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, 2008
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Or
|
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
000-24821
eBay Inc.
(Exact name of registrant as
specified in its charter)
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|
Delaware
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|
74-0430924
|
(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification Number)
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2145 Hamilton Avenue
San Jose, California
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95125
(Zip Code)
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(Address of principal executive
offices)
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(408) 376-7400
(Registrants telephone
number, including area code)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer þ
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|
Accelerated
filer o
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Non-accelerated
filer (Do not check if a smaller reporting
company) o
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|
Smaller reporting
company 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 16, 2008 there were 1,276,943,660 shares
of the registrants common stock, $0.001 par value,
outstanding, which is the only class of common or voting stock
of the registrant issued.
TABLE OF CONTENTS
PART I:
FINANCIAL INFORMATION
|
|
Item 1:
|
Financial
Statements
|
eBay
Inc.
CONDENSED
CONSOLIDATED BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
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|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands, except
|
|
|
|
par value amounts)
|
|
|
|
(Unaudited)
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|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
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Cash and cash equivalents
|
|
$
|
4,221,191
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|
|
$
|
3,342,717
|
|
Short-term investments
|
|
|
676,264
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|
|
|
301,136
|
|
Accounts receivable, net
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|
|
480,557
|
|
|
|
436,456
|
|
Funds receivable and customer accounts
|
|
|
1,513,578
|
|
|
|
1,555,835
|
|
Other current assets
|
|
|
230,915
|
|
|
|
372,202
|
|
|
|
|
|
|
|
|
|
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Total current assets
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7,122,505
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|
|
|
6,008,346
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|
Long-term investments
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|
138,237
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|
|
|
133,629
|
|
Property and equipment, net
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|
1,120,452
|
|
|
|
1,215,469
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Goodwill
|
|
|
6,257,153
|
|
|
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6,172,133
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Intangible assets, net
|
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|
596,038
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467,610
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Other assets
|
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|
131,652
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|
|
|
242,970
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|
|
|
|
|
|
|
|
|
|
Total assets
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|
$
|
15,366,037
|
|
|
$
|
14,240,157
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|
|
|
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|
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LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
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Accounts payable
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|
$
|
156,613
|
|
|
$
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217,272
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|
Funds payable and amounts due to customers
|
|
|
1,513,578
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|
|
|
1,555,835
|
|
Accrued expenses and other current liabilities
|
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1,151,139
|
|
|
|
804,634
|
|
Deferred revenue and customer advances
|
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|
166,495
|
|
|
|
180,777
|
|
Income taxes payable
|
|
|
111,754
|
|
|
|
96,215
|
|
|
|
|
|
|
|
|
|
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Total current liabilities
|
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|
3,099,579
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|
|
|
2,854,733
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|
Deferred and other tax liabilities, net
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510,557
|
|
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639,926
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Other liabilities
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51,299
|
|
|
|
51,803
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|
|
|
|
|
|
|
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Total liabilities
|
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3,661,435
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|
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3,546,462
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|
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|
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Stockholders equity:
|
|
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Common Stock, $0.001 par value; 3,580,000 shares
authorized; 1,350,219 and 1,276,843 shares outstanding
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1,458
|
|
|
|
1,465
|
|
Additional paid-in capital
|
|
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8,996,303
|
|
|
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9,385,363
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Treasury stock at cost, 107,522 and 188,188 shares
|
|
|
(3,184,981
|
)
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|
|
(5,377,070
|
)
|
Retained earnings
|
|
|
4,190,546
|
|
|
|
5,602,828
|
|
Accumulated other comprehensive income
|
|
|
1,701,276
|
|
|
|
1,081,109
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
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|
11,704,602
|
|
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10,693,695
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
15,366,037
|
|
|
$
|
14,240,157
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
eBay
Inc.
CONDENSED
CONSOLIDATED STATEMENT OF (LOSS) INCOME
|
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|
|
|
|
|
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|
|
|
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|
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Three Months Ended September 30,
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Nine Months Ended September 30,
|
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2007
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|
2008
|
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2007
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2008
|
|
|
|
(In thousands, except per share amounts)
|
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(Unaudited)
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|
Net revenues
|
|
$
|
1,889,220
|
|
|
$
|
2,117,531
|
|
|
$
|
5,491,723
|
|
|
$
|
6,505,415
|
|
Cost of net revenues
|
|
|
446,521
|
|
|
|
560,963
|
|
|
|
1,256,999
|
|
|
|
1,648,478
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|
|
|
|
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|
|
|
|
|
|
|
|
|
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Gross profit
|
|
|
1,442,699
|
|
|
|
1,556,568
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|
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4,234,724
|
|
|
|
4,856,937
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|
|
|
|
|
|
|
|
|
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|
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Operating expenses:
|
|
|
|
|
|
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|
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|
|
|
|
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Sales and marketing
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|
485,240
|
|
|
|
457,216
|
|
|
|
1,406,260
|
|
|
|
1,497,181
|
|
Product development
|
|
|
164,879
|
|
|
|
190,842
|
|
|
|
450,411
|
|
|
|
554,393
|
|
General and administrative
|
|
|
287,447
|
|
|
|
331,715
|
|
|
|
849,284
|
|
|
|
1,020,672
|
|
Amortization of acquired intangible assets
|
|
|
51,888
|
|
|
|
52,720
|
|
|
|
150,791
|
|
|
|
162,472
|
|
Impairment of goodwill
|
|
|
1,390,938
|
|
|
|
|
|
|
|
1,390,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,380,392
|
|
|
|
1,032,493
|
|
|
|
4,247,684
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|
|
|
3,234,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(937,693
|
)
|
|
|
524,075
|
|
|
|
(12,960
|
)
|
|
|
1,622,219
|
|
Interest and other income, net
|
|
|
38,363
|
|
|
|
38,556
|
|
|
|
102,350
|
|
|
|
91,551
|
|
Interest expense
|
|
|
(2,728
|
)
|
|
|
11
|
|
|
|
(10,004
|
)
|
|
|
(3,474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(902,058
|
)
|
|
|
562,642
|
|
|
|
79,386
|
|
|
|
1,710,296
|
|
Provision for income taxes
|
|
|
(33,577
|
)
|
|
|
(70,423
|
)
|
|
|
(262,021
|
)
|
|
|
(298,014
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(935,635
|
)
|
|
$
|
492,219
|
|
|
$
|
(182,635
|
)
|
|
$
|
1,412,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.69
|
)
|
|
$
|
0.38
|
|
|
$
|
(0.13
|
)
|
|
$
|
1.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.69
|
)
|
|
$
|
0.38
|
|
|
$
|
(0.13
|
)
|
|
$
|
1.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,354,786
|
|
|
|
1,288,937
|
|
|
|
1,360,830
|
|
|
|
1,311,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
1,354,786
|
|
|
|
1,297,484
|
|
|
|
1,360,830
|
|
|
|
1,322,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
eBay
Inc.
CONDENSED
CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
|
(Unaudited)
|
|
|
Net (loss) income
|
|
$
|
(935,635
|
)
|
|
$
|
492,219
|
|
|
$
|
(182,635
|
)
|
|
$
|
1,412,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
301,135
|
|
|
|
(597,518
|
)
|
|
|
464,375
|
|
|
|
(367,276
|
)
|
Unrealized gains (losses) on investments, net
|
|
|
285,756
|
|
|
|
(114,953
|
)
|
|
|
286,441
|
|
|
|
(432,424
|
)
|
Unrealized (losses) gains on hedging activities
|
|
|
(839
|
)
|
|
|
19,022
|
|
|
|
(1,319
|
)
|
|
|
11,046
|
|
Tax (provision) benefit on above items
|
|
|
(114,120
|
)
|
|
|
44,974
|
|
|
|
(114,200
|
)
|
|
|
168,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in accumulated other comprehensive (loss) income
|
|
|
471,932
|
|
|
|
(648,475
|
)
|
|
|
635,297
|
|
|
|
(620,167
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
$
|
(463,703
|
)
|
|
$
|
(156,256
|
)
|
|
$
|
452,662
|
|
|
$
|
792,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
eBay
Inc.
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
|
(Unaudited)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(182,635
|
)
|
|
$
|
1,412,282
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts and authorized credits
|
|
|
66,848
|
|
|
|
92,234
|
|
Provision for transaction losses
|
|
|
100,848
|
|
|
|
118,197
|
|
Depreciation and amortization
|
|
|
441,891
|
|
|
|
517,917
|
|
Impairment of goodwill
|
|
|
1,390,938
|
|
|
|
|
|
Stock-based compensation
|
|
|
232,160
|
|
|
|
269,481
|
|
Deferred income taxes
|
|
|
(68,934
|
)
|
|
|
(110,947
|
)
|
Tax benefits from stock-based compensation
|
|
|
112,883
|
|
|
|
38,220
|
|
Excess tax benefits from stock-based compensation
|
|
|
(69,026
|
)
|
|
|
(4,670
|
)
|
Changes in assets and liabilities, net of acquisition effects:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(86,316
|
)
|
|
|
(47,612
|
)
|
Funds receivable and customer accounts
|
|
|
(420,817
|
)
|
|
|
(42,256
|
)
|
Other current assets
|
|
|
(179,927
|
)
|
|
|
(112,098
|
)
|
Other non-current assets
|
|
|
(79,069
|
)
|
|
|
(26,242
|
)
|
Accounts payable
|
|
|
12,707
|
|
|
|
33,300
|
|
Funds payable and amounts due to customers
|
|
|
420,817
|
|
|
|
42,256
|
|
Accrued expenses and other liabilities
|
|
|
5,642
|
|
|
|
(105,124
|
)
|
Deferred revenue and customer advances
|
|
|
27,477
|
|
|
|
12,480
|
|
Income taxes payable and other tax liabilities
|
|
|
123,076
|
|
|
|
110,854
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1,848,563
|
|
|
|
2,198,272
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment, net
|
|
|
(326,035
|
)
|
|
|
(406,739
|
)
|
Purchases of investments
|
|
|
(205,298
|
)
|
|
|
(107,990
|
)
|
Maturities and sales of investments
|
|
|
783,816
|
|
|
|
42,248
|
|
Acquisitions, net of cash acquired
|
|
|
(320,195
|
)
|
|
|
(159,064
|
)
|
Other
|
|
|
5,523
|
|
|
|
(51,369
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(62,189
|
)
|
|
|
(682,914
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net
|
|
|
365,199
|
|
|
|
98,727
|
|
Repurchases of common stock, net
|
|
|
(1,170,699
|
)
|
|
|
(2,179,552
|
)
|
Excess tax benefits from stock-based compensation
|
|
|
69,026
|
|
|
|
4,670
|
|
Repayment of borrowings
|
|
|
|
|
|
|
(200,220
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(736,474
|
)
|
|
|
(2,276,375
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
199,899
|
|
|
|
(117,457
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
1,249,799
|
|
|
|
(878,474
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
2,662,792
|
|
|
|
4,221,191
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
3,912,591
|
|
|
$
|
3,342,717
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
6,381
|
|
|
$
|
1,257
|
|
Cash paid for income taxes
|
|
$
|
281,657
|
|
|
$
|
329,160
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
Common stock options assumed pursuant to acquisition
|
|
$
|
10,361
|
|
|
$
|
4,398
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
eBay
Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
Note 1
|
The
Company and Summary of Significant Accounting Policies
|
The
Company
eBay Inc. (eBay) was incorporated in California in
May 1996, and reincorporated in Delaware in April 1998.
eBays purpose is to pioneer new communities around the
world, built on commerce, sustained by trust and inspired by
opportunity. eBay connects hundreds of millions of people around
the world every day, empowering them to explore new
opportunities and innovate together. eBay Inc. does this by
providing Internet platforms for global commerce, payments and
communications. Since its inception, eBay Inc. has expanded to
include eBay, PayPal, Skype, Shopping.com, StubHub and others.
eBay has three operating segments: Marketplaces, Payments and
Communications. The Marketplaces segment enables online commerce
through a variety of platforms, including the Marketplaces site
comprising auction-style and fixed price formats, our
classifieds websites, our comparison shopping site,
Shopping.com, our secondary tickets platform, StubHub, our fixed
price media marketplace, Half.com and our apartment listing
service platform, Rent.com. 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 SA (Skype)
business, enables Voice over Internet Protocol
(VoIP) communications between Skype users, and
provides low-cost connectivity to traditional fixed-line and
mobile telephones.
When we refer to we, our, us
or eBay in this document, we mean the current
Delaware corporation (eBay Inc.) and its California predecessor,
as well as all of our consolidated subsidiaries.
Use of
estimates
The preparation of condensed consolidated financial statements
in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date
of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. We
evaluate our estimates on an ongoing basis, including those
related to provisions for doubtful accounts and authorized
credits, the provision for transaction losses, legal
contingencies, income taxes, marketing services and other
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.
These unaudited interim financial statements reflect our
condensed consolidated balance sheet as of December 31,
2007 and September 30, 2008. These statements also show our
condensed consolidated statement of (loss) income and condensed
consolidated statement of comprehensive (loss) income for the
three and nine months ended September 30, 2007 and 2008 and
our condensed consolidated statement of cash flows for the nine
months ended September 30, 2007 and 2008. 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, 2007 included in our Annual Report
on
Form 10-K
filed with the Securities and Exchange Commission
(SEC) on February 29, 2008. The condensed
consolidated
6
eBay
Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
balance sheet as of December 31, 2007 was derived from our
audited financial statements for the year ended
December 31, 2007, but does not include all disclosures
required by U.S. generally accepted accounting principles.
The condensed consolidated statements of (loss) income,
comprehensive (loss) 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. Customer accounts were
reclassified from other current assets to funds receivable and
customer accounts.
Recent
accounting pronouncements
In December 2007, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (FAS) No. 141 (Revised 2007),
Business Combinations (FAS 141(R)).
FAS 141(R) establishes principles and requirements for how
an acquirer in a business combination recognizes and measures in
its financial statements the identifiable assets acquired,
liabilities assumed, and any noncontrolling interests in the
acquiree, as well as the goodwill acquired. Significant changes
from current practice resulting from FAS 141(R) include the
expansion of the definitions of a business and a
business combination. For all business combinations
(whether partial, full or step acquisitions), the acquirer will
record 100% of all assets and liabilities of the acquired
business, including goodwill, generally at their fair values;
contingent consideration will be recognized at its fair value on
the acquisition date and, for certain arrangements, changes in
fair value will be recognized in earnings until settlement; and
acquisition-related transaction and restructuring costs will be
expensed rather than treated as part of the cost of the
acquisition. FAS 141(R) also establishes disclosure
requirements to enable users to evaluate the nature and
financial effects of the business combination. FAS 141(R)
applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15,
2008. FAS 141(R) may have an impact on our consolidated
financial statements. The nature and magnitude of the specific
impact will depend upon the nature, terms, and size of the
acquisitions consummated after the effective date.
In December 2007, the FASB issued FAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements An amendment of ARB No. 51
(FAS 160). FAS 160 amends Accounting
Research Bulletin 51, Consolidated Financial
Statements, to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and
for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary, which is sometimes
referred to as minority interest, is a third-party ownership
interest in the consolidated entity that should be reported as a
component of equity in the consolidated financial statements.
Among other requirements, FAS 160 requires the consolidated
statement of income to be reported at amounts that include the
amounts attributable to both the parent and the noncontrolling
interest. FAS 160 also requires disclosure on the face of
the consolidated statement of income of the amounts of
consolidated net income attributable to the parent and to the
noncontrolling interest. FAS 160 is effective for fiscal
years, and interim periods within those fiscal years, beginning
on or after December 15, 2008. Earlier adoption is not
permitted. We are currently evaluating the potential impact of
this statement.
In February 2008, the FASB issued FASB Staff Position
FAS 157-2,
Effective Date of FASB Statement No. 157
(FSP 157-2),
to partially defer FASB Statement No. 157, Fair Value
Measurements (FAS 157).
FSP 157-2
defers the effective date of FAS 157 for nonfinancial
assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), to fiscal
years, and interim periods within those fiscal years, beginning
after November 15, 2008. We are currently evaluating the
impact of adopting the provisions of FAS 157 as it relates
to non-financial assets and liabilities.
In March 2008, the FASB issued FAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities (FAS 161). FAS 161 amends
and expands the disclosure requirements of FAS 133,
Accounting for Derivative Instruments and Hedging
Activities and requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of gains and losses on
derivative instruments, and disclosures about
credit-risk-related contingent features in derivative
agreements. This statement is
7
eBay
Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
effective for financial statements issued for fiscal periods
beginning after November 15, 2008. Earlier adoption is not
permitted. We do not believe the adoption of FAS 161 will
have a material impact on our consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position
FAS 142-3,
Determination of Useful Life of Intangible Assets
(FSP 142-3).
FSP 142-3
amends the factors that should be considered in developing the
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under FAS 142,
Goodwill and Other Intangible Assets.
FSP 142-3
also requires expanded disclosure regarding the determination of
intangible asset useful lives.
FSP 142-3
is effective for fiscal years beginning after December 15,
2008. Earlier adoption is not permitted. We are currently
evaluating the potential impact the adoption of
FSP 142-3
will have on our consolidated financial statements.
In October 2008, the FASB issued FASB Staff Position
FAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active
(FSP 157-3).
FSP 157-3
clarified the application of FAS 157.
FSP 157-3
demonstrated how the fair value of a financial asset is
determined when the market for that financial asset is inactive.
FSP 157-3
was effective upon issuance, including prior periods for which
financial statements had not been issued. The implementation of
this standard did not have an impact on our consolidated
financial statements.
|
|
Note 2
|
Net
(Loss) Income Per Share
|
Basic net (loss) income per share is computed by dividing the
net (loss) income for the period by the weighted average number
of common shares outstanding during the period. Diluted net
(loss) income per share is computed by dividing the net (loss)
income for the period by the weighted average number of shares
of common stock and potentially dilutive common stock
outstanding during the period. The dilutive effect of
outstanding options and restricted stock is reflected in diluted
earnings per share by application of the treasury stock method.
The calculation of diluted net (loss) income per share excludes
all anti-dilutive shares. The following table sets forth the
computation of basic and diluted net (loss) income per share for
the periods indicated (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(935,635
|
)
|
|
$
|
492,219
|
|
|
$
|
(182,635
|
)
|
|
$
|
1,412,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares basic
|
|
|
1,354,786
|
|
|
|
1,288,937
|
|
|
|
1,360,830
|
|
|
|
1,311,501
|
|
Dilutive effect of equity incentive plans
|
|
|
|
|
|
|
8,547
|
|
|
|
|
|
|
|
10,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares diluted
|
|
|
1,354,786
|
|
|
|
1,297,484
|
|
|
|
1,360,830
|
|
|
|
1,322,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.69
|
)
|
|
$
|
0.38
|
|
|
$
|
(0.13
|
)
|
|
$
|
1.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.69
|
)
|
|
$
|
0.38
|
|
|
$
|
(0.13
|
)
|
|
$
|
1.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock equivalents excluded from (loss) income per diluted
share because their effect would have been anti-dilutive
|
|
|
139,590
|
|
|
|
102,322
|
|
|
|
142,403
|
|
|
|
94,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
eBay
Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 3
|
Business
Combinations, Goodwill and Intangible Assets
|
Acquisition
of Fraud Sciences Ltd.
On January 30, 2008, we acquired all of the outstanding
shares of Fraud Sciences Ltd. (Fraud Sciences) for a
total aggregate purchase price of approximately
$153.6 million. The purchase price consisted of cash
totaling $148.3 million, $0.9 million in estimated
acquisition-related expenses and the assumption of Fraud
Sciences outstanding common stock options, valued at
approximately $4.4 million. The fair value of Fraud
Sciences stock options that were assumed was determined
using a Black-Scholes model. Fraud Sciences provides online risk
tools and is included within our Payments segment. Fraud
Sciences is expected to enhance PayPals proprietary fraud
management systems and accelerate our development of next
generation fraud detection tools.
We accounted for the acquisition as a taxable purchase
transaction and, accordingly, the purchase price has been
allocated to the tangible assets, liabilities assumed and
identifiable intangible assets acquired based on their estimated
fair values on the acquisition date. The excess of the purchase
price over the aggregate fair values was recorded as goodwill.
The fair value assigned to identifiable intangible assets
acquired is determined using the income approach, which
discounts expected future cash flows to present value using
estimates and assumptions determined by management. Purchased
intangible assets are amortized on a straight-line basis over
the respective useful lives. Our preliminary allocation of the
purchase price is summarized below (in thousands):
|
|
|
|
|
Net liabilities assumed, net of cash acquired of $198
|
|
$
|
(5,117
|
)
|
Goodwill
|
|
|
135,477
|
|
Developed technology
|
|
|
23,200
|
|
|
|
|
|
|
Total
|
|
$
|
153,560
|
|
|
|
|
|
|
The estimated useful economic life of the acquired developed
technology is two years. The allocation of the purchase price
for the acquisition has been prepared on a preliminary basis and
changes to that allocation may occur as additional information
becomes available.
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 Fraud Sciences.
Fraud Sciences results of operations for periods prior to
this acquisition were not material to our condensed consolidated
statement of income and, accordingly, pro forma financial
information has not been presented.
Goodwill
The following table presents goodwill balances and the movements
for each of our reportable segments during the nine months ended
September 30, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Goodwill
|
|
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
Acquired
|
|
|
Adjustments
|
|
|
2008
|
|
|
Reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplaces
|
|
$
|
3,016,799
|
|
|
$
|
7,435
|
|
|
$
|
(183,576
|
)
|
|
$
|
2,840,658
|
|
Payments
|
|
|
1,348,373
|
|
|
|
135,477
|
|
|
|
(173
|
)
|
|
|
1,483,677
|
|
Communications
|
|
|
1,919,341
|
|
|
|
|
|
|
|
(44,183
|
)
|
|
|
1,875,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,284,513
|
|
|
$
|
142,912
|
|
|
$
|
(227,932
|
)
|
|
$
|
6,199,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
9
eBay
Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of December 31, 2007 and September 30, 2008, the
goodwill related to our equity investments, included above, was
approximately $27.4 million.
The changes in goodwill during the nine months ended
September 30, 2008 were due primarily to the acquisition of
Fraud Sciences and foreign currency translation adjustments.
In accordance with Statement of FAS No. 142,
Goodwill and Other Intangible Assets, 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, 2008 and determined there
was no impairment. There were no events or circumstances from
that date through September 30, 2008 indicating that a
further assessment was necessary.
Intangible
Assets
The components of identifiable intangible assets are as follows
(in thousands, except years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
September 30, 2008
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Weighted
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Weighted
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Average
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Average
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Useful Life
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Useful Life
|
|
|
|
|
|
|
|
|
|
|
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
(Years)
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists and user base
|
|
$
|
588,714
|
|
|
$
|
(334,864
|
)
|
|
$
|
253,850
|
|
|
|
6
|
|
|
$
|
569,793
|
|
|
$
|
(393,851
|
)
|
|
$
|
175,942
|
|
|
|
6
|
|
Trademarks and trade names
|
|
|
572,918
|
|
|
|
(292,854
|
)
|
|
|
280,064
|
|
|
|
5
|
|
|
|
559,360
|
|
|
|
(368,513
|
)
|
|
|
190,847
|
|
|
|
5
|
|
Developed technologies
|
|
|
125,504
|
|
|
|
(85,441
|
)
|
|
|
40,063
|
|
|
|
4
|
|
|
|
147,876
|
|
|
|
(102,921
|
)
|
|
|
44,955
|
|
|
|
4
|
|
All other
|
|
|
62,052
|
|
|
|
(38,546
|
)
|
|
|
23,506
|
|
|
|
4
|
|
|
|
114,792
|
|
|
|
(58,166
|
)
|
|
|
56,626
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,349,188
|
|
|
$
|
(751,705
|
)
|
|
$
|
597,483
|
|
|
|
|
|
|
$
|
1,391,821
|
|
|
$
|
(923,451
|
)
|
|
$
|
468,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 and September 30, 2008, the
net carrying amount of intangible assets related to our equity
investments included above was approximately $1.4 million
and $0.8 million, respectively. All of our identifiable
intangible assets are subject to amortization. Aggregate
amortization expense for intangible assets was
$56.7 million and $66.3 million for the three months
ended September 30, 2007 and 2008, respectively. Aggregate
amortization expense for intangible assets was
$167.6 million and $195.2 million for the nine months
ended September 30, 2007 and 2008, respectively.
10
eBay
Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Operating segments are based upon our organization structure,
the manner in which our operations are managed, the criteria
used by our Chief Executive Officer, who is our chief decision
maker for segment reporting purposes, to evaluate segment
performance and the availability of separate financial
information. We have three operating segments: Marketplaces,
Payments and Communications.
The following tables summarize the financial performance of our
operating segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2007
|
|
|
|
Marketplaces
|
|
|
Payments
|
|
|
Communications
|
|
|
Consolidated
|
|
|
Net revenues from external customers
|
|
$
|
1,320,632
|
|
|
$
|
470,396
|
|
|
$
|
98,192
|
|
|
$
|
1,889,220
|
|
Direct costs
|
|
|
760,918
|
|
|
|
386,474
|
|
|
|
83,758
|
|
|
|
1,231,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct contribution
|
|
$
|
559,714
|
|
|
$
|
83,922
|
|
|
$
|
14,434
|
|
|
|
658,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses and indirect costs of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,595,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(937,693
|
)
|
Interest and other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,363
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,728
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(902,058
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2008
|
|
|
|
Marketplaces
|
|
|
Payments
|
|
|
Communications
|
|
|
Consolidated
|
|
|
Net revenues from external customers
|
|
$
|
1,376,853
|
|
|
$
|
597,211
|
|
|
$
|
143,467
|
|
|
$
|
2,117,531
|
|
Direct costs
|
|
|
789,109
|
|
|
|
483,713
|
|
|
|
105,766
|
|
|
|
1,378,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct contribution
|
|
$
|
587,744
|
|
|
$
|
113,498
|
|
|
$
|
37,701
|
|
|
|
738,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses and indirect costs of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
214,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
524,075
|
|
Interest and other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,556
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
562,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2007
|
|
|
|
Marketplaces
|
|
|
Payments
|
|
|
Communications
|
|
|
Consolidated
|
|
|
Net revenues from external customers
|
|
$
|
3,861,384
|
|
|
$
|
1,363,904
|
|
|
$
|
266,435
|
|
|
$
|
5,491,723
|
|
Direct costs
|
|
|
2,180,678
|
|
|
|
1,104,055
|
|
|
|
239,429
|
|
|
|
3,524,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct contribution
|
|
$
|
1,680,706
|
|
|
$
|
259,849
|
|
|
$
|
27,006
|
|
|
|
1,967,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses and indirect costs of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,980,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,960
|
)
|
Interest and other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,350
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,004
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
79,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
eBay
Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2008
|
|
|
|
Marketplaces
|
|
|
Payments
|
|
|
Communications
|
|
|
Consolidated
|
|
|
Net revenues from external customers
|
|
$
|
4,319,201
|
|
|
$
|
1,780,585
|
|
|
$
|
405,629
|
|
|
$
|
6,505,415
|
|
Direct costs
|
|
|
2,440,797
|
|
|
|
1,417,231
|
|
|
|
322,880
|
|
|
|
4,180,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct contribution
|
|
$
|
1,878,404
|
|
|
$
|
363,354
|
|
|
$
|
82,749
|
|
|
|
2,324,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses and indirect costs of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
702,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,622,219
|
|
Interest and other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,551
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,710,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs of operating segments include specific costs of net
revenues, sales and marketing expenses, product development
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, 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 costs related to corporate management,
human resources, finance and legal), amortization of intangible
assets, stock-based compensation expenses and impairment of
goodwill as they are not evaluated in the measurement of segment
performance.
|
|
Note 5
|
Fair
Value Measurement of Assets and Liabilities
|
The following table summarizes our financial assets and
liabilities measured at fair value on a recurring basis in
accordance with FAS 157 as of September 30, 2008 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
|
Balance as of
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
Description
|
|
September 30, 2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank deposits and money market funds
|
|
$
|
2,720,693
|
|
|
$
|
2,720,693
|
|
|
$
|
|
|
Commercial paper
|
|
|
622,024
|
|
|
|
|
|
|
|
622,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
3,342,717
|
|
|
|
2,720,693
|
|
|
|
622,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
22,216
|
|
|
|
22,216
|
|
|
|
|
|
Equity instruments
|
|
|
165,365
|
|
|
|
165,365
|
|
|
|
|
|
Time deposits
|
|
|
97,303
|
|
|
|
|
|
|
|
97,303
|
|
Corporate debt securities
|
|
|
16,252
|
|
|
|
|
|
|
|
16,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
|
301,136
|
|
|
|
187,581
|
|
|
|
113,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term restricted cash
|
|
|
6,854
|
|
|
|
6,854
|
|
|
|
|
|
Derivatives
|
|
|
18,995
|
|
|
|
|
|
|
|
18,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
$
|
3,669,702
|
|
|
$
|
2,915,128
|
|
|
$
|
754,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
8,532
|
|
|
$
|
|
|
|
$
|
8,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
eBay
Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our financial assets and liabilities are valued using market
prices on both active markets (level 1) and less
active markets (level 2). Level 1 instrument
valuations are obtained from real-time quotes for transactions
in active exchange markets involving identical assets.
Level 2 instrument valuations are obtained from
readily-available pricing sources for comparable instruments. As
of September 30, 2008, we did not have any assets or
liabilities without observable market values that would require
a high level of judgment to determine fair value (level 3
assets). Our derivative instruments are valued using pricing
models that take into account the contract terms as well as
multiple inputs where applicable, such as equity prices,
interest rate yield curve, option volatility and currency rates.
Our derivative instruments are short-term in nature, typically
one month to one year in duration.
We incurred a reduction in unrealized gains of
$115.0 million and $432.4 million for the three and
nine months ended September 30, 2008, respectively. These
reductions in unrealized gains are due primarily to the
difference in value of our investment in MercadoLibre at the
beginning and end of the period and are excluded from earnings
and reported as a component of accumulated other comprehensive
income. At September 30, 2008, our investment in
MercadoLibre had an aggregate unrealized gain of
$156.9 million. We do not anticipate any significant
realized losses associated with this investment as our
historical cost basis is not significant.
In addition to the long-term restricted cash, noted above, we
had approximately $126.8 million of cost and equity method
investments at September 30, 2008, classified within
long-term investments on the condensed consolidated balance
sheet.
As of September 30, 2008, we held no direct investments in
auction rate securities, collateralized debt obligations,
structured investment vehicles or mortgage-backed securities.
In Europe, we have a cash pooling arrangement with a financial
institution for cash management purposes. This arrangement
allows for cash withdrawals from this financial institution
based upon our aggregate operating cash balances held in Europe
within the same financial institution (Aggregate Cash
Deposits). This arrangement also allows us to withdraw
amounts exceeding the Aggregate Cash Deposits up to an
agreed-upon
limit. The net balance of the withdrawals and the Aggregate Cash
Deposits are used by the financial institution as a basis for
calculating our net interest expense or income. As of
September 30, 2008, we had a total of $1.8 billion in
cash withdrawals offsetting our $1.9 billion in Aggregate
Cash Deposits held within the same financial institution under
this cash pooling arrangement.
|
|
Note 6
|
Commitments
and 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. 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. The matter was eventually decided by the German
Supreme Court which in 2007 held, following a 2004 precedent in
the matter of Rolex v Ricardo, that eBay must take
reasonable measures to prevent recurrence once it is informed of
clearly identified infringement, and that eBay may in certain
circumstances be liable upon first notice of infringement. The
court referred the case back to the Higher Regional Court to
determine whether, in some circumstances, a low starting listing
price was sufficient to indicate that a listing was infringing.
In July 2007, the German Federal Supreme Court extended the
reach of the Rolex decision in IVD v. eBay.
The court held that (i) in certain circumstances, a duty of
care could be found to exist to competitors requiring eBay to
take reasonable measures to prevent illegal items from being
listed (even where the competitors were not directly harmed) and
(ii) such duty would extend to listings by the same seller
in the same category (not just identical listings). We expect
that this ruling will likely result in increased costs and
litigation against us in Germany although we do not currently
believe that it will require a major change in our business
practices.
13
eBay
Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. Among other things,
the complaint alleges that we violated French tort law by
negligently broadcasting listings posted by third parties
offering counterfeit items bearing plaintiffs trademarks,
and by purchasing certain advertising keywords. Around 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 the plaintiffs established in France and
the European Union by allowing third parties to post listings
offering genuine perfumes and cosmetics for sale on our
websites. In June 2008, the Paris Court of Commerce ruled that
eBay and eBay International AG were liable for failing to
prevent the sale of counterfeit items on its websites that
traded on plaintiffs brand names and for interfering with
the plaintiffs selective distribution network. The court
awarded plaintiffs approximately EUR 38.6 million in
damages and issued an injunction prohibiting all sales of
perfumes and cosmetics bearing the Dior, Guerlain, Givenchy and
Kenzo brands over all worldwide eBay sites to the extent that
they are accessible from France. We have taken measures to
comply with the injunction and have appealed these rulings.
However, these and similar suits may force us to modify our
business practices, which could lower our revenue, increase our
costs, or make our websites less convenient to our customers.
Any such results could materially harm our business. Other
luxury brand owners have also filed suit against us or have
threatened to do so, seeking to hold us liable for, among other
things, alleged counterfeit items listed on our websites by
third parties, for tester and other not for resale
consumer products listed on our websites by third parties, for
the alleged misuse of trademarks in listings, for alleged
violations of selective distribution channel laws, for alleged
non-compliance of consumer protection laws or in connection with
paid search advertisements. We continue to believe that we have
meritorious defenses to these suits and intend to defend
ourselves vigorously.
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 were not
infringed. The parties have completed claim construction
briefing and most of fact discovery and are conducting expert
discovery. The pretrial conference is scheduled for November
2008. We believe that we have meritorious defenses and intend to
defend ourselves vigorously.
In March 2007, a plaintiff filed a purported antitrust class
action lawsuit against eBay in the Western District of Texas
alleging that eBay and its wholly owned subsidiary PayPal
monopolized markets through various anticompetitive
acts and tying arrangements. The plaintiff alleges claims under
sections 1 and 2 of the Sherman Act, as well as related
state law claims. The complaint seeks treble damages and an
injunction. In April 2007, the plaintiff
re-filed the
complaint in the U.S. District Court for the Northern
District of California
(No. 07-CV-01882-RS),
and dismissed the Texas action. In May 2007, the case was
consolidated with other similar lawsuits
(No. 07-CV-01882JF).
In June 2007, we filed a motion to dismiss the class action
complaint. In March 2008, the court granted the motion to
dismiss the tying claims with leave to amend and denied the
motion with respect to the monopolization claims. Plaintiffs
subsequently decided not to refile the tying claims. The class
certification motion is scheduled for January 2009. We
believe that we have meritorious defenses and intend to defend
ourselves vigorously.
In May 2007, Netcraft Corporation filed a lawsuit in the Western
District of Wisconsin
(No. 07-C-0254C)
alleging that eBay and PayPal infringed two of its patents
entitled Internet billing methods. The suit seeks an
injunction against continuing infringement, unspecified damages,
and interest, costs, and fees. In September 2007, we filed a
motion for summary judgment of noninfringement on both patents.
In December 2007, the U.S. District Court for the Western
District of Wisconsin entered a judgment granting our motion for
summary judgment of non-infringement on both of the patents that
Netcraft asserted against eBay and PayPal. Netcraft Corporation
has appealed the judgment. Both sides have filed their appeal
briefs, and oral argument took place in October 2008 before the
Court of Appeals for the Federal Circuit.
14
eBay
Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In October 2007, PartsRiver filed a lawsuit in the Eastern
District of Texas
(No. 2-07CV-440-DF)
alleging that eBay, Microsoft, Yahoo!, Shopzilla, PriceGrabber
and PriceRunner infringed its patent relating to search methods.
The suit seeks an injunction against continuing infringement,
unspecified damages, and interest, costs, and fees. The
defendants have moved to transfer venue and the parties are
conducting discovery. Fact discovery cutoff is scheduled for
July 2009, and trial is scheduled for October 2009. We believe
that we have meritorious defenses and intend to defend ourselves
vigorously.
eBays Korean subsidiary, IAC, has notified a majority of
its approximately 20 million users of a data breach
involving personally identifiable information including name,
address, resident registration number and some transaction and
refund data (but not including credit card information or real
time banking information). Approximately 139,000 users have sued
IAC over this breach in several lawsuits and we expect more to
do so in the future. There is some precedent in Korea for a
court to grant consolation money for data breaches
without a specific finding of harm from the breach. Such
precedents have involved payments of up to approximately $200
per user. IAC intends to vigorously defend itself in this
lawsuit.
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 are subject to additional
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 Marketplaces, 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 become subject to laws in 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 laws will be filed against
us. 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.
Credit
Agreement
Lehman Brothers Commercial Bank was a participating lender in
our $2.0 billion credit agreement. As a result of the
bankruptcy of its parent company, our available line of credit
has been reduced by its commitment of $160 million. As of
September 30, 2008, we had no outstanding borrowings under
this credit agreement. As of September 30, 2008, we were in
compliance with the financial covenants associated with the
credit agreement. See Note 10 Subsequent
Events for discussion of activity related to the line of
credit after September 30, 2008.
Indemnification
Provisions
In the ordinary course of business, we have included limited
indemnification provisions in certain of our agreements with
parties with which 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 a
third party with respect to 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, which are indemnities mainly
related to copyrights, trademarks, and patents. In our PayPal
business, we have provided an indemnity to our
15
eBay
Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
payment processors in the event of certain third-party claims or
card network fines against the processor arising out of conduct
by PayPal or PayPals customers. 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.
|
|
Note 7
|
Stock
Repurchase Programs
|
In January 2008, our Board authorized a stock repurchase program
to provide for the repurchase of up to $2.0 billion of our
common stock, excluding broker commissions, with no expiration
from the date of authorization. This program is in addition to
our previously announced stock repurchase program. The stock
repurchase activity under the stock repurchase programs during
the first nine months of 2008 is summarized as follows (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Value of
|
|
|
Remaining
|
|
|
|
Shares
|
|
|
Price per
|
|
|
Shares
|
|
|
Amount
|
|
|
|
Repurchased
|
|
|
Share
|
|
|
Repurchased
|
|
|
Authorized
|
|
|
Balance at January 1, 2008
|
|
|
99,084
|
|
|
$
|
31.84
|
|
|
$
|
3,154,682
|
|
|
$
|
845,318
|
|
Authorization of new plan in January 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000,000
|
|
Repurchase of common stock
|
|
|
80,608
|
|
|
|
27.15
|
|
|
|
2,188,818
|
|
|
|
(2,188,818
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008
|
|
|
179,692
|
|
|
$
|
29.74
|
|
|
$
|
5,343,500
|
|
|
$
|
656,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These repurchased shares are recorded as treasury stock and are
accounted for under the cost method. No repurchased shares have
been retired or reissued.
From time to time, we enter into structured equity hedging
transactions. According to the terms of these transactions, if
the market price of our common stock exceeds a pre-determined
price on the maturity date, we have the option to settle these
transactions in cash or by repurchasing shares of our common
stock. If the market price of our common stock is below that
pre-determined price on the maturity date, we are required to
settle these transactions by repurchasing shares of our common
stock. The number of shares repurchased through the use of
structured equity hedging transactions are included in the table
above. The structured equity hedging transactions that settled
in cash during the nine months ended September 30, 2008,
resulted in premiums of approximately $12.3 million, which
were recorded as additional paid-in capital.
|
|
Note 8
|
Stock-Based
Plans
|
Stock
Options
The following table summarizes stock option activity for the
nine-month period ended September 30, 2008
(in thousands):
|
|
|
|
|
|
|
Shares
|
|
|
Outstanding at January 1, 2008
|
|
|
117,862
|
|
Granted and assumed
|
|
|
10,875
|
|
Exercised
|
|
|
(4,730
|
)
|
Forfeited/expired/cancelled
|
|
|
(11,238
|
)
|
|
|
|
|
|
Outstanding at September 30, 2008
|
|
|
112,769
|
|
|
|
|
|
|
Stock options granted under our equity incentive plans generally
vest 25% one year from the date of grant (for new hires) and
12.5% six months from the date of grant (for existing employees)
and the remainder generally vest at a rate of 2.08% per month
thereafter, in either case based on the optionees
continuing service to eBay, and generally expire
16
eBay
Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
seven to ten years from the date of grant. The weighted average
exercise price of stock options granted and assumed during the
period was $25.13 per share and the related weighted average
grant date fair value was $7.56 per share.
Restricted
Stock Units and Performance-Based Restricted Stock
Units
The following table summarizes restricted stock unit activity
for the nine-month period ended September 30, 2008 (in
thousands):
|
|
|
|
|
|
|
Units
|
|
|
Outstanding at January 1, 2008
|
|
|
8,833
|
|
Awarded
|
|
|
19,492
|
|
Vested
|
|
|
(1,943
|
)
|
Forfeited
|
|
|
(2,042
|
)
|
|
|
|
|
|
Outstanding at September 30, 2008
|
|
|
24,340
|
|
|
|
|
|
|
In general, restricted stock units vest over three to five years
and are subject to the recipients continuing service to
eBay. The cost of restricted stock units is determined using the
fair value of our common stock on the date of grant. The
weighted average grant date fair value for restricted stock
units awarded during the period was $25.97 per share.
During the first nine months of 2008, we awarded 86,550
restricted stock units (which are included in the restricted
stock unit activity table above) under the performance-based
restricted stock unit plan in accordance with the satisfaction
of performance conditions related to such performance-based
restricted stock units.
Stock-based
Compensation Expense
The impact on our results of operations of recording stock-based
compensation expense for the three and nine months ended
September 30, 2007 and 2008 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
Cost of net revenues
|
|
$
|
9,132
|
|
|
$
|
10,395
|
|
|
$
|
27,543
|
|
|
$
|
31,908
|
|
Sales and marketing
|
|
|
22,192
|
|
|
|
23,745
|
|
|
|
64,501
|
|
|
|
72,096
|
|
Product development
|
|
|
21,374
|
|
|
|
23,458
|
|
|
|
56,751
|
|
|
|
71,627
|
|
General and administrative
|
|
|
27,891
|
|
|
|
32,653
|
|
|
|
83,365
|
|
|
|
93,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
80,589
|
|
|
$
|
90,251
|
|
|
$
|
232,160
|
|
|
$
|
269,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense included in capitalized
development costs was $2.2 million and $3.4 million
for the three months ended September 30, 2007 and 2008,
respectively. Total stock-based compensation expense included in
capitalized development costs was $6.4 million and
$8.2 million for the nine months ended September 30,
2007 and 2008, respectively.
17
eBay
Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Valuation
Assumptions
We calculated the fair value of each option award on the date of
grant using the Black-Scholes option pricing model. The
following weighted average assumptions were used for the three
and nine months ended September 30, 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
Risk-free interest rates
|
|
|
4.5
|
%
|
|
|
2.9
|
%
|
|
|
4.5
|
%
|
|
|
2.3
|
%
|
Expected lives (in years)
|
|
|
3.4
|
|
|
|
3.9
|
|
|
|
3.5
|
|
|
|
3.8
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
40
|
%
|
|
|
40
|
%
|
|
|
36
|
%
|
|
|
34
|
%
|
Our computation of expected volatility is based on a combination
of historical and market-based implied volatility from traded
options on our common stock. Our computation of expected life
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 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.
The following table reflects changes in unrecognized tax
benefits for the nine-month period ended September 30, 2008
(in thousands):
|
|
|
|
|
Gross amounts of unrecognized tax benefits as of January 1,
2008
|
|
$
|
494,253
|
|
Gross amounts of increases in unrecognized tax benefits for tax
positions taken during the period
|
|
|
116,042
|
|
|
|
|
|
|
Gross amounts of unrecognized tax benefits as of
September 30, 2008
|
|
$
|
610,295
|
|
|
|
|
|
|
As of September 30, 2008, our liabilities for unrecognized
tax benefits were included in deferred and other tax
liabilities, net. The total liabilities for unrecognized tax
benefits and the increase for the current period of these
liabilities relate primarily to the allocations of revenue and
costs among our global operations. Over the next twelve months,
our existing tax positions will continue to generate an increase
in liabilities for unrecognized tax benefits. We recognize
interest
and/or
penalties related to uncertain tax positions in income tax
expense. The amount of interest and penalties accrued at
September 30, 2008 was approximately $29.6 million.
We are subject to taxation in the U.S. and various states
and foreign jurisdictions. We are under examination by certain
tax authorities for the 2003 tax year. The material
jurisdictions that are subject to potential examination by tax
authorities for tax years after 2002 include, among others, the
U.S., California, France, Germany, Italy, Switzerland and
Singapore.
|
|
Note 10
|
Subsequent
Events
|
On October 3, 2008 we entered into a definitive agreement
to acquire all of the equity securities of Bill Me Later for
approximately $820 million in cash and $125 million
worth of outstanding options, net of option exercise proceeds.
Bill Me Later has expertise in deferred payments and promotional
financing services. The transaction is expected to close in the
fourth quarter of 2008.
On October 6, 2008 we completed the acquisition of all of
the equity securities of Den Blå Avis and Bilbasen, and
certain other related companies, for a purchase price of
approximately $390 million in cash. Den Blå Avis and
Bilbasen are two leading online classifieds sites in Denmark.
The total purchase price will be allocated to the
18
eBay
Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
tangible and identifiable intangible assets acquired and
liabilities assumed based on their estimated fair values as of
the acquisition date.
On October 6, 2008, we announced an initiative to simplify
and streamline our organization, improve our cost structure and
strengthen the overall competitiveness of our existing
businesses through a reduction in our global workforce. As a
result of this initiative, we expect to incur aggregate costs of
approximately $70-$80 million, with the charges
predominantly recorded in the fourth quarter of 2008.
On October 16, 2008, we drew down an aggregate amount of
$1.0 billion under our revolving credit facility pursuant
to the Credit Agreement. We expect that the funds will be used
for general corporate purposes, including financing the
acquisition of Bill Me Later, Inc. and its associated
receivables. See Note 6 Commitments and
Contingencies for further information on the Credit
Agreement.
19
|
|
Item 2:
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
FORWARD-LOOKING
STATEMENTS
This Quarterly Report on
Form 10-Q
contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934,
including statements that involve expectations, plans or
intentions (such as those relating to future business or
financial results, new features or services, or management
strategies). You can identify these forward-looking statements
by words such as may, will,
should, could, expect,
anticipate, believe,
estimate, intend, plan and
other similar expressions. These forward-looking statements
involve risks and uncertainties that could cause our actual
results to differ materially from those expressed or implied in
our forward-looking statements. Such risks and uncertainties
include, among others, those discussed in
Part II Item 1A: Risk Factors,
of this Quarterly Report on
Form 10-Q
as well as our 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, or the SEC. We do not intend, and undertake no
obligation, to update any of our forward-looking statements
after the date of this report to reflect actual results or
future events or circumstances. Given these risks and
uncertainties, readers are cautioned not to place undue reliance
on such forward-looking statements.
You should read the following 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.
Our
Business
We operate three primary business segments: Marketplaces,
Payments and Communications. The Marketplaces segment enables
online commerce through a variety of different platforms,
including the Marketplaces site comprising auction-style and
fixed priced formats, our classifieds websites, our comparison
shopping site, Shopping.com, our secondary tickets platform,
StubHub, our fixed price media marketplace, Half.com, and our
apartment listing service platform, Rent.com. Our Payments
segment, which consists of PayPal, enables individuals and
businesses to securely, easily and quickly send and receive
payments online. Our Communications segment, which consists of
Skype, enables VoIP communications between Skype users and also
provides Skype users low-cost connectivity to traditional
fixed-line and mobile telephones.
Key
Operating Metrics and Financial Performance
Members of our senior management team regularly review key
operating metrics such as active users, sold items, listings,
Gross Merchandise Volume (GMV), net Total Payment
Volume (TPV), transaction loss rates, Skype
registered users and SkypeOut minutes. Members of our senior
management team also regularly review key financial information
including net revenues, operating margins, earnings per share,
cash flows and financial metrics that exclude certain non-cash
items. These financial measures allow us to monitor the
profitability of our business and to evaluate the effectiveness
of investments that we have made (and continue to make) in the
areas of marketing, product development, international
expansion, customer support and site operations. We believe that
an understanding of these key operating and financial measures
and how they change over time is important to investors,
analysts and other parties analyzing our business results and
future market opportunities.
Financial
Summary
Net revenues for the three months ended September 30, 2008
were $2.1 billion, representing an increase of 12% compared
to the same period of the prior year. Our revenue growth
continues to be driven by PayPal merchant services, global
classifieds, advertising and Skype as well as a weaker
U.S. dollar relative to other currencies (primarily the
Euro). Our revenue growth, particularly in our Marketplaces and
Payments segments, was negatively impacted by the difficult
global economic environment as buyers reduced their spending.
Operating income for the three months ended September 30,
2008 was $524.1 million, or 25% of net revenues, compared
to an operating loss of $937.7 million, or (50%) of net
revenues, in the same period of the prior year. The year over
year change in operating margin (which is operating income as a
percentage of net revenues) was due to the goodwill impairment
20
charge in 2007 as well as margins improving in all three of our
business segments offset by the continued faster growth of our
lower margin businesses, primarily PayPal and Skype. Net income
for the three months ended September 30, 2008 was
$492.2 million, or $0.38 earnings per diluted share,
compared to a net loss of $935.6 million, or $0.69 loss per
diluted share for the same period of the prior year. The change
in earnings per diluted share was due primarily to the goodwill
impairment charge in 2007 and our lower weighted average share
count as a result of shares of our common stock repurchased over
the last year. During the third quarter of 2008, we repurchased
24.8 million shares of our common stock under our
repurchase program for an aggregate purchase price of
$622.8 million.
Our
expectations
For the remainder of 2008, compared to the same period in 2007,
we expect that our net revenues and earnings per diluted share
will decrease primarily as a result of the slowing growth in our
core Marketplace business, uncertain global consumer spending
environment, the strengthening of the U.S. dollar, the
impact of our previously announced acquisitions of Den Blå
Avis and Bilbasen, and agreement to acquire Bill Me Later, and a
charge associated with our global reduction in workforce. Our
global reduction in workforce is intended to simplify and
streamline our organization, improve our cost structure and
strengthen the overall competitiveness of our existing
businesses. The reduction is expected to result in pretax
restructuring charges of approximately $70 to $80 million,
with charges predominantly recorded in the fourth quarter of
2008. Additionally, we expect to continue to make significant
investments in all three of our business segments that are
designed to enhance our business fundamentals and enable us to
provide a better overall experience for our customers, and we
expect to benefit from these investments over time.
Seasonality
The following table sets forth, for the periods presented, our
total net revenues and the sequential quarterly growth of these
net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(In thousands, except percentages)
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
1,390,419
|
|
|
$
|
1,410,784
|
|
|
$
|
1,448,637
|
|
|
$
|
1,719,901
|
|
Percent change from prior quarter
|
|
|
5
|
%
|
|
|
1
|
%
|
|
|
3
|
%
|
|
|
19
|
%
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
1,768,074
|
|
|
$
|
1,834,429
|
|
|
$
|
1,889,220
|
|
|
$
|
2,180,606
|
|
Percent change from prior quarter
|
|
|
3
|
%
|
|
|
4
|
%
|
|
|
3
|
%
|
|
|
15
|
%
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
2,192,223
|
|
|
$
|
2,195,661
|
|
|
$
|
2,117,531
|
|
|
|
N/A
|
|
Percent change from prior quarter
|
|
|
1
|
%
|
|
|
0
|
%
|
|
|
(4
|
)%
|
|
|
|
|
We expect transaction activity patterns in our businesses to
increasingly mirror general consumer buying patterns, both
online and offline, as our business expands, with the strongest
sequential growth usually occurring in the fourth quarter. Our
revenue growth in the third quarter of 2008 was negatively
impacted by the broader economic environment as well as a
strengthening U.S. dollar. We saw a considerable slowdown across
virtually all of our businesses beginning in mid-August. The
uncertain global consumer spending environment and strengthening
of the U.S. dollar, noted above, is expected to result in
less than 3% sequential growth in the fourth quarter of 2008.
Results
of Operations
Beginning with the first quarter of 2008, we reclassified
revenue generated primarily from our Marketplaces non-GMV based
businesses (which include Shopping.com, Rent.com and our
classified websites) from Net Transaction Revenues
to Marketing Services and Other Revenues in order to
more closely align our net transaction revenue presentation with
our key operating metrics. Marketing Services and Other
Revenues also includes amounts previously reflected under
Advertising and Other Revenue. Prior period amounts
have been reclassified to conform to the current presentation.
Consolidated net revenues, as well as total segment revenues,
are unchanged.
21
Our net transaction revenues from our Marketplaces segment are
derived primarily from listing and final value fees paid by
sellers. For our Payments segment, net transaction revenues are
generated primarily by fees from payment processing services.
Our Communications segment net transaction revenues are
generated primarily from fees charged to users to connect
Skypes VoIP product to traditional telecommunication
networks. These fees are charged on a per minute basis or on a
subscription basis, and we refer to these minutes as SkypeOut
minutes.
Our Marketing Services and Other Revenues are derived
principally from the sale of advertisements, revenue sharing
arrangements, classifieds fees, lead referral fees and other
revenues. Other revenues are derived principally from
contractual arrangements with third parties that provide
services to eBay and PayPal users and interest earned from banks
on certain PayPal customer account balances.
Revenues are attributed to U.S. and international
geographies primarily based upon the country in which the
seller, payment recipient, Skype users Internet protocol
address, online property that generates advertising, or other
service provider, as the case may be, is located. Because we
generate the majority of our revenue internationally,
fluctuations in foreign currency exchange rates will impact our
results of operations.
The following table sets forth, for the periods presented, the
breakdown of net revenues by type, segment and geography. In
addition, we have provided a table of certain key operating
metrics that we believe are significant factors affecting our
net revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Percent
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Percent
|
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
|
(In thousands, except percent changes)
|
|
|
Net Revenues by Type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net transaction revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplaces
|
|
$
|
1,155,886
|
|
|
$
|
1,163,890
|
|
|
|
1
|
%
|
|
$
|
3,400,535
|
|
|
$
|
3,664,830
|
|
|
|
8
|
%
|
Payments
|
|
|
447,952
|
|
|
|
576,302
|
|
|
|
29
|
%
|
|
|
1,299,238
|
|
|
|
1,716,309
|
|
|
|
32
|
%
|
Communications
|
|
|
93,823
|
|
|
|
137,201
|
|
|
|
46
|
%
|
|
|
254,198
|
|
|
|
387,143
|
|
|
|
52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net transaction revenues
|
|
|
1,697,661
|
|
|
|
1,877,393
|
|
|
|
11
|
%
|
|
|
4,953,971
|
|
|
|
5,768,282
|
|
|
|
16
|
%
|
Marketing services and other revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplaces
|
|
|
164,746
|
|
|
|
212,963
|
|
|
|
29
|
%
|
|
|
460,851
|
|
|
|
654,371
|
|
|
|
42
|
%
|
Payments
|
|
|
22,444
|
|
|
|
20,909
|
|
|
|
(7
|
)%
|
|
|
64,666
|
|
|
|
64,276
|
|
|
|
(1
|
)%
|
Communications
|
|
|
4,369
|
|
|
|
6,266
|
|
|
|
43
|
%
|
|
|
12,235
|
|
|
|
18,486
|
|
|
|
51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketing services and other revenues
|
|
|
191,559
|
|
|
|
240,138
|
|
|
|
25
|
%
|
|
|
537,752
|
|
|
|
737,133
|
|
|
|
37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
1,889,220
|
|
|
$
|
2,117,531
|
|
|
|
12
|
%
|
|
$
|
5,491,723
|
|
|
$
|
6,505,415
|
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplaces
|
|
$
|
1,320,632
|
|
|
$
|
1,376,853
|
|
|
|
4
|
%
|
|
$
|
3,861,384
|
|
|
$
|
4,319,201
|
|
|
|
12
|
%
|
Payments
|
|
|
470,396
|
|
|
|
597,211
|
|
|
|
27
|
%
|
|
|
1,363,904
|
|
|
|
1,780,585
|
|
|
|
31
|
%
|
Communications
|
|
|
98,192
|
|
|
|
143,467
|
|
|
|
46
|
%
|
|
|
266,435
|
|
|
|
405,629
|
|
|
|
52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
1,889,220
|
|
|
$
|
2,117,531
|
|
|
|
12
|
%
|
|
$
|
5,491,723
|
|
|
$
|
6,505,415
|
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
929,605
|
|
|
$
|
1,001,637
|
|
|
|
8
|
%
|
|
$
|
2,710,334
|
|
|
$
|
3,028,098
|
|
|
|
12
|
%
|
International
|
|
|
959,615
|
|
|
|
1,115,894
|
|
|
|
16
|
%
|
|
|
2,781,389
|
|
|
|
3,477,317
|
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
1,889,220
|
|
|
$
|
2,117,531
|
|
|
|
12
|
%
|
|
$
|
5,491,723
|
|
|
$
|
6,505,415
|
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Percent
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Percent
|
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
|
(In millions, except percent changes)
|
|
|
Supplemental Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplaces Segment:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active users(2)
|
|
|
83.0
|
|
|
|
85.7
|
|
|
|
3
|
%
|
|
|
83.0
|
|
|
|
85.7
|
|
|
|
3
|
%
|
Number of new listings(3)
|
|
|
555.6
|
|
|
|
700.2
|
|
|
|
26
|
%
|
|
|
1,703.1
|
|
|
|
2,014.6
|
|
|
|
18
|
%
|
Gross merchandise volume(4)
|
|
$
|
14,395
|
|
|
$
|
14,284
|
|
|
|
(1
|
)%
|
|
$
|
43,140
|
|
|
$
|
46,004
|
|
|
|
7
|
%
|
Payments Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active registered accounts(5)
|
|
|
54.8
|
|
|
|
65.3
|
|
|
|
19
|
%
|
|
|
54.8
|
|
|
|
65.3
|
|
|
|
19
|
%
|
Net total payment volume(6)
|
|
$
|
11,569
|
|
|
$
|
14,812
|
|
|
|
28
|
%
|
|
$
|
33,426
|
|
|
$
|
44,159
|
|
|
|
32
|
%
|
Communications Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered users(7)
|
|
|
245.7
|
|
|
|
370.2
|
|
|
|
51
|
%
|
|
|
245.7
|
|
|
|
370.2
|
|
|
|
51
|
%
|
|
|
|
(1) |
|
Rent.com, Shopping.com and our classifieds websites are not
included in these metrics. |
|
(2) |
|
All users, excluding users of Half.com, StubHub and Internet
Auction Co., our Korean subsidiary, who bid on, bought or listed
an item within the previous
12-month
period. Users may register more than once and as a result, may
have more than one account. |
|
(3) |
|
Listings on eBay Marketplaces trading platforms during the
period, regardless of whether the listing subsequently closed
successfully. |
|
(4) |
|
Total value of all successfully closed items between users on
eBay Marketplaces trading platforms during the period,
regardless of whether the buyer and seller actually consummated
the transaction. |
|
(5) |
|
All registered accounts that successfully sent or received at
least one payment or payment reversal through the PayPal system
within the previous
12-month
period. |
|
(6) |
|
Total dollar volume of payments, net of payment reversals,
successfully completed through the PayPal system during the
period, excluding the payment gateway business. |
|
(7) |
|
Cumulative number of unique user accounts, which includes users
who may have registered via non-Skype based websites, as of the
end of the period. Users may register more than once and, as a
result, may have more than one account. |
Marketplaces
Net Transaction Revenues
Total net transaction revenues from Marketplaces increased 1%
and 8% during the third quarter and first nine months of 2008,
respectively, compared to the same periods of the prior year.
The slight increase in net transaction revenues for the third
quarter of 2008 was primarily due to an increase in take rate
resulting from a change in category mix offset by a 1% decline
in total GMV due to slowing growth in our core Marketplaces
business and as a result of slowing consumer spending in an
uncertain economic environment more than offset the growth of
listings. The increase in net transaction revenues for the first
nine months of 2008 was due primarily to a 7%
year-over-year
growth in GMV with clothing, consumer electronics, home and
garden, tickets, parts and accessories and sports having the
most significant dollar impact, partially offset by a decrease
in vehicles GMV. Marketplaces net transaction revenue growth
rate
year-over-year
was negatively impacted by an increase in buyer and seller
incentive programs, some of which are recorded as contra-revenue.
Marketplaces net transaction revenues earned internationally
were $601.1 million and $2.0 billion during the third
quarter and first nine months of 2008, respectively, and
represented 52% and 54% of total Marketplaces net transaction
revenues during those periods, respectively. Marketplaces net
transaction revenues earned internationally were
$599.3 million and $1.8 billion during the third
quarter and first nine months of 2007, respectively, and
represented 52% of total Marketplaces net transaction revenues
during both periods. Based on changes in foreign currency rates
year over year, Marketplaces net revenues were positively
impacted by foreign currency translation of approximately
$51.7 million and $244.6 million during the third
quarter and first nine months of 2008,
23
respectively, as compared to net revenues that would have been
recorded had foreign currency rates remained constant. Changes
in foreign currency rates will impact our operating results and,
to the extent that the U.S. dollar strengthens, our foreign
currency denominated net revenues will be negatively impacted.
We expect our Marketplaces net transaction revenues for the
remainder of 2008, compared to the same period in 2007, to
decrease as a result of the slowing growth in our core
Marketplaces business, the uncertain global consumer spending
environment, strengthening dollar and our continued use of buyer
and seller incentives (some of which are recorded as contra
revenue).
Payments
Net Transaction Revenues
Payments net transaction revenues increased 29% and 32% during
the third quarter and first nine months of 2008 respectively,
compared to the same periods of the prior year. The increase in
net transaction revenues was consistent with our 28% and 32%
growth in TPV during the third quarter and first nine months of
2008, respectively, compared to the same periods of the prior
year. TPV increased due to growth in PayPals merchant
services business and continued penetration of eBay Marketplaces
transactions. However, TPV growth was negatively impacted by the
difficult global economic environment.
TPV for PayPals merchant services business was
approximately $7.5 billion and $21.4 billion in the
third quarter and first nine months of 2008, respectively, which
represented an increase of 49% and 56% compared to the same
periods of the prior year, respectively. PayPals merchant
services business accounted for approximately 51% and 49% of
PayPals TPV in the third quarter and first nine months of
2008, respectively, compared to 44% and 41% in the same periods
of the prior year, respectively. The increase in PayPals
merchant services business was primarily the result of more
online merchants, both domestically and internationally, adding
PayPal as a payment option, as well as increased usage of PayPal
by customers of our existing merchant services clients. Our
Payments net transaction revenues as a percentage of TPV was
3.9% for all periods presented.
Payments net transaction revenues earned internationally were
$256.6 million and $753.8 million during the third
quarter and first nine months of 2008, respectively, and
represented 45% and 44% of total Payments net transaction
revenues in the third quarter and first nine months of 2008,
respectively. Payments net transaction revenues earned
internationally were $191.1 million and $543.5 million
during the third quarter and first nine months of 2007,
respectively, and represented 43% and 42% of total Payments net
transaction revenues during those periods, respectively.
International growth in our Payments segment continues to
benefit from the expansion of our international operations and
the number of currencies supported by PayPal over the last
12 months. Based on changes in foreign currency rates year
over year, Payments net revenues were positively impacted by
foreign currency translation of approximately $0.9 million
and $4.6 million during the third quarter and first nine
months of 2008, respectively, as compared to net revenues that
would have been recorded had foreign currency rates remained
constant.
We expect our Payments net transaction revenues for the
remainder of 2008, compared to the same period in 2007, to
continue to grow based upon growth in our merchant services
business resulting from an increased number of merchants
integrating PayPal on their websites, continued penetration on
Marketplaces transactions and the expected completion of our
acquisition of Bill Me Later in the fourth quarter of 2008. Our
growth rate will continue to be impacted by the uncertain global
consumer spending environment.
Communications
Net Transaction Revenues
Communications net transaction revenues increased 46% and 52%
during the third quarter and first nine months of 2008,
respectively, compared to the same periods of the prior year.
The increase in net transaction revenues was due primarily to an
increase in SkypeOut minutes to 2.2 billion and
5.8 billion during the third quarter and first nine months
of 2008, respectively, compared to 1.4 billion and
4.4 billion in the same periods of the prior year, or
year-over-year
growth of 54% and 30%, respectively. The cumulative number of
Skype registered users increased to 370.2 million at
September 30, 2008 from 245.7 million at
September 30, 2007. The growth in Skype registered users
was due primarily to its marketing activities and strategic
partnership initiatives, such as Skypes collaboration with
MySpace.
24
Communications net transaction revenues earned internationally
were $113.0 million and $321.6 million in the third
quarter and first nine months of 2008, respectively, and
represented 82% and 83% of total Communications net transaction
revenues during those periods, respectively. Communications net
transaction revenues earned internationally were
$78.3 million and $214.8 million in the third quarter
and first nine months of 2007, respectively, and represented 83%
and 85% of total Communications net transaction revenues during
those periods, respectively. Based on changes in foreign
currency rates year over year, Communications net revenues were
positively impacted by foreign currency translation of
approximately $12.3 million and $46.6 million during
the third quarter and first nine months of 2008, respectively,
as compared to net revenues that would have been recorded had
foreign currency rates remained constant.
We expect our Communications net transaction revenues for the
remainder of 2008, compared to the same period in 2007, to
continue to grow as we focus on increasing user activity,
growing our registered user base and expanding our calling plans
and products.
Marketing
Services and Other Revenues
Marketing services and other revenues was $240.1 million
and $737.1 million in the third quarter and first nine
months of 2008, respectively, representing an increase of 25%
and 37%, respectively, compared to the same periods in the prior
year. Marketing services and other revenues represented 11% of
total net revenues during both the third quarter and first nine
months of 2008, respectively, compared to 10% of total net
revenues during both the third quarter and first nine months of
2007. Marketing services and other revenues increased during the
third quarter and first nine months of 2008 compared to the same
periods of the prior year due primarily to the advertising
initiatives in our Marketplaces segment, primarily
internationally, as well as growth in our classifieds business
partially offset by a decline in Shopping.com business and
interest earned from banks on certain U.S. PayPal customer
account balances.
We expect marketing services and other revenues for the
remainder of 2008, compared to the same period in 2007, to
continue to grow as advertising revenue generated from all of
Marketplaces platforms increases along with our classifieds
business.
Cost
of Net Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Percent
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Percent
|
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
|
(In thousands, except percentages)
|
|
|
Cost of net revenues
|
|
$
|
446,521
|
|
|
$
|
560,963
|
|
|
|
26
|
%
|
|
$
|
1,256,999
|
|
|
$
|
1,648,478
|
|
|
|
31
|
%
|
As a percentage of net revenues
|
|
|
23.6
|
%
|
|
|
26.5
|
%
|
|
|
|
|
|
|
22.9
|
%
|
|
|
25.3
|
%
|
|
|
|
|
Cost of net revenues consists primarily of costs associated with
payment processing, customer support and site operations, and
Skype telecommunications costs. Significant cost components
include bank transaction fees, credit card interchange,
assessments, other payment processing costs, employee
compensation, contractor costs, facilities costs for our
customer support and site operations, depreciation of equipment,
amortization of capitalized product development costs and
amortization of acquired developed technology.
The increase in cost of net revenues in the third quarter and
first nine months of 2008 of $114.4 million and
$391.5 million, respectively, compared to the same periods
in the prior year was due primarily to an increase in customer
support and site operations costs, payment processing costs and
Skype telecommunications costs. Aggregate customer support and
site operations costs increased $57.4 million and
$162.8 million during the third quarter and first nine
months of 2008, respectively, compared to the same periods of
the prior year. The increase was due primarily to our increased
focus on customer care initiatives and the development and
expansion of our customer support and site operations
infrastructure as a result of our growth in transaction volume.
Payment processing costs increased $29.0 million and
$120.8 million during the third quarter and first nine
months of 2008, respectively, compared to the same periods of
the prior year. Payment processing costs were driven primarily
by an increase in PayPal TPV driven by Marketplaces and
PayPals merchant services activity. Skype
telecommunications costs increased $13.9 million and
$50.0 million during the third quarter and first nine
months of 2008,
25
respectively, compared to the same periods of the prior year due
primarily to an increase in SkypeOut minutes. Cost of net
revenues increased as a percentage of net revenues during the
third quarter and first nine months of 2008, compared to the
same periods of the prior year, primarily as a result of the
relative growth of our lower gross margin businesses, PayPal and
Skype.
For the remainder of 2008, compared to the same period in 2007,
we expect our Payments and Communications segments to grow at a
faster rate than our Marketplaces segment, which will increase
our cost of net revenues as a percentage of net revenues.
Sales
and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Percent
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Percent
|
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
|
(In thousands, except percentages)
|
|
|
Sales and marketing
|
|
$
|
485,240
|
|
|
$
|
457,216
|
|
|
|
(6
|
)%
|
|
$
|
1,406,260
|
|
|
$
|
1,497,181
|
|
|
|
6
|
%
|
As a percentage of net revenues
|
|
|
25.7
|
%
|
|
|
21.6
|
%
|
|
|
|
|
|
|
25.6
|
%
|
|
|
23.0
|
%
|
|
|
|
|
Sales and marketing expense consists primarily of advertising
costs, marketing programs, contractor costs and employee
compensation for sales and marketing staff.
Sales and marketing expense decreased in the third quarter of
2008 by $28.0 million, compared to the same period in the
prior year. Sales and marketing expense increased in the first
nine months of 2008 by $90.9 million, compared to the same
period in the prior year. Employee-related costs, including the
use of contractors, facilities and equipment, increased
$26.4 million and $90.8 million in the third quarter
and first nine months of 2008, respectively, compared to the
same periods in the prior year due primarily to an increase in
staffing. We direct customers to our websites primarily through
a number of online marketing channels such as sponsored search,
portal advertising, email campaigns and other initiatives.
Combined advertising and marketing costs decreased
$50.3 million and $14.0 million during the third
quarter and first nine months of 2008 compared to the same
periods in the prior year. Advertising and marketing costs are
decreasing as a percentage of net revenues as we increase the
use of buyer and seller incentives (for which certain associated
expenses are recorded as contra-revenue instead of sales and
marketing expense) as opposed to online and offline marketing
programs in an effort to improve user loyalty and retention, as
well as to more efficiently incur marketing expenditures by our
Marketplaces segment.
For the remainder of 2008, compared to the same period in 2007,
we expect sales and marketing expense to decrease in total and
as a percentage of revenues due to improved sales and marketing
expense leverage in our Marketplaces segment, the relative
growth in our Payments and Communications segments (each of
which generally has lower relative sales and marketing expense
as a percentage of net revenues than our Marketplaces segment),
and our increased use of buyer and seller incentives (for which
certain associated expenses are recorded as contra-revenue
instead of sales and marketing expense).
Product
Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Percent
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Percent
|
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
|
(In thousands, except percentages)
|
|
|
Product development
|
|
$
|
164,879
|
|
|
$
|
190,842
|
|
|
|
16
|
%
|
|
$
|
450,411
|
|
|
$
|
554,393
|
|
|
|
23
|
%
|
As a percentage of net revenues
|
|
|
8.7
|
%
|
|
|
9.0
|
%
|
|
|
|
|
|
|
8.2
|
%
|
|
|
8.5
|
%
|
|
|
|
|
Product development expense consists primarily of employee
compensation, contractor costs, facilities cost and depreciation
on equipment. Product development expense is net of required
capitalization of major site and other product development
efforts, including the development of our next-generation
platform architecture, migration of certain platforms, seller
tools and Payments services projects. Capitalized site and
product development costs were $32.9 million and
$85.5 million in the third quarter and first nine months of
2008, respectively, compared to $22.3 million and
$61.2 million in the third quarter and first nine months of
2007, respectively.
26
Capitalized site and product development costs are reflected as
a cost of net revenues when amortized in future periods.
The increase in product development expense in the third quarter
and first nine months of 2008 of $26.0 million and
$104.0 million, respectively, compared to the same periods
in the prior year was due primarily to an increase in employee
related and contractor costs, including stock-based compensation
expense, to support several platform development initiatives to
enhance the user experience and expand our existing product
offerings.
For the remainder of 2008, compared to the same period in 2007,
we expect product development expense will continue to increase
in total and increase slightly as a percentage of net revenues
as we develop new site features and functionality and continue
to expand our existing product offerings.
General
and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Percent
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Percent
|
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
|
(In thousands, except percentages)
|
|
|
General and administrative
|
|
$
|
287,447
|
|
|
$
|
331,715
|
|
|
|
15
|
%
|
|
$
|
849,284
|
|
|
$
|
1,020,672
|
|
|
|
20
|
%
|
As a percentage of net revenues
|
|
|
15.2
|
%
|
|
|
15.7
|
%
|
|
|
|
|
|
|
15.5
|
%
|
|
|
15.7
|
%
|
|
|
|
|
General and administrative expense consists primarily of
employee compensation, contractor costs, provisions for
transaction losses associated with PayPal, facilities costs,
depreciation of equipment, provision for doubtful accounts,
payroll taxes on employee stock options, insurance, professional
fees and legal related costs.
General and administrative expense increased by
$44.3 million and $171.4 million in the third quarter
and first nine months of 2008, respectively, compared to the
same periods of the prior year due to higher employee related
costs, legal costs, provision for doubtful accounts and
authorized credits, and provision for transaction losses.
Employee-related costs, including the cost of using contractors,
facilities and equipment, increased by $14.3 million and
$67.2 million in the third quarter and first nine months of
2008, respectively, to support our global growth. Legal-related
costs increased by $9.1 million and $53.1 million in
the third quarter and first nine months of 2008, respectively,
relating primarily to various ongoing litigation. These costs
may fluctuate from period to period. Provision for doubtful
accounts and authorized credits increased by $10.0 million
and $25.4 million in the third quarter and first nine
months of 2008, respectively, due to higher revenue and the
current market conditions.
PayPals provision for transaction losses increased by
$12.6 million and $17.3 million for the third quarter
and first nine months of 2008, respectively, compared to the
same periods of the prior year, due primarily to higher TPV.
PayPals transaction loss rate, which is the transaction
loss expense as a percentage of PayPals TPV, was 0.29% and
0.26% during the third quarter and first nine months of 2008,
respectively, compared to 0.27% and 0.30% during the third
quarter and first nine months of 2007, respectively. The
increase in the transaction loss rate for the third quarter
compared to the same period in the prior year is due primarily
to a reduction in transaction losses in the third quarter of
2007 as a result of a refinement in our estimate. The decrease
in our transaction loss rate for the first nine months compared
to the same period in the prior year is due to our continued
enhancement of our fraud detection models based on our
historical experiences.
For the remainder of 2008, compared to the same period in 2007,
we expect general and administrative expense to increase in
total and as a percentage of net revenues due to our continued
investment across all areas of our business and related
corporate functions. In addition, we expect our transaction loss
rate to fluctuate depending on many factors such as the increase
in protection coverage, product and credit policy changes,
historical loss experience, TPV, macroeconomic factors and
proportion of payments made with credit cards.
27
Amortization
of Acquired Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Percent
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Percent
|
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
|
(In thousands, except percentages)
|
|
|
Amortization of acquired intangible assets
|
|
$
|
51,888
|
|
|
$
|
52,720
|
|
|
|
2
|
%
|
|
$
|
150,791
|
|
|
$
|
162,472
|
|
|
|
8
|
%
|
As a percentage of net revenues
|
|
|
2.7
|
%
|
|
|
2.5
|
%
|
|
|
|
|
|
|
2.7
|
%
|
|
|
2.5
|
%
|
|
|
|
|
From time to time we have purchased, and we expect to continue
to purchase, assets or businesses to accelerate category and
geographic expansion, increase the features, functions and
formats available to our users and maintain a leading role in
ecommerce, payments and communications. These purchase
transactions generally result in the creation of acquired
intangible assets with finite lives and lead to a corresponding
increase in our amortization expense in future periods. We
amortize intangible assets over the period of estimated benefit
using the straight-line method and estimated useful lives
ranging from one to eight years. The increase in amortization of
acquired intangibles during the third quarter and first nine
months of 2008 as compared to the same periods of the prior year
is due primarily to the business acquisitions we consummated
during 2007 and 2008. Significant acquisitions completed during
the first nine months of 2008 include the acquisition of Fraud
Sciences.
For the remainder of 2008, compared to the same period of 2007,
we expect amortization of acquired intangible assets to increase
due to the acquisitions of Den Blå Avis and Bilbasen and
the anticipated acquisition of Bill Me Later.
Impairment
of Goodwill
There were no goodwill impairment charges in the three and nine
months ended September 30, 2008 as compared to the
$1.4 billion impairment of goodwill related to our
Communications segment in the three and nine months ended
September 30, 2007, which was the result of our annual
impairment test of goodwill as of August 31, 2007.
Interest
and Other Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Percent
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Percent
|
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
|
(In thousands, except percentages)
|
|
|
Interest and other income, net
|
|
$
|
38,363
|
|
|
$
|
38,556
|
|
|
|
1
|
%
|
|
$
|
102,350
|
|
|
$
|
91,551
|
|
|
|
(11
|
)%
|
As a percentage of net revenues
|
|
|
2.0
|
%
|
|
|
1.8
|
%
|
|
|
|
|
|
|
1.9
|
%
|
|
|
1.4
|
%
|
|
|
|
|
Interest and other income, net, consists of interest earned on
cash, cash equivalents and investments, as well as foreign
exchange transaction gains and losses, our portion of
unconsolidated joint venture and minority equity investment
results and other miscellaneous transactions not related to our
primary operations.
Interest and other income, net, increased slightly during the
third quarter of 2008 as compared to the same periods of the
prior year. Interest and other income, net, decreased 11% during
the first nine months of 2008 due to lower interest income
generated by lower interest rates earned on lower average cash,
cash equivalents and investments balances.
For the remainder of 2008, compared to the same period in 2007,
we expect interest and other income, net, to decrease based
primarily on lower interest rates and level of invested assets.
28
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Percent
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Percent
|
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
|
(In thousands, except percentages)
|
|
|
Interest expense
|
|
$
|
2,728
|
|
|
$
|
(11
|
)
|
|
|
(100
|
)%
|
|
$
|
10,004
|
|
|
$
|
3,474
|
|
|
|
(65
|
)%
|
As a percentage of net revenues
|
|
|
0.1
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.2
|
%
|
|
|
0.1
|
%
|
|
|
|
|
Interest expense consists primarily of interest charges on the
amount drawn under our existing credit agreement and certain
accrued contingencies. The decrease in interest expense in the
third quarter and first nine months of 2008 compared to the same
periods of the prior year is due primarily to decreased interest
charges associated with lower outstanding balances under our
credit agreement and certain accrued contingencies.
For the remainder of 2008, compared to the same period in 2007,
we expect interest expense to increase as we borrowed against
our line of credit in October 2008.
Provision
for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Percent
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Percent
|
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
|
(In thousands, except percentages)
|
|
|
Provision for income taxes
|
|
$
|
33,577
|
|
|
$
|
70,423
|
|
|
|
110
|
%
|
|
$
|
262,021
|
|
|
$
|
298,014
|
|
|
|
14
|
%
|
As a percentage of net revenues
|
|
|
1.8
|
%
|
|
|
3.3
|
%
|
|
|
|
|
|
|
4.8
|
%
|
|
|
4.6
|
%
|
|
|
|
|
Effective tax rate
|
|
|
(4
|
)%
|
|
|
13
|
%
|
|
|
|
|
|
|
(330
|
)%
|
|
|
17
|
%
|
|
|
|
|
The provision for income taxes differs from the amount computed
by applying the statutory U.S. federal rate principally due
to foreign income with lower tax rates and from tax credits that
lower the effective tax rate, offset by state taxes and
subsidiary losses for which we have not provided a benefit and
other factors that impact the effective tax rate.
The increase in the effective tax rate for the third quarter and
first nine months of 2008 compared to the same period of the
prior year primarily resulted from the goodwill impairment
charge recorded in the three and nine months ended
September 30, 2007, which is non-deductible for tax
purposes. In addition, the effective tax rate for the three and
nine months ended September 30, 2007 was favorably impacted
by a tax benefit from a ruling issued by a tax authority related
to prior periods. During fiscal 2008, the expansion of our
international operations has resulted in favorable changes to
our geographic earnings mix.
For the remainder of 2008, we are projecting an effective tax
rate slightly higher than our effective tax rate in the first
nine months of 2008.
Liquidity
and Capital Resources
Cash
Flows
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
1,848,563
|
|
|
$
|
2,198,272
|
|
Investing activities
|
|
|
(62,189
|
)
|
|
|
(682,914
|
)
|
Financing activities
|
|
|
(736,474
|
)
|
|
|
(2,276,375
|
)
|
Effect of exchange rates on cash and cash equivalents
|
|
|
199,899
|
|
|
|
(117,457
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
1,249,799
|
|
|
$
|
(878,474
|
)
|
|
|
|
|
|
|
|
|
|
29
We generated cash from operating activities in amounts greater
than net income in the nine months ended September 30, 2007
and 2008 due primarily to non-cash charges to earnings and tax
benefits from stock-based compensation. Non-cash charges to
earnings included depreciation and amortization on our long-term
assets, impairment of goodwill, stock-based compensation,
provision for doubtful accounts and authorized credits, the
provision for transaction losses and deferred income taxes. We
continue to expect net cash provided by operating activities to
be lower for the remainder of 2008, compared to the same period
of 2007, due primarily to lower net income.
Net cash used in investing activities of $682.9 million
during the first nine months of 2008 consisted primarily of cash
paid for acquisitions, primarily Fraud Sciences, totaling
$159.1 million, and the purchase of fixed assets to support
our site operations, customer support and international
expansion totaling $406.7 million. The purchase of fixed
assets consisted primarily of computer equipment, software, and
leasehold improvements for our offices and buildings. Net cash
used in investing activities during the first nine months of
2007 consisted primarily of cash paid to acquire businesses
totaling $320.2 million, and the purchase of fixed assets
for $326.0 million, offset by net cash provided by our
investment activity of $783.8 million. In the fourth
quarter of fiscal 2008, we announced an acquisition for
$390 million and the entry into another acquisition
agreement for an aggregate transaction value of
$945 million. Both transactions involve the use of cash. In
addition, we expect to continue to purchase property and
equipment for cash and we may acquire other businesses for cash.
Net cash flows used in financing activities of $2.3 billion
during the first nine months of 2008 were due primarily to the
repurchase of approximately 80.6 million shares of common
stock for an aggregate purchase price of approximately
$2.2 billion and the repayment of our line of credit of
$200.2 million, offset in part by net proceeds from the
issuance of common stock of $98.7 million. The net cash
flows used in financing activities during the first nine months
of 2007 were due primarily to the repurchase of approximately
35.3 million shares of common stock for an aggregate
purchase price of approximately $1.2 billion, offset in
part by net proceeds from the issuance of common stock of
$365.2 million. For the remainder of 2008, we may continue
to repurchase our common stock for cash. On October 16,
2008, we drew down an aggregate amount of $1.0 billion
under our revolving credit facility.
The negative effect of exchange rates on cash and cash
equivalents of $117.5 million during the first nine months
of 2008 was due to the strength of the U.S. dollar during
the period against other foreign currencies, primarily the Euro.
At September 30, 2008, we held balances in cash and cash
equivalents outside the U.S. in certain of our foreign
operations totaling approximately $2.9 billion. If these
cash and cash equivalents were distributed to the U.S. in
the form of dividends or otherwise, we would be subject to
additional U.S. income taxes (subject to adjustment for
foreign tax credits) and foreign withholding taxes.
At September 30, 2008, we had cash and cash equivalents of
$3.3 billion. Our available cash and cash equivalents are
held in bank deposits, money market funds and commercial paper.
We actively monitor the third-party depository institutions that
hold our cash and cash equivalents. Our emphasis is primarily on
safety of principal while secondarily maximizing yield on those
funds. We diversify our cash and cash equivalents among
counterparties to minimize exposure to any one of these
entities. To date, we have experienced no material loss or lack
of access to our invested cash or cash equivalents; however, we
can provide no assurances that access to our invested cash and
cash equivalents will not be impacted by adverse conditions in
the financial markets.
At any point in time we have funds in our operating accounts and
customer accounts that are with third party financial
institutions. These balances in the U.S. may exceed the
Federal Deposit Insurance Corporation (FDIC)
insurance limits. While we monitor the cash balances in our
operating accounts and adjusts the cash balances as appropriate,
these cash balances could be impacted if the underlying
financial institutions fail or could be subject to other adverse
conditions in the financial markets.
Credit
Agreement
Lehman Brothers Commercial Bank was a participating lender in
our $2.0 billion credit agreement. As a result of the
bankruptcy of its parent company, our available line of credit
has been reduced by its commitment of $160 million. As of
September 30, 2008, we had no outstanding borrowings under
our credit agreement of $1.8 billion. As of
September 30, 2008, we were in compliance with the
financial covenants associated with the
30
credit agreement. On October 16, 2008, we drew down an
aggregate amount of $1.0 billion under our revolving credit
facility pursuant to the Credit Agreement. We expect that the
funds will be used for general corporate purposes, including
financing the acquisition of Bill Me Later, Inc. and its
associated receivables. Additionally, we are not aware of any
lack of access to the remaining $840M under the line of credit;
however, we can provide no assurance that access to the
remaining available line of credit will not be impacted by
adverse conditions in the financial markets. Our line of credit
is not reliant upon a single bank.
Stock
Repurchases
In January 2008, our Board authorized, and we announced, a stock
repurchase program of up to $2.0 billion of our common
stock. This program is in addition to our previously announced
stock repurchase program. During the third quarter and first
nine months of 2008, we repurchased approximately
$622.8 million and $2.2 billion of our common stock,
respectively. As of September 30, 2008, we have repurchased
approximately $5.3 billion of our common stock
($4.0 billion of which completed the previously announced
and expanded stock repurchase program) and we have the ability
to repurchase up to $656.5 million of our common stock
under our stock repurchase program authorized by our Board in
January 2008.
Off-Balance
Sheet Arrangements and Customer Accounts
As of September 30, 2008, we had no off-balance sheet
arrangements that have, or are reasonably likely to have, a
current or future material effect on our condensed consolidated
financial condition, results of operations, liquidity, capital
expenditures or capital resources. As of September 30,
2008, we had a total of $1.8 billion in cash withdrawals
offsetting our $1.9 billion in cash deposits held within
the same financial institution under our cash pooling
arrangement. See Note 5 Fair Value
Measurement of Assets and Liabilities for further
discussion.
Customer balances held as direct claims against us, primarily
PayPal, are included on our condensed consolidated balance sheet
in funds receivable and customer accounts with an offsetting
current liability in funds payable and amounts due to customers,
and totaled approximately $1.1 billion as of
December 31, 2007 and $1.0 billion as of
September 30, 2008. Customer funds held by PayPal as an
agent or custodian on behalf of our customers are not reflected
in our condensed consolidated balance sheets. These funds
include funds held on behalf of U.S. customers that are
deposited in bank accounts insured up to certain limits by the
FDIC and funds that U.S. customers choose to invest in the
PayPal Money Market Fund, and totaled approximately
$1.8 billion and $2.0 billion as of December 31,
2007 and September 30, 2008, respectively. The assets of
the PayPal Money Market Fund are invested in a portfolio managed
by Barclays Global Fund Advisors.
Indemnification
Provisions
In the ordinary course of business, we have included limited
indemnification provisions in certain of our agreements with
parties with which 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 a
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, which are indemnities mainly
related to various intellectual property rights. In our PayPal
business, we have provided an indemnity to our payment
processors in the event of certain third-party claims or card
network fines against the processor arising out of conduct by
PayPal or PayPal customers. 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.
31
Liquidity
and Capital Resource Requirements
We believe that existing cash, cash equivalents and investments
of approximately $3.8 billion, together with cash generated
from operations and available borrowings under our credit
facility, will be sufficient to fund our operating activities,
capital expenditures and other obligations for the foreseeable
future.
Recent
Accounting Pronouncements
See Note 1 The Company and Summary of
Significant Accounting Policies to the condensed
consolidated financial statements, regarding the effect of
certain recent accounting pronouncements on our condensed
consolidated financial statements.
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Item 3:
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Quantitative
and Qualitative Disclosures About Market Risk
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The information in this section should be read in connection
with the information on financial market risk related to changes
in interest rates and
non-U.S. currency
exchange rates in Part II, Item 7A, Quantitative
and Qualitative Disclosures About Market Risk, in our
Annual Report on
Form 10-K
for the year ended December 31, 2007. Our market risk
profile has not changed significantly during the first nine
months of 2008.
Interest
Rate Risk
We actively monitor the third-party depository institutions that
hold our cash and cash equivalents. We diversify our cash and
cash equivalents among counterparties to minimize exposure to
any one of these entities. Our emphasis is primarily on safety
of principal while secondarily maximizing yield on those funds.
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 investments are
generally 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, net of estimated tax.
Investment
Risk
As of September 30, 2008, the carrying value of our cash
and cash equivalents approximated their fair value and
represented approximately 88% of our total cash, cash
equivalents and investment portfolio, which was held primarily
in bank deposits, commercial paper and money market funds. As of
September 30, 2008, we held no direct investments in
auction rate securities, collateralized debt obligations,
structured investment vehicles or mortgage-backed securities.
Foreign
Currency Risk
We are a growing company, with an increasing proportion of our
operations conducted outside the U.S. Our foreign currency
exposure continues to evolve as we grow internationally. Our
exposure to foreign currency transaction gains and losses is the
result of certain net receivables due from our foreign
subsidiaries and customers being denominated in currencies other
than the U.S. dollar, primarily the Euro, British pound,
Korean won and Australian dollar in which our revenues and
profits are denominated. A portion of these risks is hedged, but
fluctuations could impact our results of operations, financial
position, and cash flows.
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Item 4:
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Controls
and Procedures
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(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.
32
PART II:
OTHER INFORMATION
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Item 1:
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Legal
Proceedings
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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. 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. The matter was eventually decided by the German
Supreme Court which in 2007 held, following a 2004 precedent in
the matter of Rolex v Ricardo, that eBay must take
reasonable measures to prevent recurrence once it is informed of
clearly identified infringement, and that eBay may in certain
circumstances be liable upon first notice of infringement. The
court referred the case back to the Higher Regional Court to
determine whether, in some circumstances, a low starting listing
price was sufficient to indicate that a listing was infringing.
In July 2007, the German Federal Supreme Court extended the
reach of the Rolex decision in IVD v. eBay.
The court held that (i) in certain circumstances, a duty of
care could be found to exist to competitors requiring eBay to
take reasonable measures to prevent illegal items from being
listed (even where the competitors were not directly harmed) and
(ii) such duty would extend to listings by the same seller
in the same category (not just identical listings). We expect
that this ruling will likely result in increased costs and
litigation against us in Germany although we do not currently
believe that it will require a major 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. Among other things,
the complaint alleges that we violated French tort law by
negligently broadcasting listings posted by third parties
offering counterfeit items bearing plaintiffs trademarks,
and by purchasing certain advertising keywords. Around 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 the plaintiffs established in France and
the European Union by allowing third parties to post listings
offering genuine perfumes and cosmetics for sale on our
websites. In June 2008, the Paris Court of Commerce ruled that
eBay and eBay International AG were liable for failing to
prevent the sale of counterfeit items on its websites that
traded on plaintiffs brand names and for interfering with
the plaintiffs selective distribution network. The court
awarded plaintiffs approximately EUR 38.6 million in
damages and issued an injunction prohibiting all sales of
perfumes and cosmetics bearing the Dior, Guerlain, Givenchy and
Kenzo brands over all worldwide eBay sites to the extent that
they are accessible from France. We have taken measures to
comply with the injunction and have appealed these rulings.
However, these and similar suits may force us to modify our
business practices, which could lower our revenue, increase our
costs, or make our websites less convenient to our customers.
Any such results could materially harm our business. Other
luxury brand owners have also filed suit against us or have
threatened to do so, seeking to hold us liable for, among other
things, alleged counterfeit items listed on our websites by
third parties, for tester and other not for resale
consumer products listed on our websites by third parties, for
the alleged misuse of trademarks in listings, for alleged
violations of selective distribution channel laws, for alleged
non-compliance of consumer protection laws or in connection with
paid search advertisements. We continue to believe that we have
meritorious defenses to these suits and intend to defend
ourselves vigorously.
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 were not
infringed. The parties have completed claim construction
briefing and most of fact discovery and are conducting expert
discovery. The pretrial conference is scheduled for November
2008. We believe that we have meritorious defenses and intend to
defend ourselves vigorously.
In March 2007, a plaintiff filed a purported antitrust class
action lawsuit against eBay in the Western District of Texas
alleging that eBay and its wholly owned subsidiary PayPal
monopolized markets through various anticompetitive
acts and tying arrangements. The plaintiff alleges claims under
sections 1 and 2 of the Sherman Act, as well as
33
related state law claims. The complaint seeks treble damages and
an injunction. In April 2007, the plaintiff re-filed the
complaint in the U.S. District Court for the Northern
District of California
(No. 07-CV-01882-RS),
and dismissed the Texas action. In May 2007, the case was
consolidated with other similar lawsuits
(No. 07-CV-01882JF).
In June 2007, we filed a motion to dismiss the class action
complaint. In March 2008, the court granted the motion to
dismiss the tying claims with leave to amend and denied the
motion with respect to the monopolization claims. Plaintiffs
subsequently decided not to refile the tying claims. The class
certification motion is scheduled for January 2009. We believe
that we have meritorious defenses and intend to defend ourselves
vigorously.
In May 2007, Netcraft Corporation filed a lawsuit in the Western
District of Wisconsin
(No. 07-C-0254C)
alleging that eBay and PayPal infringed two of its patents
entitled Internet billing methods. The suit seeks an
injunction against continuing infringement, unspecified damages,
and interest, costs, and fees. In September 2007, we filed a
motion for summary judgment of noninfringement on both patents.
In December 2007, the U.S. District Court for the Western
District of Wisconsin entered a judgment granting our motion for
summary judgment of non-infringement on both of the patents that
Netcraft asserted against eBay and PayPal. Netcraft Corporation
has appealed the judgment. Both sides have filed their appeal
briefs, and oral argument took place in October 2008 before the
Court of Appeals for the Federal Circuit.
In October 2007, PartsRiver filed a lawsuit in the Eastern
District of Texas
(No. 2-07CV-440-DF)
alleging that eBay, Microsoft, Yahoo!, Shopzilla, PriceGrabber
and PriceRunner infringed its patent relating to search methods.
The suit seeks an injunction against continuing infringement,
unspecified damages, and interest, costs, and fees. The
defendants have moved to transfer venue and the parties are
conducting discovery. Fact discovery cutoff is scheduled for
July 2009, and trial is scheduled for October 2009. We believe
that we have meritorious defenses and intend to defend ourselves
vigorously.
eBays Korean subsidiary, IAC, has notified a majority of
its approximately 20 million users of a data breach
involving personally identifiable information including name,
address, resident registration number and some transaction and
refund data (but not including credit card information or real
time banking information). Approximately 139,000 users have sued
IAC over this breach in several lawsuits and we expect more to
do so in the future. There is some precedent in Korea for a
court to grant consolation money for data breaches
without a specific finding of harm from the breach. Such
precedents have involved payments of up to approximately $200
per user. IAC intends to vigorously defend itself in this
lawsuit.
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 are subject to additional
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 Marketplaces, 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 become subject to laws in 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 laws will be filed against
us. 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.
34
Risk
Factors That May Affect Results of Operations and Financial
Condition
The risks and uncertainties described below are not the only
ones facing us. Other events that we do not currently anticipate
or that we currently deem immaterial also may affect our results
of operations and financial condition.
Our
operating results may decline.
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, attract new users,
and 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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our ability to increase activity of the users of our
Marketplaces business, especially with respect to our top buyers
and sellers, in our most mature geographies, especially the
U.S., Germany and the U.K.;
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general economic conditions, including the possibility of a
severe recession in the U.S. and a worldwide economic
slowdown; recent disruptions to the credit and financial markets
in the U.S. and worldwide; and those economic conditions
specific to the Internet, ecommerce and payments industries;
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our ability to successfully integrate and manage businesses that
we acquire, including new needs to manage credit risks and bad
debts upon completion of our announced acquisition of Bill Me
Later;
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the volume, size, timing, monetization, and completion rates 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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the effect of recently announced and possible future changes to
our pricing, products and policies, including, among other
changes: a reduced emphasis on upfront fees (e.g., insertion
fees for listings) and corresponding increases in success-based
fees (e.g., final value fees for sold items); new algorithms for
determining which listings appear at the top of searches (Best
Match); changes to buyer and seller feedback criteria; tighter
seller standards, which may restrict some sellers from selling
on our websites even if they have been able to do so
historically; new restrictions or holds on payments made to
certain sellers or in connection with certain categories of
higher-risk transactions; new incentives and rewards for top
PowerSellers; increased protection for buyers who pay for
eligible transactions on eBay.com using PayPal, as well as
improved seller protection for U.S. eBay sellers against
claims, chargebacks and reversals; lower insertion fees for, and
extended duration of, listings of fixed-price items; shipping
and handling limits on certain categories of items (e.g.,
media); and, beginning in October 2008, no longer allowing paper
forms of payment, including checks and money orders, to be used
on eBay.com in the U.S. for most categories of items;
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regulatory and legal actions imposing obligations on our
businesses or our users, including the injunction related to
certain cosmetic and perfume brands (see
Item 1 Legal Proceedings above);
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new laws or regulations, or interpretations of existing laws or
regulations, that impose liability on us for actions of our
users or otherwise harm our business models or restrict the
Internet, electronic commerce, online payments, or online
communications;
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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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our ability to manage PayPals transaction loss rate and
payment funding mix;
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35
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the costs and results of litigation that involves us;
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our ability to develop product enhancements, programs, and
features at a reasonable cost and 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 comply with the requirements of entities whose
services are required for our operations, such as credit card
networks and banks;
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our ability to increase the acceptance of PayPal by online
merchants outside of our Marketplaces platforms, which may
require long implementation cycles and incentives to merchants
that are initially dilutive;
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our ability to manage, profitably expand and effectively
monetize the Skype business;
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our ability to manage our businesses following recently
announced reductions in our workforce;
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the effect of recently announced management changes;
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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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our ability to attract new personnel in a timely and effective
manner and to retain key employees;
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the continued healthy operation of our technology suppliers and
other parties with which 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, phishing, viruses, spyware, and other
dangers of the Internet; and
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macroeconomic and geopolitical events such as recession,
commodity inflation, war, threat of war, or terrorist actions.
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The increased variety of services offered on our websites makes
it difficult for us to forecast the level or source of our
revenues or earnings accurately. In view of the rapidly evolving
nature of our business, we believe that period-to-period
comparisons of our operating results may not be meaningful, and
you should not rely upon them as an indication of future
performance. We do not have backlog, and substantially all of
our net revenues each quarter come from transactions involving
sales or payments during that quarter. Due to the inherent
difficulty in forecasting revenues, it is also difficult to
forecast income statement expenses as a percentage of net
revenues. Quarterly and annual income statement expenses as a
percentage of net revenues may be significantly different from
historical or projected rates. Our operating results in one or
more future quarters may fall below the expectations of
securities analysts and investors. In that event, the trading
price of our common stock would almost certainly decline.
We invest heavily in marketing and promotion, customer support,
and further development of the operating infrastructure for our
core and non-core 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.
Growth rates of our Marketplaces businesses in our most
established markets, such as the U.S., Germany and the U.K.,
have continued to decline. Despite our efforts to stem these
declines, growth rates in these and other markets may continue
to decline. As our penetration in established markets grows, we
will increasingly need to focus on keeping existing users,
especially our top buyers and sellers, active and increasing
their activity level on our sites in order to continue to grow
our business. In addition, our Marketplaces business is facing
increased competitive pressure. If we are unable to change our
services in ways that reflect the changing demands of the
ecommerce marketplace, particularly the higher growth of sales
of fixed-price items, our business will suffer.
In January and June 2008, we announced significant changes to
our Marketplaces business in four major areas: fee structure,
seller incentives, standards and buyer and seller feedback and
increased buyer and seller protections in
36
the U.S. In August 2008, we announced a series of pricing,
shipping and other changes for our Marketplaces business in our
three largest markets: the U.S., Germany and the U.K. We may
make further changes in these or other areas in the future. Some
of the changes that we have announced to date have been
controversial with, and led to dissatisfaction among, a number
of our sellers, and additional changes that we announce in the
future may also be negatively received by a number of our
sellers. Given the number of recent changes that we have made to
our policies and pricing, it may take a number of our sellers
some time to fully assess and adjust to these changes, and
sellers may elect to reduce volume while making such assessments
and adjustments. If any of these changes cause sellers to move
their business (in whole or in part) away from our websites or
otherwise fail to improve gross merchandise volume or the number
of successful listings, our operating results and profitability
will be harmed.
In addition, because a large percentage of PayPal transactions
originate on the eBay platform, declines in growth rates in
major Marketplaces markets also adversely affect PayPals
growth rate. The expected future growth of our PayPal, Skype,
StubHub, and other lower margin businesses may also cause
downward pressure on our profit margins because those businesses
have lower gross margins than our Marketplaces platforms.
An
economic recession could harm our business.
Our Marketplaces and Payments businesses are dependent on
consumer purchases. An economic downturn would likely reduce the
volume of purchases on our Marketplaces platforms and the volume
of transactions paid for using our PayPal payment service and
adversely affect our business. In addition, an economic downturn
would likely require us to increase our reserves for bad debt
and PayPal transaction loss.
We are
exposed to fluctuations in currency exchange rates and interest
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 many 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 be negatively impacted if the U.S. dollar
strengthens against foreign currencies, as has happened
recently. Based on changes in foreign currency rates year over
year, net revenues in the three months ended September 30,
2008 were positively impacted by foreign currency translation of
$64.9 million, compared to the same period of the prior
fiscal year. Based on changes in foreign currency rates year
over year, operating income for the three months ended
September 30, 2008 was positively impacted by foreign
currency translation of $43.6 million, compared to the same
period of the prior fiscal 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, British pound,
Australian dollar, and Canadian dollar, our foreign revenues and
profits will be reduced as a result of these translation
adjustments. While from time to time we 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. In addition, to the extent the
U.S. dollar strengthens against the Euro, the British
pound, the Australian dollar, and the Canadian dollar,
cross-border trade related to purchases of dollar-denominated
goods by
non-U.S. purchasers
will likely decrease, and that decrease will likely not be
offset by a corresponding increase in cross-border trade
involving purchases by U.S. buyers of goods denominated in
other currencies, adversely affecting our business.
In addition, we face exposure to fluctuations in interest rates.
For example, reductions in interest rates reduce our investment
income, which in turn would lower our net interest income.
37
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 asserting their purported rights against
online companies, including eBay. Allegations of infringement of
intellectual property rights have resulted in threats of
litigation and actual litigation against us from time to time,
including litigation brought by Tiffany & Co. in the
U.S., Rolex S.A. in Germany, Louis Vuitton Malletier and
Christian Dior Couture in France, LOréal SA,
Lancôme Parfums et Beauté & Cie, and Laboratoire
Garnier & Cie in several European countries, and a
number of others. The plaintiffs in these cases seek to hold
eBay liable for alleged counterfeit items listed on our sites by
third parties, for tester and other not for resale
consumer products listed on our sites by third parties, for the
alleged misuse of trademarks or copyrights in listings or
otherwise on our sites, or in connection with paid search
advertisements, or for alleged violations of selective
distribution channel laws or parallel import laws for listings
of authentic items. Such plaintiffs seek, among other things,
injunctive relief and damages. In the aggregate, these suits
could result in significant damage awards and could adversely
affect our business. Other luxury brand owners have also filed
suit against us or have threatened to do so. In June 2008, the
Paris Court of Commerce ruled in the Louis Vuitton Malletier
and Christian Dior Couture cases that eBay and eBay
International AG were liable for failing to prevent the sale of
counterfeit items on its websites that traded on
plaintiffs brand names and for interfering with the
plaintiffs selective distribution network. The court
awarded the plaintiffs approximately EUR 38.6 million
in damages and issued an injunction prohibiting all sales of
perfumes and cosmetics bearing the Dior, Guerlain, Givenchy and
Kenzo brands over all worldwide eBay sites to the extent they
are accessible from France. We have taken measures to comply
with the injunction and have appealed these rulings. However,
these and similar suits may force us to modify our business
practices, which could lower our revenue, increase our costs or
make our websites less convenient to our customers. Any such
results could materially harm our business.
In addition to litigation from rights owners, we may be subject
to regulatory, civil or criminal proceedings and penalties if
the authorities feel we have aided in the sale of counterfeit
goods. While we have had some early success in defending against
such litigation, more recent cases have been based, at least in
part, on different legal theories than those of earlier cases,
and there is no guarantee that we will continue to be successful
in defending against such litigation. For example, the German
Federal Supreme Court has ruled against us in the Rolex
and IVD cases. Plaintiffs in recent cases have argued
that we are not entitled to safe harbors under the Digital
Millennium Copyright Act in the U.S. or as a hosting
provider in the European Union because of the alleged 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 supposedly have not adequately removed counterfeit
listings or effectively suspended users who have created such
listings. We are constantly improving and modifying our efforts
to eliminate counterfeit and pirated items. These improvements
are in response to ongoing business initiatives designed to
reduce bad buyer experiences and improve customer satisfaction
as well as in response to new patterns we are seeing among
counterfeiters and others committing fraud on our users.
Notwithstanding these efforts, we believe that the legal
climate, especially in Europe, is becoming more adverse to our
arguments, which may require us to take actions which could
lower our revenues, increase our costs, or make our websites
less convenient to our customers. This may materially harm our
business.
Content owners and other intellectual property rights owners may
also seek to bring legal action against entities that are
peripherally involved in the sale of infringing items, such as
payment companies. To the extent that intellectual property
rights owners bring legal action against PayPal based upon the
use of PayPals payment services in a transaction involving
the sale of infringing items, including on our websites, our
business could be harmed.
Litigation and negative publicity has increased as our websites
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, injunctive relief,
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. In addition, a public
perception that counterfeit or pirated items are commonplace on
our site, even if factually incorrect, could damage our
reputation and our business.
38
We are
subject to patent litigation.
We have repeatedly been sued for allegedly infringing other
parties patents. Some of these ongoing suits are described
under the heading Item 1 Legal
Proceedings, above. We are a defendant in other patent
suits and 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 Marketplaces, Payments and Communications segments. These
claims, whether meritorious or not, are time consuming and
costly to resolve, and could require expensive changes in our
methods of doing business, could require us to enter into costly
royalty or licensing agreements, or could require us to cease
conducting certain operations.
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
often challenged in the U.S. and internationally. In
violation of our policies, unlawful goods and stolen goods have
been listed and traded on our services. We may be unable to
prevent our users from selling unlawful or stolen goods or
unlawful services or selling goods or services 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 services. We have been subject to several lawsuits
based upon such allegations. In December 2004, an executive of
Baazee.com, our Indian subsidiary, was arrested (and later
released) in connection with a users listing of a
pornographic video clip on that website. We continue to contest
the charges related to this arrest. Similarly, our Korean
subsidiary and one of its employees were found criminally liable
for listings on the Korean subsidiarys website. The German
Federal Supreme Court has ruled that we may have a duty to take
reasonable measures to prevent prohibited DVDs from being sold
on our site to minors and that competitors may be able to
enforce this duty. In a number of circumstances, third parties
have alleged that our services aid and abet certain violations
of certain laws, including antiscalping laws with respect to the
resale of tickets, laws regarding the sale of counterfeit items,
the fencing of stolen goods, and restrictive distribution laws
and distance selling laws.
Although we have prohibited the listing of stolen goods and
certain high-risk items and implemented other protective
measures, we may be required to spend substantial resources to
take additional protective measures or discontinue certain
service offerings, any of which could harm our business. Any
costs incurred as a result of potential liability relating to
the alleged 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 and stolen goods using our
services. This negative publicity, even if factually incorrect,
could damage our reputation and diminish the value of our brand
names. It also could make users reluctant 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. Recent changes in law have increased the penalties for
intermediaries providing payment services for certain illegal
activities. Despite measures PayPal has taken to detect and
lessen the risk of this kind of conduct, including PayPals
ability to take legal action to recover its losses for certain
violations of its acceptable use policy, illegal activities
could still be funded using PayPal. Any resulting claims or
liabilities could adversely affect our business.
Current
or future anti-money laundering laws could increase
PayPals costs or require it to change its
processes.
PayPal is subject to anti-money laundering and counter-terrorist
financing 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
39
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 may apply, which in some cases are more stringent.
Several countries, including Australia, Canada and Luxembourg,
are in the process of implementing new anti-money laundering and
counter-terrorist financing laws and regulations, and the impact
of these laws and regulations on PayPals business is
uncertain. 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 networks, could
raise PayPals costs significantly and reduce the
attractiveness of its product. Failure to comply with federal,
state or foreign country money laundering and counter-terrorist
financing laws could result in significant criminal and civil
lawsuits, penalties, and forfeiture of significant assets.
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 often 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 court decisions arguably have narrowed
the scope of the immunity provided to Internet service providers
like us under the Communications Decency Act. For example, the
Ninth Circuit recently held that certain immunity provisions
under the Communications Decency Act might not apply to the
extent that a website owner materially contributes to the
development of unlawful content on its website. In addition, the
Paris Court of Commerce has ruled in the Louis Vuitton
Malletier and Christian Dior Couture cases that
applicable laws protecting passive internet hosts
from liability are inapplicable to eBay given that the content
in question was provided by users under eBays control and
authority. This trend, if continued, may increase our potential
liability to third parties for the user-provided content on our
sites. 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.
Government
inquiries may lead to charges or penalties.
A large number of transactions occur on our websites. Government
regulators have received a significant 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, from time to time we have 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 regarding 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
40
regarding protection programs to users. We currently face
inquiries from government regulators in various jurisdictions
related to actions that we have taken that are designed to
improve the safety of transactions on our websites, most notably
by requiring PayPal to be offered
and/or used
for certain high-risk transactions or by certain sellers in
certain jurisdictions, and we may face similar inquires from
other government regulators in the future. We are likely to
receive other additional inquiries from regulatory agencies in
the future, which may lead to action against us. 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 enforcement
actions, fines or other penalties, or forced to change our
operating practices in ways that could harm our business.
We are
subject to general litigation and regulatory
disputes.
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. In Germany, the German Federal Supreme Court has
ruled that we may owe duties, under certain circumstances, to
content owners and competitors relating to taking reasonable
steps to prevent the listing of illegal, counterfeit, and
pirated items. In June 2008, the Paris Court of Commerce ruled
in the Louis Vuitton Malletier and Christian Dior
Couture cases that eBay and eBay International AG were
liable for failing to prevent the sale of counterfeit items on
its websites that traded on plaintiffs brand names and for
interfering with the plaintiffs selective distribution
network. The scope of these duties is being defined by the
courts, including appellate courts, and the ultimate impact on
us is uncertain, but may require us to increase our level of
filtering and review for these items, thereby increasing our
costs. 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.
Failure
to deal effectively with fraudulent transactions and customer
disputes would increase our loss rate and harm our
business.
In June 2008, we announced that beginning in the fall of 2008,
buyers who pay for transactions on eBay.com with PayPal will be
protected on eligible transactions for the full amount of an
items purchase price if the buyer does not receive the
goods they purchased or if the goods differ significantly from
what was described by the seller. Furthermore, U.S. sellers
on eBay.com will receive improved seller protection for eligible
transactions in which the seller is paid with PayPal, in that
they will be covered against payment reversals due to buyer
claims of an unauthorized payment or an item that was not
received, so long as the seller delivers to the address that the
buyer provided to PayPal. We will also offer enhanced buyer and
seller protections in some eBay international marketplaces The
recently announced changes to PayPals buyer protection
program could result in future increases and fluctuations in
PayPals transaction loss rate. For the full year ended
December 31, 2007 and the nine months ended
September 30, 2008, PayPals transaction loss
(including both direct losses and buyer protection payouts)
totaled $139.3 million and $117.0 million,
representing 0.29% and 0.26% of PayPals TPV in each
period, respectively.
PayPals highly automated and liquid payment service makes
PayPal an attractive target for fraud. In configuring its
service, PayPal continually strives to maintain the right
balance of appropriate measures to promote both convenience and
security for customers. 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 may be required to reimburse
customers for any funds stolen as a result of
41
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 was assessed substantial
fines for excess chargebacks in 2001, and excessive chargebacks
may arise in the future. PayPal has taken measures to detect and
reduce the risk of fraud, but these measures need to be
continually improved and may not be effective against new forms
of fraud or in connection with new product offerings. If these
measures do not succeed, our business will suffer.
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 and Asian jurisdictions, buyers may also have the
right to withdraw from a sale made by a professional seller
within a specified time period. While sometimes 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 in some jurisdictions and may be
higher in some
non-U.S. jurisdictions
than it is in the U.S. Litigation involving liability for
third-party actions could be costly for us, divert management
attention, result in increased costs of doing business, lead to
adverse judgments, or otherwise harm our business. In addition,
affected users will likely complain to regulatory agencies that
could take action against us, including imposing fines or
seeking injunctions.
Negative publicity and user sentiment generated as a result of
fraudulent or deceptive conduct by users of our eBay and PayPal
services could damage our reputation, reduce our ability to
attract new users or retain our current users, and diminish the
value of our brand names. We believe that negative user
experiences are one of the primary reasons users stop using our
services.
Any
factors which reduce cross-border trade could harm our
business.
Cross-border transactions using our websites generally provide
higher revenues and gross margins than similar transactions that
take place within a single country due to higher transaction
fees we earn for those transactions. Cross-border trade has
become an increasingly important source of both revenue and
profits for us. To the extent that any factors result in a net
reduction in cross-border trade, including, among other factors,
fluctuations in exchange rates, the application of specific
national or regional laws (e.g., selective distribution channel
laws) to users in other countries, or any other factors impose
restrictions on, or increase the costs of, shipping goods across
national borders, our business would suffer. We believe that
recent increases in the relative value of the U.S. dollar
versus other currencies have reduced cross-border trade between
U.S. sellers and foreign buyers, without a corresponding
increase in cross-border traffic in the other direction,
adversely affecting our business.
42
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 detect or 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,
and could result in a violation of applicable privacy and other
laws. In addition, a party that is able to circumvent our
security measures could misappropriate proprietary information,
cause interruption in our operations, damage our computers or
those of our users, or otherwise damage our reputation and
business. Under credit card rules and our contract with our card
processors, if there is a breach of credit card information that
we store, or that is stored by PayPals direct credit card
processing customers, we could be liable to the credit card
issuing banks for their cost of issuing new cards and related
expenses. In addition, if we fail to follow credit card industry
security standards, even if there is no compromise of customer
information, we could incur significant fines or lose our
ability to give customers the option of using credit cards to
fund their payments or pay their fees. If we were unable to
accept credit cards, our business would be seriously damaged.
eBays Korean subsidiary, IAC, has notified a majority of
its approximately 20 million users of a data breach
involving personally identifiable information including name,
address, resident registration number and some transaction and
refund data (but not including credit card information or real
time banking information). Approximately 139,000 users have sued
IAC over this breach in several lawsuits and we expect more to
do so in the future. There is some precedent in Korea for a
court to grant consolation money for data breaches
without a specific finding of harm from the breach. Such
precedents have involved payments of up to approximately $200
per user. IAC intends to vigorously defend itself in this
lawsuit.
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, including any breach that results in
the release of our users personal information, 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 and phishing
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.
Despite our efforts to mitigate spoof and
phishing emails through product improvements and
user education, spoof and phishing
remain a serious problem that may damage our brands, discourage
use of our websites, and increase our costs.
Changes
in regulations or user concerns regarding privacy and protection
of user data could adversely affect our business.
We are subject to laws relating to the collection, use,
retention, security and transfer of personally identifiable
information about our users, especially for financial
information and for users located outside of the U.S. In
many cases, these laws 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
43
relations. New laws in this area have been passed by several
jurisdictions, and other jurisdictions are considering imposing
additional restrictions. The interpretation and application of
user data protection laws are in a state of flux. These laws may
be interpreted and applied inconsistently from country to
country and our current data protection policies and practices
may not be consistent with those interpretations and
applications. Complying with these varying international
requirements could cause us to incur substantial costs or
require us to change our business practices in a manner adverse
to our business. In addition, we have and post on our websites
our own privacy policies and practices concerning the
collection, use and disclosure of user data. Any failure, or
perceived failure, by us to comply with our posted privacy
policies or with any regulatory requirements or orders or other
federal, state or international privacy or consumer
protection-related laws and regulations could result in
proceedings or actions against us by governmental entities or
others, subject us to significant penalties and negative
publicity and adversely affect us. In addition, as noted above,
we are subject to the possibility of security breaches, which
themselves may result in a violation of these laws.
Our
revenue from advertising is subject to factors beyond our
control.
We derive an increasing portion of our revenues from advertising
on our websites. Revenues from online advertising are sensitive
to events and trends that affect advertising expenditures, such
as general changes in the economy and changes in consumer
spending, as well as the effectiveness of online advertising
versus offline advertising media and the value our websites
provide to advertisers relative to other websites. In addition,
major search engine operators have the ability to change from
time to time, at their sole discretion, the rules and search
algorithms governing the pricing, availability, and placement of
online advertising. Any changes in these rules or search
algorithms may potentially reduce the value of online
advertising to our businesses. If we experience a reduction in
our advertising revenues due to economic, competitive,
technological or other factors, including a reduction in
consumer spending due to a recession in the U.S. and a
worldwide economic slowdown or if we are unable to provide value
to our advertisers, our business and financial results would
suffer.
Our
growth will depend on our ability to develop our brands, and
these efforts may be costly.
We believe that continuing to strengthen our brands will be
critical to achieving widespread acceptance of our services, and
will require a continued focus on active marketing efforts
across all of our brands. The demand for and cost of online and
traditional advertising have been increasing, and may continue
to increase. Accordingly, we will need to continue to spend
substantial amounts of money on, and devote substantial
resources to, advertising, marketing, and other efforts to
create and maintain brand loyalty among users. Since 2004, we
have significantly increased the number of brands we are
supporting, adding Rent.com, Shopping.com, Kijiji, StubHub, 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. Also, major search engine
operators that we use to advertise our brands have
frequently-changing rules that govern their pricing,
availability and placement of online advertisement (e.g., paid
search, keywords), and changes to these rules could negatively
affect our use of online advertising to promote 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.
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. It is not
always clear how existing laws governing issues such as property
ownership, copyrights, trademarks and other intellectual
property issues, parallel imports and distribution controls,
taxation, libel and defamation, obscenity, and personal privacy
apply to online businesses such as ours. 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, are being interpreted by the courts, but their
applicability and scope remain uncertain. Furthermore, as our
activities and the types of goods and services listed on our
websites expand, including through acquisitions such
44
as our acquisition of StubHub, an online ticket marketplace, in
February 2007, 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 with respect
the sale of certain items, such as real estate, event tickets,
cultural goods, boats, and automobiles.
Our success and increased visibility has driven some existing
businesses that perceive our business model to be a threat to
their business to raise concerns about our business models to
policymakers and regulators, particularly in the U.S. and
Europe. These established businesses and their trade association
groups employ significant resources in their efforts to shape
the legal and regulatory regimes in countries where we have
significant operations. They may employ these resources in an
effort to change the legal and regulatory regimes in ways
intended to reduce the effectiveness of our businesses and the
ability of users to use our products and services. In
particular, these established businesses have raised concerns
relating to pricing, parallel imports, professional seller
obligations, stolen goods, copyrights, trademarks and other
intellectual property rights, and the liability of the provider
of an Internet marketplace for the conduct of its users related
to those and other issues. Success in changing the legal or
regulatory regimes in a manner that would increase our liability
for third-party listings could negatively impact our business.
Over the last few years some large retailers and their trade
associations have sought legislation in a number of states and
the U.S. Congress that would make eBay liable for the sale
of stolen property or would ban certain categories of goods from
sale on our platform, including gift cards and health and beauty
products. No such legislation has passed. Nonetheless, the
proponents continue to seek passage of such legislation, and if
any of these laws are adopted it could harm our business.
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. Several states and some foreign
jurisdictions, including France, 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 France, we have been sued by Conseil des
Ventes, the French auction regulatory authority. The agency
alleges that sales on our French website constitute illegal
auctions that cannot be performed without its consent. A lawsuit
alleging similar claims has been brought against us by two
associations of French antique dealers. We intend to vigorously
defend against these lawsuits. However, this and other
regulatory and licensure claims could result in costly
litigation and, if successful, could require us to change the
way we or our users do business in ways that increase costs or
reduce revenues (for example, by forcing 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.
A number of the lawsuits against us relating to trademark issues
seek to have our websites subject to unfavorable local laws. For
example, trademark exhaustion principles provide
trademark owners with certain rights to control the sale of a
branded authentic product until it has been placed on the market
by the trademark holder or with the holders consent. The
application of trademark exhaustion principles is
largely unsettled in the context of the Internet, and if
trademark owners are able to force us to prohibit listings of
certain items in one or more locations, our business could be
harmed.
As we expand and localize our international activities, we
become obligated to comply with the laws of the countries in
which we operate. In addition, because our services are
accessible worldwide, and we facilitate sales of goods to users
worldwide, one or more jurisdictions may claim that we or our
users are required to comply with their laws based on the
location of our servers or one or more of our users, or the
location of the product or service being sold or provided in an
ecommerce transaction. For example, we were found liable in the
recent Louis Vuitton Malletier litigation for transactions on
our websites worldwide, including in China. Laws regulating
Internet and ecommerce companies outside of the U.S. may be
less favorable than those in the U.S., giving greater rights to
consumers, content owners, competitors, users and other third
parties. Compliance may be more costly or may require us to
change our business practices or restrict our service offerings,
and the imposition of any regulations on our users may harm our
business. In addition, we may be subject to overlapping legal or
regulatory regimes that impose conflicting requirements on us.
Our alleged failure to comply with foreign laws could subject us
to penalties ranging from criminal prosecution to significant
fines to bans on our services.
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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.
Nearly all U.S. states and territories have enacted
legislation regulating money transmitters. To date, PayPal has
obtained licenses in 42 of these jurisdictions and
interpretations in six states that licensing is not required
under their existing statutes, and is applying for a license in
one additional state. The remaining U.S. states and
territories do not currently regulate money transmitters. 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. If PayPal were found to be in violation of 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.
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 reimburse consumers
for losses above $50 from transactions not authorized by the
consumer. PayPal currently voluntarily reimburses consumers for
all financial losses from transactions not authorized by the
consumer, not just losses above $50. PayPal seeks to pass most
of these losses on to the relevant merchants, but PayPal incurs
losses if the merchant does not have sufficient funds in its
PayPal account. 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. 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 2.33 million transactions per day during the
quarter ended September 30, 2008, and any violations could
expose PayPal to significant liability. Any negative change in
the publics perception of PayPals compliance with
privacy laws and policies could also negatively impact
PayPals business.
PayPal
is subject to regulation as a bank in Luxembourg, and its 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 190 markets, and allows its customers to receive
payments in 65 of those markets (including the U.S.). Customers
can only withdraw funds electronically to local bank accounts in
40 of these 65 markets. In 20 of these 65 markets customers can
withdraw funds electronically to their credit or debit card. In
two of these 65 markets customers can only withdraw funds
locally by receiving a bank draft in the mail, and in another
three of these 65 markets, customers cannot withdraw locally and
can only withdraw funds if they have a U.S. bank account.
These limitations affect PayPals ability to grow in these
markets. PayPal also offers customers the ability to send or
receive payments denominated in 19 currencies. Of the 190
markets whose residents can use the PayPal service, 31 (27
countries plus four French overseas departments) are members of
the European Union. As of July 2007, PayPal provides localized
versions of its service to customers in the EU through PayPal
(Europe) S.A.R.L. et Cie, SCA., a wholly-owned subsidiary of
PayPal that is licensed as a bank in Luxembourg. Accordingly,
PayPal (Europe) is subject to significant fines or other
enforcement action if it violates the disclosure, reporting,
anti-money laundering, capitalization, funds management,
corporate governance or other requirements imposed on Luxembourg
banks. PayPal has limited experience in operating as a bank, and
any fines or other enforcement actions imposed by the Luxembourg
regulator could adversely affect PayPals business. PayPal
(Europe) implements its localized services in EU countries
through an expedited passport notification process
through the Luxembourg regulator to regulators in other EU
member states pursuant to EU Directives, and has completed the
passport notice process in all EU member countries.
The regulators in these countries could notify PayPal (Europe)
of local consumer protection laws that will apply to its
business, in addition to Luxembourg consumer protection law. The
regulators in these countries could
46
also seek to persuade the Luxembourg regulator to order PayPal
(Europe) to conduct its activities in the local country through
a branch office. Any such responses from these regulators could
increase the cost of, or delay, PayPals plans for
expanding its business.
In markets other than the U.S., EU, Australia and China, PayPal
serves its customers through PayPal Singapore Private Ltd., a
wholly-owned subsidiary of PayPal that is based in Singapore. In
many of these markets, it is not clear whether PayPals
Singapore-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. 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. PayPal may also be subject to other laws and
regulations of one or more countries in which it serves its
customers, such as data protection and anti-money laundering
laws, which vary from country to country and are subject to
change. In some cases, these laws may require expensive changes
to PayPals current business practices. 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.
In addition, if PayPal were to seek to expand the financial
products that it offers outside of the U.S., either alone,
through a commercial alliance, or through an acquisition, PayPal
could become subject to additional licensure requirements,
additional laws and regulations, or increased regulatory
scrutiny, which could impose substantial costs and delay the
introduction of any new products.
Changes
to credit card networks or bank fees, rules, or practices could
harm PayPals business.
PayPal does not belong to or directly access credit card
networks, such as Visa and MasterCard. As a result, PayPal must
rely on banks or other payment processors to process
transactions, and must pay a fee for this service. From time to
time, credit card networks have increased, and may increase in
the future, the interchange fees and assessments that they
charge for each transaction using one of their cards.
PayPals credit card processors have the right to pass any
increases in interchange fees and assessments 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 network operating rules, and PayPal has
agreed to reimburse its processors for any fines they are
assessed by credit card networks as a result of any rule
violations by PayPal or PayPals customers. The credit card
networks set and interpret the credit card rules. Credit card
networks 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 networks
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 the credit card
networks discretion. PayPal also could be subject to fines
from credit card networks 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 credit card networks 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 or
use buyer credit issued by GE Money Bank. 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
directly with their credit card provider if merchandise is not
delivered or is not as described, the ability to earn frequent
flier miles or other incentives offered by credit card issuers,
the ability to defer payment, or a reluctance to provide bank
account information to PayPal. The proportion of PayPals
payment volume funded using credit cards has increased over
time. In addition, some of PayPals newer offerings,
including the ability to make a limited number of payments
without opening an account, have a higher rate of credit card
funding than PayPals basic product offering. 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 plaintiffs in a suit that alleged, among
other things, that PayPals disclosure regarding the
effects of users choice of funding mechanism was
deceptive. This settlement has now been approved by the court.
Although PayPal did not admit any liability for any of the
allegations in the two cases, changes to our disclosure
practices could result in increased use of credit card funding,
which could harm PayPals business.
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. In
some of the markets that PayPal serves and currencies that
PayPal offers, PayPal has a limited operating history and
limited management experience in managing 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.
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. Our
eBay.com website has been interrupted for periods of up to
22 hours, and our PayPal website has suffered intermittent
unavailability for periods as long as five days. In August 2007,
Skype experienced an interruption during which the majority of
Skypes users were unable to use its products for
approximately two days. 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. Reliability is particularly critical
for PayPal, especially as it seeks to expand its Merchant
Services business. Because PayPal is a regulated financial
entity, frequent or persistent site interruptions could lead to
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
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48
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.
There
are many risks associated with our international
operations.
Our international expansion has been rapid and our international
business, especially in Germany and the U.K., has also become
critical to our revenues and profits. Net revenues outside the
U.S. accounted for approximately 51% and 53%, respectively,
of our net revenues in fiscal year 2007 and the first nine
months of 2008. Expansion into international markets requires
management attention and resources and requires us to localize
our services to conform to local cultures, standards, and
policies. The commercial, Internet, and transportation
infrastructure in lesser-developed countries may make it more
difficult for us to replicate our traditional Marketplace
business model. In many countries, we compete with local
companies that 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, and in 2007 we contributed our business in
China to a joint venture with a local Chinese company. Even if
we are successful in developing new markets, we often 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 our classified
businesses, we are increasingly subject to risks of doing
business internationally, including the following:
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strong local competitors;
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regulatory requirements, including regulation of Internet
services, communications, auctioneering, professional selling,
distance selling, privacy and data protection, 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 various taxes, penalties or
audits, or limit the transfer of information between us and our
affiliates;
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greater liability or 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,
conflicting court decisions and lack of clear precedent or
applicable law;
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cultural ambivalence towards, or non-acceptance of, online
trading;
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laws and business practices that favor local competitors or
prohibit foreign ownership of certain businesses;
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difficulties in integrating with local payment providers,
including banks, credit and debit card networks, 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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challenges associated with joint venture relationships,
including dependence on our joint venture partners;
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difficulties in implementing and maintaining adequate internal
controls;
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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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different and more stringent user protection, data protection,
privacy and other laws;
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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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profit repatriation restrictions, foreign currency exchange
restrictions, and exchange rate fluctuations;
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volatility in a specific countrys or regions
political, economic or military conditions; and
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differing intellectual property laws.
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Some of these factors may cause our international costs of doing
business to exceed our comparable domestic costs. As we expand
our international operations and have additional portions of our
international revenues denominated in foreign currencies, we
also could become subject to increased difficulties in
collecting accounts receivable, repatriating money without
adverse tax consequences, and risks relating to foreign currency
exchange rate fluctuations. The impact of currency exchange rate
fluctuations is discussed in more detail under We are
exposed to fluctuations in currency exchange rates and interest
rates, above.
In addition, we conduct certain functions, including product
development, customer support and other operations, in regions
outside the U.S., particularly in India and China. We are
subject to both U.S. and local laws and regulations
applicable to our offshore activities, and any factors which
reduce the anticipated benefits, including cost efficiencies and
productivity improvements, associated with providing these
functions outside of the U.S. could adversely affect our
business.
We are continuing to expand PayPals services
internationally. In some countries, expansion of PayPals
business may require a close commercial relationship with one or
more local banks, a shared ownership interest with a local
entity or registration as a bank under local law. Such
requirements may reduce our profitability or limit the scope of
our activities in particular countries. 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 in January
2008 we acquired Fraud Sciences Ltd., an Israeli company. As a
result, political, economic and military conditions in Israel
affect those operations. The future of peace efforts between
Israel and its neighboring countries remains uncertain.
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 our
employees in Israel could be required to serve in the military
for extended periods of time under emergency circumstances. Our
Israeli operations could be disrupted by the absence of
employees due to military service, which could adversely affect
our business.
Acquisitions
and joint ventures could result in operating difficulties,
dilution, and other harmful consequences.
We have acquired a number of businesses in the past, including,
most recently, Den Blå Avis and Bilbasen, classified
businesses in Denmark. We also recently announced that we have
agreed to acquire Bill Me Later, Inc. 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;
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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;
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in the case of foreign acquisitions, the need to integrate
operations across different cultures and languages and to
address the particular economic, currency, political, and
regulatory risks associated with specific countries;
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in some cases, the need to transition operations, users, and
customers onto our existing platforms; and
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liability for activities of the acquired company before the
acquisition, including violations of laws, rules and
regulations, commercial disputes, tax liabilities and other
known and unknown liabilities.
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Moreover, we may not realize the anticipated benefits of any or
all of our acquisitions, or may not realize them in the time
frame expected. For example, in connection with the Skype
transaction, we recorded a goodwill impairment charge of
approximately $1.4 billion in our financial statements
during 2007. Future acquisitions or mergers may require us to
issue additional equity securities, spend our cash, or incur
debt, liabilities, amortization expenses related to intangible
assets or write-offs of goodwill, any of which could reduce our
profitability and harm our business.
In addition, we have made investments in certain joint ventures
in which we have a minority equity interest and lack management
and operational control. These investments in joint ventures may
involve risks, including the risk that the controlling joint
venture partner may have business interests, strategies or goals
that are inconsistent with ours, and the risk that business
decisions or other actions or omissions of the controlling joint
venture partner or the joint venture company may result in harm
to our reputation or adversely affect the value of our
investment in the joint venture.
Our
expected acquisition of Bill Me Later will expose us to new
risks.
We have signed an agreement to acquire Bill Me Later, Inc., a
company that provides transaction-based credit. The acquisition
is expected to close during the fourth quarter of 2008. Upon
acquiring Bill Me Later, we will be exposed to new risks,
including:
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risks of writedowns related to Bill Me Laters loan
portfolio (expected to exceed $500 million at closing);
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risks related to the willingness of consumers to borrow in the
current economic environment and risks related to Bill Me
Laters evaluation of the creditworthiness of such
consumers;
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risks that the nonpayment rate for Bill Me Laters loans
would increase as a result of worsening economic conditions,
higher unemployment rates, and other factors, which would lead
to increases in loan chargeoffs;
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any termination or interruption of services provided by certain
third parties to Bill Me Later, including payment processors and
gateways that process transactions for Bill Me Later and CIT
Bank, which funds the consumer loans at the point of sale, prior
to Bill Me Later purchasing the receivables;
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risks that top merchants may terminate their agreements with
Bill Me Later; and
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other risks similar to those faced by PayPal, including the risk
of systems failures, security breaches or other loss of customer
data, fraud, intellectual property claims, compliance failures,
and changes to regulations relating to credit offerings.
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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, or VAT, goods and services tax, business tax,
and gross receipt tax) to ecommerce businesses such as eBay and
to 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
ecommerce. 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. From time to time, some taxing
authorities have notified us that they believe we owe them
certain taxes. Most recently, the City of Chicago has notified
both eBay and StubHub that they are liable for a city amusement
tax on tickets to events in Chicago, irrespective of the
location of the buyer or seller, and has filed suit to enforce
collection of taxes they claim are due. The application of
similar existing 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 or communications through the Internet. These
proposals, if adopted, could substantially impair the growth of
ecommerce and our brands, and could diminish our opportunity to
derive financial benefit from our activities. The
U.S. federal governments moratorium on state and
local taxation of Internet access or multiple or discriminatory
taxes on ecommerce was extended through November 2014. This
moratorium does not prohibit federal, state, or local
authorities from collecting taxes on our income or from
collecting certain taxes that were in effect prior to the
enactment of the moratorium
and/or one
of its extensions.
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 without a robust small
business exemption 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 the federal government or
foreign countries may seek to impose a tax collection or
reporting or record-keeping obligation on companies that engage
in or facilitate ecommerce. Such an obligation could be imposed
by legislation intended to improve tax compliance (and
legislation to such effect has been discussed in the
U.S. Congress, several states, and a number of foreign
jurisdictions) or if an eBay company was ever deemed to be the
legal agent of the users of our services by a jurisdiction in
which eBay operates. In July 2008, the Housing and Economic
Recovery Act of 2008 (H.R. 3221) was signed into law. This
law contains provisions that require companies like PayPal to
report to the IRS information on payments received by some of
our customers. The legislation, effective for payments received
after December 31, 2010, will require PayPal and similar
companies to report to the IRS customers who receive more than
$20,000 in payments and more than 200 payments in a year. This
law will require PayPal to request tax ID numbers from users and
track payments by tax ID number. This requirement may decrease
seller activity and harm our business. One or more other
jurisdictions may also seek to impose tax-collection or
reporting obligations based on the location of the product or
service being sold or provided in an ecommerce transaction,
regardless of where the respective users are located. Imposition
of a discriminatory record keeping or tax collecting requirement
could decrease seller activity on our sites and 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
many jurisdictions for information regarding the transactions of
large classes of sellers on our sites, and in some cases we have
been legally obligated to provide this data. The imposition of
any requirements on us to disclose transaction records for all
or a class of sellers to tax or other regulatory authorities or
to file tax forms on behalf of any sellers, especially
requirements that are imposed on us but not on alternative means
of ecommerce, 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.
We pay input VAT on applicable taxable purchases within the
various countries in which we operate. In most cases, we are
entitled to reclaim input VAT from the various countries.
However, because of our unique business
52
model, the application of the laws and rules that allow such
reclamation is sometimes uncertain. A successful assertion by
one or more countries that we are not entitled to reclaim VAT
could 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 or tax-related reporting
requirements could harm our users 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.
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. Skype believes that its Internet
communications products are currently subject to few, if any, of
the same regulations that apply to traditional telephony and
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. However, the status of VoIP providers is uncertain
in many jurisdictions and Skype frequently must respond to
inquiries about its regulatory status. Regulatory agencies may
require Skype to conform to rules that are difficult or
impossible for it to comply with due to the nature of its
communications technologies, which could adversely affect its
business. For example, while suitable alternatives may be
developed in the future, Skype is currently unable to identify
the exact 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.
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. In addition, such fees may be assessed by
governments retroactively or prospectively. Skype may be
required 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 in the U.S. and similar
laws in other jurisdictions. 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 increasing growth and popularity of Internet communications
heightens the risk that governments will seek to regulate VoIP
and Internet communications, and Skype has received an
increasing number of inquiries from regulators about its
products and services. 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 beginning to
impose their own requirements and taxes on VoIP. Some countries
have prohibited Skype. In many countries in which Skype products
are available, 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.
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. In addition, increased regulatory
requirements on VoIP would increase Skypes costs, and, as
a result, our business would suffer.
New rules and regulations with respect to VoIP are being
considered in various countries around the world, and at least
some of these rules and regulations are likely to be adopted and
to be applicable to Skype. Such new rules and regulations are
likely to increase our costs of doing business and could prevent
us from delivering our products and offerings over the Internet,
which could adversely affect Skypes customer base, and
thus its revenue.
53
Skype
depends on key technology that is licensed from third
parties.
Skype licenses technology underlying certain key 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 video
compression/decompression used to provide high video quality.
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 or loss of service 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 license or
develop alternative technologies would harm Skypes
business. Skype and one of its licensors are currently
attempting to resolve a dispute concerning licensed technology.
Failure to successfully resolve this dispute would harm
Skypes business.
Our
businesses depend on continued and unimpeded access to the
Internet. Internet service providers may be able to block,
degrade, or charge us or our users additional fees for our
offerings.
Our customers rely on access to the Internet to use our products
and services. In many cases that access is provided by companies
that compete with at least some of our offerings, including
incumbent telephone companies, cable companies, mobile
communications companies, and large Internet service providers.
Some of these providers have stated that they may take measures
that could degrade, disrupt, or increase the cost of
customers use of 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
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 VoIP
offerings (which would include Skype) 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.
Our
tickets business is subject to regulatory, competitive, and
other risks that could harm this business.
Our tickets business, which includes our StubHub business, is
subject to numerous risks. Many jurisdictions have laws and
regulations covering the resale of event tickets, and some
jurisdictions prohibit the resale of event tickets at prices
above the face value of the tickets. In addition, new laws and
regulations may be passed that would limit our or our
users ability to continue this business. Regulatory
agencies or courts may claim or hold that we are responsible for
ensuring that our users comply with these laws and regulations
or that we or our users are either subject to licensure or
prohibited from reselling event tickets in their jurisdictions.
Some event organizers and professional sports teams have
expressed concern about the resale of their event tickets on our
sites. In November 2006, the New England Patriots filed suit
against StubHub alleging that StubHubs resale activities
violate Massachusetts ticket resale laws and constitute
intentional interference with the teams relationship with
its season ticket holders. In April 2007, Ticketmaster filed
suit against eBay d/b/a StubHub alleging that StubHub had
improperly interfered with Ticketmasters contracts with
its clients by wrongfully obtaining tickets for sale in
violation of Ticketmasters exclusive contractual rights to
sell such tickets. Such litigation could result in damage
awards, could require us to change our business practices in
harmful ways, or could otherwise negatively affect our tickets
business. Others have threatened litigation. Our tickets
business is also subject to seasonal fluctuations and the
general economic and business conditions that impact the
sporting events and live entertainment industries. Our tickets
business also faces significant competition from a number of
sources, including ticketing service companies (such as
TicketMaster and Tickets.com), event organizers (such as
professional sports teams and leagues), ticket brokers, and
other online and offline ticket resellers, such as TicketsNow
(which is owned by TicketMaster) and RazorGator. If we are
unable to effectively compete with these competitors,
54
our tickets business could be harmed. In addition, ticketing
service companies and event organizers have recently begun to
issue event tickets through paperless (electronic) ticketing
systems that include restrictions on the transferability of such
event tickets. To the extent that event tickets issued in this
manner cannot be resold on our websites, our tickets business
could be harmed.
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. We recently changed our
Chief Executive Officer and the heads of all three of our
business units. These changes may result in increased attrition
of our personnel as new reporting relationships are established
and as other companies may increasingly target our executives.
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 many members of our senior
management team have fully vested the vast majority of their
in-the-money equity incentives. The loss of the services of any
of our executive officers or other key employees could harm our
business. 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
equity awards 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.
In October 2008, we announced our plans to reduce our global
workforce to simplify and streamline our organization, improve
our cost structure and strengthen our overall businesses. These
changes will result in the recording of related accounting
charges and could harm employee morale and productivity and be
disruptive to our business.
Problems
with or price increases by third parties who provide services to
us or to our users could harm our business.
A number of parties provide services to us or to our users that
benefit us. Such services include seller tools that automate and
manage listings, merchant tools that manage listings and
interface with inventory management software, storefronts that
help our users list items, caching services that make our sites
load faster, and shipping providers that deliver goods sold on
our platform, 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.
PayPal is dependent on the processing companies and banks that
link PayPal to the credit card and bank clearing networks.
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 or payments on our websites more difficult, and
thereby harm our business. Price increases by companies that
provide services to our users could also reduce the number of
listings on our websites or make it more difficult for our users
to complete transactions, thereby harming our business. For
example, we believe recent changes in postal rates may have
reduced listing volume on our sites in certain categories. Any
security breach at one of these companies could also affect our
customers and harm our business. In addition, we have outsourced
certain functions to third-party outside providers, including
customer support and product development functions, which are
critical to our operations. If our service providers do not
perform satisfactorily, our operations could be disrupted, which
could result in user dissatisfaction and adversely affect our
business, reputation and operating results. Although we
generally have been able to renew or extend the terms of
contractual arrangements with third parties who provide services
to us on acceptable terms, there can be no assurance that we
will continue to be able to do so in the future, and there can
be no assurance that third parties who provide services directly
to our users will continue to do so at reasonable rates or at
all.
55
Customer
complaints or negative publicity about our customer support or
anti-fraud measures could diminish use of our
services.
Customer complaints or negative publicity about our customer
support 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 have the potential to
damage relations with our customers or decrease activity on our
sites by making our sites more difficult to use or restricting
the activities of certain users. These measures heighten the
need for prompt and accurate customer support to resolve
irregularities and disputes. Effective customer support requires
significant personnel expense, and this expense, if not managed
properly, could significantly impact our profitability. Failure
to manage or train our customer support 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 support and must resolve
certain customer contacts within shorter time frames. As part of
PayPals program to reduce fraud losses and prevent money
laundering, it may temporarily restrict the ability of customers
to withdraw their funds if those funds or the customers
account activity are identified by PayPals risk models as
suspicious. PayPal has in the past received negative publicity
with respect to its customer support 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. As a result,
current and future revenues could suffer, and its operating
margins may decrease. In addition, negative publicity about or
experiences with customer support for Marketplaces, PayPal or
Skype could cause our reputation to suffer or affect consumer
confidence in our brands as a whole.
Our
industry is intensely competitive, and other companies or
governmental agencies may allege that our behavior is
anti-competitive.
Marketplaces
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, including small
businesses who want to create and promote their own stores, can
easily launch online sites at a nominal cost using commercially
available software or partnering with any one of a number of
successful ecommerce 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. Among others, these include:
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 offer a variety of services that provide
channels for buyers to find and buy items from sellers of all
sizes, including online aggregation and classifieds websites
such as craigslist (in which we own a minority equity stake),
Google Base, Microsoft Live Expo, and Oodle.com. Our Kijiji
websites offers classifieds listings in a variety of local
international markets, and in July 2007, Kijiji launched local
classifieds websites in the U.S. In many markets in which
it operates, including in the U.S., our classified platforms
compete against more established online and offline classifieds
platforms.
In 2005, we acquired Shopping.com Ltd., an online shopping
comparison site. Shopping.com competes with sites such as
Buy.com, Googles Product Search, Nextag.com,
Pricegrabber.com, Shopzilla, and Yahoo! Product Search, which
offer shopping search engines that allow consumers to search the
Internet for specified products. Recent legal developments may
affect the utility of shopping comparison sites if manufacturers
begin requiring
56
more uniformity in product pricing. In addition, 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 websites. For example,
category-specific competitors to offerings in our
Clothing & Accessories category include,
among others, Abercrombie & Fitch, AE.com,
Bloomingdales, Bluefly.com, Coldwater-Creek.com,
Delias.com, Dockers.com, DSW, Eddie Bauer, eBags, eLuxury, The
Gap, J.C. Penney, J. Crew, Kohls, Lands End, Lane
Bryant, The Limited, LL Bean, Macys, The Mens
Wearhouse, Neiman-Marcus, Nike, Nordstrom, Old Navy,
Overstock.com, Payless, Ross, Saks Fifth Avenue, Shoes.com,
Urban Outfitters, Victorias Secret, Yoox.com, and
Zappos.com., as well as other online and offline retailers,
stores and shopping networks.
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
ecommerce sites, such as Quelle and Otto in Germany, Tradus
(recently acquired by Naspers) in Poland, Yahoo-Kimo in Taiwan,
Lotte and Gmarket in South Korea, OZtion and Aussie Bidder in
Australia, 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 and retain buyers and sellers;
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volume of transactions and price and selection of goods;
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customer service; and
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brand recognition.
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With respect to our online competition, additional competitive
factors include:
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community cohesion, interaction and size;
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website ease-of-use and accessibility;
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level of trust in the seller;
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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.
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Some current and potential competitors have longer operating
histories, larger customer bases and greater brand recognition
in other business and Internet sectors than we do. Other online
trading services may be acquired by, receive investments from,
or enter into other commercial relationships with
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-
57
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, in January 2008, we announced significant changes to
our Marketplaces business in three major areas: fee structure,
seller incentives and standards, and buyer and seller feedback.
In March 2008, we announced that beginning in June 2008, we
would require users in the UK to offer PayPal as one option as a
method of payment on most transactions on our localized UK
website, and in April 2008, we announced that we planned to
require users in Australia to offer and use PayPal as the
exclusive method of payment on most transactions on our
localized Australian website. In June 2008, the Australian
Competition and Consumer Commission (ACCC) issued a draft notice
precluding us from requiring PayPal to be used as the exclusive
payment option for transactions on our localized Australian
website. In July 2008, we withdrew our notification to the ACCC.
In August 2008, we announced that beginning in late October
2008, we will no longer allow any forms of paper payment,
including checks and money orders, to be used on eBay.com in the
U.S. for most categories of items. While these initiatives
are intended to improve and make safer our users buying
experience
and/or
increase activity on our sites, certain users may be negatively
affected by or react negatively to these changes. We currently
face inquiries from government regulators in various
jurisdictions related to actions that we have taken that are
designed to improve the safety of transactions on our websites,
most notably by requiring PayPal to be offered
and/or used
for certain high-risk transactions
and/or by
sellers in certain jurisdictions, and we may face similar
inquiries from other government regulators in the future. Any
negative reaction to these changes by our users or government
authorities could, among other things, force us to change our
operating practices in ways that could harm our business,
operating results and profitability. 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 sellers 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 are
increasingly becoming 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.
PayPal
The markets for PayPals product are intensely competitive
and are subject to rapid technological change, including but not
limited to: mobile payments, electronic funds transfer networks
starting to allow Internet access, cross-border access to
networks, creation of new networks, expansion of prepaid cards,
and bill pay networks. PayPal competes with existing online and
offline payment methods, including, among others:
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credit card merchant processors that offer their services to
online merchants, including American Express, Cardservice
International, Chase Paymentech, First Data, and Wells Fargo;
and payment gateways, including CyberSource and Authorize.net
(which has merged with CyberSource);
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money remitters such as MoneyGram and Western Union;
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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, eBillMe, Revolution Money and
TeleCheck, a subsidiary of First Data, or to pay on credit,
including Bill Me Later (which we have agreed to acquire);
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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 GreenDot;
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mobile payments, including Obopay, TextPayMe (a subsidiary of
Amazon), Crandy, LUUP and Payforit;
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Amazon Payments, which acts as a credit processor and can be
linked to a personal bank account; and
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Google Checkout, which enables the online payment of merchants
using credit cards.
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Some of these competitors have longer operating histories,
significantly greater financial, technical, marketing, customer
service and other resources, greater name recognition, or a
larger base of customers in affiliated businesses than PayPal.
PayPals competitors may respond to new or emerging
technologies and changes in customer requirements faster and
more effectively than PayPal. Some of these competitors may also
be subject to lesser licensing, anti-money laundering, and other
regulatory requirements than PayPal, which is subject to
additional regulations based on its licensure as a bank in
Luxembourg. They may devote greater resources to the
development, promotion, and sale of products and services than
PayPal, and they may offer lower prices. For example, Google
Checkout provided free payment processing promotion through
February 1, 2008, and currently offers free payments
processing on transactions in an amount proportionate to certain
advertising spending with Google. 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, Royal Bank of Scotlands World
Pay and ClickandBuy in the EU, NOCHEX, Moneybookers, NETeller
and FirePay in the United Kingdom, CertaPay and HyperWallet in
Canada, Paymate and BPay in Australia, Alipay, YeePay, 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.
Some of PayPals competitors, such as Wells Fargo, First
Data, American Express, and Royal Bank of Scotland, also provide
processing or foreign exchange services to PayPal. If PayPal
were to seek to expand the financial products that it offers,
either alone or through a commercial alliance or an acquisition,
these processing and foreign exchange relationships could be
negatively affected, or these competitors and other processors
could make it more difficult for PayPal to deliver its services.
Skype
The market for Skypes products is also intensely
competitive and characterized by rapid technological change. We
expect Skypes various communications competitors,
including, for example, the providers of online communications
products and telecommunications operators, 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, which could lower Skypes
adoption rates, decrease its ability to attract new users or
cause its current users to migrate to a competing company.
Additionally, several 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.
59
If we
are unable to operate our new in-house global affiliate platform
in an effective and efficient manner, our business could
suffer.
Under our affiliate programs, affiliates and website publishers
are paid for traffic driven to our websites. Our affiliate
programs were previously run externally through a third-party
platform. In April 2008, we launched our new global affiliate
platform, the eBay Partner Network, which is managed and
operated internally. If we are unable to transition our
affiliate programs in-house in a timely and effective manner,
this could result in dissatisfaction on the part of our
affiliates
and/or a
reduction in traffic to our websites, which could adversely
affect our business and operating results. In addition, we may
incur substantial costs associated with implementing and
operating the eBay Partner Network, including costs
associated with implementing appropriate internal controls and
procedures with respect to the new platform. If we are unable to
operate the eBay Partner Network as planned, our results of
operations, business and reputation may be adversely affected.
We are also exposed to the risk of fraud by our affiliates
(including click fraud or other clicks or conversions) in our
affiliates program, which may result in inflated traffic to our
websites
and/or lower
quality traffic. If we are unable to detect and prevent any such
fraud by our affiliates in a timely and effective manner, our
profitability may be negatively impacted.
Our
business may be adversely affected by factors that cause 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.
Our
failure to cost effectively manage certain aspects of our
business could harm us.
We have expanded our headcount, facilities, and infrastructure
in the U.S. and internationally, and anticipate that
further expansion will be required as we continue to expand into
new lines of business and geographic areas. This expansion has
placed, and we expect it will continue to place, a significant
strain on our management, operational, and financial resources.
The areas that are put under strain by our growth include the
following:
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Website Usability. User activity rates on our
websites depend in part on the quality of our users
experiences on those sites. The rapid growth in the number and
complexity of products and features on our sites has
occasionally caused users to become confused or overwhelmed or
has otherwise impaired users experiences on those sites.
We are in the process of making numerous improvements to our
eBay websites, including an attempt to improve the user
experience on those websites. These attempts at improvement
could fail, or could decrease activity among users who had grown
used to or preferred the existing experience on our sites. Any
impairment of customer satisfaction as a result of site
usability issues could lead to a loss of customers or impair our
ability to add customers, either of which would harm our
business.
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Website Stability. 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
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60
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developed or purchased technologies or businesses with our
existing systems, and any failure to do so could result in
problems on our sites. 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. 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 effectively hire, train, and manage new
employees. 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
will 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.
We may
have exposure to greater than anticipated tax
liabilities.
The determination of our worldwide provision for income taxes
and other tax liabilities requires estimation and significant
judgment and there are many transactions and calculations where
the ultimate tax determination is uncertain. Our determination
of our tax liability is always subject to audit and review by
applicable domestic and foreign tax authorities, and we are
currently undergoing a number of such audits and reviews by
taxing authorities throughout the world. Any adverse outcome of
any such audit or review could have a negative effect on our
operating results and financial condition. Although we believe
our estimates are reasonable, the ultimate tax outcome may
differ from the amounts recorded in our financial statements and
may materially affect our financial results in the period or
periods for which such determination is made.
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 and may prefer Internet analogues to such
traditional retail means to our offerings, such as the
retailers own website. 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.
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
61
similar programs may harm the performance of the Internet. The
backbone computers of the Internet have been the targets of such
programs. The Internet has experienced a variety of outages and
other delays as a result of damage to portions of its
infrastructure, and it could face outages and delays in the
future. These outages and delays could reduce the level of
Internet usage generally as well as the level of usage of our
services.
We may
be unable to protect or enforce our own intellectual property
rights adequately.
We regard the protection of our trademarks, copyrights, patents,
domain names, trade dress, and trade secrets as critical to our
success. We aggressively protect our intellectual property
rights by relying on a federal, state and common law rights, as
well as a variety of administrative procedures. 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 these oppositions to Skypes applications were to be
successful, Skypes ability to protect its brand against
third-party infringers would be compromised. 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.
We are
subject to the risks of owning real property.
We own real property, including land and buildings related to
our operations. We have little experience in managing real
property. Ownership of this property subjects us to risks,
including:
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the possibility of environmental contamination and the costs
associated with fixing any environmental problems;
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adverse changes in the value of these properties, due to
interest rate changes, changes in the neighborhoods in which the
properties are located, or other factors;
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the possible need for structural improvements in order to comply
with zoning, seismic, disability act, or other
requirements; and
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possible disputes with tenants, neighboring owners, or others.
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Some
anti-takeover provisions may affect the price of our common
stock.
Our Board of Directors has the authority to issue up to
10,000,000 shares of preferred stock and to determine the
preferences, rights and privileges of those shares without any
further vote or action by the stockholders. The rights of the
holders of common stock may be harmed by rights granted to the
holders of any preferred stock that may be issued in the future.
Some provisions of our certificate of incorporation and bylaws
could have the effect of making it more difficult for a
potential acquirer to acquire a majority of our outstanding
voting stock. These include provisions that provide for a
classified board of directors, prohibit stockholders from taking
action by written consent and restrict the ability of
stockholders to call special meetings. We are also subject to
provisions of Delaware law that prohibit us from engaging in any
business combination with any interested stockholder for a
period of three years from the date the person became an
interested stockholder, unless certain conditions are met. This
restriction could have the effect of delaying or preventing a
change of control.
62
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Item 2:
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Unregistered
Sales of Equity Securities and Use of Proceeds
|
Stock repurchase activity during the three months ended
September 30, 2008 was as follows:
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Total Number of
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Maximum Dollar
|
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|
Total Number of
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Average
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Shares Purchased as
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Value that May Yet
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Shares
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Price Paid
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Part of Publicly
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be Purchased Under
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Period
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Purchased(2)
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per Share
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Announced Programs
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the Programs(1)
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July 1, 2008-July 31, 2008
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2,683,473
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$
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24.65
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2,682,132
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$
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1,213,090,493
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August 1, 2008-August 30, 2008
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18,624,369
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$
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25.48
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18,584,437
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$
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738,993,973
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September 1, 2008-September 30, 2008
|
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3,559,000
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|
$
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23.17
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3,559,000
|
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|
$
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656,500,143
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24,866,842
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24,825,569
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(1) |
|
In July 2006, our Board authorized a stock repurchase program
for up to $2.0 billion of our common stock within two years
from the date of authorization. In January 2007, our Board
authorized the expansion of this stock repurchase program to
provide for the repurchase of up to an additional
$2.0 billion of our common stock by January 2009. In
January 2008, our Board authorized another stock repurchase
program to provide for the repurchase of up to an additional
$2.0 billion of our common stock with no expiration from
the date of authorization. Under these programs, as of
September 30, 2008, we had repurchased in the aggregate
approximately $5.3 billion of our common stock at an
average price of $29.74 per share. As of September 30,
2008, $656.5 million remained available for further
repurchases under the stock repurchase program authorized by the
Board in January 2008. |
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(2) |
|
Includes 1,341 and 39,932 shares of stock withheld from
employees to satisfy tax obligations in July and August 2008,
respectively. |
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Item 3:
|
Defaults
Upon Senior Securities
|
Not applicable.
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Item 4:
|
Submission
of Matters to a Vote of Security Holders
|
None
|
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Item 5:
|
Other
Information
|
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 or other permitted services not
related to the services performed by PwC as our independent
registered public accounting firm, our internal finance
personnel will prepare a summary of the proposed engagement,
detailing the nature of the engagement, the reasons why PwC is
the preferred provider of such services and the estimated
duration and cost of the engagement. The report will be provided
to our Audit Committee or a designated committee member, who
will evaluate whether the proposed engagement will interfere
with the independence of PwC in the performance of its auditing
services. We intend to disclose all approved non-audit
engagements in the appropriate quarterly report on
Form 10-Q
or annual report on
Form 10-K.
During the quarter ended September 30, 2008 there were no
pre-approvals of any non-audit engagement work to be performed
by PwC.
63
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|
|
|
|
Exhibit 3
|
.01*
|
|
Registrants Amended and Restated Bylaws.
|
|
Exhibit 10
|
.01+
|
|
Letter Agreement dated September 30, 2008 between
Robert Swan and Registrant.
|
|
Exhibit 10
|
.02+
|
|
Separation Agreement dated August 21, 2008 between Rajiv
Dutta and Registrant.
|
|
Exhibit 10
|
.03
|
|
Second Amendment Agreement dated September 5, 2008, by and
among Registrant, Bank of America, N.A., as Administrative
Agent, and other lenders named from time to time therein.
|
|
Exhibit 12
|
.01
|
|
Statement regarding computation of ratio of earnings to fixed
charges.
|
|
Exhibit 31
|
.01
|
|
Certification of eBays Chief Executive Officer, as
required by Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
Exhibit 31
|
.02
|
|
Certification of eBays Chief Financial Officer, as
required by Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
Exhibit 32
|
.01
|
|
Certification of eBays Chief Executive Officer, as
required by Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
Exhibit 32
|
.02
|
|
Certification of eBays Chief Financial Officer, as
required by Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
* |
|
Filed as an exhibit to Registrants Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
October 3, 2008, and incorporated herein by reference |
|
+ |
|
Indicates a management contract or compensatory plan or
arrangement |
64
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
eBay Inc.
Principal Executive Officer:
John Donahoe
President and Chief Executive Officer
Date: October 22, 2008
Principal Financial Officer:
Robert H. Swan
Senior Vice President and Chief Financial Officer
Date: October 22, 2008
Principal Accounting Officer:
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By:
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/s/ Phillip
P. DePaul
|
Phillip P. DePaul
Vice President, Chief Accounting Officer
Date: October 22, 2008
65
INDEX TO
EXHIBITS
|
|
|
|
|
|
Exhibit 3
|
.01*
|
|
Registrants Amended and Restated Bylaws.
|
|
Exhibit 10
|
.01+
|
|
Letter Agreement dated September 30, 2008 between
Robert Swan and Registrant.
|
|
Exhibit 10
|
.02+
|
|
Separation Agreement dated August 21, 2008 between Rajiv
Dutta and Registrant.
|
|
Exhibit 10
|
.03
|
|
Second Amendment Agreement dated September 5, 2008, by and
among Registrant, Bank of America, N.A., as Administrative
Agent, and other lenders named from time to time therein.
|
|
Exhibit 12
|
.01
|
|
Statement regarding computation of ratio of earnings to fixed
charges.
|
|
Exhibit 31
|
.01
|
|
Certification of eBays Chief Executive Officer, as
required by Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
Exhibit 31
|
.02
|
|
Certification of eBays Chief Financial Officer, as
required by Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
Exhibit 32
|
.01
|
|
Certification of eBays Chief Executive Officer, as
required by Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
Exhibit 32
|
.02
|
|
Certification of eBays Chief Financial Officer, as
required by Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
* |
|
Filed as an exhibit to Registrants Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
October 3, 2008, and incorporated herein by reference |
|
+ |
|
Indicates a management contract or compensatory plan or
arrangement |