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.
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 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
nine months ended September 30, 2005 and 2006, the equity
method income recorded in interest and other income, net was 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.
7
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 September 30, 2006. These
statements also show our condensed consolidated statement of
income and condensed consolidated statement of comprehensive
income for the three and nine months ended September 30,
2005 and 2006 and our condensed consolidated statement of cash
flows for the nine months ended September 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,
comprehensive 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.
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 nine months
ended September 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 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
income during the three and nine months ended September 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 nine months ended
September 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. FIN 48 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 January 1,
8
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2007, 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 consolidated financial statements.
In September 2006, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 108, Considering
the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements
(SAB 108), which provides interpretive guidance on how the
effects of the carryover or reversal of prior year misstatements
should be considered in quantifying a current year misstatement.
We will be required to adopt the provisions of SAB 108 in
our annual financial statements for fiscal year 2006. We do not
believe that the adoption of SAB 108 will materially impact
our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (FAS 157). FAS 157
establishes a framework for measuring fair value and expands
disclosures about fair value measurements. The changes to
current practice resulting from the application of this
Statement relate to the definition of fair value, the methods
used to measure fair value, and the expanded disclosures about
fair value measurements. We will be required to adopt the
provisions of FAS 157 beginning with our first quarter
ending March 31, 2007. We do not believe that the adoption
of the provisions of FAS 157 will materially impact our
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans an amendment of FASB Statements
No. 87, 88, 106, and 132(R), (FAS 158).
FAS 158 requires an employer to recognize the over-funded
or under-funded status of a defined benefit pension and other
postretirement plan (other than a multiemployer plan) as an
asset or liability in its statement of financial position and to
recognize changes in that funded status in the year in which the
changes occur through comprehensive income of a business entity.
We will be required to adopt the provisions of FAS 158 in
our annual financial statements for fiscal year 2007. We do not
believe that the adoption of the provisions of FAS 158 will
materially impact our consolidated financial statements.
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 equivalents outstanding during
the period. The dilutive effect of outstanding options,
restricted stock units 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
9
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2006 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
254,971 |
|
|
$ |
280,896 |
|
|
$ |
802,822 |
|
|
$ |
779,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
1,357,279 |
|
|
|
1,410,647 |
|
|
|
1,350,876 |
|
|
|
1,409,848 |
|
|
Weighted average nonvested common stock subject to
forfeiture/repurchase
|
|
|
(40 |
) |
|
|
(4,265 |
) |
|
|
(40 |
) |
|
|
(4,011 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic calculation
|
|
|
1,357,239 |
|
|
|
1,406,382 |
|
|
|
1,350,836 |
|
|
|
1,405,837 |
|
|
Weighted average effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average nonvested common stock subject to
forfeiture/repurchase
|
|
|
40 |
|
|
|
4,265 |
|
|
|
40 |
|
|
|
4,011 |
|
|
Employee stock options
|
|
|
29,759 |
|
|
|
15,465 |
|
|
|
32,148 |
|
|
|
23,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted calculation
|
|
|
1,387,038 |
|
|
|
1,426,112 |
|
|
|
1,383,024 |
|
|
|
1,433,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.19 |
|
|
$ |
0.20 |
|
|
$ |
0.59 |
|
|
$ |
0.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.18 |
|
|
$ |
0.20 |
|
|
$ |
0.58 |
|
|
$ |
0.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The calculation of diluted net income per share excludes all
anti-dilutive shares. For the three months ended
September 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 these periods, amounted to approximately
29.6 million and 90.4 million shares, respectively.
For the nine months ended September 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 these periods, amounted to
approximately 26.0 million and 69.1 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. We
anticipate that this acquisition will allow us to expand our
online auction-style marketplace in Sweden. 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.
10
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 of 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, which is expected to occur
in the second quarter of 2007.
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.
The following table presents goodwill balances and the movements
for each of our reportable segments during the nine months ended
September 30, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
Goodwill | |
|
|
|
September 30, | |
|
|
2005 | |
|
Acquired | |
|
Adjustments | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
Reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplaces
|
|
$ |
2,486,870 |
|
|
$ |
43,120 |
|
|
$ |
81,223 |
|
|
$ |
2,611,213 |
|
|
Payments
|
|
|
1,348,385 |
|
|
|
|
|
|
|
155 |
|
|
|
1,348,540 |
|
|
Communications
|
|
|
2,312,184 |
|
|
|
|
|
|
|
163,396 |
|
|
|
2,475,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,147,439 |
|
|
$ |
43,120 |
|
|
$ |
244,774 |
|
|
$ |
6,435,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to goodwill during the nine months ended
September 30, 2006, resulted primarily from foreign
currency translation adjustments.
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 September 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
conducted our annual impairment test as of August 31, 2006
and determined there was no impairment. There were no events or
circumstances from that date through September 30, 2006
indicating that a further assessment was necessary.
11
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of acquired identifiable intangible assets are as
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
September 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 |
|
|
$ |
541,262 |
|
|
$ |
(217,484 |
) |
|
$ |
323,778 |
|
|
|
6 |
|
|
Trademarks and trade names
|
|
|
443,565 |
|
|
|
(75,571 |
) |
|
|
367,994 |
|
|
|
5 |
|
|
|
467,007 |
|
|
|
(145,467 |
) |
|
|
321,540 |
|
|
|
5 |
|
|
Developed technologies
|
|
|
101,971 |
|
|
|
(45,882 |
) |
|
|
56,089 |
|
|
|
4 |
|
|
|
102,524 |
|
|
|
(59,085 |
) |
|
|
43,439 |
|
|
|
4 |
|
|
All other
|
|
|
36,450 |
|
|
|
(14,761 |
) |
|
|
21,689 |
|
|
|
4 |
|
|
|
56,167 |
|
|
|
(22,834 |
) |
|
|
33,333 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,108,643 |
|
|
$ |
(281,611 |
) |
|
$ |
827,032 |
|
|
|
|
|
|
$ |
1,166,960 |
|
|
$ |
(444,870 |
) |
|
$ |
722,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of our acquired identifiable intangible assets are subject
to amortization. As of December 31, 2005 and
September 30, 2006, the net carrying amount of intangible
assets related to our equity investments included above totaled
approximately $3.8 million and $2.8 million,
respectively. Aggregate amortization expense for intangible
assets totaled $30.6 million and $52.6 million for the
three months ended September 30, 2005 and 2006,
respectively. Aggregate amortization expense for intangible
assets totaled $81.9 million and $169.3 million for
the nine months ended September 30, 2005 and 2006,
respectively. Included in amortization of intangibles for the
nine months ended September 30, 2006 is a charge of
$10.9 million for in-process research and development
related to an asset purchase completed during the period.
As of September 30, 2006, expected future intangible asset
amortization was as follows (in thousands):
|
|
|
|
|
|
Fiscal Years:
|
|
|
|
|
|
2006 (remaining three months)
|
|
$ |
48,927 |
|
|
2007
|
|
|
199,110 |
|
|
2008
|
|
|
190,766 |
|
|
2009
|
|
|
169,630 |
|
|
2010
|
|
|
95,043 |
|
|
Thereafter
|
|
|
18,614 |
|
|
|
|
|
|
|
$ |
722,090 |
|
|
|
|
|
Note 4 Segments
Operating 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
(CODM) to evaluate segment performance and the availability
of separate financial information. We currently have three
operating segments: Marketplaces, Payments and Communications.
In prior periods, U.S. and International Marketplaces were
separate operating segments. During the third quarter of 2006,
the U.S. and International Marketplaces operating segments were
considered components of one global Marketplaces operating
segment based upon developments in our business and changes in
the manner in which our CODM evaluates the performance of our
Marketplaces segment and determines the allocation of resources
among segments. Prior
12
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
periods have been reclassified to reflect the manner in which
our Marketplaces operations are currently managed as one segment
by our CODM.
The Marketplaces segment includes our global online marketplaces
and e-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 net revenues from external
customers 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
discretionary control, such as advertising and marketing
programs, customer support expenses, bank charges, site
operations expenses, product development expenses, billing
operations, certain technology and facilities expenses,
transaction expenses, provisions for doubtful accounts,
authorized credits and transaction losses. Segment managers do
not have discretionary control over expenses such as our
corporate center costs (consisting of certain costs such as
corporate management, human resources, finance and legal),
amortization of acquired intangible assets and stock-based
compensation expenses, as they are not evaluated in the
measurement of segment performance. Prior period amounts have
been reclassified to reflect changes in the current management
of site operations cost, product development, billing
operations, and certain technology and facilities expenses as
direct costs.
The following table summarizes our financial performance (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, | |
|
|
| |
|
|
2005 | |
|
|
| |
|
|
Marketplaces | |
|
Payments | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
Net revenues from external customers
|
|
$ |
858,417 |
|
|
$ |
247,098 |
|
|
$ |
1,105,515 |
|
Direct costs
|
|
|
501,966 |
|
|
|
180,167 |
|
|
|
682,133 |
|
|
|
|
|
|
|
|
|
|
|
|
Direct contribution
|
|
|
356,451 |
|
|
|
66,931 |
|
|
|
423,382 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses and indirect costs of net revenues
|
|
|
|
|
|
|
|
|
|
|
66,646 |
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
356,736 |
|
Interest and other income, net
|
|
|
|
|
|
|
|
|
|
|
30,657 |
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(431 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests
|
|
|
|
|
|
|
|
|
|
$ |
386,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, | |
|
|
| |
|
|
2005 | |
|
|
| |
|
|
Marketplaces | |
|
Payments | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
Net revenues from external customers
|
|
$ |
2,499,461 |
|
|
$ |
724,081 |
|
|
$ |
3,223,542 |
|
Direct costs
|
|
|
1,431,963 |
|
|
|
500,209 |
|
|
|
1,932,172 |
|
|
|
|
|
|
|
|
|
|
|
|
Direct contribution
|
|
|
1,067,498 |
|
|
|
223,872 |
|
|
|
1,291,370 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses and indirect costs of net revenues
|
|
|
|
|
|
|
|
|
|
|
220,074 |
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
1,071,296 |
|
Interest and other income, net
|
|
|
|
|
|
|
|
|
|
|
85,585 |
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(2,556 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests
|
|
|
|
|
|
|
|
|
|
$ |
1,154,325 |
|
|
|
|
|
|
|
|
|
|
|
13
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, | |
|
|
| |
|
|
2006 | |
|
|
| |
|
|
Marketplaces | |
|
Payments | |
|
Communications | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
Net revenues from external customers
|
|
$ |
1,049,039 |
|
|
$ |
349,577 |
|
|
$ |
50,021 |
|
|
$ |
1,448,637 |
|
Direct costs
|
|
|
616,470 |
|
|
|
274,788 |
|
|
|
59,688 |
|
|
|
950,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct contribution
|
|
$ |
432,569 |
|
|
$ |
74,789 |
|
|
$ |
(9,667 |
) |
|
|
497,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses and indirect costs of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
339,033 |
|
Interest and other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,231 |
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(553 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
379,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, | |
|
|
| |
|
|
2006 | |
|
|
| |
|
|
Marketplaces | |
|
Payments | |
|
Communications | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
Net revenues from external customers
|
|
$ |
3,096,767 |
|
|
$ |
1,023,734 |
|
|
$ |
129,339 |
|
|
$ |
4,249,840 |
|
Direct costs
|
|
|
1,808,182 |
|
|
|
774,530 |
|
|
|
155,311 |
|
|
|
2,738,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct contribution
|
|
$ |
1,288,585 |
|
|
$ |
249,204 |
|
|
$ |
(25,972 |
) |
|
|
1,511,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses and indirect costs of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
538,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
973,071 |
|
Interest and other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,621 |
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,229 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,063,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 5 Balance Sheet Components
At December 31, 2005 and September 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 | |
|
|
| |
|
|
Gross | |
|
Gross | |
|
Gross | |
|
|
|
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
Estimated | |
|
|
Cost | |
|
Gains | |
|
Losses | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash and investments
|
|
$ |
33,030 |
|
|
$ |
48 |
|
|
$ |
|
|
|
$ |
33,078 |
|
|
Corporate debt securities
|
|
|
592,303 |
|
|
|
93 |
|
|
|
(1,407 |
) |
|
|
590,989 |
|
|
Government and agency securities
|
|
|
151,414 |
|
|
|
|
|
|
|
(748 |
) |
|
|
150,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
776,747 |
|
|
$ |
141 |
|
|
$ |
(2,155 |
) |
|
$ |
774,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash and investments
|
|
$ |
2,036 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,036 |
|
|
Corporate debt securities
|
|
|
473,371 |
|
|
|
356 |
|
|
|
(24 |
) |
|
|
473,703 |
|
|
Government and agency securities
|
|
|
500 |
|
|
|
|
|
|
|
(10 |
) |
|
|
490 |
|
|
Equity instruments and equity method investments
|
|
|
62,646 |
|
|
|
|
|
|
|
|
|
|
|
62,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
538,553 |
|
|
$ |
356 |
|
|
$ |
(34 |
) |
|
$ |
538,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
September 30, | |
|
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Customer accounts
|
|
$ |
324,595 |
|
|
$ |
654,495 |
|
Prepaid expenses
|
|
|
44,610 |
|
|
|
48,639 |
|
Deferred tax asset, net
|
|
|
59,274 |
|
|
|
78,748 |
|
Other
|
|
|
58,756 |
|
|
|
62,026 |
|
|
|
|
|
|
|
|
|
|
$ |
487,235 |
|
|
$ |
843,908 |
|
|
|
|
|
|
|
|
Based on differences in regulatory requirements and commercial
law in the jurisdictions where PayPal operates, PayPal holds
customer balances either as direct claims against PayPal or as
an agent or custodian on behalf of PayPals customers.
Customer balances held as direct claims against PayPal are
included on our condensed consolidated balance sheet as customer
accounts with an offsetting current liability in funds payable
and amounts due to customers. The customer accounts can be
invested only in specified types of liquid assets. Customer
accounts reflected on our condensed consolidated balance sheet
as of September 30, 2006 increased by approximately
$180 million from December 31, 2005, primarily due to
the establishment of our PayPal Asia Pacific headquarters,
causing certain customers relationships to be transferred
to jurisdictions where we have direct non-custodial customer
relationships. All customer funds held by PayPal as an agent or
custodian on behalf of our customers are not reflected in our
condensed consolidated balance sheet. These off-balance sheet
funds include funds held in the U.S. that are deposited in
bank accounts insured by the Federal Deposit Insurance
Corporation and funds that customers choose to invest in
PayPals Money Market Fund totaling approximately
$1.2 billion and $1.4 billion as of December 31,
2005 and September 30, 2006, respectively.
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 August 2006, Louis Vuitton Malletier and Christian Dior
Couture filed two lawsuits in the Paris Court of Commerce
against eBay Inc. and eBay International AG. The complaint
alleges we have violated French tort law by negligently
broadcasting listings posted by third parties offering
counterfeit items bearing plaintiffs trademarks, and by
purchasing certain advertising keywords. The plaintiffs seek
approximately EUR 35 million in damages. The first
hearing is scheduled for December 4, 2006. In or about
September 2006
16
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Parfums Christian Dior, Kenzo Parfums, Parfums Givenchy, and
Guerlain Société also filed a lawsuit in the Paris
Court of Commerce against eBay Inc. and eBay International AG.
The complaint alleges that we have interfered with the selective
distribution network plaintiffs have set up in France and
the European Union by allowing third parties to post listings
offering genuine perfumes and cosmetics for sale on our sites.
The plaintiffs in this suit seek approximately EUR 9 million in
damages and injunctive relief. The first hearing on this suit is
scheduled for December 18, 2006. We believe that we have
meritorious defenses to these suits and intend to defend
ourselves vigorously.
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). Following a trial in 2003,
the jury returned a verdict finding that we had willfully
infringed the patents related to multiple database searching and
electronic consignment systems, and the court entered judgment
for MercExchange in the amount of approximately $30 million
plus pre-judgment interest and post-judgment interest. In May
2006, following appeals to the U.S. Court of Appeals for
the Federal Circuit and the U.S. Supreme Court, the Supreme
Court 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 separate rulings in 2005, the Patent and
Trademark Office issued initial rulings rejecting all of the
claims contained in the three patents in suit. In March 2006,
the Patent and Trademark Office affirmed its earlier ruling
rejecting the claims contained in the patent that underlies the
jury verdict, which relates to electronic consignment systems.
We have requested that the district court stay all proceedings
in the case pending the final outcome of the reexamination
proceedings, and MercExchange has renewed its request that the
district court grant an injunction. We expect that the district
court will rule on those requests in the fourth quarter of 2006.
Even if successful, our litigation of these matters will
continue to be costly. 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 of the consignment patent. 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, 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 March 2005, eBay, PayPal, and an eBay seller were sued in the
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 sought injunctive
relief, compensatory damages, and punitive damages. In
September 2006, the parties finalized a preliminary
settlement agreement. The agreement must be approved by the
district court 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
17
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
infringement, unspecified damages, including treble damages for
willful infringement, and interest, costs, and fees. We have
filed an answer and counterclaims asserting that the patents are
invalid, unenforceable, and not infringed. We expect to receive
the courts scheduling order shortly. We believe that we
have meritorious defenses and intend to defend ourselves
vigorously.
In August 2006, Peer Communications Corporation filed a lawsuit
in the U.S. District Court for the Eastern District of
Texas (No. 6-06CV-370) alleging that eBay Inc., Skype
Technologies S.A., and Skype Inc. infringed two patents
owned by Peer Communications relating to uniform network access.
The suit seeks an injunction against continuing infringement,
unspecified damages, and interest, costs, and fees. We have not
yet received a schedule from the court or filed any responsive
pleadings. We believe that we have meritorious defenses and
intend to defend ourselves vigorously.
In September 2006, Mangosoft Intellectual Property, Inc. filed a
lawsuit in the U.S. District Court for the Eastern District
of Texas (No. 2-06CV-390) alleging that eBay Inc., Skype
Technologies S.A., and Skype Software S.a.r.l. infringed a
patent owned by Mangosoft relating to dynamic directory
services. The suit seeks an injunction against continuing
infringement, unspecified damages, and interest, costs, and
fees. We have only recently been served with the complaint, and
accordingly, have not filed an answer or response. 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 in addition to those discussed above,
and expect that we will increasingly be subject to patent
infringement claims as our services expand in scope and
complexity. In particular, we expect that we may face additional
patent infringement claims involving 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. We believe that
additional lawsuits alleging that we have violated copyright or
trademark law will be filed against us, primarily in Europe.
Intellectual property claims, whether meritorious or not, are
time consuming and costly to resolve, could 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 indemnify, hold 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 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. It is not possible to determine the
maximum potential loss under these indemnification provisions
due to our limited history of
18
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
prior indemnification claims and the unique facts and
circumstances involved in each particular provision. To date, no
significant costs have been incurred, either individually or
collectively, in connection with our indemnification provisions.
Note 7 Stock-based 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 nine months ended September 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 September 30, 2006, approximately
6.4 million shares were reserved for future issuance. Our
employee stock purchase plan contains an evergreen
provision that 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.
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, the
vested deferred stock units will be issued as shares (or cash)
and all rights to the unvested deferred stock units will
terminate. In addition, directors may elect to receive, in lieu
of an 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 September 30, 2006,
33,951 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 generally vest at a rate of
2.08% per month thereafter, and generally expire 7 to
10 years from the date of grant. At September 30,
2006, 614.8 million shares were authorized under our equity
incentive plans. Shares of nonvested stock and restricted stock
units issued under these plans are subject to forfeiture,
lapsing over the vesting period, which is typically three to
five years. At September 30, 2006, 96.0 million shares
were available for future grant under our equity incentive plans.
19
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We adopted FAS 123(R) using the modified prospective
transition method beginning January 1, 2006. Accordingly,
during the nine-month period ended September 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 nine-month period ended
September 30, 2006 has been reduced for estimated
forfeitures. When estimating forfeitures, we consider voluntary
termination behaviors as well as trends of actual option
forfeitures. Our results of operations include stock-based
compensation for the three- and nine-month period ended
September 30, 2006 as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, 2006 | |
|
September 30, 2006 | |
|
|
| |
|
| |
Cost of net revenues
|
|
$ |
8,001 |
|
|
$ |
25,108 |
|
Sales and marketing
|
|
|
23,149 |
|
|
|
74,933 |
|
Product development
|
|
|
19,010 |
|
|
|
62,702 |
|
General and administrative
|
|
|
23,359 |
|
|
|
80,002 |
|
|
|
|
|
|
|
|
|
|
$ |
73,519 |
|
|
$ |
242,745 |
|
|
|
|
|
|
|
|
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), $77.3 million of excess
tax benefits for the nine months ended September 30, 2006
have been classified as a financing cash inflow. Cash received
from option exercises under all share-based payment arrangements
for the nine-month periods ended September 30, 2005 and
2006, was $384.4 million and $209.1 million,
respectively. The total income tax benefit recognized in the
income statement for stock-based compensation costs was
$22.6 million and $73.1 million for the three- and
nine-month period ended September 30, 2006, respectively.
No income tax benefit was recognized during 2005. Total
stock-based compensation costs included in capitalized
development costs was $2.3 million and $6.8 million for the
three- and nine-month period ended September 30, 2006,
respectively. There were no stock-based compensation costs
included in capitalized development costs 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.
20
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2006 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
Risk-free interest rates stock options
|
|
|
4.0% |
|
|
|
4.7% - 4.8% |
|
|
|
3.6% |
|
|
|
4.6% - 5.0% |
|
Expected life stock options
|
|
|
3 years |
|
|
|
2.1 - 4.9 years |
|
|
|
3 years |
|
|
|
2.1 - 4.9 years |
|
Dividend yield stock options
|
|
|
0% |
|
|
|
0% |
|
|
|
0% |
|
|
|
0% |
|
Expected volatility stock options
|
|
|
35% |
|
|
|
38% - 39% |
|
|
|
36% |
|
|
|
34% - 39% |
|
Weighted average volatility
|
|
|
|
|
|
|
38% |
|
|
|
|
|
|
|
36% |
|
Our computation of expected volatility for the three and nine
months ended September 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 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 nine months ended
September 30, 2006 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average | |
|
|
|
|
|
|
Weighted Average | |
|
Remaining | |
|
Aggregate Intrinsic | |
|
|
Shares | |
|
Exercise Price | |
|
Contractual Term | |
|
Value | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
(In years) | |
|
|
Outstanding at January 1, 2006
|
|
|
129,109 |
|
|
$ |
28.19 |
|
|
|
|
|
|
|
|
|
Granted and assumed
|
|
|
36,750 |
|
|
|
35.27 |
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(11,592 |
) |
|
|
16.15 |
|
|
|
|
|
|
|
|
|
Forfeited/expired/cancelled
|
|
|
(10,333 |
) |
|
|
37.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outanding at September 30, 2006
|
|
|
143,934 |
|
|
|
30.32 |
|
|
|
6.86 |
|
|
$ |
588,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at September 30, 2006
|
|
|
134,295 |
|
|
$ |
29.88 |
|
|
|
6.82 |
|
|
$ |
583,581 |
|
Options exercisable at September 30, 2006
|
|
|
74,146 |
|
|
$ |
25.21 |
|
|
|
6.38 |
|
|
$ |
529,076 |
|
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 64.9 million
options that were
in-the-money at
September 30, 2006. During the three months ended
September 30, 2005 and 2006, the aggregate intrinsic value
of options exercised under our equity incentive plans was
$165.4 million and $25.6 million, respectively,
determined as of the date of option exercise. During the nine
months ended September 30, 2005
21
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and 2006, the aggregate intrinsic value of options exercised
under our equity incentive plans was $476.3 million and
$217.3 million, respectively, determined as of the date of
option exercise. As of September 30, 2006, there was
approximately $451.0 million of total unrecognized
compensation cost related to stock options granted under our
equity incentive plans. That cost is expected to be recognized
over a weighted-average period of three years. The weighted
average grant-date fair value of options granted in the
three-month periods ended September 30, 2005 and 2006 was
$12.16 and $7.75, respectively. The weighted average grant-date
fair value of options granted in the nine-month periods ended
September 30, 2005 and 2006 was $11.97 and $10.54,
respectively.
Nonvested shares and restricted stock units were awarded to
employees under our equity incentive plans. In general,
nonvested shares and restricted stock units vest over three to
five years and are subject to the employees continuing
service to the company. The cost of nonvested shares and
restricted stock units is determined using the fair value of our
common stock on the date of the grant. The compensation expense
is recognized over the vesting period.
A summary of the status of and changes in restricted stock units
granted under our equity incentive plans as of and during the
nine months ended September 30, 2006 is presented below (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average | |
|
|
|
|
Grant-Date Fair | |
|
|
Shares | |
|
Value (per Share) | |
|
|
| |
|
| |
Oustanding at January 1, 2006
|
|
|
|
|
|
$ |
|
|
Awarded
|
|
|
526 |
|
|
|
28.13 |
|
Vested
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006
|
|
|
526 |
|
|
$ |
28.13 |
|
|
|
|
|
|
|
|
Vested and expected to vest at September 30, 2006
|
|
|
391 |
|
|
|
|
|
As of September 30, 2006, there was approximately
$10.6 million of unrecognized compensation cost related to
restricted stock units granted under our equity incentive plans.
That cost is expected to be recognized over a weighted-average
period of two years.
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 nine months ended
September 30, 2006 is presented below (in thousands, except
per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average | |
|
|
|
|
Grant-Date Fair | |
|
|
Shares | |
|
Value (per Share) | |
|
|
| |
|
| |
Nonvested at January 1, 2006
|
|
|
40 |
|
|
$ |
43.82 |
|
Granted
|
|
|
721 |
|
|
|
33.12 |
|
Vested
|
|
|
(70 |
) |
|
|
38.09 |
|
|
|
|
|
|
|
|
Nonvested at September 30, 2006
|
|
|
691 |
|
|
$ |
39.71 |
|
|
|
|
|
|
|
|
During the three months ended September 30, 2006, the fair
value of awards vested under our stock plans was
$1.6 million, determined as of the date of vesting. During
the nine months ended September 30, 2006, the fair value of
awards vested under our stock plans was $2.0 million,
determined as of the date of vesting. There were no awards
vesting in 2005. As of September 30, 2006, there was
approximately $13.8 million of unrecognized compensation
cost related to nonvested shares granted under our equity
incentive plans. That cost is expected to be recognized over a
weighted-average period of two years.
22
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Pro forma Information for Periods Prior to the Adoption of
FAS 123R |
Prior to the adoption of FAS 123(R), we provided the
disclosures required under FAS 123, as amended by
FAS 148. Employee stock-based compensation expense
recognized under FAS 123(R) was not reflected in our
results of operations for the three- and nine-month period ended
September 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
1998 Employee Stock Purchase Plan 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 nine months ended
September 30, 2005 was as follows (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, 2005 | |
|
September 30, 2005 | |
|
|
| |
|
| |
Net income, as reported
|
|
$ |
254,971 |
|
|
$ |
802,822 |
|
Add: Amortization of stock-based compensation expense determined
under the intrinsic value method (net of cancellations)
|
|
|
4,138 |
|
|
|
3,735 |
|
Deduct: Total stock-based compensation expense determined under
fair value based method, net of tax
|
|
|
59,446 |
|
|
|
184,150 |
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
199,663 |
|
|
$ |
622,407 |
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic Reported
|
|
$ |
0.19 |
|
|
$ |
0.59 |
|
|
|
Pro forma
|
|
$ |
0.15 |
|
|
$ |
0.46 |
|
|
Diluted Reported
|
|
$ |
0.18 |
|
|
$ |
0.58 |
|
|
|
Pro forma
|
|
$ |
0.14 |
|
|
$ |
0.45 |
|
Note 8 Stock Repurchases
In July 2006, eBays Board of Directors authorized the
repurchase of up to $2.0 billion of the companys
common stock within two years from the date of authorization.
The stock repurchase program was announced on July 19,
2006. During the third quarter of 2006, we repurchased
approximately 24.0 million shares at an average price of
$27.80 per share. As of September 30, 2006,
$1.3 billion remained available for further purchases under
the program. The additional 7.5 million shares in treasury
stock primarily represents the cumulative amount of stock
repurchased from employees at the cost of issuance, which was
usually nominal.
These repurchased shares are recorded as treasury stock and are
accounted for under the cost method.
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 is intended to comply with the volume, timing and other
limitations set forth in
Rule 10b-18 under
the Securities Exchange Act of 1934.
23
|
|
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 in Item 1A of
Part II, 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 and 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.
Overview
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: Marketplaces,
Payments and Communications. Our Marketplaces business provides
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 Voice Over Internet Protocol, or
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 |
Our Chief Operating Decision Maker (CODM) and 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 on our Marketplaces
platform, as well as total payment volume processed by our
wholly owned PayPal subsidiary and number of users registered
with our wholly owned Skype subsidiary. Our CODM and 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.
24
Consolidated net revenues for the three month period ended
September 30, 2006 was $1.449 billion, representing a
growth rate of 31% year over year, which was primarily due to
continued Marketplaces and Payments growth and acquisitions made
in the prior year, including Shopping.com and Skype. Net income
for the three-month period ended September 30, 2006 was
$280.9 million, or $0.20 earnings per diluted share,
increasing 10% year over year. The increase was primarily due to
higher net revenues and reductions in income tax partly offset
by higher operating expenses.
|
|
|
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 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 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, 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.
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 Black-Scholes 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 nine months ended
September 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).
25
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 |
|
|
$ |
1,448,637 |
|
|
|
N/A |
|
|
Current quarter vs prior quarter
|
|
|
5 |
% |
|
|
1 |
% |
|
|
3 |
% |
|
|
|
|
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 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 | |
|
|
| |
|
|
September 30, | |
|
December 31, | |
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
|
2005 | |
|
2005 | |
|
2006 | |
|
2006 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Net revenues
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100 |
% |
Cost of net revenues(1)
|
|
|
18.1 |
|
|
|
18.0 |
|
|
|
20.0 |
|
|
|
20.7 |
|
|
|
21.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
81.9 |
|
|
|
82.0 |
|
|
|
80.0 |
|
|
|
79.3 |
|
|
|
78.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
26.6 |
|
|
|
28.5 |
|
|
|
28.8 |
|
|
|
28.2 |
|
|
|
27.3 |
% |
|
Product development
|
|
|
7.1 |
|
|
|
7.8 |
|
|
|
8.6 |
|
|
|
8.8 |
|
|
|
8.3 |
% |
|
General and administrative
|
|
|
13.3 |
|
|
|
13.9 |
|
|
|
15.7 |
|
|
|
15.8 |
|
|
|
15.7 |
% |
|
Amortization of acquired intangible assets
|
|
|
2.6 |
|
|
|
3.9 |
|
|
|
3.7 |
|
|
|
4.4 |
|
|
|
3.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
49.6 |
|
|
|
54.1 |
|
|
|
56.8 |
|
|
|
57.2 |
|
|
|
54.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
32.3 |
|
|
|
27.9 |
|
|
|
23.2 |
|
|
|
22.1 |
|
|
|
23.4 |
% |
Interest and other income, net
|
|
|
2.8 |
|
|
|
1.9 |
|
|
|
1.9 |
|
|
|
1.8 |
|
|
|
2.8 |
% |
Interest expense
|
|
|
(0.0 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(0.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests
|
|
|
35.0 |
|
|
|
29.7 |
|
|
|
25.0 |
|
|
|
23.8 |
|
|
|
26.2 |
% |
Provision for income taxes
|
|
|
(11.9 |
) |
|
|
(8.7 |
) |
|
|
(7.1 |
) |
|
|
(6.1 |
) |
|
|
(6.8 |
)% |
Minority interests
|
|
|
(0.0 |
) |
|
|
(0.0 |
) |
|
|
(0.0 |
) |
|
|
(0.0 |
) |
|
|
(0.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
23.1 |
% |
|
|
21.0 |
% |
|
|
17.9 |
% |
|
|
17.7 |
% |
|
|
19.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
(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 |
% |
|
|
0.1 |
% |
|
|
0.7 |
% |
|
|
0.5 |
% |
|
|
0.6 |
% |
Sales and marketing
|
|
|
0.1 |
% |
|
|
0.6 |
% |
|
|
1.8 |
% |
|
|
1.9 |
% |
|
|
1.6 |
% |
Product development
|
|
|
0.1 |
% |
|
|
0.4 |
% |
|
|
1.5 |
% |
|
|
1.6 |
% |
|
|
1.3 |
% |
General and administrative
|
|
|
0.3 |
% |
|
|
0.6 |
% |
|
|
2.0 |
% |
|
|
2.0 |
% |
|
|
1.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
|
0.5 |
% |
|
|
1.7 |
% |
|
|
6.0 |
% |
|
|
6.1 |
% |
|
|
5.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
Nine Months | |
|
|
|
Nine Months | |
|
|
Ended | |
|
Percent | |
|
Ended | |
|
Ended | |
|
Percent | |
|
Ended | |
|
|
September 30, 2005 | |
|
Change | |
|
September 30, 2006 | |
|
September 30, 2005 | |
|
Change | |
|
September 30, 2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percent changes) | |
Net Revenues by Type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction net revenues Marketplaces
|
|
$ |
836,820 |
|
|
|
22% |
|
|
$ |
1,017,274 |
|
|
$ |
2,432,889 |
|
|
|
24% |
|
|
$ |
3,004,922 |
|
|
Payments
|
|
|
239,922 |
|
|
|
42% |
|
|
|
340,032 |
|
|
|
704,236 |
|
|
|
42% |
|
|
|
998,866 |
|
|
Communications
|
|
|
|
|
|
|
n/a |
|
|
|
50,021 |
|
|
|
|
|
|
|
n/a |
|
|
|
129,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net transaction revenues
|
|
|
1,076,742 |
|
|
|
31% |
|
|
|
1,407,327 |
|
|
|
3,137,125 |
|
|
|
32% |
|
|
|
4,133,127 |
|
Advertising and other non- transaction net revenues
|
|
|
28,773 |
|
|
|
44% |
|
|
|
41,310 |
|
|
|
86,417 |
|
|
|
35% |
|
|
|
116,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$ |
1,105,515 |
|
|
|
31% |
|
|
$ |
1,448,637 |
|
|
$ |
3,223,542 |
|
|
|
32% |
|
|
$ |
4,249,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplaces
|
|
$ |
858,417 |
|
|
|
22% |
|
|
$ |
1,049,039 |
|
|
$ |
2,499,461 |
|
|
|
24% |
|
|
$ |
3,096,767 |
|
|
Payments
|
|
|
247,098 |
|
|
|
41% |
|
|
|
349,577 |
|
|
|
724,081 |
|
|
|
41% |
|
|
|
1,023,734 |
|
|
Communications
|
|
|
|
|
|
|
n/a |
|
|
|
50,021 |
|
|
|
|
|
|
|
n/a |
|
|
|
129,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$ |
1,105,515 |
|
|
|
31% |
|
|
$ |
1,448,637 |
|
|
$ |
3,223,542 |
|
|
|
32% |
|
|
$ |
4,249,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$ |
608,428 |
|
|
|
26% |
|
|
$ |
763,864 |
|
|
$ |
1,746,525 |
|
|
|
28% |
|
|
$ |
2,236,699 |
|
|
International
|
|
|
497,087 |
|
|
|
38% |
|
|
|
684,773 |
|
|
|
1,477,017 |
|
|
|
36% |
|
|
|
2,013,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$ |
1,105,515 |
|
|
|
31% |
|
|
$ |
1,448,637 |
|
|
$ |
3,223,542 |
|
|
|
32% |
|
|
$ |
4,249,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our net revenues are derived primarily from listing, feature and
final value fees paid by sellers on our Marketplaces platform,
fees from payment processing services on our PayPal platform, as
well as Skype revenues generated from VoIP offerings. 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, gross merchandise
volume (GMV) on our Marketplaces platforms and payment
transactions both on and off the Marketplaces platforms
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 user protection
programs.
27
Net revenues by geography are attributed to U.S. and
International geographies based upon the country in which the
seller, payment recipient, Skype user internet protocol address,
advertiser or
end-to-end service
provider is located.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
Nine Months | |
|
|
|
Nine Months | |
|
|
Ended | |
|
Percent | |
|
Ended | |
|
Ended | |
|
Percent | |
|
Ended | |
|
|
September 30, 2005 | |
|
Change | |
|
September 30, 2006 | |
|
September 30, 2005 | |
|
Change | |
|
September 30, 2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions, except percentages, unless otherwise indicated) | |
Marketplaces Segment(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Confirmed Registered Users(2)
|
|
|
168.1 |
|
|
|
26% |
|
|
|
211.9 |
|
|
|
168.1 |
|
|
|
26% |
|
|
|
211.9 |
|
|
Active Users(3)
|
|
|
68.0 |
|
|
|
17% |
|
|
|
79.8 |
|
|
|
68.0 |
|
|
|
17% |
|
|
|
79.8 |
|
|
Number of Non-Stores Listings(4)
|
|
|
407.0 |
|
|
|
20% |
|
|
|
488.3 |
|
|
|
1,209.0 |
|
|
|
22% |
|
|
|
1,469.6 |
|
|
Number of Stores Listings(4)
|
|
|
51.6 |
|
|
|
85% |
|
|
|
95.4 |
|
|
|
121.5 |
|
|
|
135% |
|
|
|
285.5 |
|
|
Gross Merchandise Volume(5)
|
|
$ |
10,800 |
|
|
|
17% |
|
|
$ |
12,639 |
|
|
$ |
32,286 |
|
|
|
18% |
|
|
$ |
38,039 |
|
|
eBay Stores(6) (in thousands)
|
|
|
336.0 |
|
|
|
71% |
|
|
|
573.0 |
|
|
|
336.0 |
|
|
|
71% |
|
|
|
573.0 |
|
Payments Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accounts(7)
|
|
|
86.6 |
|
|
|
41% |
|
|
|
122.5 |
|
|
|
86.6 |
|
|
|
41% |
|
|
|
122.5 |
|
|
Active accounts(8)
|
|
|
24.5 |
|
|
|
26% |
|
|
|
30.9 |
|
|
|
24.5 |
|
|
|
26% |
|
|
|
30.9 |
|
|
Total number of payments(9)
|
|
|
117.4 |
|
|
|
25% |
|
|
|
146.2 |
|
|
|
341.0 |
|
|
|
29% |
|
|
|
438.7 |
|
|
Total payment volume(10)
|
|
$ |
6,667 |
|
|
|
37% |
|
|
$ |
9,123 |
|
|
$ |
19,371 |
|
|
|
38% |
|
|
$ |
26,748 |
|
Communications Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered users(11)
|
|
|
|
|
|
|
N/A |
|
|
|
135.9 |
|
|
|
|
|
|
|
N/A |
|
|
|
135.9 |
|
|
|
|
|
(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 and Internet Auction, 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) |
Total number of eBay Seller Stores worldwide, hosted on
eBays trading platforms as of each respective period. |
|
|
(7) |
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. |
|
|
(8) |
All accounts, and users whether registered or not, that sent or
received at least one payment through the PayPal system during
the last 90 days of the period. |
|
|
(9) |
Total number of payments initiated through the PayPal system
during the quarter, 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. |
|
|
(10) |
Total 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. |
|
(11) |
Communications registered users represent the cumulative number
of unique user accounts created on Skype. |
28
The Marketplaces segment includes our global marketplaces and
e-commerce platforms.
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 in October 2005.
Our net revenues result from fees associated with our
transaction, referral fees, advertising and other services in
our Marketplaces, Payments, and Communications segments. Net
transaction 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, PayPal and Skype users.
|
|
|
Marketplaces Segment Net Transaction Revenues |
Total net transaction revenues from our Marketplaces segment
increased 22% and 24% in the aggregate during the third quarter
and first nine months of 2006, respectively, compared to the
same periods in the prior year. The growth in net transaction
revenues was primarily the result of increased transaction
activity globally, reflected in the growth of the number of
registered users, active users and gross merchandise volume.
Gross merchandise volume from Marketplaces increased 17% and 18%
during the third quarter of 2006 and the first nine months of
2006, respectively, compared to the same periods of the prior
year. Transaction revenue growth in the U.S. was 20% and
23% during the third quarter and first nine months of 2006,
while transaction revenue growth internationally was 24% for
both the third quarter and first nine months of 2006,
respectively, compared to the same periods in the prior year.
The growth in international transaction net revenue was primary
the result of a strong performance in the United Kingdom, as
well as significant increases in certain of our less established
markets, particularly Australia, France and Italy. Gross
merchandise volume growth in the U.S. was 13% and 15%,
while GMV growth internationally increased 21% and 20% during
the third quarter and first nine months of 2006, respectively,
compared to the same periods of the prior year. In terms of
category GMV growth, during the third quarter and first nine
months of 2006, there was GMV growth across all major
categories, with our motors, consumer electronics, computers,
sports, collectibles, clothing & accessories and
home & garden categories contributing most of such
year-over-year growth. We expect net transaction revenues from
our Marketplaces segment to increase in 2006 compared to 2005 in
absolute terms; however, we expect its growth rate to be lower
than that of 2005. Also, we expect that our GMV from
international countries will continue to grow in significance as
a proportion of the total Marketplaces GMV. 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 user protection
initiatives and the recent launch and rollout of eBay Express.
|
|
|
Payments Segment Net Transaction Revenues |
Payments net transaction revenues increased 42% during the third
quarter and first nine months of 2006, 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 third quarter of 2006 and 22% in the same period
of the prior year. Payments segment net transaction revenues as
a percentage of total net transaction revenues was 24% during
the first nine months of 2006, compared to 22% in the same
period of the prior year. The growth in Payments net transaction
revenues was positively affected by PayPals continued
penetration of Marketplaces transactions in all major markets
around the world and growth in PayPal merchant services.
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 $3.3 billion and
$9.4 billion in the third quarter and first nine months of
2006, respectively, which represents 37% and 35% of
PayPals total payment volume. The total payment volume for
our PayPal merchant services transactions was approximately
$2.1 billion and $5.9 billion in the third quarter and
first nine months of 2005, respectively, which represents 32%
and 30% of PayPals total payment volume. Payments net
transaction revenues as a percentage of total
29
payment volume remained consistent at 3.7% during the third
quarter and first nine months of 2006 and was 3.6% during the
same periods of 2005.
Payments net transaction revenues earned internationally totaled
$127.8 million and $371.7 million during the third
quarter and first nine months of 2006, respectively,
representing 38% and 37%, respectively of total Payments net
transaction revenue compared to the prior periods. This is
compared to net transaction revenues from the Payments segment
earned internationally of $88.2 million and
$255.5 million during the third quarter and first nine
months of 2005, respectively, representing 37% and 36% of total
Payments segment net transaction revenue. 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
continued on-eBay penetration and the merchant services business.
|
|
|
Communications Segment Net Transaction Revenues |
Communications net transaction revenues were $50.0 million
and $129.3 million in the third quarter and first nine
months of 2006, respectively. These segment revenues represent
the revenues generated from VoIP offerings from our 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. The cumulative number of Skype
registered users increased from 74.7 million at
December 31, 2005 (the first quarter with Skype results) to
135.9 million at September 30, 2006. 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 third quarter and first nine months of 2006 as
compared to the same periods in 2005. Advertising and other
non-transaction net revenues represented 2.9% and 2.6% of total
net revenues during the third quarter of 2006 and of 2005,
respectively. Advertising and other non-transaction net revenues
represented 2.7% of total net revenues during the first nine
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 our total net revenues during the remainder
of 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
Nine Months | |
|
|
|
Nine Months | |
|
|
Ended | |
|
Percent | |
|
Ended | |
|
Ended | |
|
Percent | |
|
Ended | |
|
|
September 30, 2005 | |
|
Change | |
|
September 30, 2006 | |
|
September 30, 2005 | |
|
Change | |
|
September 30, 2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Cost of net revenues
|
|
$ |
200,375 |
|
|
|
58 |
% |
|
$ |
315,717 |
|
|
$ |
578,584 |
|
|
|
53 |
% |
|
$ |
886,764 |
|
As a percentage of net revenues
|
|
|
18.1 |
% |
|
|
|
|
|
|
21.8 |
% |
|
|
17.9 |
% |
|
|
|
|
|
|
20.9 |
% |
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 third quarter
and first nine months of 2006, compared to the same periods in
the prior year, was primarily due to increases in payment
processing costs, Skype telecommunication costs, stock-based
compensation, and the development and expansion of our customer
support and site operations infrastructure. Payment processing
costs increased by $27.5 million and $76.9 million
during the third quarter and first nine months of 2006,
respectively, compared to the same periods of the prior year.
These increases reflect primarily the increase in PayPals
total payment volume and increases in credit card account
funding, offset by reduced contractual payment processing rates.
Aggregate customer support and site operations costs increased
by approximately $44.8 million and $110.9 million
during
30
the third quarter and first nine months of 2006, respectively,
compared to the same periods of the prior year.
Telecommunications costs increased by $37.1 million and
$96.0 million during the third quarter and first nine
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 third quarter
and first nine months of 2006 was $8.0 million and
$25.1 million, respectively. Cost of net revenues prior to
fiscal 2006 did not include FAS 123(R) stock-based
compensation expense. Cost of net revenues is 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
Nine Months | |
|
|
|
Nine Months | |
|
|
Ended | |
|
Percent | |
|
Ended | |
|
Ended | |
|
Percent | |
|
Ended | |
|
|
September 30, 2005 | |
|
Change | |
|
September 30, 2006 | |
|
September 30, 2005 | |
|
Change | |
|
September 30, 2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Sales and marketing
|
|
$ |
293,746 |
|
|
|
34 |
% |
|
$ |
394,820 |
|
|
$ |
852,239 |
|
|
|
40 |
% |
|
$ |
1,193,382 |
|
|
As a percentage of net revenues
|
|
|
26.6 |
% |
|
|
|
|
|
|
27.3 |
% |
|
|
26.4 |
% |
|
|
|
|
|
|
28.1 |
% |
Sales and marketing expenses consist primarily of advertising,
tradeshow and other promotional costs, employee compensation for
our category development and marketing staff and certain user
protection program costs.
The increase in sales and marketing expenses in the third
quarter and first nine months of 2006, compared to the same
periods in the prior year was primarily due to a
$23.1 million and $74.9 million, respectively,
increase in stock-based compensation expense recognized as sales
and marketing expenses primarily from the adoption of
FAS 123(R), our continued investment in growing our global
user base through advertising and marketing and the inclusion of
Skypes sales and marketing expenses since our acquisition
in October 2005. Advertising and marketing costs increased by
$61.9 million and $182.5 million during the third
quarter and first nine 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 $16.2 million and $67.9 million during
the third quarter and first nine months of 2006 as compared to
the same periods of the prior year. The increase in employee
related costs is consistent with increases in headcount to
support our sales and marketing initiatives. 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 the higher
sales and marketing expenses of Shopping.com as a percentage of
net revenues relative to our other businesses, offset by the
structurally lower sales and marketing expense incurred by our
Payments and Communications segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
Nine Months | |
|
|
|
|
|
|
Ended | |
|
|
|
Ended | |
|
Ended | |
|
|
|
Nine Months | |
|
|
September 30, | |
|
Percent | |
|
September 30, | |
|
September 30, | |
|
Percent | |
|
Ended | |
|
|
2005 | |
|
Change | |
|
2006 | |
|
2005 | |
|
Change | |
|
September 30, 2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Product development
|
|
$ |
78,881 |
|
|
|
53 |
% |
|
$ |
120,405 |
|
|
$ |
224,309 |
|
|
|
62 |
% |
|
$ |
363,447 |
|
As a percentage of net revenues
|
|
|
7.1 |
% |
|
|
|
|
|
|
8.3 |
% |
|
|
7.0 |
% |
|
|
|
|
|
|
8.6 |
% |
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 $16.6 million and $52.0 million in the
third quarter and first nine months of 2006, respectively, and
are reflected as a cost of net revenues when amortized in future
periods. During the third quarter and first nine months of 2005,
capitalized costs for major site and other product development
efforts totaled $9.0 million and $27.7 million,
31
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 businesses.
The increase in product development expenses in the third
quarter and first nine months of 2006 compared to the same
periods in the prior year was primarily due to a
$19.0 million and $62.7 million increase in
stock-based compensation expense recognized as product
development expenses primarily from the adoption of
FAS 123(R) and increased headcount, including contractors
and consultants, to support various platform and software
development initiatives in our businesses. Employee-related
costs, not including stock-based compensation expense, increased
by approximately $14.0 million and $42.9 million
during the third quarter and first nine months of 2006,
respectively, compared to the same period in the prior year. The
increase in employee-related costs is consistent with increases
in headcount to support our product development initiatives.
Contractor and consultant costs increased by approximately
$5.5 million and $16.9 million during the third
quarter and first nine 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 | |
|
Nine Months | |
|
|
|
|
|
|
Ended | |
|
|
|
Ended | |
|
Ended | |
|
|
|
Nine Months | |
|
|
September 30, | |
|
Percent | |
|
September 30, | |
|
September 30, | |
|
Percent | |
|
Ended | |
|
|
2005 | |
|
Change | |
|
2006 | |
|
2005 | |
|
Change | |
|
September 30, 2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
General and administrative
|
|
$ |
146,578 |
|
|
|
55 |
% |
|
$ |
227,188 |
|
|
$ |
419,598 |
|
|
|
59 |
% |
|
$ |
667,785 |
|
As a percentage of net revenues
|
|
|
13.3 |
% |
|
|
|
|
|
|
15.7 |
% |
|
|
13.0 |
% |
|
|
|
|
|
|
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, consultancy
costs and certain user protection program costs.
The increase in general and administrative expenses in the third
quarter and first nine months of 2006, compared to the same
period of the prior year was primarily due to a
$23.4 million and $80.0 million increase in
stock-based compensation expense recognized as general and
administrative expenses primarily as a result of our adoption of
FAS 123(R), other employee-related costs, transaction loss
provisions and consultancy costs. PayPal transaction loss
expenses as a percentage of net payment revenues increased in
the third quarter and first nine 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 $19.3 million and $72.2 million during
the third quarter and first nine months of 2006, compared to the
same periods of the prior year. Consultant costs increased by
approximately $8.2 million and $20.1 million during
the third quarter and first nine months of 2006, respectively,
compared to the same period in the prior year. The increases in
employee related costs and consultancy costs primarily resulted
from continued headcount growth and increases in headcount
related to user protection programs. PayPals payment
transaction loss expense increased by approximately
$16.0 million and $34.7 million during the third
quarter and first nine months of 2006, respectively, as compared
to same periods of the prior year. PayPals transaction
loss rate, which is the transaction loss expense as a percentage
of PayPals total payment volume, increased to 0.35% and
0.31% during the third quarter and first nine months of 2006,
respectively, compared to 0.24% during both the third quarter
and first nine months of 2005. The increase in the transaction
loss rate was primarily due to higher levels of credit card
charge-backs from unauthorized credit card transactions,
partially driven by new, faster growing products which have an
increased funding mix. 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 user protection programs.
32
|
|
|
Amortization of Acquired Intangible Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
Nine Months | |
|
|
|
Nine Months | |
|
|
Ended | |
|
Percent | |
|
Ended | |
|
Ended | |
|
Percent | |
|
Ended | |
|
|
September 30, 2005 | |
|
Change | |
|
September 30, 2006 | |
|
September 30, 2005 | |
|
Change | |
|
September 30, 2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Amortization of acquired intangible assets
|
|
$ |
29,199 |
|
|
|
76 |
% |
|
$ |
51,474 |
|
|
$ |
77,516 |
|
|
|
113 |
% |
|
$ |
165,391 |
|
As a percentage of net revenues
|
|
|
2.6 |
% |
|
|
|
|
|
|
3.6 |
% |
|
|
2.4 |
% |
|
|
|
|
|
|
3.9 |
% |
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 third quarter
and first nine 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
first nine months of 2006 is an expense of $10.9 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. We conduct our annual impairment test as of
August 31 of each year. Based on our impairment test as of
August 31, 2006 we determined there was no impairment.
There were no events or circumstances from that date through
September 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 nine
months of 2006. Amortization of acquired intangible assets may
increase further should we make additional acquisitions in the
future or estimated useful lives of existing intangible assets
are reduced.
|
|
|
Interest and Other Income, Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
Nine Months | |
|
|
|
Nine Months | |
|
|
Ended | |
|
Percent | |
|
Ended | |
|
Ended | |
|
Percent | |
|
Ended | |
|
|
September 30, 2005 | |
|
Change | |
|
September 30, 2006 | |
|
September 30, 2005 | |
|
Change | |
|
September 30, 2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Interest and other income, net
|
|
$ |
30,657 |
|
|
|
34 |
% |
|
$ |
41,231 |
|
|
$ |
85,585 |
|
|
|
8 |
% |
|
$ |
92,621 |
|
As a percentage of net revenues
|
|
|
2.8 |
% |
|
|
|
|
|
|
2.8 |
% |
|
|
2.7 |
% |
|
|
|
|
|
|
2.2 |
% |
33
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, increased during the third
quarter and first nine months of 2006 as compared to the same
periods of the prior year, primarily due to higher interest
income due to higher interest rates and a decrease in foreign
exchange transaction losses. The weighted-average interest rate
of our portfolio was approximately 4.1% and 3.8% in the third
quarter and first nine months of 2006, respectively, compared to
3.2% and 2.8% in the third quarter and first nine 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 Stock Repurchases for
additional discussion of our $2 billion stock repurchase
program that we announced in July 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
Nine Months | |
|
|
|
Nine Months | |
|
|
Ended | |
|
Percent | |
|
Ended | |
|
Ended | |
|
Percent | |
|
Ended | |
|
|
September 30, 2005 | |
|
Change | |
|
September 30, 2006 | |
|
September 30, 2005 | |
|
Change | |
|
September 30, 2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Interest expense
|
|
$ |
431 |
|
|
|
28 |
% |
|
$ |
553 |
|
|
$ |
2,556 |
|
|
|
(13 |
)% |
|
$ |
2,229 |
|
As a percentage of net revenues
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
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 third 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 nine 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 | |
|
Nine Months | |
|
|
|
Nine Months | |
|
|
Ended | |
|
Percent | |
|
Ended | |
|
Ended | |
|
Percent | |
|
Ended | |
|
|
September 30, 2005 | |
|
Change | |
|
September 30, 2006 | |
|
September 30, 2005 | |
|
Change | |
|
September 30, 2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Provision for income taxes
|
|
$ |
131,989 |
|
|
|
(25 |
)% |
|
$ |
98,814 |
|
|
$ |
351,455 |
|
|
|
(19 |
)% |
|
$ |
284,288 |
|
As a percentage of net revenues
|
|
|
11.9 |
% |
|
|
|
|
|
|
6.8 |
% |
|
|
10.9 |
% |
|
|
|
|
|
|
6.7 |
% |
Effective tax rate
|
|
|
34 |
% |
|
|
|
|
|
|
26 |
% |
|
|
30 |
% |
|
|
|
|
|
|
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.
The effective tax rates for the third quarter of 2005 and the
first nine months of 2005, were higher due to a
$16.6 million charge related to the final application of
tax regulations requiring the inclusion of stock option expense
in intercompany cost sharing arrangements. Excluding this
$16.6 million charge, the differences between the effective
tax rates for the third quarter and first nine months of 2006,
compared to the same periods of the prior year, primarily
reflect changes in our estimated geographic mix of our net
income and evolution of our tax structures to support our
increasingly complex international 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
34
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 third quarter and first nine 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 47% of our consolidated
net revenues in both periods, as compared to approximately 45%
and 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, 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 positively impacted by foreign currency
translation of approximately $28.6 million in the third
quarter and negatively impacted by foreign currency translation
of approximately $22.2 million in the first nine months of
2006 as compared to the same periods of the prior year.
Operating income was positively impacted by foreign currency
translation of approximately $12.0 million in the third
quarter and negatively impacted by foreign currency translation
of approximately $16.2 million in the first nine 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
effects of 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.
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
35
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 derivative 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 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. FIN 48 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 January 1, 2007, 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
consolidated financial statements.
In September 2006, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 108, Considering
the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements
(SAB 108), which provides interpretive guidance on how the
effects of the carryover or reversal of prior year misstatements
should be considered in quantifying a current year misstatement.
We will be required to adopt the provisions of SAB 108 in
our annual financial statements for fiscal year 2006. We do not
believe that the adoption of SAB 108 will materially impact
our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (FAS 157). FAS 157
establishes a framework for measuring fair value and expands
disclosures about fair value measurements. The changes to
current practice resulting from the application of this
Statement relate to the definition of fair value, the methods
used to measure fair value, and the expanded disclosures about
fair value measurements. We will be required to adopt the
provisions of FAS 157 beginning with our first quarter
ending March 31, 2007. We do not believe that the adoption
of the provisions of FAS 157 will materially impact our
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans an amendment of FASB Statements
No. 87, 88, 106, and 132(R), (FAS 158).
FAS 158 requires an employer to recognize the over-funded
or under-funded status of a defined benefit pension and other
postretirement plan (other than a multiemployer plan) as an
asset or liability in its statement of financial position and to
recognize changes in that funded status in the year in which the
changes occur through comprehensive income of a business entity.
We will be required to adopt the provisions of FAS 158 in
our annual financial statements for fiscal year 2007. We do not
believe that the adoption of the provisions of FAS 158 will
materially impact our consolidated financial statements.
As of September 30, 2006, eBay Inc. and its consolidated
subsidiaries employed approximately 13,000 people (including
approximately 700 temporary employees), of whom approximately
7,700 were located in the United States (including approximately
400 temporary employees).
36
|
|
|
Liquidity and Capital Resources |
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$ |
1,483,654 |
|
|
$ |
1,621,830 |
|
|
Investing activities
|
|
|
(848,286 |
) |
|
|
(138,310 |
) |
|
Financing activities
|
|
|
256,145 |
|
|
|
(380,203 |
) |
|
Effect of exchange rates on cash and cash equivalents
|
|
|
(40,960 |
) |
|
|
65,360 |
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
$ |
850,553 |
|
|
$ |
1,168,677 |
|
|
|
|
|
|
|
|
We generated cash from operating activities in amounts greater
than net income in the nine months ended September 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 stock options and purchases, tax benefits on the exercise of
stock options, provision for doubtful accounts and authorized
credits and the provision for transaction losses resulting from
increased total payment volumes processed by our PayPal
subsidiary.
Prior to adopting FAS 123(R), we presented all tax benefits
resulting from the exercise of stock options as operating cash
flows in the consolidated 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),
$77.3 million of excess tax benefits for the nine months
ended September 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
$140 million in 2006.
Net cash used in investing activities during the first nine
months of 2006 consisted primarily of net purchases of property
and equipment of $418.9 million, purchases of investments
of $547.4 million, and acquisitions completed during the
period of $45.5 million, net of cash acquired, offset by
$882.3 million of net maturities and sales of investments.
These purchases related mainly to data centers, building, and
software investments to support capacity expansion in our
business, and capitalized development costs related to our
websites. Net cash used in investing activities during the first
nine months of 2005 consisted primarily of the cash payment for
the acquisition of Rent.com of approximately
$435.4 million, the cash payment for the acquisition of
certain international classifieds websites of approximately
$81.6 million and the cash payment for the acquisition of
Shopping.com of approximately $584.4 million. Purchases of
property and equipment totaled $212.2 million (net of
proceeds from sale of our corporate aircraft of
$28.3 million) during the first nine 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 used in financing activities during the first
nine months of 2006 consisted primarily of proceeds from stock
option exercises of $209.1 million and excess tax benefits
from stock-based compensation of $77.3 million, offset by
repurchases of common stock of $666.5 million. In July
2006, eBays Board of Directors authorized the repurchase
of up to $2.0 billion of our common stock within two years
from the date of authorization. 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 Stock
Repurchases for additional discussion of the
$2.0 billion stock repurchase program.
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
37
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 nine months ended September 30, 2006
was due to the weakening of the U.S. dollar during the nine
month period against other foreign currencies, primarily the
Euro. The negative effect of exchange rates on cash and cash
equivalents during the nine months ended September 30, 2005
was due to the strengthening of the U.S. dollar during the
period against other foreign currencies, primarily the Euro.
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 September 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. All customer funds held by
PayPal as an agent or custodian on behalf of our customers are
not reflected in our condensed consolidated balance sheet. These
off-balance sheet funds include funds held in the U.S. that
are deposited in bank accounts insured by the Federal Deposit
Insurance Corporation and funds that customers choose to invest
in PayPals Money Market Fund totaling approximately
$1.2 billion and $1.4 billion as of December 31,
2005 and September 30, 2006, respectively.
|
|
|
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 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 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. It is not possible to determine the
maximum potential loss under these indemnification provisions
due to our limited history of prior indemnification claims and
the unique facts and circumstances involved in each particular
provision. 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
38
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 September 30, 2006, our fixed-income investments
earned a pretax yield of approximately 4.1%, with a weighted
average maturity of one 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 $2.9 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 nine months ended September 30, 2006 or 2005 relating
to the other-than-temporary impairment in the fair value of
equity investments. At September 30, 2006, the total
carrying value of our equity instruments and equity method
investments was $62.6 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 September 30, 2006,
we held balances in cash, cash equivalents and investments
outside the U.S. totaling approximately $1.7 billion.
As of September 30, 2006, we had outstanding forward
contracts and derivative foreign exchange hedge contracts with
notional values equivalent to approximately $254.2 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. Transaction
gains and losses on the contracts and the assets and liabilities
are recognized each period in our condensed consolidated
statement of income.
Foreign exchange rate fluctuations may adversely impact our
consolidated financial position as well as our consolidated
results of operations and 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 nine
months ended September 30, 2006, was a net translation gain
of approximately $354.5 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
39
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 nine months ended
September 30, 2006, the realized gains and losses related
to these hedges were not significant.
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
derivative foreign exchange contracts during the three months
ended September 30, 2006. The objective of the derivative
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 derivative 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 (loss) all unrealized gains and losses
related to the derivative contracts that receive hedge
accounting treatment. We record all unrealized gains and losses
in interest and accumulated other income, net, related to the
derivative contracts that do not receive hedge accounting
treatment pursuant to FAS 133. During the three and nine
months ended September 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 was $19.0 million and the net loss
related to these hedges recorded to accumulated other
comprehensive income as of September 30, 2006 was not
significant.
Item 4: 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.
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
40
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 August 2006, Louis Vuitton Malletier and Christian Dior
Couture filed two lawsuits in the Paris Court of Commerce
against eBay Inc. and eBay International AG. The complaint
alleges we have violated French tort law by negligently
broadcasting listings posted by third parties offering
counterfeit items bearing plaintiffs trademarks, and by
purchasing certain advertising keywords. The plaintiffs seek
approximately EUR 35 million in damages. The first
hearing is scheduled for December 4, 2006. In or about
September 2006 Parfums Christian Dior, Kenzo Parfums, Parfums
Givenchy, and Guerlain Société also filed a lawsuit in
the Paris Court of Commerce against eBay Inc. and eBay
International AG. The complaint alleges that we have interfered
with the selective distribution network plaintiffs have
set up in France and the European Union by allowing third
parties to post listings offering genuine perfumes and cosmetics
for sale on our sites. The plaintiffs in this suit seek
approximately EUR 9 million in damages and injunctive relief.
The first hearing on this suit is scheduled for
December 18, 2006. We believe that we have meritorious
defenses to these suits and intend to defend ourselves
vigorously.
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). Following a trial in 2003,
the jury returned a verdict finding that we had willfully
infringed the patents related to multiple database searching and
electronic consignment systems, and the court entered judgment
for MercExchange in the amount of approximately $30 million
plus pre-judgment interest and post-judgment interest. In May
2006, following appeals to the U.S. Court of Appeals for
the Federal Circuit and the U.S. Supreme Court, the Supreme
Court 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 separate rulings in 2005, the Patent and
Trademark Office issued initial rulings rejecting all of the
claims contained in the three patents in the suit. In March
2006, the Patent and Trademark Office affirmed its earlier
ruling rejecting the claims contained in the patent that
underlies the jury verdict, which relates to electronic
consignment systems. We have requested that the district court
stay all proceedings in the case pending the final outcome of
the reexamination proceedings, and MercExchange has renewed its
request that the district court grant an injunction. We expect
that the district court will rule on those requests in the
fourth quarter of 2006. Even if successful, our litigation of
these matters will continue to be costly. 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 of the consignment patent. 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,
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 March 2005, eBay, PayPal, and an eBay seller were sued in the
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 sought injunctive relief,
compensatory damages, and punitive damages. In September 2006,
the parties finalized a preliminary settlement agreement. The
41
agreement must be approved by the district court 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, costs, and fees. We have
filed an answer and counterclaims asserting that the patents are
invalid, unenforceable, and not infringed. We expect to receive
the courts scheduling order shortly. We believe that we
have meritorious defenses and intend to defend ourselves
vigorously.
In August 2006, Peer Communications Corporation filed a lawsuit
in the U.S. District Court for the Eastern District of
Texas
(No. 6-06CV-370)
alleging that eBay Inc., Skype Technologies S.A., and Skype Inc.
infringed two patents owned by Peer Communications relating to
uniform network access. The suit seeks an injunction against
continuing infringement, unspecified damages, and interest,
costs, and fees. We have not yet received a schedule from the
court or filed any responsive pleadings. We believe that we have
meritorious defenses and intend to defend ourselves vigorously.
In September 2006, Mangosoft Intellectual Property, Inc. filed a
lawsuit in the U.S. District Court for the Eastern District
of Texas
(No. 2-06CV-390)
alleging that eBay Inc., Skype Technologies S.A., and Skype
Software S.a.r.l. infringed a patent owned by Mangosoft relating
to dynamic directory services. The suit seeks an injunction
against continuing infringement, unspecified damages, and
interest, costs, and fees. We have only recently been served
with the complaint, and accordingly, have not filed an answer or
response. 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 in addition to those discussed above,
and expect that we will increasingly be subject to patent
infringement claims as our services expand in scope and
complexity. In particular, we expect that we may face additional
patent infringement claims involving 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. We believe that
additional lawsuits alleging that we have violated copyright or
trademark law will be filed against us, primarily in Europe.
Intellectual property claims, whether meritorious or not, are
time consuming and costly to resolve, could 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.
Item 1A: Risk
Factors
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.
42
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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 the
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 user protection programs; |
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the costs and results of litigation that involves us; |
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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 develop product enhancements at a reasonable cost
and to develop programs and features in a timely manner; |
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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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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 manage PayPals transaction loss and credit
card chargeback rates and payment funding mix; |
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our ability to continue Skypes growth and to find
mechanisms to more effectively monetize it; |
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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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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; |
43
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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. |
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.
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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 services, 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 enhancing our websites, customer support,
transaction and chargeback rates, user protection programs, and
international and product expansion; |
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maintain sufficient transaction volume to attract buyers and
sellers; |
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cost effectively 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. |
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.
In addition, our Marketplaces business is facing increased
competitive pressure, particularly in Asia. Because a large
percentage of PayPal transactions originate on the eBay
platform, declines in growth rates in major eBay Marketplace
markets also adversely affect 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.
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There are many risks associated with our international
operations. |
Our international expansion has been rapid and our international
business, especially in Germany, the United Kingdom, and South
Korea, has also 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 nine 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,
44
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, Shopping.com, and Kijiji, we are
subject to risks of doing business internationally, including
the following:
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regulatory requirements, including regulation of Internet
services, communications, auctioneering, professional selling,
distance selling, 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 legal systems that are less developed with respect to
the Internet, 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,
communications, and Internet 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 user 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. |
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
45
foreign currency exchange 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. Shopping.coms Israeli
operations could be disrupted by the absence of employees due to
military service, which could adversely affect its business.
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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 positively
impacted by foreign currency translation of approximately
$28.6 million in the third quarter and negatively impacted
by foreign currency translation of approximately
$22.2 million in the first nine months of 2006 as compared
to the same periods of the prior year. Operating income was
positively impacted by foreign currency translation of
approximately $12.0 million in the third quarter and
negatively impacted by foreign currency translation of
approximately $16.2 million in the first nine 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.
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We are subject to patent litigation. |
We have repeatedly been sued for allegedly infringing other
parties patents. Some of these suits are ongoing, as
described under the heading Item 1: Legal
Proceedings, above. We have been notified of several other
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 that we may
face additional patent infringement claims involving various
aspects of our Payments and Communications businesses. These
claims, whether meritorious or not, are time consuming and
costly to resolve, and could require expensive changes in our
methods of doing business, or could require us to enter into
costly royalty or licensing agreements.
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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. In September 2006, PayPal entered into a settlement
agreement with the attorneys general of a number of states under
which it agreed to pay $1.7 million to the attorneys
general, shorten and streamline its user agreement, increase
educational messaging to users about funding choices, and
communicate more information regarding protection programs to
users. 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.
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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, Louis
Vuitton Malletier and Christian Dior Couture in France, and a
number of other owners of intellectual property rights. The
plaintiffs in these cases seek to hold eBay liable for
counterfeit items listed on our sites by third parties or
alleged violations of selective distribution channels. 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. A trial in the Tiffany case has been scheduled for
January 2007. Nanette Lepore sought, among other things, to
require eBay to block all listings offering Nanette Lepore
items, as well as damages. The court denied Nanette
Lepores request for a preliminary injunction, and found
that eBays process for addressing the listing of
counterfeit items by third parties on its site was both
reasonable and adequate. Nanette Lepore initially appealed the
ruling, but subsequently abandoned its appeal. We believe that
additional lawsuits alleging that we have violated copyright or
trademark law will be filed against us, primarily in Europe.
While we have been largely successful to date in defending
against such litigation, more
47
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 particular, plaintiffs in recent cases have argued that we
are not entitled to safe harbors under the Digital Millennium
Copyright Act or as a hosting provider in the European Union
because of the active nature of our involvement with our
sellers, and that, whether or not such safe harbors are
available, we should be found liable because we have not
adequately removed counterfeit listings or effectively suspended
users who have created such listings. 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.
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We are subject to general litigation. |
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. 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 such as ourselves are either unclear or
less favorable. 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.
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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
management, 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
acquisition of VeriSigns payment gateway business in late
2005, 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.
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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.
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.
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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.
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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 (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 electronic commerce or communications conducted over
the Internet. In addition, some jurisdictions have implemented
or may implement laws specifically addressing the Internet or
some aspect of electronic commerce or communications on the
Internet. 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
foreign countries that we should collect taxes on the exchange
of merchandise or services on our websites would harm our
business. Foreign authorities may also require eBay to help
ensure compliance by our users with local laws regulating
professional sellers, including tax requirements. In addition,
we have periodically received requests from tax authorities in
some foreign jurisdictions for information regarding the
transactions of sellers on our sites, and in some cases we may
be legally obligated to provide this data. Requirements that we
disclose sellers transaction records to tax authorities,
and any use of those records to investigate, collect taxes from,
or prosecute sellers, could decrease seller activity on our
sites and 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.
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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 nine
months of 2006, PayPals transaction loss totaled
$73.8 million and $81.7 million, representing 0.27%
and 0.31% 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
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
51
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.
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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 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.
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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 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. In addition, some products that PayPal is introducing as
it expands its business are expected to have a higher rate of
credit card funding than PayPals current rate. In
September 2006, PayPal entered into a settlement agreement with
the attorneys general of a number of states under which it
agreed to pay $1.7 million to the attorneys general,
shorten and streamline its user agreement, and communicate more
information regarding protection programs to users. Also in
September 2006, PayPal announced that it had reached a
preliminary settlement agreement under which it agreed to pay
approximately $3.5 million into a settlement fund for the
benefit of a class represented by
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plaintiffs in a suit that alleged, among other things, that
PayPals disclosure regarding the effects of users
choice of funding mechanism was deceptive. Although PayPal did
not admit any liability for any of the allegations in the two
cases, the required changes to our disclosure practices under
the settlement agreements could result in increased use of
credit card funding, which would harm PayPals business.
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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 35
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
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 nine
months of 2006, and any violations could expose PayPal to
significant liability. Any
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negative change in the publics perception of PayPals
compliance with privacy laws and policies could also negatively
impact PayPals business.
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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 103 markets, and to receive payments in 49 of
those markets. In 35 of these 49 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 17 currencies. 25 of the 103 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 United Kingdom 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 user protection laws that will apply to
its business, in addition to United Kingdom user 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.
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The current regulatory environment for Voice over Internet
Protocol (VoIP) is uncertain, 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 uncertain 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, or Skype may change its product offerings in a manner
that makes it become subject to telecommunications regulations.
Increased fees could include access and other charges payable to
local exchange carriers to carry and terminate traffic,
contributions to federal or state Universal Service Funds 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, user 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 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
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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 and regulatory agencies are considering whether 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 its users.
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.
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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 a decrease in
service quality until equivalent technology or suitable
alternatives can be developed, identified, licensed and
integrated. While we believe Skype has the ability to 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.
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Our businesses depend on continued and unimpeded access to
the Internet. Internet service providers may be able to block,
degrade, or charge us for 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 our offerings by restricting or
prohibiting the use of their lines for our offerings, by
filtering, blocking, delaying, or degrading the packets
containing the data associated with our products, or by charging
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increased fees to us or our users for use of their lines to
provide our offerings. Some of these providers have
contractually restricted their customers access to
Skypes offerings through their terms of service with their
customers. These activities are technically feasible and may be
permitted by applicable law. In addition, Internet service
providers could attempt to charge us each time our customers use
our offerings. 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.
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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 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.
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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 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 spoof 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. Despite our
efforts to mitigate spoof
e-mails through product
improvements and user education, spoof remains a
serious problem that may damage our brand, discourage use of our
websites, and increase our costs.
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.
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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.
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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
57
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 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. Problems with our
conversion to a 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 user
protection 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. |
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.
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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
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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 a PayPal subsidiary, 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.
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 existing
regulations that restrict or prohibit the use of Skypes
software.
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Our business is adversely affected by anything that causes
our users to spend less time on our websites, including seasonal
factors, national events and increased usage of other
websites. |
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. In addition,
increased usage of social networking or other entertainment
websites may decrease the amount of time users spend on our
websites, which could adversely affect our financial results.
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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. Skype users may be required
to purchase computer headsets, or leave a personal
59
computer on to communicate, and they may believe 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.
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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.
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
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laundering laws could result in significant criminal and civil
lawsuits, penalties, and forfeiture of significant assets.
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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.
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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 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.
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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
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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.
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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 has 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 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.
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Our industry is intensely competitive, and other companies
or governmental agencies may allege that our behavior is
anti-competitive. |
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
62
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, 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 Computers,
Consumer Electronics, and Cameras & Photo categories
include Abe Electronics, Best Buy, Buy.com, Circuit City, CNET,
CompUSA, Computer Discount Warehouse, Dell, Electronics
Boutique, Frys Electronics, Gamestop, Gateway, Hewlett
Packard, IBM, MicroWarehouse, Overstock.com, PC Connection,
PCMall.com, Radio Shack, Ritz Camera, Tech Depot, Tiger Direct,
Tweeter Home Entertainment, uBid, major wireless carriers, and
computer, consumer electronics, and photography retailers.
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, operated by a partnership
between Alibaba.com and Yahoo, in China, and Amazon in the
United Kingdom 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.
The principal competitive factors for 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. |
With respect to our online competition, additional competitive
factors include:
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community cohesion, interaction and size; |
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website ease-of-use and
accessibility; |
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system reliability; |
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reliability of delivery and payment; |
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level of service fees; and |
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quality of search tools. |
63
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, in July 2006
we 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 their
vertically integrated electronic commerce sites or their
advertisers sites, attempt to restrict our access, or
charge us substantial fees for inclusion. Search engines may
increasingly become a starting point for online shopping, and as
the costs of operating an online store decline, online sellers
may increasingly sell goods through multiple channels, which
could reduce the number and value of transactions these sellers
conduct through our sites.
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; |
64
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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. |
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 United Kingdom, 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.
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 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.
65
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.
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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.
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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.
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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; |
66
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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.
Item 2: Unregistered
Sales of Equity Securities and Use of Proceeds
The table below sets forth information regarding repurchases of
our common stock during the three months ended
September 30, 2006.
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Total Number of | |
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Shares Purchased as | |
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Maximum Dollar | |
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Average Price | |
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Part of Publicly | |
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Value that May yet | |
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Total Number of | |
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Paid per | |
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Announced | |
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be Purchased | |
Period |
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Shares Purchased | |
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Share | |
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Programs | |
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Under the Program | |
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July 1, 2006 - July 31, 2006
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August 1, 2006 - August 31, 2006
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September 1, 2006 - September 30, 2006
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23,979,700 |
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$ |
27.80 |
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23,979,700 |
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$ |
1,333,458,652 |
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23,979,700 |
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23,979,700 |
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In July 2006, eBays Board of Directors authorized the
repurchase of up to $2.0 billion of the companys
common stock within two years from the date of authorization.
The stock repurchase program was announced on July 19,
2006. During the third quarter of 2006, we spent approximately
$666.5 million to repurchase shares at an average price of
$27.80 per share. As of September 30, 2006,
$1.3 billion remained available for further purchases under
the program.
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 is intended to comply with the volume, timing and other
limitations set forth in
Rule 10b-18 under
the Securities Exchange Act of 1934.
67
Item 3: Defaults Upon
Senior Securities
Not applicable.
Item 4: Submission of
Matters to a Vote of Security Holders
None
Item 5: Other
Information
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. There
were no non-audit engagements approved in the quarter ended
September 30, 2006.
Item 6: Exhibits
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Exhibit 10 |
.01+ |
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Separation Agreement dated as of August 8, 2006 between
eBay Inc. and Maynard Webb. |
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Exhibit 10 |
.02+ |
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Separation Agreement dated as of September 11, 2006 between
eBay Inc. and Jeffrey Jordan. |
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Exhibit 10 |
.03+ |
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Consulting Agreement dated as of September 11, 2006 between
eBay Inc. and Jeffrey Jordan. |
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Exhibit 31 |
.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 |
.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 |
.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 |
.02 |
|
Certification of eBays Chief Financial Officer, as
required by Section 906 of the Sarbanes-Oxley Act of 2002. |
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+ |
Indicates a management contract or compensatory plan. |
68
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.
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By: |
/s/ Margaret C. Whitman |
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Margaret C. Whitman |
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President and Chief Executive Officer |
Date: October 27, 2006
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Principal Financial Officer: |
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Robert H. Swan |
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Senior Vice President and Chief Financial Officer |
Date: October 27, 2006
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Principal Accounting Officer: |
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Douglas Jeffries |
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Vice President, Chief Accounting Officer |
Date: October 27, 2006
69
INDEX TO EXHIBITS
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Exhibit 10 |
.01+ |
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Separation Agreement dated as of August 8, 2006 between
eBay Inc. and Maynard Webb. |
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Exhibit 10 |
.02+ |
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Separation Agreement dated as of September 11, 2006 between
eBay Inc. and Jeffrey Jordan. |
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Exhibit 10 |
.03+ |
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Consulting Agreement dated as of September 11, 2006 between
eBay Inc. and Jeffrey Jordan. |
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Exhibit 31 |
.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 |
.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 |
.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 |
.02 |
|
Certification of eBays Chief Financial Officer, as
required by Section 906 of the Sarbanes-Oxley Act of 2002. |
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+ |
Indicates a management contract or compensatory plan. |