e10vqza
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
(Amendment No. 1)
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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 March 31, 2006 |
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or |
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to |
Commission file number 000-24821
eBay Inc.
(Exact name of registrant as specified in its charter)
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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
(Address of principal executive offices) |
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95125
(Zip Code) |
(408) 376-7400
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2 of the
Exchange Act (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Exchange
Act). Yes o No þ
As of April 21, 2006, there were 1,410,109,123 shares
of the registrants common stock, $0.001 par value,
outstanding, which is the only class of common or voting stock
of the registrant issued.
EXPLANATORY NOTE
eBay Inc. is filing this Amendment No. 1 to its Quarterly
Report on Form 10-Q for the quarterly period ended
March 31, 2006, as filed with the Securities and Exchange
Commission on April 24, 2006, to correct an error in our
narrative description of the impact of foreign currency exchange
rates on net revenues and operating expenses during the first
quarter of 2006, as compared to the same period of the prior
year, on pages 25, 26, 31, and 42 of the Quarterly Report. eBay
Inc.s previously filed financial statements remain
unchanged.
TABLE OF CONTENTS
PART I: FINANCIAL
INFORMATION
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Item 1: |
Financial Statements |
eBay Inc.
CONDENSED CONSOLIDATED BALANCE SHEET
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December 31, | |
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March 31, | |
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2005 | |
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2006 | |
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(In thousands, except | |
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par value amounts) | |
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(Unaudited) | |
ASSETS |
Current assets:
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Cash and cash equivalents
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$ |
1,313,580 |
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$ |
1,876,434 |
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Short-term investments
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774,650 |
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828,049 |
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Accounts receivable, net
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322,788 |
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318,878 |
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Funds receivable from customers
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255,282 |
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225,295 |
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Restricted cash and investments
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29,702 |
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30,755 |
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Other current assets
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487,235 |
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620,832 |
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Total current assets
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3,183,237 |
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3,900,243 |
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Long-term investments
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825,667 |
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793,497 |
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Property and equipment, net
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801,602 |
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860,493 |
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Goodwill
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6,120,079 |
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6,205,075 |
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Intangible assets, net
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823,280 |
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781,988 |
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Other assets
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35,121 |
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27,239 |
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Total assets
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$ |
11,788,986 |
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$ |
12,568,535 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities:
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Accounts payable
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$ |
55,692 |
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$ |
101,157 |
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Funds payable and amounts due to customers
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586,651 |
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660,838 |
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Accrued expenses and other current liabilities
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578,557 |
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589,665 |
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Deferred revenue and customer advances
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81,940 |
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90,965 |
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Income taxes payable
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182,095 |
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238,883 |
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Total current liabilities
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1,484,935 |
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1,681,508 |
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Deferred tax liabilities, net
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215,682 |
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220,430 |
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Other liabilities
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40,388 |
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39,797 |
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Total liabilities
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1,741,005 |
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1,941,735 |
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Stockholders equity:
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Common Stock, $0.001 par value; 3,580,000 shares
authorized; 1,404,183 and 1,409,069 shares issued and
outstanding
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1,404 |
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1,409 |
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Additional paid-in capital
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7,272,476 |
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7,429,377 |
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Unearned stock-based compensation
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(45,540 |
) |
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Retained earnings
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2,716,511 |
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2,964,793 |
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Accumulated other comprehensive income
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103,130 |
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231,221 |
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Total stockholders equity
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10,047,981 |
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10,626,800 |
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Total liabilities and stockholders equity
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$ |
11,788,986 |
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$ |
12,568,535 |
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
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Three Months Ended | |
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March 31, | |
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2005 | |
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2006 | |
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(In thousands, except | |
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per share amounts) | |
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(Unaudited) | |
Net revenues
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$ |
1,031,724 |
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$ |
1,390,419 |
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Cost of net revenues(1)
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186,369 |
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278,568 |
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Gross profit
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845,355 |
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1,111,851 |
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Operating expenses(1):
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Sales and marketing
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271,349 |
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400,562 |
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Product development
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73,789 |
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119,070 |
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General and administrative
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136,389 |
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215,350 |
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Payroll tax on employee stock options
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5,731 |
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2,324 |
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Amortization of acquired intangible assets
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22,523 |
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51,921 |
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Total operating expenses
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509,781 |
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789,227 |
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Income from operations
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335,574 |
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322,624 |
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Interest and other income, net
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22,403 |
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25,760 |
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Interest expense
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(1,720 |
) |
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(747 |
) |
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Income before income taxes and minority interests
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356,257 |
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347,637 |
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Provision for income taxes
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(99,948 |
) |
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(99,354 |
) |
Minority interests
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(18 |
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(1 |
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Net income
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$ |
256,291 |
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$ |
248,282 |
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Net income per share:
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Basic
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$ |
0.19 |
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$ |
0.18 |
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Diluted
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$ |
0.19 |
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$ |
0.17 |
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Weighted average shares:
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Basic
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1,343,442 |
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1,406,309 |
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Diluted
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1,382,150 |
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1,437,581 |
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(1) Includes stock-based compensation as follows (2006
increases are due primarily to the adoption of FAS 123(R)):
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Cost of net revenues
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$ |
78 |
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$ |
9,476 |
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Sales and marketing
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24,721 |
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Product development
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322 |
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20,701 |
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General and administrative
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3,196 |
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28,920 |
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Total stock-based compensation
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$ |
3,596 |
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$ |
83,818 |
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
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Three Months Ended | |
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March 31, | |
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2005 | |
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2006 | |
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(In thousands) | |
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(Unaudited) | |
Net income
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$ |
256,291 |
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$ |
248,282 |
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Other comprehensive income (loss):
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Foreign currency translation
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(13,687 |
) |
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127,533 |
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Unrealized gains (losses) on investments, net
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(4,818 |
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2,592 |
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Unrealized gains (losses) on cash flow hedges
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1,414 |
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(1,564 |
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Estimated tax benefit (provision)
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1,314 |
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(470 |
) |
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Net change in accumulated other comprehensive income (loss)
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(15,777 |
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128,091 |
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Comprehensive income
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$ |
240,514 |
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$ |
376,373 |
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
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Three Months Ended | |
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March 31, | |
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2005 | |
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2006 | |
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(In thousands) | |
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(Unaudited) | |
Cash flows from operating activities:
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Net income
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$ |
256,291 |
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$ |
248,282 |
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Adjustments:
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Provision for doubtful accounts and authorized credits
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22,024 |
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27,047 |
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Provision for transaction losses
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18,579 |
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25,627 |
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Depreciation and amortization
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79,660 |
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123,286 |
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Stock based compensation expense related to stock options and
employee stock purchases
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3,596 |
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83,818 |
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Tax benefit on the exercise of employee stock options
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84,992 |
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37,442 |
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Excess tax benefits from stock-based compensation
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(23,372 |
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Minority interests
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18 |
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1 |
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Changes in assets and liabilities, net of acquisition effects:
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Accounts receivable
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(54,162 |
) |
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(22,901 |
) |
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Funds receivable from customers
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(77,333 |
) |
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29,748 |
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Other current assets
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1,203 |
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(117,726 |
) |
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Other non-current assets
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(8,361 |
) |
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7,263 |
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Deferred tax liabilities, net
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2,240 |
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(7,500 |
) |
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Accounts payable
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20,909 |
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|
51,956 |
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Funds payable and amounts due to customers
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168,928 |
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|
74,331 |
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Accrued expenses and other liabilities
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(21,838 |
) |
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(18,761 |
) |
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Deferred revenue and customer advances
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(6,975 |
) |
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9,023 |
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Income taxes payable
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5,648 |
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56,640 |
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Net cash provided by operating activities
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495,419 |
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584,204 |
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Cash flows from investing activities:
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Purchases of property and equipment, net
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(79,584 |
) |
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(133,576 |
) |
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Purchases of investments
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(368,094 |
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(378,087 |
) |
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Maturities and sales of investments
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245,665 |
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365,777 |
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Acquisitions, net of cash acquired
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(445,008 |
) |
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Net cash used in investing activities
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(647,021 |
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(145,886 |
) |
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Cash flows from financing activities:
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Proceeds from issuance of common stock, net
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179,279 |
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|
80,606 |
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Excess tax benefits from stock-based compensation
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23,372 |
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Payment of headquarters lease facility obligation
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(126,390 |
) |
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Principal payments on long-term obligations
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(1,849 |
) |
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Net cash provided by financing activities
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|
51,040 |
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|
103,978 |
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Effect of exchange rate changes on cash and cash equivalents
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(12,711 |
) |
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|
20,558 |
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Net increase (decrease) in cash and cash equivalents
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|
(113,273 |
) |
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|
562,854 |
|
Cash and cash equivalents at beginning of period
|
|
|
1,330,045 |
|
|
|
1,313,580 |
|
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Cash and cash equivalents at end of period
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|
$ |
1,216,772 |
|
|
$ |
1,876,434 |
|
|
|
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|
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|
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
eBay Inc. (eBay) was incorporated in California in
May 1996, and reincorporated in Delaware in April 1998. eBay,
together with its subsidiaries, pioneers new communities around
the world, built on commerce, sustained by trust, and inspired
by opportunity. eBay brings together millions of buyers and
sellers every day on a local, national and international basis
through an array of websites. eBay provides online marketplaces
for the sale of goods and services, online payment services and
online communication offerings to a diverse community of
individuals and businesses.
eBay currently has three primary businesses: the eBay
Marketplaces, Payments and Communications. The eBay Marketplaces
segments provide the infrastructure to enable online commerce in
a variety of formats, including the traditional auction
platform, along with our other online platforms, such as
Rent.com, Shopping.com, Kijiji, mobile.de, and Marktplaats.nl.
The Payments segment, which consists of our PayPal, Inc.
(PayPal) business, enables individuals or businesses
to securely, easily and quickly send and receive payments
online. The Communications segment, which consists of our Skype
Technologies SA (Skype) business, enables Voice over
Internet Protocol (VoIP) calls between Skype users,
as well as provides low-cost connectivity to traditional
fixed-line and mobile telephones.
When we refer to we, our, us
or eBay in this document, we mean the current
Delaware corporation (eBay Inc.) and its California predecessor,
as well as all of our consolidated subsidiaries.
The preparation of consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. On an
ongoing basis, we evaluate our estimates, including those
related to provisions for doubtful accounts and authorized
credits, the provision for transaction losses, legal
contingencies, income taxes, advertising and other
non-transaction revenues, stock-based compensation expense and
goodwill and intangible assets. We base our estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. Actual
results could differ from those estimates.
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|
Principles of consolidation and basis of
presentation |
The accompanying financial statements are consolidated and
include the financial statements of eBay and our majority-owned
subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
The consolidated financial statements include 100% of the assets
and liabilities of these majority-owned subsidiaries and the
ownership interests of minority investors are recorded as
minority interests. Investments in entities where we hold more
than a 20% but less than a 50% ownership interest and have the
ability to significantly influence the operations of the
investee are accounted for using the equity method of accounting
and the investment balance is included in long-term investments,
while our share of the investees results of operations is
included in interest and other income, net. For the three month
period ended March 31, 2006 and 2005, the equity method
income recorded in interest and other income, net were not
material to the Companys operating results. Investments in
entities where we hold less than a 20% ownership interest and
where we do not have the ability to significantly influence the
operations of the investee are accounted for using the cost
method of accounting and are included in long-term investments.
6
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
These unaudited interim financial statements reflect our
condensed consolidated financial position as of
December 31, 2005 and March 31, 2006. These statements
also show our condensed consolidated statement of income for the
three months ended March 31, 2005 and 2006 and our
condensed consolidated statement of cash flows for the three
months ended March 31, 2005 and 2006. These statements
include all normal recurring adjustments that we believe are
necessary to fairly state our financial position, operating
results and cash flows. Because all of the disclosures required
by generally accepted accounting principles in the United States
of America for annual consolidated financial statements are not
included herein, these interim financial statements should be
read in conjunction with the audited financial statements and
the notes thereto for the year ended December 31, 2005,
included in our Annual Report on
Form 10-K filed
with the Securities and Exchange Commission on February 23,
2006. The condensed consolidated statements of income and cash
flows for the periods presented are not necessarily indicative
of results that we expect for any future period.
Certain prior period balances have been reclassified to conform
to the current period presentation.
On January 1, 2006, we adopted Financial Accounting
Standards No. 123 (revised 2004), Share-Based
Payment (FAS 123(R)), that addresses the accounting
for share-based payment transactions in which an enterprise
receives employee services in exchange for either equity
instruments of the enterprise or liabilities that are based on
the fair value of the enterprises equity instruments or
that may be settled by the issuance of such equity instruments.
The statement eliminates the ability to account for share-based
compensation transactions, as we formerly did, using the
intrinsic value method as prescribed by Accounting Principles
Board, or APB, Opinion No. 25, Accounting for Stock
Issued to Employees, and generally requires that such
transactions be accounted for using a fair-value-based method
and recognized as expenses in our consolidated statement of
income.
We adopted FAS 123(R) using the modified prospective method
which requires the application of the accounting standard as of
January 1, 2006. Our consolidated financial statements as
of and for the first quarter of 2006 reflect the impact of
adopting FAS 123(R). In accordance with the modified
prospective method, the consolidated financial statements for
prior periods have not been restated to reflect, and do not
include, the impact of FAS 123(R). See Note 7
Stock-based Benefit Plans for further details.
Stock-based compensation expense recognized during the period is
based on the value of the portion of stock-based payment awards
that is ultimately expected to vest. Stock-based compensation
expense recognized in the condensed consolidated statement of
operations during the first quarter of 2006 included
compensation expense for stock-based payment awards granted
prior to, but not yet vested, as of December 31, 2005 based
on the grant date fair value estimated in accordance with the
pro forma provisions of FAS 148 and compensation expense
for the stock-based payment awards granted subsequent to
December 31, 2005, based on the grant date fair value
estimated in accordance with FAS 123(R). As stock-based
compensation expense recognized in the statement of income for
the first quarter of 2006 is based on awards ultimately expected
to vest, it has been reduced for estimated forfeitures.
FAS 123(R) requires forfeitures to be estimated at the time
of grant and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates. In the pro forma
information required under FAS 148 for the periods prior to
2006, we accounted for forfeitures as they occurred.
7
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 2 Net Income Per Share
Basic net income per share is computed by dividing the net
income for the period by the weighted average number of common
shares outstanding during the period. Diluted net income per
share is computed by dividing the net income for the period by
the weighted average number of shares of common stock and
potentially dilutive common stock outstanding during the period.
The dilutive effect of outstanding options and restricted stock
is reflected in diluted earnings per share by application of the
treasury stock method, which in the current period includes
consideration of stock-based compensation required by
FAS 123(R). The following table sets forth the computation
of basic and diluted net income per share for the periods
indicated (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2005 | |
|
2006 | |
|
|
| |
|
| |
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
256,291 |
|
|
$ |
248,282 |
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
1,343,582 |
|
|
|
1,406,449 |
|
|
Weighted average unvested restricted common stock subject to
repurchase
|
|
|
(140 |
) |
|
|
(140 |
) |
|
|
|
|
|
|
|
|
|
Denominator for basic calculation
|
|
|
1,343,442 |
|
|
|
1,406,309 |
|
|
Weighted average effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Weighted average unvested restricted common stock subject to
repurchase
|
|
|
140 |
|
|
|
140 |
|
|
Employee stock options
|
|
|
38,568 |
|
|
|
31,132 |
|
|
|
|
|
|
|
|
|
|
Denominator for diluted calculation
|
|
|
1,382,150 |
|
|
|
1,437,581 |
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.19 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.19 |
|
|
$ |
0.17 |
|
|
|
|
|
|
|
|
The calculation of diluted net income per share excludes all
anti-dilutive shares. For the three months ended March 31,
2005 and 2006, the number of anti-dilutive shares, as calculated
based on the weighted average closing price of our common stock
for the period, amounted to approximately 15.8 million and
36.8 million shares, respectively.
Note 3 Business Combinations, Goodwill and
Intangible Assets
The following table presents goodwill balances and the movements
for each of our reportable segments during the three months
ended March 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
Goodwill |
|
|
|
March 31, | |
|
|
2005 | |
|
Acquired |
|
Adjustments | |
|
2006 | |
|
|
| |
|
|
|
| |
|
| |
Reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Marketplaces
|
|
$ |
961,081 |
|
|
$ |
|
|
|
$ |
(6,849 |
) |
|
$ |
954,232 |
|
|
International Marketplaces
|
|
|
1,525,789 |
|
|
|
|
|
|
|
35,876 |
|
|
|
1,561,665 |
|
|
Payments
|
|
|
1,348,385 |
|
|
|
|
|
|
|
53 |
|
|
|
1,348,438 |
|
|
Communications
|
|
|
2,312,184 |
|
|
|
|
|
|
|
55,916 |
|
|
|
2,368,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,147,439 |
|
|
$ |
|
|
|
$ |
84,996 |
|
|
$ |
6,232,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Adjustments to goodwill during the three months ended
March 31, 2006, resulted primarily from foreign currency
translation adjustments and purchase price adjustments related
to deferred tax assets.
Investments accounted for under the equity method of accounting
are classified on our balance sheet as long-term investments.
Such investments include identifiable intangible assets,
deferred tax liabilities and goodwill. As of December 31,
2005 and March 31, 2006, the goodwill related to our equity
investment totaled approximately $27.4 million.
In accordance with Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets
(FAS 142), goodwill is subject to at least an annual
assessment for impairment, applying a fair-value based test. We
conduct our annual impairment test as of August 31 of each
year. Based on our last impairment test as of August 31,
2005 we determined there was no impairment. There were no events
or circumstances from that date through March 31, 2006
indicating that a further assessment was necessary.
The components of acquired identifiable intangible assets are as
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
March 31, 2006 | |
|
|
| |
|
| |
|
|
Gross | |
|
|
|
Net | |
|
Weighted | |
|
Gross | |
|
|
|
Net | |
|
Weighted | |
|
|
Carrying | |
|
Accumulated | |
|
Carrying | |
|
Average Useful | |
|
Carrying | |
|
Accumulated | |
|
Carrying | |
|
Average Useful | |
|
|
Amount | |
|
Amortization | |
|
Amount | |
|
Economic Life | |
|
Amount | |
|
Amortization | |
|
Amount | |
|
Economic Life | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(Years) | |
|
|
|
|
|
|
|
(Years) | |
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists and user base
|
|
$ |
526,657 |
|
|
$ |
(145,397 |
) |
|
$ |
381,260 |
|
|
|
6 |
|
|
$ |
530,264 |
|
|
$ |
(170,417 |
) |
|
$ |
359,847 |
|
|
|
6 |
|
|
Trademarks and trade names
|
|
|
443,565 |
|
|
|
(75,571 |
) |
|
|
367,994 |
|
|
|
5 |
|
|
|
451,354 |
|
|
|
(98,629 |
) |
|
|
352,725 |
|
|
|
5 |
|
|
Developed technologies
|
|
|
101,971 |
|
|
|
(45,882 |
) |
|
|
56,089 |
|
|
|
4 |
|
|
|
100,931 |
|
|
|
(49,706 |
) |
|
|
51,225 |
|
|
|
4 |
|
|
All other
|
|
|
36,450 |
|
|
|
(14,761 |
) |
|
|
21,689 |
|
|
|
4 |
|
|
|
38,325 |
|
|
|
(16,671 |
) |
|
|
21,654 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,108,643 |
|
|
$ |
(281,611 |
) |
|
$ |
827,032 |
|
|
|
|
|
|
$ |
1,120,874 |
|
|
$ |
(335,423 |
) |
|
$ |
785,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of our acquired identifiable intangible assets are subject
to amortization. As of December 31, 2005 and March 31,
2006, the net carrying amount of intangible assets related to
our equity investment totaled approximately $3.8 million
and $3.5 million respectively. Aggregate amortization
expense for intangible assets totaled $23.9 million and
$53.4 million for the three months ended March 31,
2005 and 2006, respectively.
As of March 31, 2006, expected future intangible asset
amortization is as follows (in thousands):
|
|
|
|
|
|
Fiscal Years:
|
|
|
|
|
|
2006 (remaining nine months)
|
|
$ |
147,301 |
|
|
2007
|
|
|
188,257 |
|
|
2008
|
|
|
180,600 |
|
|
2009
|
|
|
162,128 |
|
|
2010
|
|
|
90,212 |
|
|
Thereafter
|
|
|
16,953 |
|
|
|
|
|
|
|
$ |
785,451 |
|
|
|
|
|
On April 24, 2006, we acquired all equity securities of
Tradera.com, the leading online auction-style marketplace in
Sweden for approximately 365 million Swedish Kronor, plus
acquisition costs and an adjustment for net cash acquired. Based
on an April 21, 2006 exchange rate of SEK 7.56 to US$1.00,
the net purchase amount approximates $48 million.
9
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 4 Segments
Reporting segments are based upon our internal organization
structure, the manner in which our operations are managed, the
criteria used by our chief operating decision-maker to evaluate
segment performance, the availability of separate financial
information, and overall materiality considerations.
The U.S. Marketplaces segment includes our U.S. online
marketplaces commerce platforms. The International Marketplaces
segment includes our international online marketplaces commerce
platforms. The Payments segment includes our global payments
platform, consisting of our PayPal subsidiary. The
Communications segment includes the VoIP offerings provided by
our Skype subsidiary. Results from our Communications segment
reflect Skype operations for the post-acquisition period from
October 15, 2005.
Direct contribution consists of revenues less direct costs.
Direct costs include specific costs of net revenues, sales and
marketing expenses, and general and administrative expenses over
which segment managers have direct discretionary control, such
as advertising and marketing programs, customer support
expenses, bank charges, transaction expenses, provisions for
doubtful accounts, authorized credits and transaction losses.
Expenses over which segment managers do not currently have
discretionary control, such as certain general and
administrative costs, amortization of acquired intangible assets
and stock-based compensation expenses, are monitored by
management through shared cost centers and are not evaluated in
the measurement of segment performance. Prior period amounts
have been reclassified to reflect the current management of site
operations cost and product development expenses as direct costs.
The following table summarizes our financial performance (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2005 | |
|
|
| |
|
|
U.S. | |
|
International | |
|
|
|
|
Marketplaces | |
|
Marketplaces | |
|
Payments | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
Net revenues from external customers
|
|
$ |
404,848 |
|
|
$ |
393,792 |
|
|
$ |
233,084 |
|
|
$ |
1,031,724 |
|
Direct costs
|
|
|
244,592 |
|
|
|
194,324 |
|
|
|
159,969 |
|
|
|
598,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct contribution
|
|
$ |
160,256 |
|
|
$ |
199,468 |
|
|
$ |
73,115 |
|
|
$ |
432,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses and indirect costs of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
335,574 |
|
Interest and other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,403 |
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,720 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
356,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2006 | |
|
|
| |
|
|
U.S. | |
|
International | |
|
|
|
|
Marketplaces | |
|
Marketplaces | |
|
Payments | |
|
Communications | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Net revenues from external customers
|
|
$ |
527,220 |
|
|
$ |
492,973 |
|
|
$ |
335,066 |
|
|
$ |
35,160 |
|
|
$ |
1,390,419 |
|
Direct costs
|
|
|
317,516 |
|
|
|
254,870 |
|
|
|
248,412 |
|
|
|
44,008 |
|
|
|
864,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct contribution
|
|
$ |
209,704 |
|
|
$ |
238,103 |
|
|
$ |
86,654 |
|
|
$ |
(8,848 |
) |
|
$ |
525,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses and indirect costs of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
202,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
322,624 |
|
Interest and other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,760 |
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(747 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
347,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5 Balance Sheet Components
At December 31, 2005 and March 31, 2006, short and
long-term investments were classified as available-for-sale
securities, except for restricted cash and investments, and were
reported at fair value as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
|
| |
|
|
Gross | |
|
Gross | |
|
Gross | |
|
|
|
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
Estimated | |
|
|
Cost | |
|
Gains | |
|
Losses | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash and investments
|
|
$ |
29,670 |
|
|
$ |
32 |
|
|
$ |
|
|
|
$ |
29,702 |
|
|
Corporate debt securities
|
|
|
362,438 |
|
|
|
4 |
|
|
|
(2,679 |
) |
|
|
359,763 |
|
|
Government and agency securities
|
|
|
371,537 |
|
|
|
|
|
|
|
(3,198 |
) |
|
|
368,339 |
|
|
Time deposits and other
|
|
|
46,548 |
|
|
|
|
|
|
|
|
|
|
|
46,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
810,193 |
|
|
$ |
36 |
|
|
$ |
(5,877 |
) |
|
$ |
804,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash and investments
|
|
$ |
1,065 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,065 |
|
|
Corporate debt securities
|
|
|
665,418 |
|
|
|
115 |
|
|
|
(1,921 |
) |
|
|
663,612 |
|
|
Government and agency securities
|
|
|
110,450 |
|
|
|
|
|
|
|
(1,409 |
) |
|
|
109,041 |
|
|
Equity instruments and equity method investments
|
|
|
51,949 |
|
|
|
|
|
|
|
|
|
|
|
51,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
828,882 |
|
|
$ |
115 |
|
|
$ |
(3,330 |
) |
|
$ |
825,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 | |
|
|
| |
|
|
Gross | |
|
Gross | |
|
Gross | |
|
|
|
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
Estimated | |
|
|
Cost | |
|
Gains | |
|
Losses | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash and investments
|
|
$ |
30,717 |
|
|
$ |
38 |
|
|
$ |
|
|
|
$ |
30,755 |
|
|
Corporate debt securities
|
|
|
370,018 |
|
|
|
16 |
|
|
|
(2,669 |
) |
|
|
367,365 |
|
|
Government and agency securities
|
|
|
420,367 |
|
|
|
|
|
|
|
(2,733 |
) |
|
|
417,634 |
|
|
Time deposits and other
|
|
|
43,050 |
|
|
|
|
|
|
|
|
|
|
|
43,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
864,152 |
|
|
$ |
54 |
|
|
$ |
(5,402 |
) |
|
$ |
858,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash and investments
|
|
$ |
1,071 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,071 |
|
|
Corporate debt securities
|
|
|
699,686 |
|
|
|
136 |
|
|
|
(999 |
) |
|
|
698,823 |
|
|
Government and agency securities
|
|
|
34,985 |
|
|
|
6 |
|
|
|
(45 |
) |
|
|
34,946 |
|
|
Equity instruments and equity method investments
|
|
|
58,657 |
|
|
|
|
|
|
|
|
|
|
|
58,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
794,399 |
|
|
$ |
142 |
|
|
$ |
(1,044 |
) |
|
$ |
793,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
March 31, | |
|
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Customer accounts
|
|
$ |
324,595 |
|
|
$ |
429,266 |
|
Prepaid expenses
|
|
|
44,610 |
|
|
|
54,698 |
|
Deferred tax asset, net
|
|
|
59,274 |
|
|
|
75,543 |
|
Other
|
|
|
58,756 |
|
|
|
61,325 |
|
|
|
|
|
|
|
|
|
|
$ |
487,235 |
|
|
$ |
620,832 |
|
|
|
|
|
|
|
|
Customer accounts include liquid assets set aside for certain
customer liabilities as required in conjunction with
PayPals Electronic Money Institution license from the
United Kingdoms Financial Services Authority. The customer
liabilities represent claims on PayPals U.K. subsidiary
and may be invested only in specified types of liquid assets.
These assets are included on our balance sheet as current assets
with an offsetting current liability in funds payable and
amounts due to customers. All customer funds held by PayPal as
an agent or custodian, for the benefit of its customers and,
accordingly, are not reflected in our consolidated balance
sheet. These balances include funds held in the U.S. which
are deposited in accounts insured by the Federal Deposit
Insurance Corporation.
Note 6 Litigation and Other Contingencies
|
|
|
Litigation and Other Legal Matters |
In April 2001, two of our European subsidiaries, eBay GmbH and
eBay International AG, were sued by Montres Rolex S.A. and
certain of its affiliates in the regional court of Cologne,
Germany. The suit subsequently was transferred to the regional
court in Düsseldorf, Germany. Rolex alleged that our
subsidiaries were infringing Rolexs trademarks as a result
of users selling counterfeit Rolex watches through our German
website. The suit also alleged unfair competition. Rolex sought
an order enjoining the sale of Rolex-branded watches on the
website as well as damages. In December 2002, a trial was held
in the matter and the court ruled in favor of eBay on all causes
of action. Rolex appealed the ruling to the Higher Regional
Court of
12
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Düsseldorf, and the appeal was heard in October 2003. In
February 2004, the court rejected Rolexs appeal and ruled
in our favor. Rolex has appealed the ruling to the German
Federal Supreme Court, and a hearing is expected in December
2006. In September 2004, the German Federal Supreme Court issued
its written opinion in favor of Rolex in a case involving an
unrelated company, ricardo.de AG, but somewhat comparable legal
theories. Although it is not yet clear what the ultimate effect
of the reasoning of the German Federal Supreme Courts
ricardo.de decision will have when applied to eBay, we believe
the Courts decision has resulted in an increase in similar
litigation against us in Germany, although we do not currently
believe that it will require a significant change in our
business practices.
In September 2001, MercExchange LLC filed a complaint against
us, our Half.com subsidiary and ReturnBuy, Inc. in the
U.S. District Court for the Eastern District of Virginia
(No. 2:01-CV-736) alleging infringement of three patents
(relating to online consignment auction technology, multiple
database searching and electronic consignment systems) and
seeking a permanent injunction and damages (including treble
damages for willful infringement). In October 2002, the court
granted in part our summary judgment motion, effectively
invalidating the patent related to online auction technology and
rendering it unenforceable. This ruling left only two patents in
the case. Trial of the matter began in April 2003. In May 2003,
the jury returned a verdict finding that eBay had willfully
infringed one and Half.com had willfully infringed both of the
patents in the suit, awarding $35 million in compensatory
damages. Both parties filed post-trial motions, and in August
2003, the court entered judgment for MercExchange in the amount
of approximately $30 million plus pre-judgment interest and
post-judgment interest in an amount to be determined, while
denying MercExchanges request for an injunction and
attorneys fees. We appealed the verdict and judgment in
favor of MercExchange and MercExchange filed a cross-appeal of
the granting in part of our summary judgment motion and the
denial of its request for an injunction and attorneys fees.
In March 2005, the U.S. Court of Appeals for the Federal
Circuit issued a ruling in the appeal of the MercExchange patent
litigation suit which, among other things (1) invalidated
all claims asserted against eBay and Half.com arising out of the
multiple database search patent and reduced the verdict amount
by $4.5 million; (2) upheld the electronic consignment
system patent; (3) affirmed the district courts
refusal to award attorneys fees or enhanced damages
against us; (4) reversed the district courts order
granting summary judgment in our favor regarding the auction
patent; and (5) reversed the district courts refusal
to grant an injunction and remanded that issue to the district
court for further proceedings. In May 2005, the Court of Appeals
for the Federal Circuit granted our petition to stay the mandate
in the case in order to allow us to petition the
U.S. Supreme Court for review on certain issues. We filed
our petition for review with the U.S. Supreme Court in July
2005, and in November 2005, the Court granted our petition for
review. Oral arguments in the case were heard by the Court in
March 2006, and the Courts decision is expected in the
second quarter of 2006. In parallel with the federal court
proceedings, at our request, the U.S. Patent and Trademark
Office is actively reexamining each of the patents in suit,
having found that substantial questions exist regarding the
validity of the claims contained in them. In January 2005, the
Patent and Trademark Office issued an initial ruling rejecting
all of the claims contained in the patent that related to online
auctions; in March 2005, the Patent and Trademark Office issued
an initial ruling rejecting all of the claims contained in the
patent that related to electronic consignment systems; and in
May 2005, the Patent and Trademark Office issued an initial
ruling rejecting all of the claims contained in the patent that
related to multiple database searching. In March 2006, the
Patent and Trademark Office affirmed its earlier ruling
rejecting the claims contained in the patent that related to
electronic consignment systems. Even if successful, our
litigation of these matters will continue to be costly. In
addition, as a precautionary measure, we have modified certain
functionality of our websites and business practices in a manner
which we believe would avoid any further infringement. For this
reason, we believe that any injunction that might be issued by
the district court will not have any impact on our business. We
also believe we have appropriate reserves for this litigation.
Nonetheless, if we are not successful in appealing or modifying
the courts ruling, and if the modifications to the
functionality of our websites and business practices are not
sufficient to make them non-infringing, we would
13
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
likely be forced to pay significant additional damages and
licensing fees and/or modify our business practices in an
adverse manner.
In August 2002, Charles E. Hill & Associates, Inc.
filed a lawsuit in the U.S. District Court for the Eastern
District of Texas
(No. 2:02-CV-186)
alleging that we and 17 other companies, primarily large
retailers, infringed three patents owned by Hill generally
relating to electronic catalog systems and methods for
transmitting and updating data at a remote computer. The suit
seeks an injunction against continuing infringement, unspecified
damages, including treble damages for willful infringement, and
interest, costs, expenses, and fees. The case was transferred to
the U.S. District Court for the Southern District of
Indiana in January 2003, but was transferred back to the
U.S. District Court for the Eastern District of Texas in
December 2003. A claim construction hearing was held in August
2005. In February 2006, we entered into and paid for a
settlement agreement with the plaintiffs in the case under which
we will be licensed under all of the patents at issue.
In February 2002, PayPal was sued in California state court (No.
CV-805433) in a
purported class action alleging that its limiting access to
customer accounts and failure to promptly restore access to
legitimate accounts violates California state consumer
protection laws and is an unfair business practice and a breach
of PayPals User Agreement. This action was re-filed with a
different named plaintiff in June 2002
(No. CV-808441),
and a similar action was also filed in the U.S. District
Court for the Northern District of California in June 2002
(No. C-02-2777).
In March 2002, PayPal was sued in the U.S. District Court
for the Northern District of California
(No. C-02-1227) in
a purported class action alleging that its limiting access to
customer accounts and failure to promptly restore access to
legitimate accounts violates federal and state consumer
protection and unfair business practice laws. The two federal
court actions were consolidated into a single case, and the
state court action was stayed pending developments in the
federal case. In June 2004, the parties announced that they had
reached a proposed settlement. The settlement received approval
from the federal court on November 2, 2004, and the state
court action was dismissed with prejudice in March 2005. In the
settlement, PayPal does not acknowledge that any of the
allegations in the case are true. Under the terms of the
settlement, certain PayPal account holders are eligible to
receive payment from a settlement fund of $9.25 million,
less administrative costs and the amount awarded to
plaintiffs counsel by the court. That sum is being
distributed to class members who have submitted timely claims in
accordance with the settlements plan of allocation. The
plan of allocation for the portion of the settlement fund that
remains undistributed was approved by the District Court in
March 2006. Substantially all of the cost associated with the
settlement was recognized in 2003.
In July 2004, a purported class action lawsuit was filed by two
eBay users in Superior Court of the State of California, County
of Santa Clara (No. 104CV022708) alleging that eBay engaged
in improper billing practices as the result of problems with the
rollout of a new billing software system in the second and third
quarters of 2004. The lawsuit sought damages and injunctive
relief. An amended complaint was filed in January 2005, dropping
one plaintiff, changing the capacity of the other plaintiff to
that of representative plaintiff, and adding seven additional
eBay users as plaintiffs. The amended complaint expanded its
claim to include numerous alleged improper billing practices
from September 2003 until the present. In February 2005, eBay
filed a motion to strike and a demurrer seeking to dismiss the
complaint. In April 2005, the court sustained portions of the
demurrer, but granted the plaintiffs leave to amend their
complaint. The plaintiffs filed a second amended complaint,
dropping the last original plaintiff and again adding new
plaintiffs. We filed a motion to strike and a demurrer regarding
the plaintiffs second amended complaint. In July 2005, the
court again sustained a portion of the demurrer and again
granted the plaintiffs leave to amend their complaint, and the
plaintiffs filed a third amended complaint. In December 2005,
the plaintiffs filed a fourth amended complaint, dropping
several plaintiffs. In April 2006, the court approved a
settlement agreement entered into by the parties. Under the
terms of the settlement, the plaintiffs agreed to dismiss the
lawsuit and release eBay from all claims, and eBay agreed to
make a $250,000 payment primarily directed to charity. The
estimated settlement was accrued in our consolidated income
statement for the three months ended March 31, 2006.
14
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In February 2005, eBay was sued in Superior Court of the State
of California, County of Santa Clara (No. 105CV035930)
in a purported class action alleging that certain bidding
features of our site constitute shill bidding for
the purpose of artificially inflating bids placed by buyers on
the site. The complaint alleges violations of Californias
Auction Act, Californias Consumer Remedies Act, and unfair
competition. The complaint seeks injunctive relief, damages, and
a constructive trust. In April 2005, we filed a demurrer seeking
to dismiss the complaint, and a hearing on the demurrer was held
in February 2006. In March 2006, the parties reached tentative
agreement on the terms of a settlement. The court must approve
the terms of the settlement in order for it to become final. The
estimated settlement was accrued in our consolidated income
statement for the year ended December 31, 2005.
In March 2005, eBay, PayPal, and an eBay seller were sued in
Supreme Court of the State of New York, County of Kings
(No. 6125/05) in a purported class action alleging that
certain disclosures regarding PayPals Buyer Protection
Policy, users chargeback rights, and the effects of
users choice of funding mechanism are deceptive and/or
misleading. The complaint alleged misrepresentation on the part
of eBay and PayPal, breach of contract and deceptive trade
practices by PayPal, and that PayPal and eBay have jointly
violated the civil RICO statute (18 U.S.C.
Section 1961(4)). In April 2005, eBay and PayPal removed
the case to the U.S. District Court for the Eastern
District of New York and the plaintiffs filed an amended
complaint in the U.S. District Court
(No. 05-CV-01720)
repeating the allegations of the initial complaint but dropping
the civil RICO allegations. The complaint seeks injunctive
relief, compensatory damages, and punitive damages. Following
several mediation sessions, the parties reached a tentative
settlement in December 2005 and executed a Memorandum of
Understanding in March 2006. The parties are engaged in the
process of finalizing the settlement documentation. The court
must approve the terms of the settlement in order for it to
become final. The estimated settlement was accrued in our
consolidated income statement for the year ended
December 31, 2005.
Other third parties have from time to time claimed, and others
may claim in the future, that we have infringed their
intellectual property rights. We have been notified of several
potential patent disputes, and expect that we will increasingly
be subject to patent infringement claims as our services expand
in scope and complexity. In particular, we expect to face
additional patent infringement claims involving services we
provide, including various aspects of our Payments and
Communications businesses. We have in the past been forced to
litigate such claims. We may also become more vulnerable to
third-party claims as laws such as the Digital Millennium
Copyright Act, the Lanham Act and the Communications Decency Act
are interpreted by the courts and as we expand geographically
into jurisdictions where the underlying laws with respect to the
potential liability of online intermediaries like ourselves are
either unclear or less favorable. These claims, whether
meritorious or not, could be time consuming and costly to
resolve, cause service upgrade delays, require expensive changes
in our methods of doing business, or could require us to enter
into costly royalty or licensing agreements.
From time to time, we are involved in other disputes or
regulatory inquiries that arise in the ordinary course of
business. The number and significance of these disputes and
inquiries are increasing as our business expands and our company
grows larger. Any claims or regulatory actions against us,
whether meritorious or not, could be time consuming, result in
costly litigation, require significant amounts of management
time, and result in the diversion of significant operational
resources.
|
|
|
Indemnification Provisions |
In the ordinary course of business, we have included limited
indemnification provisions in certain of our agreements with
parties with whom we have commercial relations, including our
standard marketing, promotions and
application-programming-interface license agreements. Under
these contracts, we generally indemnify, hold harmless, and
agree to reimburse the indemnified party for losses suffered or
incurred by the indemnified party in connection with claims by
any third party with respect to our domain names, trademarks,
15
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, including agreements under
which we have developed technology for certain commercial
parties, we have provided an indemnity for other types of
third-party claims, substantially all of which are indemnities
related to our copyrights, trademarks, and patents. In our
PayPal business, we have provided an indemnity to our payments
processors in the event of certain third-party claims or card
association fines against the processor arising out of conduct
by PayPal. To date, no significant costs have been incurred,
either individually or collectively, in connection with our
indemnification provisions.
Note 7 Stock-based Benefit Plans
|
|
|
Employee Stock Purchase Plan |
We have an employee stock purchase plan for all eligible
employees. Under the plan, shares of our common stock may be
purchased over an offering period with a maximum duration of two
years at 85% of the lower of the fair market value on the first
day of the applicable offering period or on the last day of the
six-month purchase period. Employees may purchase shares having
a value not exceeding 10% of their gross compensation during an
offering period. No shares were purchased during the three
months ended March 31, 2005 or 2006. At March 31,
2006, approximately 7.2 million shares were authorized. Our
employee stock purchase plan contains an evergreen
provision that automatically increases, on each January 1,
the number of shares reserved for issuance under the employee
stock purchase plan by the number of shares purchased under this
plan in the preceding calendar year.
We have a deferred stock unit plan under which deferred stock
units have been granted to new non-employee directors elected to
our Board of Directors after December 31, 2002. Under this
plan, each new director receives a one-time grant of deferred
stock units equal to the result of dividing $150,000 by the fair
market value of our common stock on the date of grant. Each
deferred stock unit constitutes an unfunded and unsecured
promise by us to deliver one share of our common stock (or the
equivalent value thereof in cash or property at our election).
Each deferred stock unit award granted to a new non-employee
director upon election to the Board vests 25% one year from the
date of grant, and at a rate of 2.08% per month thereafter.
If the services of the director are terminated at any time, all
rights to the unvested deferred stock units shall also
terminate. In addition, directors may elect to receive, in lieu
of annual retainer and committee chair fees and at the time
these fees would otherwise be payable (i.e., on a quarterly
basis in arrears for services provided), fully vested deferred
stock units with an initial value equal to the amount of these
fees. Deferred stock units are payable following the termination
of a directors tenure as a director. All eBay officers,
directors and employees are eligible to receive awards under the
plan, although, to date, awards have been made only to new
non-employee directors. As of March 31, 2006,
29,224 units have been awarded under this plan.
|
|
|
Other Equity Incentive Plans |
We have equity incentive plans for directors, officers,
employees and non-employees. Stock options granted under these
plans generally vest 25% one year from the date of grant (or
12.5% six months from the date of grant for grants to existing
employees) and the remainder vest at a rate of 2.08% per
month thereafter, and generally expire 7 to 10 years from
the date of grant. Stock options issued prior to June 1998, were
exercisable immediately, subject to repurchase rights held by
us, which lapsed over the vesting period. At March 31,
2006, 584.8 million shares were authorized under our stock
option plans. Shares of restricted stock issued under these
plans are subject to repurchase rights which lapse over the
vesting period, typically five years. At March 31, 2006,
74.2 million shares were available for future grant.
16
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Impact of the Adoption of FAS 123(R) |
We adopted FAS 123(R) using the modified prospective
transition method beginning January 1, 2006. Accordingly,
during the three-month period ended March 31, 2006, we
recorded stock-based compensation expense for awards granted
prior to, but not yet vested, as of January 1, 2006, as if
the fair value method required for pro forma disclosure under
FAS 123 were in effect for expense recognition purposes,
adjusted for estimated forfeitures. For these awards, we have
continued to recognize compensation expense using the
accelerated amortization method under FIN 28. For
stock-based awards granted after January 1, 2006, we have
recognized compensation expense based on the estimated grant
date fair value method using the Black-Scholes valuation model.
For these awards, we have recognized compensation expense using
a straight-line amortization method. As FAS 123(R) requires
that stock-based compensation expense be based on awards that
are ultimately expected to vest, stock-based compensation for
the three-month period ended March 31, 2006 has been
reduced for estimated forfeitures. When estimating forfeitures,
we consider voluntary termination behaviors as well as trends of
actual option forfeitures. The impact on our results of
operations of recording stock-based compensation for the
three-month period ended March 31, 2006 was as follows (in
thousands):
|
|
|
|
|
Cost of net revenues
|
|
$ |
9,476 |
|
Sales and marketing
|
|
|
24,721 |
|
Product development
|
|
|
20,701 |
|
General and administrative
|
|
|
28,920 |
|
|
|
|
|
|
|
$ |
83,818 |
|
|
|
|
|
Prior to adopting FAS 123(R), we presented all tax benefits
resulting from the exercise of stock options as operating cash
flows in the Statement of Cash Flows. FAS 123(R) requires
cash flows resulting from excess tax benefits to be classified
as a part of cash flows from financing activities. Excess tax
benefits are realized tax benefits from tax deductions for
exercised options in excess of the deferred tax asset
attributable to stock compensation costs for such options. As a
result of adopting FAS 123(R), $23.4 million of excess
tax benefits for the three months ended March 31, 2006 have
been classified as a financing cash inflow. Cash received from
option exercises under all share-based payment arrangements for
the three-month periods ended March 31, 2005 and 2006, was
$179.3 million and $80.6 million, respectively. The
total income tax benefit recognized in the income statement for
stock-based compensation costs was $0 and $25.5 million for
the three-month periods ended March 31, 2005 and 2006,
respectively. Total stock-based compensation costs capitalized
as part of an asset was $0 and $2.2 million for the
three-month periods ended March 31, 2005 and 2006,
respectively.
Prior to the adoption of FAS 123(R), the intrinsic value of
Skypes and Shopping.coms unvested common stock
options assumed in the acquisition were recorded as unearned
stock-based compensation as of December 31, 2005. Upon the
adoption of FAS 123(R) in January 2006, the unearned
stock-based compensation balance of approximately
$45.5 million was reclassified to
additional-paid-in-capital.
17
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We calculated the fair value of each option award on the date of
grant using the Black-Scholes option pricing model. The
following assumptions were used for each respective period:
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
Ended | |
|
|
March 31, | |
|
|
| |
|
|
2005 | |
|
2006 | |
|
|
| |
|
| |
Risk-free interest rates
|
|
|
3.5% |
|
|
|
4.6%-4.7% |
|
Expected lives (in years)
|
|
|
3 |
|
|
|
3.1-4.9 |
|
Dividend yield
|
|
|
0% |
|
|
|
0% |
|
Expected volatility
|
|
|
36% |
|
|
|
34%-38% |
|
Weighted-average volatility
|
|
|
|
|
|
|
35% |
|
Our computation of expected volatility for the first quarter of
2006 is based on a combination of historical and market-based
implied volatility from traded options on our stock. Prior to
2006, our computation of expected volatility was based on
historical volatility. Our computation of expected life in 2006,
was determined based on historical experience of similar awards,
giving consideration to the contractual terms of the stock-based
awards, vesting schedules and expectations of future employee
behavior. The range provided above results from the behavior
patterns of separate groups of employees that have similar
historical experience. The interest rate for periods within the
contractual life of the award is based on the U.S. Treasury
yield curve in effect at the time of grant.
|
|
|
Stock-based Payment Award Activity |
The following table summarizes activity under our equity
incentive plans for the three months ended March 31, 2006
(in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
|
|
|
|
|
|
|
Average | |
|
|
|
|
|
|
Weighted | |
|
Remaining | |
|
|
|
|
|
|
Average | |
|
Contractual Term | |
|
Aggregate | |
|
|
Shares | |
|
Exercise Price | |
|
(in years) | |
|
Intrinsic Value | |
|
|
| |
|
| |
|
| |
|
| |
Outstanding at January 1, 2006
|
|
|
129,109 |
|
|
$ |
28.19 |
|
|
|
|
|
|
|
|
|
Granted and assumed
|
|
|
21,064 |
|
|
|
40.14 |
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(4,686 |
) |
|
|
17.20 |
|
|
|
|
|
|
|
|
|
Forfeited/expired/cancelled
|
|
|
(1,983 |
) |
|
|
36.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006
|
|
|
143,504 |
|
|
$ |
30.19 |
|
|
|
7.32 |
|
|
$ |
1,445,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at March 31, 2006
|
|
|
132,341 |
|
|
$ |
29.49 |
|
|
|
7.27 |
|
|
$ |
1,414,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at March 31, 2006
|
|
|
64,848 |
|
|
$ |
22.96 |
|
|
|
6.60 |
|
|
$ |
1,081,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value is calculated as the difference
between the exercise price of the underlying awards and the
quoted price of our common stock for the 90.4 million
options that were
in-the-money at
March 31, 2006. During the three months ended
March 31, 2006 and 2005, the aggregate intrinsic value of
options exercised under our stock option plans was
$112.4 million and $238.6 million, respectively,
determined as of the date of option exercise. As of
March 31, 2006, there was approximately $419 million
of total unrecognized compensation cost related to unvested
share-based compensation arrangements granted under our stock
awards plans. That cost is expected to be recognized over a
weighted-average period of two years.
18
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The weighted average grant-date fair value of options granted in
three-month period ended March 31, 2005 and 2006 was $12.28
and $12.31, respectively.
A summary of the status and changes of our nonvested shares
related to our equity incentive plans as of and during the three
months ended March 31, 2006 is presented below (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average | |
|
|
|
|
Grant-Date | |
|
|
Shares | |
|
Fair Value | |
|
|
| |
|
| |
Nonvested at January 1, 2006
|
|
|
40 |
|
|
$ |
43.82 |
|
Granted
|
|
|
200 |
|
|
|
39.68 |
|
|
|
|
|
|
|
|
Nonvested at March 31, 2006
|
|
|
240 |
|
|
$ |
40.37 |
|
|
|
|
|
|
|
|
|
|
|
Pro forma Information for Periods Prior to the Adoption of
FAS 123R |
Prior to the adoption of FAS No. 123(R), we provided
the disclosures required under FAS No. 123, as amended
by FAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosures.
Employee stock-based compensation expense recognized under
FAS 123(R) was not reflected in our results of operations
for the three-month period ended March 31, 2005 for
employee stock option awards as all options were granted with an
exercise price equal to the market value of the underlying
common stock on the date of grant. Our ESPP was deemed
non-compensatory under the provisions of APB No. 25.
Forfeitures of awards were recognized as they occurred.
Previously reported amounts have not been restated.
The pro forma information for the three months ended
March 31, 2005 was as follows (in thousands, except per
share amounts):
|
|
|
|
|
|
|
Net income, as reported
|
|
$ |
256,291 |
|
Add: Amortization of stock-based compensation expense determined
under the intrinsic value method (net of cancellations)
|
|
|
282 |
|
Deduct: Total stock-based compensation expense determined under
fair value based method, net of tax
|
|
|
(63,441 |
) |
|
|
|
|
Pro forma net income
|
|
$ |
193,132 |
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
Basic Reported
|
|
$ |
0.19 |
|
|
|
Pro forma
|
|
$ |
0.14 |
|
|
Diluted Reported
|
|
$ |
0.19 |
|
|
|
Pro forma
|
|
$ |
0.14 |
|
19
|
|
Item 2: |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
FORWARD LOOKING STATEMENTS
This report contains statements that involve expectations,
plans or intentions (such as those relating to future business
or financial results, new features or services, or management
strategies). These statements are forward-looking and are
subject to risks and uncertainties, so actual results may vary
materially. You can identify these forward-looking statements by
words such as may, should,
expect, anticipate, believe,
estimate, intend, plan and
other similar expressions. You should consider our forward-
looking statements in light of the risks discussed under the
heading Risk Factors That May Affect Results of Operations
and Financial Condition below, 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. We assume
no obligation to update any forward-looking statements.
You should read the following Managements Discussion and
Analysis of Financial Condition and Results of Operations in
conjunction with the unaudited condensed consolidated financial
statements and the related notes that appear elsewhere in this
document.
Overview
Our purpose is to pioneer new communities around the world built
on commerce, sustained by trust, and inspired by opportunity. We
bring together millions of buyers and sellers every day on a
local, national and international basis through an array of
websites. We provide online marketplaces for the sale of goods
and services, online payments services and online communication
offerings to a diverse community of individuals and businesses.
We currently have three primary businesses: eBay Marketplaces,
Payments and Communications. Our eBay Marketplaces provide the
infrastructure to enable online commerce in a variety of
formats, including the traditional auction platform, along with
our other online platforms, such as Rent.com, Shopping.com,
Kijiji, mobile.de, and Marktplaats.nl. Our Payments business,
which consists of our PayPal business, enables individuals or
businesses to securely, easily and quickly send and receive
payments online. Our Communications business, which consists of
our Skype business, enables VoIP calls between Skype users, as
well as provides low-cost connectivity to traditional fixed-line
and mobile telephones.
|
|
|
Executive Operating and Financial Summary |
|
|
|
Our focus is on understanding our key operating and financial
metrics |
Members of our senior management team regularly review key
operating metrics such as new users, new user accounts, active
users, listings and gross merchandise volume, as well as total
payment volume processed by our wholly owned PayPal subsidiary
and number of users registered with our Skype subsidiary.
Members of our senior management also regularly review key
financial information including net revenues, operating income
margins, earnings per share, cash flows from operations and free
cash flows, which we define as operating cash flows less
purchases of property and equipment, net. These operating and
financial measures allow us to monitor the health and vibrancy
of our Marketplaces, Payments, and Communications platforms and
the profitability of our business and to evaluate the
effectiveness of investments that we have made and continue to
make in the areas of international expansion, customer support,
product development, marketing and site operations. We believe
that an understanding of these key operating and financial
measures and how they change over time is important to
investors, analysts and other parties analyzing our business
results and future market opportunities.
Consolidated net revenues for the three-month period ended
March 31, 2006 was $1.390 billion, representing a
growth rate of 35% year over year. Operating income was
$322.6 million and was 23% of net revenues. Net income for
the three-month period ended March 31, 2006 was
$248.3 million, or $0.17 earnings
20
per diluted share, which includes the impact of FAS 123(R)
stock-based compensation expense of $0.04 earnings per diluted
share.
|
|
|
Our expectations for growth |
We expect that our growth in net revenues during 2006 will
result primarily from increased net transaction revenues across
our U.S. Marketplaces, International Marketplaces, Payments
and Communications segments. We continue to make investments in
our business and infrastructure to help us achieve our long-term
growth objectives. We expect to continue our investments in the
areas of international expansion for our eBay Marketplaces, our
Payments and Communications businesses, customer support, site
operations, marketing and various corporate infrastructure
areas. We believe these investments are necessary to support the
long-term demands of our growing business as well as to build
the infrastructure necessary to support long- term growth. In
addition, to the extent that the U.S. dollar strengthens
against foreign currencies, and, in particular, the Euro,
British pound and Korean won, the remeasurement of these foreign
currency denominated transactions into U.S. dollars will
negatively impact our consolidated net revenues and, to the
extent that they are not hedged, our net income.
The discussion of our consolidated financial results contained
herein is intended to assist investors, analysts and other
parties reading this report to better understand the key
operating and financial measures summarized above as well as the
changes in our consolidated results of operations from year to
year, and the primary factors that accounted for those changes.
During the first quarter of 2006, we implemented the following
new critical accounting policy related to our stock-based
compensation. Beginning on January 1, 2006, we began
accounting for stock options and ESPP shares under the
provisions of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment
(FAS 123(R)), which requires the recognition of the fair
value of stock-based compensation. Under the fair value
recognition provisions for FAS 123(R), stock-based
compensation cost is estimated at the grant date based on the
fair value of the awards expected to vest and recognized as
expense ratably over the requisite service period of the award.
We have used the Black-Scholes valuation model, or BSM, to
estimate fair value of our stock-based awards which requires
various judgmental assumptions including estimating stock price
volatility, forfeiture rates, and expected life. Our computation
of expected volatility is based on a combination of historical
and market-based implied volatility. In addition, we consider
many factors when estimating expected forfeitures and expected
life, including types of awards, employee class, and historical
experience. If any of the assumptions used in the BSM model
change significantly, stock-based compensation expense may
differ materially in the future from that recorded in the
current period.
We adopted FAS 123(R) using the modified prospective method
which requires the application of the accounting standard as of
January 1, 2006. Our consolidated financial statements as
of and for the first quarter of 2006 reflect the impact of
FAS 123(R). In accordance with the modified prospective
method, the consolidated financial statements for prior periods
have not been restated to reflect, and do not include, the
impact of FAS 123(R).
21
The following table sets forth, for the periods presented, our
total net revenues and the sequential quarterly growth of these
net revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
| |
|
|
March 31 | |
|
June 30 | |
|
September 30 | |
|
December 31 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$ |
756,239 |
|
|
$ |
773,412 |
|
|
$ |
805,876 |
|
|
$ |
935,782 |
|
|
Current quarter vs prior quarter
|
|
|
17 |
% |
|
|
2 |
% |
|
|
4 |
% |
|
|
16 |
% |
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$ |
1,031,724 |
|
|
$ |
1,086,303 |
|
|
$ |
1,105,515 |
|
|
$ |
1,328,859 |
|
|
Current quarter vs prior quarter
|
|
|
10 |
% |
|
|
5 |
% |
|
|
2 |
% |
|
|
20 |
% |
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$ |
1,390,419 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
Current quarter vs prior quarter
|
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
We have historically experienced our strongest quarters of
sequential growth in the first and fourth fiscal quarters. We
expect transaction activity patterns on our websites to
increasingly mirror general consumer buying patterns, both
online and offline as our business matures. Our expectation is
that Skypes business will experience seasonally slower
growth during holiday periods.
Results of Operations
The following table sets forth, for the periods presented,
certain data from our condensed consolidated statement of income
as a percentage of net revenues. This information should be read
in conjunction with our condensed consolidated financial
statements and notes thereto included elsewhere in this
report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
| |
|
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
|
March 31, | |
|
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Net revenues
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100 |
% |
Cost of net revenues(1)
|
|
|
18.1 |
|
|
|
17.7 |
|
|
|
18.1 |
|
|
|
18.0 |
|
|
|
20.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
81.9 |
|
|
|
82.3 |
|
|
|
81.9 |
|
|
|
82.0 |
|
|
|
80.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
26.3 |
|
|
|
26.4 |
|
|
|
26.6 |
|
|
|
28.5 |
|
|
|
28.8 |
|
|
Product development
|
|
|
7.2 |
|
|
|
6.6 |
|
|
|
7.1 |
|
|
|
7.8 |
|
|
|
8.6 |
|
|
General and administrative
|
|
|
13.2 |
|
|
|
11.9 |
|
|
|
13.1 |
|
|
|
13.7 |
|
|
|
15.5 |
|
|
Payroll tax on employee stock options
|
|
|
0.6 |
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
0.2 |
|
|
Amortization of acquired intangible assets
|
|
|
2.2 |
|
|
|
2.4 |
|
|
|
2.6 |
|
|
|
3.9 |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
49.4 |
|
|
|
47.5 |
|
|
|
49.6 |
|
|
|
54.1 |
|
|
|
56.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
32.5 |
|
|
|
34.9 |
|
|
|
32.3 |
|
|
|
27.9 |
|
|
|
23.2 |
|
Interest and other income, net
|
|
|
2.2 |
|
|
|
3.0 |
|
|
|
2.8 |
|
|
|
1.9 |
|
|
|
1.9 |
|
Interest expense
|
|
|
(0.2 |
) |
|
|
(0.0 |
) |
|
|
(0.0 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests
|
|
|
34.5 |
|
|
|
37.8 |
|
|
|
35.0 |
|
|
|
29.7 |
|
|
|
25.0 |
|
Provision for income taxes
|
|
|
(9.7 |
) |
|
|
(11.0 |
) |
|
|
(11.9 |
) |
|
|
(8.7 |
) |
|
|
(7.1 |
) |
Minority interests
|
|
|
(0.0 |
) |
|
|
(0.0 |
) |
|
|
(0.0 |
) |
|
|
(0.0 |
) |
|
|
(0.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
24.8 |
% |
|
|
26.8 |
% |
|
|
23.1 |
% |
|
|
21.0 |
% |
|
|
17.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
(1) |
Includes stock-based compensation as follows (2006 increases are
due primarily to the adoption of FAS 123(R)): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenues
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.1 |
% |
|
|
0.7 |
% |
Sales and marketing
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.1 |
|
|
|
0.6 |
|
|
|
1.8 |
|
Product development
|
|
|
0.0 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.4 |
|
|
|
1.5 |
|
General and administrative
|
|
|
0.3 |
|
|
|
(0.1 |
) |
|
|
0.3 |
|
|
|
0.6 |
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
|
0.3 |
% |
|
|
0.0 |
% |
|
|
0.5 |
% |
|
|
1.7 |
% |
|
|
6.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
|
Ended | |
|
Percent | |
|
Ended | |
|
|
March 31, 2005 | |
|
Change | |
|
March 31, 2006 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except percent changes) | |
Net Revenues by Type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Marketplaces
|
|
$ |
388,759 |
|
|
|
30% |
|
|
$ |
507,312 |
|
|
International Marketplaces
|
|
|
387,187 |
|
|
|
25% |
|
|
|
483,215 |
|
|
Payments
|
|
|
227,097 |
|
|
|
44% |
|
|
|
328,150 |
|
|
Communications
|
|
|
|
|
|
|
n/a |
|
|
|
35,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net transaction revenues
|
|
|
1,003,043 |
|
|
|
35% |
|
|
|
1,353,837 |
|
Advertising and other non-transaction net revenues
|
|
|
28,681 |
|
|
|
28% |
|
|
|
36,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$ |
1,031,724 |
|
|
|
35% |
|
|
$ |
1,390,419 |
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Marketplaces
|
|
$ |
404,848 |
|
|
|
30% |
|
|
$ |
527,220 |
|
|
International Marketplaces
|
|
|
393,792 |
|
|
|
25% |
|
|
|
492,973 |
|
|
Payments
|
|
|
233,084 |
|
|
|
44% |
|
|
|
335,066 |
|
|
Communications
|
|
|
|
|
|
|
n/a |
|
|
|
35,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$ |
1,031,724 |
|
|
|
35% |
|
|
$ |
1,390,419 |
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$ |
556,246 |
|
|
|
35% |
|
|
$ |
748,136 |
|
|
International
|
|
|
475,478 |
|
|
|
35% |
|
|
|
642,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$ |
1,031,724 |
|
|
|
35% |
|
|
$ |
1,390,419 |
|
|
|
|
|
|
|
|
|
|
|
Our net revenues are derived primarily from listing, feature and
final value fees paid by sellers on our eBay Marketplaces and
fees from payment processing services on our PayPal platform.
Our net revenues have continued to grow each year, primarily as
a result of increased auction and fixed-price transaction
activity, reflected in the growth in the number of our confirmed
registered users, user activity, listings, user gross
merchandise volume on our eBay Marketplaces platforms and
payment transactions both on and off the eBay Marketplaces
processed by PayPal. We believe these increases are largely the
result of our promotional efforts and our emphasis on enhancing
the online commerce experience of our user community, both
domestically and internationally, through the introduction of
new site features and functionality and expanded trust and
safety programs.
23
Net Marketplaces revenues are attributed to U.S. and
International geographies based upon the country in which the
seller, payment recipient, advertiser or end-to-end service
provider is located. Our Payments and Communications segments
net revenues include amounts earned internationally.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
|
Ended | |
|
Percent | |
|
Ended | |
|
|
March 31, 2005 | |
|
Change | |
|
March 31, 2006 | |
|
|
| |
|
| |
|
| |
|
|
(In millions, except percentages) | |
Supplemental Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and International Marketplaces
|
|
|
|
|
|
|
|
|
|
|
|
|
Segments(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Confirmed registered users(2)
|
|
|
147.1 |
|
|
|
31% |
|
|
|
192.9 |
|
|
Active users(3)
|
|
|
60.5 |
|
|
|
25% |
|
|
|
75.4 |
|
|
Number of non-stores listings(4)
|
|
|
399.8 |
|
|
|
23% |
|
|
|
490.8 |
|
|
Number of stores listings(4)
|
|
|
32.0 |
|
|
|
164% |
|
|
|
84.6 |
|
|
Gross merchandise volume(5)
|
|
$ |
10,602 |
|
|
|
18% |
|
|
$ |
12,504 |
|
Payments Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accounts(6)
|
|
|
71.6 |
|
|
|
47% |
|
|
|
105.0 |
|
|
Active accounts(7)
|
|
|
22.1 |
|
|
|
32% |
|
|
|
29.2 |
|
|
Number of payments(8)
|
|
|
110.4 |
|
|
|
35% |
|
|
|
149.2 |
|
|
Total payment volume(9)
|
|
$ |
6,233 |
|
|
|
41% |
|
|
$ |
8,769 |
|
Communications Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered users(10)
|
|
|
|
|
|
|
|
|
|
|
94.6 |
|
|
|
|
|
(1) |
Rent.com, Shopping.com, and our classifieds websites are not
included in these metrics. |
|
|
(2) |
Cumulative total of all users who have completed the
registration process on one of eBays trading platforms. |
|
|
(3) |
All users, excluding users of Half.com, Internet Auction,
Rent.com, Shopping.com, and our classifieds websites, who bid
on, bought, or listed an item within the previous
12-month period.
Includes users of eBay India since the migration to the eBay
platform in April 2005. |
|
|
(4) |
All listings on eBays trading platforms during the
quarter, regardless of whether the listing subsequently closed
successfully. |
|
|
(5) |
Total value of all successfully closed items between users on
eBays trading platforms during the quarter, regardless of
whether the buyer and seller actually consummated the
transaction. |
|
|
(6) |
Cumulative total of all accounts opened, including users who
made payments using PayPal but have not registered and excluding
accounts that have been closed or locked and the payment gateway
business accounts. |
|
|
(7) |
All accounts, and users whether registered or not, that sent or
received at least one payment through the PayPal system during
the quarter. |
|
|
(8) |
Total number of payments initiated through the PayPal system
during the quarter, excluding the payment gateway business,
regardless of whether the payment was actually sent
successfully, or was reversed, rejected, or pending at the end
of the quarter. |
|
|
(9) |
Total dollar volume of payments initiated through the PayPal
system during the quarter, excluding the payment gateway
business, regardless of whether the payment was actually sent
successfully, or was reversed, rejected, or was pending at the
end of the quarter. |
|
|
(10) |
Communications registered users represent the cumulative total
of all users who have completed the Skype registration process. |
The U.S. Marketplaces segment includes our
U.S. marketplaces commerce platforms, other than our PayPal
subsidiary. The International Marketplaces segment includes our
international marketplaces com-
24
merce platforms excluding our PayPal and Skype subsidiaries. The
Payments segment consists of our global payments platform
operated by our PayPal subsidiary. The Communications segment
consists of our VoIP offerings from our Skype subsidiary
subsequent to our acquisition of Skype on October 14, 2005.
Our net revenues result from fees associated with our
transaction, referral fees, advertising and other services in
our U.S. Marketplaces, International Marketplaces,
Payments, and Communications segments. Net transaction revenues
are derived primarily from listing, feature and final value fees
paid by sellers and fees from payment processing services. Net
revenues from advertising are derived principally from the sale
of banner and sponsorship advertisements for cash and through
barter arrangements. Other non-transaction net revenues are
derived principally from contractual arrangements with third
parties that provide transaction services to eBay and PayPal
users.
|
|
|
Marketplaces Net Transaction Revenues |
Total net transaction revenues from our Marketplaces segment
increased 35% in the aggregate during the first quarter of 2006,
compared to the same period in the prior year. The growth in
both domestic and international net transaction revenues was
primarily the result of increased transaction activity,
reflected in the growth of the number of registered users,
active users, listings and gross merchandise volume. Gross
merchandise volume from Marketplaces increased 18% during the
first quarter of 2006, compared to the same period of the prior
year. During the first quarter of 2006, there was gross
merchandise volume growth across all major categories, with our
motors, consumer electronics, computers, sports,
clothing & accessories, home & garden and
business and industrial categories contributing most of such
year-over-year growth.
U.S. Marketplaces net transaction revenues increased 30%
during the first quarter of 2006, compared to the same period in
the prior year. Net transaction revenues derived from the
U.S. Marketplaces represented 37% of the total net
transaction revenues in the first quarter of 2006, compared to
39% in the same period of the prior year. Gross merchandise
volume from the U.S. Marketplaces increased 18% during the
first quarter of 2006, compared to the same period of the prior
year. The U.S. Marketplaces is our largest and most
developed business. We expect net transaction revenues from our
U.S. Marketplaces segment to increase in the remainder of
2006, but to decrease as a percentage of total eBay Marketplaces
net transaction revenues as the International Marketplaces
segment grows in significance. In addition, even as the
U.S. Marketplaces segment continues to grow in absolute
terms, we expect its growth rate in 2006 to be lower than that
of 2005. These expectations are subject to additional
uncertainties related to the possible impact of changes to the
store inventory format search initiative, planned trust and
safety initiatives and the upcoming launch of eBay Express.
|
|
|
International Marketplaces |
International Marketplaces net transaction revenues increased
25% during the first quarter of 2006 compared to the same period
of the prior year. International Marketplaces net transaction
revenues as a percentage of total net transaction revenues was
36% during the first quarter of 2006, compared to 39% in the
same period of the prior year. Gross merchandise volume from the
International Marketplaces increased 18% during the first
quarter of 2006, compared to the same period of the prior year.
The growth in our International Marketplaces net transaction
revenues was primarily the result of strong performances in the
United Kingdom and Germany as well as significant increases in
certain of our less established markets, particularly Australia,
France and Italy, partially offset by slower growth in Korea due
to increased competition. The relative strength of the
U.S. dollar against certain foreign currencies, primarily
the Euro, decreased net revenues by approximately
$42.6 million during the first quarter of 2006, compared to
the same period of the prior year. Changes in foreign currency
rates will impact our operating results, and to the extent that
the U.S. dollar strengthens, our foreign currency
denominated transaction net revenues will be negatively
impacted. We expect that the growth rates of our International
Marketplaces segment transaction net revenues will continue to
decline in the remainder of 2006, although we expect such
revenues to grow in significance relative to our total eBay
Marketplaces as we continue to develop and deploy our global
online commerce platform during the remainder of 2006.
25
|
|
|
Payments Segment Net Transaction Revenues |
Payments segment net transaction revenues increased 44% during
the first quarter of 2006 compared to the same period of the
prior year. Payments segment net transaction revenues as a
percentage of total net transaction revenues was 24% during the
first quarter of 2006, compared to 23% in the same period of the
prior year. The growth in Payments segment net transaction
revenues was positively affected by PayPals continued
penetration of eBay Marketplaces transactions, particularly in
the United States and the United Kingdom. Further, Payments
segment net transaction revenues have grown in connection with
the increase in our eBay Marketplaces gross merchandise volume
during the first quarter of 2006 as compared to the same period
of the prior year.
In addition, revenues increased as a result of an increase in
total payment volume for our PayPal merchant services
transactions and the inclusion of the payment gateway business.
The total payment volume for our PayPal merchant services
transactions was approximately $2.9 billion in the first
quarter of 2006, which represents 33% of PayPals total
payment volume. The total payment volume for our PayPal merchant
services transactions was approximately $1.8 billion in the
same period of the prior year, which represents 29% of
PayPals total payment volume. Our Payments segment net
transaction revenues as a percentage of total payment volume
increased slightly to 3.7% during the first quarter of 2006,
compared to 3.6% in the same period of the prior year.
Net transaction revenues from the Payments segment earned
internationally totaled $118.6 million during the first
quarter of 2006, representing 36% of total Payments segment net
transaction revenue during that period. This is compared to net
transaction revenues from the Payments segment earned
internationally of $81.7 million during the first quarter
of 2005, representing 36% of total Payments segment net
transaction revenue. The relative strength of the
U.S. dollar against certain foreign currencies, primarily
the Euro, decreased net revenues by approximately
$7.6 million during the first quarter of 2006, as compared
to the same period of the prior year. 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 the Payments segment net transaction revenues to
increase in total during 2006 and for net transaction revenues
earned internationally to increase in total and as a percentage
of Payments net transaction revenues. We also expect that the
Payments segment net transaction revenues will increase as a
percentage of total net transaction revenues in the remainder of
2006.
|
|
|
Communications Segment Net Transaction Revenues |
Communications net transaction revenues were $35.2 million
in the first quarter of 2006. This segment revenue represents
the revenue generated from VoIP offerings from our recent
acquisition of Skype on October 14, 2005. We expect the
Communications segment net transaction revenues to increase in
total and as a percentage of total net transactions revenues
during the remainder of 2006.
|
|
|
Advertising and Other Non-Transaction Net Revenues |
Advertising and other non-transaction net revenues increased
during the first quarter of 2006 as compared to the same period
in 2005. Advertising and other non-transaction net revenues
represented 3% of total net revenues during the first quarter of
2006 and of 2005. We continue to view our business as primarily
transaction-revenue driven and we expect advertising and other
net revenues to continue to represent a relatively small
proportion of total net revenues during the remainder of 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
|
Ended | |
|
Percent | |
|
Ended | |
|
|
March 31, 2005 | |
|
Change | |
|
March 31, 2006 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Cost of net revenues
|
|
$ |
186,369 |
|
|
|
49% |
|
|
$ |
278,568 |
|
As a percentage of net revenues
|
|
|
18.1 |
% |
|
|
|
|
|
|
20.0 |
% |
26
Cost of net revenues consists primarily of costs associated with
payment processing, site operations, and certain types of
customer support. Significant cost components include bank
charges, credit card interchange and assessments, other payment
processing costs, employee compensation and facilities costs for
our customer support and site operations, depreciation of
equipment and amortization of required capitalization of major
site product development costs and telecommunication costs.
The increase in cost of net revenues during the first quarter of
2006, compared to the same period in the prior year, was
primarily due to an increase in payment processing costs, the
volume of transactions on our Marketplaces and Payments
websites, development and expansion of our customer support and
site operations infrastructure, telecommunication costs and
stock-based compensation. Payment processing costs increased
$25.5 million during the first quarter of 2006 compared to
the same period of the prior year. This increase reflects the
increase in PayPals total payment volume and increased
payment processing costs offset by reduced contractual payment
processing rates. Aggregate customer support and site operations
costs increased approximately $30.0 million during the
first quarter of 2006, compared to the same period of the prior
year. Telecommunications costs increased $26.5 million
during the first quarter of 2006, compared to the same period of
the prior year, due to the inclusion of such costs since our
acquisition of Skype in October 2005. Stock-based compensation
expense included in cost of net revenues in the first quarter of
2006 was $9.5 million. Cost of net revenues prior to fiscal
2006 did not include FAS 123(R) stock-based compensation
expense. Cost of net revenues are expected to increase in total
and as a percentage of net revenues during the remainder of 2006
resulting from the expected growth of our lower gross margin
Payments and Communications businesses, and increased
stock-based compensation expense offset by our expected
operational efficiency in our site operations and transaction
costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
|
Ended | |
|
Percent | |
|
Ended | |
|
|
March 31, 2005 | |
|
Change | |
|
March 31, 2006 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Sales and marketing
|
|
$ |
271,349 |
|
|
|
48% |
|
|
$ |
400,562 |
|
As a percentage of net revenues
|
|
|
26.3 |
% |
|
|
|
|
|
|
28.8 |
% |
Sales and marketing expenses consist primarily of advertising,
tradeshow and other promotional costs, employee compensation for
our category development and marketing staff and certain trust
and safety programs.
The increase in sales and marketing expenses in the first
quarter of 2006, compared to the same period in the prior year
was primarily due to a $24.7 million increase in
stock-based compensation expense recognized as sales and
marketing expenses from the adoption of FAS 123(R) and our
continued investment in growing our global user base.
Advertising and marketing costs increased by $68.1 million
due to our integrated marketing campaigns globally and search
engine marketing expenses in our Shopping.com business.
Employee-related costs, not including stock-based compensation
expense, increased by approximately $27.4 million during
the first quarter of 2006 as compared to the same period of the
prior year. Sales and marketing expenses are expected to
increase in total however, remain consistent as a percentage of
net revenues during the remainder of 2006 as we recognize
additional stock-based compensation expense and as Shopping.com
has higher sales and marketing expenses as a percentage of net
revenues than our other businesses. In addition, our online
marketing expenses are expected to increase because of increases
in the volume of online advertising that we expect to purchase
in order to attract new customers and increased user activity on
our websites, including growth initiatives in sales and
marketing activities in our Marketplaces segments.
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
|
Ended | |
|
Percent | |
|
Ended | |
|
|
March 31, 2005 | |
|
Change | |
|
March 31, 2006 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Product development
|
|
$ |
73,789 |
|
|
|
61% |
|
|
$ |
119,070 |
|
As a percentage of net revenues
|
|
|
7.2 |
% |
|
|
|
|
|
|
8.6 |
% |
Product development expenses consist primarily of employee
compensation, stock-based compensation, consultant costs,
facilities costs and depreciation on equipment used for
development. Product development expenses are net of required
capitalization of major site and other product development
efforts. These capitalized costs totaled $18.0 million in
the first quarter of 2006 and are reflected as a cost of net
revenues when amortized in future periods. During the first
quarter of 2005, capitalized costs for major site and other
product development efforts totaled $9.7 million. We
anticipate that we will continue to devote significant resources
to product development in the future as we add new features and
functionality to our Marketplaces and Payments businesses.
The increase in product development expenses in the first
quarter of 2006, compared to the same period in the prior year
was primarily due to a $20.7 million increase in
stock-based compensation expense recognized as product
development expenses from the adoption of FAS 123(R) and
increased headcount to support various platform development
initiatives in our Marketplaces and Payments segments,
domestically and internationally. Employee-related costs, not
including stock-based compensation expense, increased by
approximately $14.9 million during the first quarter of
2006, compared to the same period in the prior year. Product
development expenses are expected to increase both in total and
as a percentage of net revenues, in the remainder of 2006, as we
recognize additional stock-based compensation expense, develop
new site features and functionality and continue to improve and
expand operations across all platforms.
|
|
|
General and Administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
|
Ended | |
|
Percent | |
|
Ended | |
|
|
March 31, 2005 | |
|
Change | |
|
March 31, 2006 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
General and administrative
|
|
$ |
136,389 |
|
|
|
58% |
|
|
$ |
215,350 |
|
As a percentage of net revenues
|
|
|
13.2 |
% |
|
|
|
|
|
|
15.5 |
% |
General and administrative expenses consist primarily of
employee compensation, provisions for transaction losses
associated with our Payments segment, depreciation of equipment,
provision for doubtful accounts, insurance, professional fees
and certain trust and safety programs.
The increase in general and administrative expenses in the first
quarter of 2006, compared to the same period of the prior year
was primarily due to a $28.9 million increase in
stock-based compensation expense recognized as general and
administrative expenses from the adoption of FAS 123(R),
employee-related costs, and facilities costs. While PayPal
transaction loss expenses as a percentage of net payment
revenues declined from both the year ago period and last
quarter, these savings were partially offset by increased
investment in our infrastructure to support an increasingly
complex and global business. Employee-related costs, not
including stock-based compensation expense increased by
approximately $24.3 million during the first quarter of
2006, compared to the same period of the prior year. The
increases in employee related costs resulted from continued
headcount growth primarily in trust and safety programs and
corporate functions. Facilities costs increased by approximately
$3.3 million during the first quarter of 2006 compared to
the same period of the prior year. PayPals payment
transaction loss expense increased approximately
$6.9 million during the first quarter of 2006 as compared
to same period of the prior year. PayPals payment
transaction loss rate, which is the transaction loss expense as
a percentage of PayPals total payment volume, remained
consistent at 0.29% during the first quarter of 2006, compared
to 0.30% during the same period of the prior year. General and
administrative expenses are expected to increase both in total
and as a percentage of revenue during the remainder of 2006 as
we recognize additional stock-based compensation expense,
continue to invest across all
28
areas of our business and related corporate functions. However,
the increase of general expenses as a percentage of revenue is
partially offset by the increase in our revenue base at a higher
rate.
|
|
|
Payroll Tax on Employee Stock Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
|
Ended | |
|
Percent | |
|
Ended | |
|
|
March 31, 2005 | |
|
Change | |
|
March 31, 2006 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Payroll tax expense from employee stock options
|
|
$ |
5,731 |
|
|
|
(59 |
)% |
|
$ |
2,324 |
|
As a percentage of net revenues
|
|
|
0.6 |
% |
|
|
|
|
|
|
0.2 |
% |
We are subject to employer payroll taxes on employee gains from
the exercise of non-qualified stock options. These employer
payroll taxes are recorded as a charge to operations in the
period in which such options are exercised and sold based on
actual gains realized by employees. The fluctuation in each
respective year was primarily the result of the extent of
employee gains recognized on stock option exercises. Our results
of operations and cash flows could vary significantly depending
on the actual period that stock options are exercised by
employees and, consequently, the amount of employer payroll
taxes assessed. In general, we expect payroll taxes on employee
stock option gains to increase during periods in which our stock
price is high relative to historic levels.
|
|
|
Amortization of Acquired Intangible Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
|
Ended | |
|
Percent | |
|
Ended | |
|
|
March 31, 2005 | |
|
Change | |
|
March 31, 2006 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Amortization of acquired intangible assets
|
|
$ |
22,523 |
|
|
|
131% |
|
|
$ |
51,921 |
|
As a percentage of net revenues
|
|
|
2.2 |
% |
|
|
|
|
|
|
3.7 |
% |
From time to time we have purchased, and we expect to continue
purchasing, 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
online e-commerce.
These purchase transactions generally result in the creation of
acquired intangible assets and lead to a corresponding increase
in the amortization expense in future periods. The increase in
amortization of acquired intangibles during the first quarter of
2006 compared to the same period of the prior year is due
primarily to the business acquisitions consummated during the
second half of 2005.
Intangible assets include purchased customer lists and user
base, trademarks and trade names, developed technologies, and
other intangible assets. We amortize intangible assets,
excluding goodwill, using the straight-line method over
estimated useful lives ranging from one to eight years. We
believe the straight-line method of amortization best
approximates the distribution of the economic value of the
identifiable intangible assets.
Goodwill represents the excess of the purchase price over the
fair value of the net tangible and identifiable intangible
assets acquired in a business combination. We evaluate goodwill,
at a minimum, on an annual basis and whenever events and changes
in circumstances suggest that the carrying amount may not be
recoverable. Impairment of goodwill is tested at the reporting
unit level by comparing the reporting units carrying
amount, including goodwill, to the fair value of the reporting
unit. The fair values of the reporting units are estimated using
a combination of the income, or discounted cash flows, approach
and the market approach, which utilizes comparable
companies data. If the carrying amount of the reporting
unit exceeds its fair value, goodwill is considered impaired and
a second step is performed to measure the amount of impairment
loss, if any. We conduct our annual impairment test as of
August 31 of each year. Based on our last impairment test
as of August 31, 2005 we determined there was no
impairment. There were no events or circumstances from that date
through March 31, 2006 indicating that a further assessment
was necessary.
We expect amortization of acquired intangible assets to remain
consistent in the remainder of 2006 as a result of the
intangible assets associated with our 2005 acquisitions.
Amortization of acquired intangible assets may increase should
we make additional acquisitions in the future.
29
|
|
|
Interest and Other Income, Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
|
Ended | |
|
Percent | |
|
Ended | |
|
|
March 31, 2005 | |
|
Change | |
|
March 31, 2006 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Interest and other income, net
|
|
$ |
22,403 |
|
|
|
15% |
|
|
$ |
25,760 |
|
As a percentage of net revenues
|
|
|
2.2 |
% |
|
|
|
|
|
|
1.9 |
% |
Interest and other income, net consists of interest earned on
cash, cash equivalents and investments as well as foreign
exchange transaction gains and losses and other miscellaneous
non-operating transactions.
Our interest and other income, net, increased during the first
quarter of 2006 as compared to the same period of the prior
year, primarily as a result of increased interest income due to
increased cash, cash equivalents and investments balances and
higher interest rates. The weighted-average interest rate of our
portfolio was approximately 3.5% in the first quarter of 2006
compared to 2.5% in the same period of the prior year. We expect
that interest and other income, net, will remain consistent as a
percentage of net revenues during 2006 compared to 2005,
excluding the potential effects from our recent and future
acquisitions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
|
Ended | |
|
Percent | |
|
Ended | |
|
|
March 31, 2005 | |
|
Change | |
|
March 31, 2006 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Interest expense
|
|
$ |
1,720 |
|
|
|
(57 |
)% |
|
$ |
747 |
|
As a percentage of net revenues
|
|
|
0.2 |
% |
|
|
|
|
|
|
0.1 |
% |
Interest expense in 2005 consisted of interest charges related
to our San Jose headquarters lease facilities, capital
leases, and mortgage notes.
Interest expense decreased during the first quarter of 2006,
compared to the same period of the prior year, primarily due to
the payment of the lease obligation for our San Jose
headquarters facility on March 1, 2005. We expect our
interest expense will decrease both in total and as a percentage
of net revenue during 2006.
|
|
|
Provision for Income Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
|
Ended | |
|
Percent | |
|
Ended | |
|
|
March 31, 2005 | |
|
Change | |
|
March 31, 2006 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Provision for income taxes
|
|
$ |
99,948 |
|
|
|
(1 |
)% |
|
$ |
99,354 |
|
As a percentage of net revenues
|
|
|
9.7 |
% |
|
|
|
|
|
|
7.1 |
% |
Effective tax rate
|
|
|
28 |
% |
|
|
|
|
|
|
29 |
% |
The provision for income taxes differs from the amount computed
by applying the statutory U.S. federal rate principally due
to state taxes, subsidiary losses for which we have not provided
a benefit and other factors that increase the effective tax
rate, offset by decreases resulting from foreign income with
lower effective tax rates and tax credits.
The higher effective tax rates for the first quarter of 2006,
compared to the first quarter of 2005, primarily reflect changes
in the companys geographic mix of business.
We received tax deductions from the gains realized by employees
on the exercise of certain non-qualified stock options for which
the benefit was recognized in prior periods as additional
paid-in-capital. These tax deductions from prior periods were
fully utilized in 2005. Beginning in January 2006, due to the
adoption of FAS 123(R), the estimated tax benefit expected from
stock-based compensation is recognized when the released expense
is reflected in our financial statements.
30
|
|
|
Impact of Foreign Currency Translation |
During the first quarter of 2006, our international net
revenues, based upon the country in which the seller, payment
recipient, advertiser or other service provider is located,
accounted for approximately 46% of our consolidated net revenues
consistent with the same period of 2005. The growth in our
international operations has increased our exposure to foreign
currency fluctuations. Net revenues and related expenses
generated from international locations are denominated in the
functional currencies of the local countries, and primarily
include Euros, British pounds, Korean won, Canadian dollars,
Taiwanese dollars, Australian dollars, Chinese renminbi, and
Indian rupee. The results of operations and certain of our
inter-company balances associated with our international
locations are exposed to foreign exchange rate fluctuations. The
statements of income of our international operations are
translated into U.S. dollars at the average exchange rates
in each applicable period. To the extent the U.S. dollar
weakens against foreign currencies, the translation of these
foreign currency denominated transactions results in increased
consolidated net revenues, operating expenses and net income.
If the U.S. dollar weakens against foreign currencies, the
translation of these foreign-currency-denominated transactions
will result in increased net revenues, operating expenses, and
net income. Similarly, our net revenues, operating expenses, and
net income will decrease if the U.S. dollar strengthens against
foreign currencies. The change in weighted average foreign
currency exchange rates in the first quarter of 2006 relative to
2005 resulted in lower net revenues of approximately
$50.2 million and lower aggregate cost of revenues and
operating expenses of approximately $25.1 million.
We expect our international operations will continue to grow in
significance as we develop and deploy our global marketplaces
and global payments platform. As a result, the impact of foreign
currency fluctuations in future periods could become more
significant and may have a negative impact on our consolidated
net revenues and net income in the event the U.S. dollar
strengthens relative to other currencies. See the information in
Item 3 under Foreign Currency Risk for
additional discussion of the impact of foreign currency
translation and related hedging activities.
|
|
|
Foreign Exchange Hedging Policy |
We are a rapidly growing company, with an increasing proportion
of our operations outside the United States. Accordingly, our
foreign currency exposures have increased substantially and are
expected to continue to grow. The objective of our foreign
exchange exposure management program is to identify material
foreign currency exposures and to manage these exposures to
minimize the potential effects of currency fluctuations on our
reported consolidated cash flow, and results of operations.
Our primary foreign currency exposures are transaction, economic
and translation:
|
|
|
Transaction Exposure: Around the world, we have certain
assets and liabilities, primarily receivables, investments and
accounts payable (including inter-company transactions) that are
denominated in currencies other than the relevant entitys
functional currency. In certain circumstances, changes in the
functional currency value of these assets and liabilities create
fluctuations in our reported consolidated financial position,
results of operations and cash flows. We may enter into foreign
exchange forward contracts or other instruments to minimize the
short-term foreign currency fluctuations on such assets and
liabilities. The gains and losses on the foreign exchange
forward contracts offset the transaction gains and losses on
certain foreign currency receivables, investments and payables
recognized in earnings. |
|
|
Economic Exposure: We also have anticipated and
unrecognized future cash flows, including revenues and expenses,
denominated in currencies other than the relevant entitys
functional currency. Our primary economic exposures include
future royalty receivables, customer collections, and vendor
payments. Changes in the relevant entitys functional
currency value will cause fluctuations in the cash flows we
expect to receive when these cash flows are realized or settled.
We may enter into foreign exchange forward contracts or other
derivatives to hedge the value of a portion of these cash flows.
We account for these foreign exchange contracts as cash flow
hedges. The effective portion of the derivatives |
31
|
|
|
gain or loss is initially reported as a component of accumulated
other comprehensive income (loss) and subsequently reclassified
into earnings when the transaction is settled. |
|
|
Earnings Translation Exposure: As our international
operations grow, fluctuations in the foreign currencies create
volatility in our reported results of operations because we are
required to consolidate the results of operations of our foreign
denominated subsidiaries. We may decide to purchase forward
exchange contracts or other instruments to offset the earnings
impact of currency fluctuations. Such contracts will be
marked-to-market on a
monthly basis and any unrealized gain or loss will be recorded
in interest and other income, net. |
Employees
As of March 31, 2006, eBay Inc. and its consolidated
subsidiaries employed approximately 12,500 people (including
approximately 800 temporary employees), of whom approximately
7,200 were located in the United States (including approximately
300 temporary employees). Our future success is substantially
dependent on the performance of our executive and senior
management and key technical personnel, and on our continuing
ability to find and retain highly qualified technical and
managerial personnel.
|
|
|
Liquidity and Capital Resources |
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$ |
495,419 |
|
|
$ |
584,204 |
|
|
Investing activities
|
|
|
(647,021 |
) |
|
|
(145,886 |
) |
|
Financing activities
|
|
|
51,040 |
|
|
|
103,978 |
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
(12,711 |
) |
|
|
20,558 |
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
$ |
(113,273 |
) |
|
$ |
562,854 |
|
|
|
|
|
|
|
|
We generated cash from operating activities in amounts greater
than net income in the three months ended March 31, 2006
and 2005, mainly due to non-cash charges to earnings. Non-cash
charges to earnings included depreciation and amortization on
our long-term assets, stock-based compensation expense related
to employee stock options and purchases, tax benefits on the
exercise of employee stock options resulting from personal gains
recognized by our employees, provision for doubtful accounts and
authorized credits resulting from increasing revenues and the
provision for transaction losses resulting from increased total
payment volumes processed by our PayPal subsidiary.
Prior to adopting FAS 123(R), the Company presented all tax
benefits resulting from the exercise of stock options as
operating cash flows in the Statement of Cash Flows.
FAS 123(R) requires cash flows resulting from excess tax
benefits to be classified as a part of cash flows from financing
activities. Excess tax benefits represent tax benefits related
to exercised options in excess of the associated deferred tax
asset for such options. As a result of adopting FAS 123(R),
$23.4 million of excess tax benefits for the three months
ended March 31, 2006 have been classified as an operating
cash outflow and a financing cash inflow. In addition, as prior
period tax benefits from stock options were fully utilized, cash
outflows will be required for estimated tax payments. These
payments will be dependent on the amount of current period tax
benefits generated from exercised options.
Net cash used in investing activities during the first three
months of 2006 consisted primarily of net purchases of property
and equipment totaled $133.6 million during the first three
months of 2006 related mainly to purchases of computer equipment
and software to support our site operations, customer support
and international expansion. Net cash used in investing
activities during the first three months of 2005 consisted
32
primarily of the cash payment for the acquisition of Rent.com of
approximately $435.4 million and the net purchase of
investments of approximately $122.4 million.
The net cash flows provided by financing activities during the
first three months of 2006 consisted primarily of proceeds from
stock option exercises of $80.6 million and excess tax
benefits from stock-based compensation of $23.4 million.
Our future cash flows from stock options are difficult to
project as such amounts are a function of our stock price, the
number of options outstanding, and the decisions by employees to
exercise stock options. In general, we expect proceeds from
stock option exercises to increase during periods in which our
stock price is high relative to historic levels.
The positive effect of exchange rates on cash and cash
equivalents during the three months ended March 31, 2006
was due to the weakening of the U.S. dollar during the
quarter against other foreign currencies, primarily the Euro.
The negative effect of exchange rates on cash and cash
equivalents during the three months ended March 31, 2005
was due to the strengthening of the U.S. dollar during the
quarter against other foreign currencies, primarily the Euro.
On April 24, 2006, we acquired all equity securities of
Tradera.com, the leading online auction-style marketplace in
Sweden for approximately 365 million Swedish Kronor, plus
acquisition costs and an adjustment for net cash acquired. Based
on an April 21, 2006 exchange rate of SEK 7.56 to US$1.00,
the net purchase amount approximates $48 million.
We believe that our remaining cash, cash equivalents and
investments, together with any cash generated from operations,
will be sufficient to fund our operating activities, capital
expenditures and other obligations for the foreseeable future.
However, if during that period or thereafter we are not
successful in generating sufficient cash flows from operations
or in raising additional capital when required in sufficient
amounts and on terms acceptable to us, our business could suffer.
|
|
|
Other Financial Arrangements |
As of March 31, 2006, we had no off-balance sheet
arrangements that are reasonably likely to have a future
material effect on our consolidated financial condition, results
of operations, liquidity, capital expenditures or capital
resources.
|
|
|
Indemnification Provisions |
In the ordinary course of business, we have included limited
indemnification provisions in certain of our agreements with
parties with whom we have commercial relations, including our
standard marketing, promotions and
application-programming-interface license agreements. Under
these contracts, we generally indemnify, hold harmless, and
agree to reimburse the indemnified party for losses suffered or
incurred by the indemnified party in connection with claims by
any third party with respect to our domain names, trademarks,
logos and other branding elements to the extent that such marks
are applicable to our performance under the subject agreement.
In a limited number of agreements, including agreements under
which we have developed technology for certain commercial
parties, we have provided an indemnity for other types of
third-party claims, substantially all of which are indemnities
related to our copyrights, trademarks, and patents. In our
PayPal business, we have provided an indemnity to our payments
processors in the event of certain third-party claims or card
association fines against the processor arising out of conduct
by PayPal. To date, no significant costs have been incurred,
either individually or collectively, in connection with our
indemnification provisions.
|
|
Item 3: |
Quantitative and Qualitative Disclosures About Market
Risk |
Interest Rate Risk
The primary objective of our investment activities is to
preserve principal while at the same time maximizing yields
without significantly increasing risk. To achieve this
objective, we maintain our portfolio of cash equivalents and
short-term and long-term investments in a variety of securities,
including government and corporate securities and money market
funds. These securities are generally classified as available
for sale
33
and consequently are recorded on the balance sheet at fair value
with unrealized gains or losses reported as a separate component
of accumulated other comprehensive income (loss), net of
estimated tax.
Investments in both fixed-rate and floating-rate
interest-earning instruments carry varying degrees of interest
rate risk. The fair market value of our fixed-rate securities
may be adversely impacted due to a rise in interest rates. In
general, securities with longer maturities are subject to
greater interest-rate risk than those with shorter maturities.
While floating rate securities generally are subject to less
interest-rate risk than fixed-rate securities, floating-rate
securities may produce less income than expected if interest
rates decrease. Due in part to these factors, our investment
income may fall short of expectations or we may suffer losses in
principal if securities are sold that have declined in market
value due to changes in interest rates. As of March 31,
2006, our fixed-income investments earned a pretax yield of
approximately 3.5%, with a weighted average maturity of two
months. If interest rates were to instantaneously increase
(decrease) by 100 basis points, the fair market value of
our total investment portfolio could decrease (increase) by
approximately $5.1 million.
Equity Price Risk
We are exposed to equity price risk on the marketable portion of
equity instruments and equity method investments we hold,
typically as the result of strategic investments in third
parties that are subject to considerable market risk due to
their volatility. We typically do not attempt to reduce or
eliminate our market exposure in these equity investments. We
did not record an impairment charge during either of the three
months ended March 31, 2006 or 2005 relating to the
other-than-temporary impairment in the fair value of equity
investments. At March 31, 2006, the total carrying value of
our equity instruments and equity method investments was
$58.7 million.
Foreign Currency Risk
International net revenues result from transactions by our
foreign operations and are typically denominated in the local
currency of each country. These operations also incur most of
their expenses in the local currency. Accordingly, our foreign
operations use the local currency, which is primarily the Euro,
and to a lesser extent, the British pound, as their functional
currency. Our international operations are subject to risks
typical of international operations, including, but not limited
to, differing economic conditions, changes in political climate,
differing tax structures, other regulations and restrictions,
and foreign exchange rate volatility. Accordingly, our future
results could be materially adversely impacted by changes in
these or other factors. In addition, at March 31, 2006, we
held balances in cash, cash equivalents and investments outside
the U.S. totaling approximately $1.1 billion.
As of March 31, 2006, we had outstanding forward foreign
exchange hedge contracts with notional values equivalent to
approximately $124.6 million with maturity dates within
15 days. The hedge contracts are used to offset changes in
the functional currency value of assets and liabilities
denominated in foreign currencies as a result of currency
fluctuations. Transaction gains and losses on the contracts and
the assets and liabilities are recognized each period in our
consolidated statement of income.
Foreign exchange rate fluctuations may adversely impact our
consolidated financial position as well as our consolidated
results of operations. Foreign exchange rate fluctuations may
adversely impact our financial position as the assets and
liabilities of our foreign operations are translated into
U.S. dollars in preparing our consolidated balance sheet.
The effect of foreign exchange rate fluctuations on our
consolidated financial position for the three months ended
March 31, 2006, was a net translation gain of approximately
$127.5 million. This gain is recognized as an adjustment to
stockholders equity through accumulated other
comprehensive income. Additionally, foreign exchange rate
fluctuations may adversely impact our consolidated results of
34
operations as exchange rate fluctuations on transactions
denominated in currencies other than our functional currencies
result in gains and losses that are reflected in our
consolidated statement of income.
We consolidate our international subsidiaries by converting them
into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52 Foreign Currency
Translation (FAS 52). The results of operations and
our financial position will fluctuate when there is a change in
foreign currency exchange rates. From time to time, we enter
into transactions to hedge portions of our foreign currency
denominated earnings translation exposure using both foreign
currency options and forward contracts. All contracts that hedge
translation exposure mature ratably over the quarter in which
they are executed. During the three months ended March 31,
2006, the realized gains and losses related to these hedges were
not significant.
We currently charge our international subsidiaries on a monthly
basis for their use of intellectual property and technology and
for certain corporate services provided by eBay and PayPal.
These charges are denominated in Euros and these forecasted
inter-company transactions represent a foreign currency cash
flow exposure. To reduce foreign exchange risk relating to these
forecasted inter-company transactions, we entered into forward
foreign exchange contracts during the three months ended
March 31, 2006. The objective of the forward contracts is
to ensure that the U.S. dollar-equivalent cash flows are
not adversely affected by changes in the U.S. dollar/Euro
exchange rate. Pursuant to Statement of Financial Accounting
Standards No. 133 Accounting for Derivative
Instruments and Hedging Activities (FAS 133), we
expect the hedge of certain of these forecasted transactions
using the forward contracts to be highly effective in offsetting
potential changes in cash flows attributed to a change in the
U.S. dollar/Euro exchange rate. Accordingly, we record as a
component of other comprehensive income all unrealized gains and
losses related to the forward contracts that receive hedge
accounting treatment. We record all unrealized gains and losses
in interest and accumulated other income, net, related to the
forward contracts that do not receive hedge accounting treatment
pursuant to FAS 133. During the three months ended
March 31, 2005 and 2006, the realized gains and losses
related to these hedges were not significant. The notional
amount of our economic hedges receiving hedge accounting
treatment and the loss, net of gains, recorded to accumulated
other comprehensive income as of March 31, 2006 were
$122.5 million and $0.8 million, respectively.
|
|
Item 4: |
Controls and Procedures |
(a) Evaluation of disclosure controls and
procedures. Based on the evaluation of our disclosure
controls and procedures (as defined in Securities Exchange Act
of 1934
Rules 13a-15(e)
and 15d-15(e)) required
by Securities Exchange Act
Rules 13a-15(b) or
15d-15(b), our Chief
Executive Officer and our Chief Financial Officer have concluded
that as of the end of the period covered by this report, our
disclosure controls and procedures were effective.
(b) Changes in internal controls. There were no
changes in our internal control over financial reporting that
occurred during our most recent fiscal quarter that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II: OTHER
INFORMATION
|
|
Item 1: |
Legal Proceedings |
In April 2001, two of our European subsidiaries, eBay GmbH and
eBay International AG, were sued by Montres Rolex S.A. and
certain of its affiliates in the regional court of Cologne,
Germany. The suit subsequently was transferred to the regional
court in Düsseldorf, Germany. Rolex alleged that our
subsidiaries were infringing Rolexs trademarks as a result
of users selling counterfeit Rolex watches through our German
website. The suit also alleged unfair competition. Rolex sought
an order enjoining the sale of Rolex-branded watches on the
website as well as damages. In December 2002, a trial was held
in the matter and the court ruled in favor of eBay on all causes
of action. Rolex appealed the ruling to the Higher Regional
Court of Düsseldorf, and the appeal was heard in October
2003. In February 2004, the court rejected Rolexs appeal
35
and ruled in our favor. Rolex has appealed the ruling to the
German Federal Supreme Court, and a hearing is expected in
December 2006. In September 2004, the German Federal Supreme
Court issued its written opinion in favor of Rolex in a case
involving an unrelated company, ricardo.de AG, but somewhat
comparable legal theories. Although it is not yet clear what the
ultimate effect of the reasoning of the German Federal Supreme
Courts ricardo.de decision will have when applied to eBay,
we believe the Courts decision has resulted in an increase
in similar litigation against us in Germany, although we do not
currently believe that it will require a significant change in
our business practices.
In September 2001, MercExchange LLC filed a complaint against
us, our Half.com subsidiary and ReturnBuy, Inc. in the
U.S. District Court for the Eastern District of Virginia
(No. 2:01-CV-736)
alleging infringement of three patents (relating to online
consignment auction technology, multiple database searching and
electronic consignment systems) and seeking a permanent
injunction and damages (including treble damages for willful
infringement). In October 2002, the court granted in part our
summary judgment motion, effectively invalidating the patent
related to online auction technology and rendering it
unenforceable. This ruling left only two patents in the case.
Trial of the matter began in April 2003. In May 2003, the jury
returned a verdict finding that eBay had willfully infringed one
and Half.com had willfully infringed both of the patents in the
suit, awarding $35 million in compensatory damages. Both
parties filed post-trial motions, and in August 2003, the court
entered judgment for MercExchange in the amount of approximately
$30 million plus pre-judgment interest and post-judgment
interest in an amount to be determined, while denying
MercExchanges request for an injunction and
attorneys fees. We appealed the verdict and judgment in
favor of MercExchange and MercExchange filed a cross-appeal of
the granting in part of our summary judgment motion and the
denial of its request for an injunction and attorneys fees.
In March 2005, the U.S. Court of Appeals for the Federal
Circuit issued a ruling in the appeal of the MercExchange patent
litigation suit which, among other things (1) invalidated
all claims asserted against eBay and Half.com arising out of the
multiple database search patent and reduced the verdict amount
by $4.5 million; (2) upheld the electronic consignment
system patent; (3) affirmed the district courts
refusal to award attorneys fees or enhanced damages
against us; (4) reversed the district courts order
granting summary judgment in our favor regarding the auction
patent; and (5) reversed the district courts refusal
to grant an injunction and remanded that issue to the district
court for further proceedings. In May 2005, the Court of Appeals
for the Federal Circuit granted our petition to stay the mandate
in the case in order to allow us to petition the
U.S. Supreme Court for review on certain issues. We filed
our petition for review with the U.S. Supreme Court in July
2005, and in November 2005, the Court granted our petition for
review. Oral arguments in the case were heard by the Court in
March 2006, and the Courts decision is expected in the
second quarter of 2006. In parallel with the federal court
proceedings, at our request, the U.S. Patent and Trademark
Office is actively reexamining each of the patents in suit,
having found that substantial questions exist regarding the
validity of the claims contained in them. In January 2005, the
Patent and Trademark Office issued an initial ruling rejecting
all of the claims contained in the patent that related to online
auctions; in March 2005, the Patent and Trademark Office issued
an initial ruling rejecting all of the claims contained in the
patent that related to electronic consignment systems; and in
May 2005, the Patent and Trademark Office issued an initial
ruling rejecting all of the claims contained in the patent that
related to multiple database searching. In March 2006, the
Patent and Trademark Office affirmed its earlier ruling
rejecting the claims contained in the patent that related to
electronic consignment systems. Even if successful, our
litigation of these matters will continue to be costly. In
addition, as a precautionary measure, we have modified certain
functionality of our websites and business practices in a manner
which we believe would avoid any further infringement. For this
reason, we believe that any injunction that might be issued by
the district court will not have any impact on our business. We
also believe we have appropriate reserves for this litigation.
Nonetheless, if we are not successful in appealing or modifying
the courts ruling, and if the modifications to the
functionality of our websites and business practices are not
sufficient to make them non-infringing, we would likely be
forced to pay significant additional damages and licensing fees
and/or modify our business practices in an adverse manner.
In August 2002, Charles E. Hill & Associates, Inc.
filed a lawsuit in the U.S. District Court for the Eastern
District of Texas
(No. 2:02-CV-186)
alleging that we and 17 other companies, primarily large
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retailers, infringed three patents owned by Hill generally
relating to electronic catalog systems and methods for
transmitting and updating data at a remote computer. The suit
seeks an injunction against continuing infringement, unspecified
damages, including treble damages for willful infringement, and
interest, costs, expenses, and fees. The case was transferred to
the U.S. District Court for the Southern District of
Indiana in January 2003, but was transferred back to the
U.S. District Court for the Eastern District of Texas in
December 2003. A claim construction hearing was held in August
2005. In February 2006, we entered into and paid for a
settlement agreement with the plaintiffs in the case under which
we will be licensed under all of the patents at issue.
In February 2002, PayPal was sued in California state court (No.
CV-805433) in a purported class action alleging that its
limiting access to customer accounts and failure to promptly
restore access to legitimate accounts violates California state
consumer protection laws and is an unfair business practice and
a breach of PayPals User Agreement. This action was
re-filed with a
different named plaintiff in June 2002
(No. CV-808441),
and a similar action was also filed in the U.S. District
Court for the Northern District of California in June 2002
(No. C-02-2777).
In March 2002, PayPal was sued in the U.S. District Court
for the Northern District of California
(No. C-02-1227) in
a purported class action alleging that its limiting access to
customer accounts and failure to promptly restore access to
legitimate accounts violates federal and state consumer
protection and unfair business practice laws. The two federal
court actions were consolidated into a single case, and the
state court action was stayed pending developments in the
federal case. In June 2004, the parties announced that they had
reached a proposed settlement. The settlement received approval
from the federal court on November 2, 2004, and the state
court action was dismissed with prejudice in March 2005. In the
settlement, PayPal does not acknowledge that any of the
allegations in the case are true. Under the terms of the
settlement, certain PayPal account holders are eligible to
receive payment from a settlement fund of $9.25 million,
less administrative costs and the amount awarded to
plaintiffs counsel by the court. That sum is being
distributed to class members who have submitted timely claims in
accordance with the settlements plan of allocation. The
plan of allocation for the portion of the settlement fund that
remains undistributed was approved by the District Court in
March 2006. Substantially all of the cost associated with the
settlement was reserved in 2003.
In July 2004, a purported class action lawsuit was filed by two
eBay users in Superior Court of the State of California, County
of Santa Clara (No. 104CV022708) alleging that eBay engaged
in improper billing practices as the result of problems with the
rollout of a new billing software system in the second and third
quarters of 2004. The lawsuit sought damages and injunctive
relief. An amended complaint was filed in January 2005, dropping
one plaintiff, changing the capacity of the other plaintiff to
that of representative plaintiff, and adding seven additional
eBay users as plaintiffs. The amended complaint expanded its
claim to include numerous alleged improper billing practices
from September 2003 until the present. In February 2005, eBay
filed a motion to strike and a demurrer seeking to dismiss the
complaint. In April 2005, the court sustained portions of the
demurrer, but granted the plaintiffs leave to amend their
complaint. The plaintiffs filed a second amended complaint,
dropping the last original plaintiff and again adding new
plaintiffs. We filed a motion to strike and a demurrer regarding
the plaintiffs second amended complaint. In July 2005, the
court again sustained a portion of the demurrer and again
granted the plaintiffs leave to amend their complaint, and the
plaintiffs filed a third amended complaint. In December 2005,
the plaintiffs filed a fourth amended complaint, dropping
several plaintiffs. In April 2006, the court approved a
settlement agreement entered into by the parties. Under the
terms of the settlement, the plaintiffs agreed to dismiss the
lawsuit and release eBay from all claims, and eBay agreed to
make a $250,000 payment primarily directed to charity. The
estimated settlement was accrued in our consolidated income
statement for the three months ended March 31, 2006.
In February 2005, eBay was sued in Superior Court of the State
of California, County of Santa Clara (No. 105CV035930)
in a purported class action alleging that certain bidding
features of our site constitute shill bidding for
the purpose of artificially inflating bids placed by buyers on
the site. The complaint alleges violations of Californias
Auction Act, Californias Consumer Remedies Act, and unfair
competition. The complaint seeks injunctive relief, damages, and
a constructive trust. In April 2005, we filed a demurrer seeking
to dismiss the complaint, and a hearing on the demurrer was held
in February 2006. In March 2006, the parties reached tentative
agreement on the terms of a settlement. The court must approve
the terms of the
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settlement in order for it to become final. The estimated
settlement was accrued in our consolidated income statement for
the year ended December 31, 2005.
In March 2005, eBay, PayPal, and an eBay seller were sued in
Supreme Court of the State of New York, County of Kings
(No. 6125/05) in a purported class action alleging that
certain disclosures regarding PayPals Buyer Protection
Policy, users chargeback rights, and the effects of
users choice of funding mechanism are deceptive and/or
misleading. The complaint alleged misrepresentation on the part
of eBay and PayPal, breach of contract and deceptive trade
practices by PayPal, and that PayPal and eBay have jointly
violated the civil RICO statute (18 U.S.C.
Section 1961(4)). In April 2005, eBay and PayPal removed
the case to the U.S. District Court for the Eastern
District of New York and the plaintiffs filed an amended
complaint in the U.S. District Court
(No. 05-CV-01720)
repeating the allegations of the initial complaint but dropping
the civil RICO allegations. The complaint seeks injunctive
relief, compensatory damages, and punitive damages. Following
several mediation sessions, the parties reached a tentative
settlement in December 2005 and executed a Memorandum of
Understanding in March 2006. The parties are engaged in the
process of finalizing the settlement documentation. The court
must approve the terms of the settlement in order for it to
become final. The estimated settlement was accrued in our
consolidated income statement for the year ended
December 31, 2005.
Other third parties have from time to time claimed, and others
may claim in the future, that we have infringed their
intellectual property rights. We have been notified of several
potential patent disputes, and expect that we will increasingly
be subject to patent infringement claims as our services expand
in scope and complexity. In particular, we expect to face
additional patent infringement claims involving services we
provide, including various aspects of our Payments and
Communications businesses. We have in the past been forced to
litigate such claims. We may also become more vulnerable to
third-party claims as laws such as the Digital Millennium
Copyright Act, the Lanham Act and the Communications Decency Act
are interpreted by the courts and as we expand geographically
into jurisdictions where the underlying laws with respect to the
potential liability of online intermediaries like ourselves are
either unclear or less favorable. These claims, whether
meritorious or not, could be time consuming and costly to
resolve, cause service upgrade delays, require expensive changes
in our methods of doing business, or could require us to enter
into costly royalty or licensing agreements.
From time to time, we are involved in other disputes or
regulatory inquiries that arise in the ordinary course of
business. The number and significance of these disputes and
inquiries are increasing as our business expands and our company
grows larger. Any claims or regulatory actions against us,
whether meritorious or not, could be time consuming, result in
costly litigation, require significant amounts of management
time, and result in the diversion of significant operational
resources.
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.
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Our operating results may fluctuate. |
Our operating results have varied on a quarterly basis during
our operating history. Our operating results may fluctuate
significantly as a result of a variety of factors, many of which
are outside our control. Factors that may affect our operating
results include the following:
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our ability to retain an active user base, to attract new users,
and to encourage existing users to list items for sale, purchase
items through our websites, or use our payment service or
communication software and products; |
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the volume, size, timing, and completion rate of transactions
using our websites or technology; |
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the amount and timing of operating costs and capital
expenditures relating to the maintenance and expansion of our
businesses, operations, and infrastructure; |
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our ability to integrate, manage, and profitably expand our
newly-acquired Skype business; |
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our ability to successfully integrate and manage other recent
and prospective acquisitions; |
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regulatory actions imposing obligations on our businesses
(including Skype) or our users; |
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the actions of our competitors, including the introduction of
new sites, services, and products; |
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consumer confidence in the safety and security of transactions
using our websites or technology; |
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the cost and availability of online and traditional advertising,
and the success of our brand building and marketing campaigns; |
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new laws or regulations, or interpretations of existing laws or
regulations, that harm the Internet, electronic commerce, online
payments or communications, or our business models; |
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our ability to comply with the requirements of entities whose
services are required for our operations, such as credit card
associations; |
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our ability to upgrade and develop our systems, infrastructure,
and customer service capabilities to accommodate growth and to
improve our websites at a reasonable cost while maintaining 24/7
operations; |
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technical difficulties or service interruptions involving our
websites or services provided to us or our users by third
parties; |
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the costs and results of litigation that involves us; |
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our ability to expand PayPals product offerings outside of
the U.S. (including our ability to obtain any necessary
regulatory approvals); |
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our ability to increase the acceptance of PayPal by online
merchants outside of the eBay marketplaces; |
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our ability to develop product enhancements at a reasonable cost
and to develop programs and features in a timely manner; |
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our ability to manage PayPals transaction loss and credit
card chargeback rates and payment funding mix; |
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the success of our geographic and product expansions; |
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our ability to attract new personnel in a timely and effective
manner and to retain key employees; |
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the continued financial strength of our technology suppliers and
other parties with whom we have commercial relations; |
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continued consumer acceptance of the Internet as a medium for
commerce and communication in the face of increasing publicity
about fraud, spoofing, viruses, and other dangers of the
Internet; |
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general economic conditions and those economic conditions
specific to the Internet and
e-commerce
industries; and |
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geopolitical events such as war, threat of war, or terrorist
actions. |
The increased variety of services offered on our websites makes
it difficult for us to forecast the level or source of our
revenues or earnings accurately. In view of the rapidly evolving
nature of our business and our limited operating history, we
believe that
period-to-period
comparisons of our operating results may not be meaningful, and
you should not rely upon them as an indication of future
performance. We do not have backlog, and substantially all of
our net revenues each quarter come from transactions involving
sales or payments during that quarter. Due to the inherent
difficulty in forecasting revenues it is also difficult to
forecast income statement expenses as a percentage of net
revenues. Quarterly and annual income statement
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expenses as a percentage of net revenues may be significantly
different from historical or projected rates. Our operating
results in one or more future quarters may fall below the
expectations of securities analysts and investors. In that
event, the trading price of our common stock would almost
certainly decline.
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We may not maintain our level of profitability or rates of
growth. |
We believe that our continued profitability and growth will
depend in large part on our ability to do the following:
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attract new users, keep existing users active on our websites,
and increase the activity levels of our active users; |
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react to changes in consumer use of the Internet and develop new
sources of monetization for some of our services; |
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manage the costs of our business, including the costs associated
with maintaining and developing our websites, customer support,
transaction and chargeback rates, and international and product
expansion; |
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maintain sufficient transaction volume to attract buyers and
sellers; |
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increase the awareness of our brands; and |
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provide our customers with superior community, customer support,
and trading and payment experiences. |
We invest heavily in marketing and promotion, customer support,
and further development of the operating infrastructure for our
core and recently acquired operations. Some of this investment
entails long-term contractual commitments. As a result, we may
be unable to adjust our spending rapidly enough to compensate
for any unexpected revenue shortfall, which may harm our
profitability. In addition, we are spending in advance of
anticipated growth, which may also harm our profitability.
Growth rates in our most established markets, such as Germany
and the U.S., have declined over time and may continue to do so
as the existing base of users and transactions becomes larger.
The expected future growth of our PayPal, Skype and Shopping.com
businesses may also cause downward pressure on our profit margin
because those businesses have lower gross margins than our eBay
trading platforms.
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There are many risks associated with our international
operations. |
Our international expansion has been rapid and we have only
limited experience in many of the countries in which we now do
business. Our international business, especially in Germany, the
U.K., and South Korea, has also become critical to our revenues
and profits. Net revenues outside the United States accounted
for approximately 46% of our net revenues in the first quarter
of 2005 and 2006. Expansion into international markets requires
management attention and resources and requires us to localize
our service to conform to local cultures, standards, and
policies. The commercial, Internet, and transportation
infrastructure in lesser-developed countries may make it
difficult for us to replicate our business model. In many
countries, we compete with local companies who understand the
local market better than we do, and we may not benefit from
first-to-market
advantages. We may not be successful in expanding into
particular international markets or in generating revenues from
foreign operations. For example, in 2002 we withdrew our eBay
marketplace offering from the Japanese market. Even if we are
successful, we expect the costs of operating new sites to exceed
our net revenues for at least 12 months in most countries.
As we continue to expand internationally, including through the
expansion of PayPal, Skype, and Shopping.com, we are subject to
risks of doing business internationally, including the following:
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regulatory requirements, including regulation of Internet
services, auctioneering, professional selling, distance selling,
communications, banking, and money transmitting, that may limit
or prevent the offering of our services in some jurisdictions,
prevent enforceable agreements between sellers and buyers,
prohibit the listing of certain categories of goods, require
product changes, require special licensure, subject us to
special taxes, or limit the transfer of information between eBay
and our affiliates; |
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legal uncertainty regarding our liability for the listings and
other content provided by our users, including uncertainty as a
result of less Internet-friendly legal systems, unique local
laws, and lack of clear precedent or applicable law; |
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difficulties in integrating with local payment providers,
including banks, credit and debit card associations, and
electronic fund transfer systems; |
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differing levels of retail distribution, shipping, and
communications infrastructures; |
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different employee/employer relationships and the existence of
workers councils and labor unions; |
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difficulties in staffing and managing foreign operations; |
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longer payment cycles, different accounting practices, and
greater problems in collecting accounts receivable; |
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potentially adverse tax consequences, including local taxation
of our fees or of transactions on our websites; |
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higher telecommunications and Internet service provider costs; |
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strong local competitors; |
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different and more stringent consumer protection, data
protection, and other laws; |
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cultural ambivalence towards, or non-acceptance of, online
trading; |
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seasonal reductions in business activity; |
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expenses associated with localizing our products, including
offering customers the ability to transact business in the local
currency; |
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laws and business practices that favor local competitors or
prohibit foreign ownership of certain businesses; |
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profit repatriation restrictions, foreign currency exchange
restrictions, and exchange rate fluctuations; |
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volatility in a specific countrys or regions
political or economic conditions; and |
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differing intellectual property laws. |
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 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, below.
We are continuing to expand PayPals services
internationally. We have limited experience with the payments
business outside of the U.S. In some countries, expansion
of PayPals business may require a close commercial
relationship with one or more local banks or a shared ownership
interest with a local entity. We do not know if these or other
factors may prevent, delay, or limit PayPals expansion or
reduce its profitability. Any limitation on our ability to
expand PayPal internationally could harm our business.
We maintain a portion of Shopping.coms research and
development facilities and personnel in Israel, and as a result,
political, economic and military conditions in Israel affect
those operations. Increased hostilities or terrorism within
Israel or armed hostilities between Israel and neighboring
states could make it more difficult for us to continue our
operations in Israel, which could increase our costs. In
addition, many of Shopping.coms employees in Israel could
be required to serve in the military for extended periods of
time under emergency circumstances. Shopping.coms Israeli
operations could be disrupted by the absence of employees due to
military service, which could adversely affect its business.
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Our operations in China are subject to risks and
uncertainties relating to the laws and regulations of the
Peoples Republic of China. |
Our operations in the Peoples Republic of China, or PRC,
are conducted through our EachNet subsidiary and through a
PayPal subsidiary. EachNet and PayPal are Delaware corporations
and foreign persons under the laws of the PRC and are subject to
many of the risks of doing business internationally described
above in There are many risks associated with our
international operations. The PRC currently regulates its
Internet sector through regulations restricting the scope of
foreign investment and through the enforcement of content
restrictions on the Internet. While many aspects of these
regulations remain unclear, they purport to limit and require
licensing of various aspects of the provision of Internet
information services. These regulations have created substantial
uncertainties regarding the legality of foreign investments in
PRC Internet companies, including EachNet and PayPal, and the
business operations of such companies. In order to meet local
ownership and regulatory licensing requirements, the eBay
EachNet website is operated through a foreign-owned enterprise
indirectly owned by eBays European operating entity, which
acts in cooperation with a local PRC company owned by certain
local employees. The PayPal China website is operated through a
foreign-owned enterprise owned by PayPals International
headquarters entity, which acts in cooperation with a local PRC
company owned by certain local employees. We believe
EachNets and PayPals current ownership structures
comply with all existing PRC laws, rules, and regulations. There
are, however, substantial uncertainties regarding the
interpretation of current PRC laws and regulations, and it is
possible that the PRC government will ultimately take a view
contrary to ours. The Peoples Bank of China, or PBOC, has
recently proposed guidelines for payment settlement
organizations which, may require PayPal to act in cooperation
with a different local PRC entity and obtain approval from the
PBOC. There are also uncertainties regarding EachNets and
PayPals ability to enforce contractual relationships they
have entered into with respect to management and control of the
companys business. If EachNet or PayPal were found to be
in violation of any existing or future PRC laws or regulations,
it could be subject to fines and other financial penalties, have
its business and Internet content provider licenses revoked, or
be forced to discontinue its business entirely. In addition, any
finding of a violation by EachNet or PayPal of PRC laws or
regulations could make it more difficult for us to launch new or
expanded services in the PRC.
Although Skype does not conduct operations in the PRC directly,
it makes its product available through a joint venture and its
product is used by residents of the PRC. PRC regulations
surrounding VoIP telephony are unclear or non-existent, and the
PRC or one of more of its provinces may adopt regulations that
restrict or prohibit the use of Skypes product.
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We are exposed to fluctuations in currency exchange
rates. |
Because we conduct a significant and growing portion of our
business outside the United States but report our results in
U.S. dollars, we face exposure to adverse movements in
currency exchange rates. In connection with its multi-currency
service, PayPal fixes exchange rates twice per day, and may face
financial exposure if it incorrectly fixes the exchange rate or
if exposure reports are delayed. PayPal also holds some
corporate and customer funds in
non-U.S. currencies,
and thus its financial results are affected by the translation
of these
non-U.S. currencies
into U.S. dollars. In addition, the results of operations
of our internationally focused websites are exposed to foreign
exchange rate fluctuations as the financial results of the
applicable subsidiaries are translated from the local currency
into U.S. dollars upon consolidation. If the
U.S. dollar weakens against foreign currencies, the
translation of these foreign-currency-denominated transactions
will result in increased net revenues, operating expenses, and
net income. Similarly, our net revenues, operating expenses, and
net income will decrease if the U.S. dollar strengthens
against foreign currencies. The change in weighted average
foreign currency exchange rates in the first quarter of 2006
relative to 2005 resulted in lower net revenues of approximately
$50.2 million and lower aggregate cost of revenues and
operating expenses of approximately $25.1 million. As
exchange rates vary, net sales and other operating results, when
translated, may differ materially from expectations. In
particular, to the extent the U.S. dollar strengthens
against the Euro and British Pound, our European revenues and
profits will be reduced as a result of these translation
adjustments. In addition, to the extent the U.S. dollar
strengthens against the Euro and the British Pound, cross-border
trade related to purchases of dollar-denominated goods by
non-U.S. purchasers
may decrease,
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and that decrease may not be offset by a corresponding increase
in cross-border trade involving purchases by U.S. buyers of
goods denominated in other currencies. While we from time to
time enter into transactions to hedge portions of our foreign
currency translation exposure, it is impossible to perfectly
predict or completely eliminate the effects of this exposure.
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Skype depends on key technology that is licensed from
third parties. |
Skype licenses technology underlying certain components of its
software from third parties it does not control, including the
technology underlying its
peer-to-peer
architecture and firewall traversal technology, and the audio
and video compression/decompression used to provide high sound
and video quality. Both of these technologies are key to the
software Skype provides. In addition, various other technologies
used by Skype are licensed from third parties. Although Skype
has contracts in place with its third party technology
providers, there can be no assurance that the licensed
technology or other technology that we may seek to license in
the future will continue to be available on commercially
reasonable terms, or at all. The loss of, or inability to
maintain, existing licenses could result in delays, a decrease
in service quality, or a complete failure of Skypes
product until equivalent technology or suitable alternatives can
be developed, identified, licensed and integrated. While we
believe Skype has the ability to either extend these licenses on
commercially reasonable terms or identify and obtain or develop
suitable alternative products, the costs associated with
licensing or developing such products could be high. Any failure
to maintain these licenses on commercially reasonable terms or
to license or develop alternative technologies would harm
Skypes business.
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Acquisitions could result in operating difficulties,
dilution, and other harmful consequences. |
We have acquired a number of businesses in the past, and
completed eight acquisitions in 2005. 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, including interests in our existing subsidiaries.
At any given time we may be engaged in discussions or
negotiations with respect to one or more of these types of
transactions. Any of these transactions could be material to our
financial condition and results of operations. The process of
integrating any acquired business may create unforeseen
operating difficulties and expenditures and is itself risky. The
areas where we may face difficulties include:
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diversion of management time, as well as a shift of focus from
operating the businesses to issues related to integration and
administration, particularly given the large number and size and
varying scope of our recent acquisitions, and, in the case of
Skype, the complex earn-out structure associated with the
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declining employee morale and retention issues resulting from
changes in, or acceleration of, compensation, or changes in
reporting relationships, future prospects, or the direction of
the business; |
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the need to integrate each companys accounting,
management, information, human resource and other administrative
systems to permit effective management, and the lack of control
if such integration is delayed or not implemented; |
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the need to implement controls, procedures and policies
appropriate for a larger public company at companies that prior
to acquisition had lacked such controls, procedures and
policies; and |
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in some cases, including in connection with PayPals recent
acquisition of VeriSigns payment gateway business, the
need to transition operations, users, and/or customers onto our
existing platforms. |
Foreign acquisitions involve special risks, including those
related to integration of operations across different cultures
and languages, currency risks, and the particular economic,
political, and regulatory risks associated with specific
countries. Moreover, we may not realize the anticipated benefits
of any or all of our acquisitions. Future acquisitions or
mergers may result in a need to issue additional equity
securities, spend our cash, or incur debt, liabilities, or
amortization expenses related to intangible assets, any of which
could reduce our profitability and harm our business.
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System failures could harm our business. |
We have experienced system failures from time to time, and any
interruption in the availability of our websites will reduce our
current revenues and profits, could harm our future revenues and
profits, and could subject us to regulatory scrutiny.
eBays primary website has been interrupted for periods of
up to 22 hours, and our PayPal site suffered intermittent
unavailability over a five-day period in October 2004. Any
unscheduled interruption in our services results in an
immediate, and possibly substantial, loss of revenues. Frequent
or persistent interruptions in our services could cause current
or potential users to believe that our systems are unreliable,
leading them to switch to our competitors or to avoid our sites,
and could permanently harm our reputation and brands. These
interruptions increase the burden on our engineering staff,
which, in turn, could delay our introduction of new features and
services on our sites. Because PayPal is a regulated financial
entity, frequent or persistent site interruptions could lead to
regulatory inquiries. These inquiries could result in fines,
penalties, or mandatory changes to PayPals business
practices, and ultimately could cause PayPal to lose existing
licenses it needs to operate or prevent it from obtaining
additional licenses that it needs to expand. Finally, because
our customers may use our products for critical transactions,
any system failures could result in damage to our
customers businesses. These customers could seek
significant compensation from us for their losses. Even if
unsuccessful, this type of claim likely would be time consuming
and costly for us to address.
Although our systems have been designed around industry-standard
architectures to reduce downtime in the event of outages or
catastrophic occurrences, they remain vulnerable to damage or
interruption from earthquakes, floods, fires, power loss,
telecommunication failures, terrorist attacks, computer viruses,
computer
denial-of-service
attacks, and similar events. Some of our systems, including our
Shopping.com and Skype websites, are not fully redundant, and
our disaster recovery planning is not sufficient for all
eventualities. Our systems are also subject to break-ins,
sabotage, and intentional acts of vandalism. Despite any
precautions we may take, the occurrence of a natural disaster, a
decision by any of our third-party hosting providers to close a
facility we use without adequate notice for financial or other
reasons, or other unanticipated problems at our hosting
facilities could result in lengthy interruptions in our
services. We do not carry business interruption insurance
sufficient to compensate us for losses that may result from
interruptions in our service as a result of system failures.
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Our growth will depend on our ability to develop our
brands, and these efforts may be costly. |
Our historical growth has been largely attributable to word of
mouth, and to frequent and high visibility national and local
media coverage. We believe that continuing to strengthen our
brands will be critical to achieving widespread acceptance of
our services, and will require an increased focus on active
marketing efforts. The demand for and cost of online and
traditional advertising have been increasing, and may continue
to increase. Accordingly, we will need to spend increasing
amounts of money on, and devote greater resources to,
advertising, marketing, and other efforts to create and maintain
brand loyalty among users. During 2004 and 2005, we
significantly increased the number of brands we are supporting,
adding Rent.com, Shopping.com, Kijiji, and Skype, among others.
Each of these brands requires its own resources, increasing the
costs of our branding efforts. Brand promotion activities may
not yield increased revenues, and even if they do, any increased
revenues may not offset the expenses incurred in building our
brands. If we do attract new users to our services, they may not
conduct transactions using our services on a regular basis. If
we fail to promote and maintain our brands, or if we incur
substantial expenses in an unsuccessful attempt to promote and
maintain our brands, our business would be harmed.
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Our business and users may be subject to sales tax and
other taxes. |
The application of indirect taxes (such as sales and use tax,
value added tax, or VAT, goods and services tax, business tax,
and gross receipt tax) to
e-commerce businesses
such as eBay and our users is a complex and evolving issue. Many
of the fundamental statutes and regulations that impose these
taxes were established before the growth of the Internet and
e-commerce. In many
cases, it is not clear how existing statutes apply to the
Internet or e-commerce.
In addition, some jurisdictions have implemented or may
implement laws
44
specifically addressing the Internet or some aspect of
e-commerce. The
application of existing, new, or future laws could have adverse
effects on our business.
Several proposals have been made at the U.S. state and
local level that would impose additional taxes on the sale of
goods and services through the Internet. These proposals, if
adopted, could substantially impair the growth of
e-commerce, and could
diminish our opportunity to derive financial benefit from our
activities. The U.S. federal governments moratorium
on states and other local authorities imposing access or
discriminatory taxes on the Internet is scheduled to expire in
November 2007. This moratorium does not prohibit federal, state,
or local authorities from collecting taxes on our income or from
collecting taxes that are due under existing tax rules.
In conjunction with the Streamlined Sales Tax
Project an ongoing, multi-year effort by U.S.,
state, and local governments to require collection and
remittance of distant sales tax by
out-of-state
sellers bills have been introduced in the
U.S. Congress to overturn the Supreme Courts Quill
decision, which limits the ability of state governments to
require sellers outside of their own state to collect and remit
sales taxes on goods purchased by in-state residents. An
overturning of the Quill decision would harm our users
and our business.
We do not collect taxes on the goods or services sold by users
of our services. One or more states or foreign countries may
seek to impose a tax collection or reporting or record-keeping
obligation on companies such as eBay that engage in or
facilitate e-commerce.
Such an obligation could be imposed if eBay were ever deemed to
be the legal agent of eBay sellers by a jurisdiction in which
eBay operates. A successful assertion by one or more states or
foreign countries that we should collect taxes on the exchange
of merchandise or services on our websites would harm our
business.
In July 2003, in compliance with the changes brought about by
the European Union (EU) VAT directive on
electronically supplied services, eBay began
collecting VAT on the fees charged to EU sellers on eBay sites
catering to EU residents. eBay also pays input VAT to suppliers
within the various countries the company operates. In most
cases, eBay is entitled to reclaim input VAT from the various
countries with regard to our own payments to suppliers or
vendors. However, because of our unique business model, the
application of the laws and rules that allow such reclamation is
sometimes uncertain. A successful assertion by one or more
countries that eBay is not entitled to reclaim VAT would harm
our business.
We continue to work with the relevant tax authorities and
legislators to clarify eBays obligations under new and
emerging laws and regulations. Passage of new legislation and
the imposition of additional tax requirements could harm eBay
sellers and our business. There have been, and will continue to
be, substantial ongoing costs associated with complying with the
various indirect tax requirements in the numerous markets in
which eBay conducts or will conduct business.
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Fraudulent activities on our websites and disputes between
users of our services may harm our business. |
PayPal faces significant risks of loss due to fraud and disputes
between senders and recipients, including:
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non-delivery of, or disputes over the quality of, goods and
services due to merchant fraud or inadequate merchant business
practices; |
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reversal of payment by buyers both for legitimate reasons and in
cases of buyer fraud; |
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unauthorized use of credit card and bank account information and
identity theft; |
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the need to provide effective customer support to process
disputes between senders and recipients; |
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potential breaches of system security; |
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potential employee fraud; and |
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use of PayPals system by customers to make or accept
payment for illegal or improper purposes. |
For the year ended December 31, 2005 and the first quarter
of 2006, PayPals transaction loss totaled
$73.8 million and $25.6 million, representing 0.27%
and 0.29% of PayPals total payment volume, respectively.
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Failure to deal effectively with fraudulent transactions
and customer disputes would increase PayPals loss rate and
harm its business.
PayPals highly automated and liquid payment service makes
PayPal an attractive target for fraud. In configuring its
service, PayPal faces an inherent trade-off between customer
convenience and security. Identity thieves and those committing
fraud using stolen credit card or bank account numbers can
potentially steal large amounts of money from businesses such as
PayPal. We believe that several of PayPals current and
former competitors in the electronic payments business have gone
out of business or significantly restricted their businesses
largely due to losses from this type of fraud. While PayPal uses
advanced anti-fraud technologies, we expect that technically
knowledgeable criminals will continue to attempt to circumvent
PayPals anti-fraud systems. In addition, PayPals
service could be subject to employee fraud or other internal
security breaches, and PayPal would be required to reimburse
customers for any funds stolen as a result of such breaches.
Merchants could also request reimbursement, or stop using
PayPal, if they are affected by buyer fraud.
PayPal incurs substantial losses from merchant fraud, including
claims from customers that merchants have not performed or that
their goods or services do not match the merchants
description. PayPal also incurs losses from claims that the
customer did not authorize the purchase, from buyer fraud, from
erroneous transmissions, and from customers who have closed bank
accounts or have insufficient funds in them to satisfy payments.
In addition to the direct costs of such losses, if they are
related to credit card transactions and become excessive they
could result in PayPal losing the right to accept credit cards
for payment. If PayPal were unable to accept credit cards, the
velocity of trade on eBay could decrease, in which case our
business would further suffer. PayPal has been assessed
substantial fines for excess charge-backs in the past, and
excessive charge-backs may arise in the future. PayPal has taken
measures to detect and reduce the risk of fraud, but these
measures may not be effective against new forms of fraud. If
these measures do not succeed, our business will suffer.
PayPal offers a buyer protection program that refunds to buyers
up to $1,000 in certain eBay transactions if they do not receive
the goods they purchased or if the goods differ significantly
from what was described by the seller. If PayPal makes such a
refund, it seeks to collect reimbursement from the seller, but
may not be able to receive any funds from the seller. The PayPal
buyer protection program has increased PayPals loss rate
and could cause future fluctuations in PayPals loss rate.
eBay faces similar risks with respect to fraudulent activities
on its websites. eBay periodically receives complaints from
users who may not have received the goods that they had
purchased. In some cases individuals have been arrested and
convicted for fraudulent activities using our websites. eBay
also receives complaints from sellers who have not received
payment for the goods that a buyer had contracted to purchase.
Non-payment may occur because of miscommunication, because a
buyer has changed his or her mind and decided not to honor the
contract to purchase the item, or because the buyer bid on the
item maliciously, in order to harm either the seller or eBay. In
some European jurisdictions, buyers may also have the right to
withdraw from a sale made by a professional seller within a
specified time period.
While eBay can suspend the accounts of users who fail to fulfill
their payment or delivery obligations to other users, eBay does
not have the ability to require users to make payment or deliver
goods, or otherwise make users whole other than through our
limited buyer protection programs. Other than through these
programs, eBay does not compensate users who believe they have
been defrauded by other users, although users who pay through
PayPal may have reimbursement rights from their credit card
company or bank, which in turn will seek reimbursement from
PayPal. eBay also periodically receives complaints from buyers
as to the quality of the goods purchased. We expect to continue
to receive communications from users requesting reimbursement or
threatening or commencing legal action against us if no
reimbursement is made. Our liability for these sort of claims is
only beginning to be clarified and may be higher in some
non-U.S. jurisdictions
than it is in the U.S. Litigation involving liability for
third-party actions could be costly for us, divert management
attention, result in increased costs of doing business, lead to
adverse judgments, or 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.
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Negative publicity and user sentiment generated as a result of
fraudulent or deceptive conduct by users of our eBay and PayPal
services could damage our reputation, reduce our ability to
attract new users or retain our current users, and diminish the
value of our brand names.
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Changes to credit card association fees, rules, or
practices could harm PayPals business. |
Because PayPal is not a bank, it cannot belong to or directly
access credit card associations, such as Visa and MasterCard. As
a result, PayPal must rely on banks or payment processors to
process transactions, and must pay a fee for this service. From
time to time, credit card associations may increase the
interchange fees that they charge for each transaction using one
of their cards. MasterCard and Visa each implemented increases
in their interchange fees for credit cards in April 2005.
PayPals credit card processors have the right to pass any
increases in interchange fees on to PayPal as well as increase
their own fees for processing. These increased fees increase
PayPals operating costs and reduce its profit margins.
PayPal is also required by its processors to comply with credit
card association operating rules, and PayPal has agreed to
reimburse its processors for any fines they are assessed by
credit card associations as a result of any rule violations by
PayPal. The credit card associations and their member banks set
and interpret the credit card rules. Some of those member banks
compete with PayPal. Visa, MasterCard, American Express, or
Discover could adopt new operating rules or re-interpret
existing rules that PayPal or its processors might find
difficult or even impossible to follow. As a result, PayPal
could lose its ability to give customers the option of using
credit cards to fund their payments. If PayPal were unable to
accept credit cards, its business would be seriously damaged. In
addition, the velocity of trade on eBay could decrease and our
business would further suffer.
PayPal is required to comply with credit card associations
special operating rules for Internet payment services. PayPal
and its credit card processors have implemented specific
business processes for merchant customers in order to comply
with these rules, but any failure to comply could result in
fines, the amount of which would be within Visas and
MasterCards discretion. PayPal also could be subject to
fines from MasterCard and Visa if it fails to detect that
merchants are engaging in activities that are illegal or
activities that are considered high risk, primarily
the sale of certain types of digital content. For high
risk merchants, PayPal must either prevent such merchants
from using PayPal or register such merchants with MasterCard and
Visa and conduct additional monitoring with respect to such
merchants. PayPal has incurred fines from its credit card
processor relating to PayPals failure to detect the use of
its service by high risk merchants. The amount of
these fines has not been material, but any additional fines in
the future would likely be for larger amounts, could become
material, and could result in a termination of PayPals
ability to accept credit cards or changes in PayPals
process for registering new customers, which would seriously
damage PayPals business.
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Changes in PayPals funding mix could adversely
affect PayPals results. |
PayPal pays significant transaction fees when senders fund
payment transactions using credit cards, nominal fees when
customers fund payment transactions by electronic transfer of
funds from bank accounts, and no fees when customers fund
payment transactions from an existing PayPal account balance.
Senders funded 53% of PayPals payment volume using credit
cards during both 2005 and the first quarter of 2006, and
PayPals financial success will remain highly sensitive to
changes in the rate at which its senders fund payments using
credit cards. Senders may prefer funding using credit cards
rather than bank account transfers for a number of reasons,
including the ability to dispute and reverse charges if
merchandise is not delivered or is not as described, the ability
to earn frequent flier miles or other incentives offered by
credit cards, the ability to defer payment, or a reluctance to
provide bank account information to PayPal. PayPal has received
inquiries regarding its disclosure practices with regard to
funding mechanisms from the attorneys general of a number of
states, and in March 2005, a complaint seeking class action
status was filed alleging, among other things, that
PayPals disclosure regarding the effects of users
choice of funding mechanism is deceptive. While we believe
PayPals disclosure is legal and accurate, any required
change to our disclosure practices could result in increased use
of credit card funding, damaging PayPals business.
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If PayPal were found to be subject to or in violation of
any U.S. laws or regulations governing banking, money
transmission, or electronic funds transfers, it could be subject
to liability and forced to change its business practices. |
A number of U.S. states have enacted legislation regulating
money transmitters. To date, PayPal has obtained licenses in 33
of these jurisdictions and interpretations in nine states that
licensing is not required under their existing statutes. As a
licensed money transmitter, PayPal is subject to bonding
requirements, restrictions on its investment of customer funds,
reporting requirements, and inspection by state regulatory
agencies. In July 2005, PayPal entered into a settlement
agreement and agreed to pay $225,000 to the California
Department of Financial Institutions in connection with alleged
violations of the California Financial Code relating to the use
of a receipt form for international payments that had not been
pre-approved by the Department, and incomplete reporting to the
Department. If PayPal were found to be in violation of other
money services laws or regulations, PayPal could be subject to
liability, forced to cease doing business with residents of
certain states, or forced to change its business practices. Any
change to PayPals business practices that makes the
service less attractive to customers or prohibits its use by
residents of a particular jurisdiction could decrease the
velocity of trade on eBay, which would further harm our
business. Even if PayPal is not forced to change its business
practices, it could be required to obtain additional licenses or
regulatory approvals that could impose a substantial cost on
PayPal.
We believe that the licensing or approval requirements of the
U.S. Office of the Comptroller of the Currency, the Federal
Reserve Board, and other federal or state agencies that regulate
banks, bank holding companies, or other types of providers of
e-commerce services do
not apply to PayPal, except for certain money transmitter
licenses mentioned above. However, PayPal has received written
communications in the past from state regulatory authorities
expressing the view that its service might constitute an
unauthorized banking business. PayPal has taken steps to address
these states concerns. However, we cannot guarantee that
the steps PayPal has taken to address these regulatory concerns
will be effective in all states, and one or more states may
conclude that PayPal is engaged in an unauthorized banking
business. If PayPal is found to be engaged in an unauthorized
banking business in one or more states, it might be subject to
monetary penalties and adverse publicity and might be required
to cease doing business with residents of those states. Even if
the steps it has taken to resolve these states concerns
are deemed sufficient by the state regulatory authorities,
PayPal could be subject to fines and penalties for its prior
activities. The need to comply with state laws prohibiting
unauthorized banking activities could also limit PayPals
ability to enhance its services in the future. Any change to
PayPals business practices that makes the service less
attractive to customers or prohibits its use by residents of a
particular jurisdiction could decrease the velocity of trade on
eBay, which would further harm our business.
Although there have been no definitive interpretations to date,
PayPal has assumed that its service is subject to the Electronic
Fund Transfer Act and Regulation E of the Federal Reserve
Board. As a result, among other things, PayPal must provide
advance disclosure of changes to its service, follow specified
error resolution procedures and absorb losses above $50 from
transactions not authorized by the consumer. In addition, PayPal
is subject to the financial privacy provisions of the
Gramm-Leach-Bliley Act, state financial privacy laws, and
related regulations. As a result, some customer financial
information that PayPal receives is subject to limitations on
reuse and disclosure. Existing and potential future privacy laws
may limit PayPals ability to develop new products and
services that make use of data gathered through its service. The
provisions of these laws and related regulations are
complicated, and PayPal does not have extensive experience in
complying with them. Even technical violations of these laws can
result in penalties of up to $1,000 for each non-compliant
transaction. PayPal processed an average of approximately
1.66 million transactions per day during the first quarter
of 2006, and any violations could expose PayPal to significant
liability.
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PayPals status under banking or financial services
laws or other laws in markets outside the U.S. is
unclear. |
PayPal currently allows its customers with credit cards to send
payments from 55 markets, and to receive payments in 42 of
those markets. In 25 of these 42 markets, customers can
withdraw funds to local bank accounts, and in eight of these
markets customers can withdraw funds by receiving a bank draft
in the mail.
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PayPal offers customers the ability to send or receive payments
denominated in U.S. dollars, British pounds, Euros,
Canadian dollars, Japanese yen, and Australian dollars. We act
in cooperation with a local company in the Peoples
Republic of China, or PRC, which offers PRC residents the
ability to send or receive payments denominated in renminbi. 25
of the 55 markets whose residents can use the PayPal service are
members of the European Union, and PayPal provides localized
versions of its service to customers in the EU through PayPal
(Europe) Ltd., a wholly-owned subsidiary of PayPal that is
licensed in the United Kingdom to operate as an Electronic Money
Institution. PayPal (Europe) implements its localized services
in EU countries through an expedited passport
notification process through the UK regulator to regulators in
other EU member states, pursuant to EU Directives. PayPal
(Europe) has completed the passport notice process
in all EU member countries. The regulators in these countries
could notify PayPal (Europe) of local consumer protection laws
that will apply to its business, in addition to UK consumer
protection law. Any such responses from these regulators could
increase the cost of, or delay, PayPals plans for
expanding its business. PayPal (Europe) is subject to
significant fines or other enforcement action if it violates the
disclosure, reporting, anti-money laundering, capitalization,
funds management or other requirements imposed on electronic
money institutions.
In many markets outside of the U.S. and the European Union, it
is not clear whether PayPals
U.S.-based service is
subject to local law or, if it is subject to local law, whether
such local law requires a payment processor like PayPal to be
licensed as a bank or financial institution or otherwise. Even
if PayPal is not currently required to obtain a license in those
countries, future localization or targeted marketing of
PayPals service in those countries could require licensure
and other laws of those countries (such as data protection and
anti-money laundering laws) may apply. If PayPal were found to
be subject to and in violation of any foreign laws or
regulations, it could be subject to liability, forced to change
its business practices or forced to suspend providing services
to customers in one or more countries. Alternatively, PayPal
could be required to obtain licenses or regulatory approvals
that could impose a substantial cost on it and involve
considerable delay to the provision or development of its
product. Delay or failure to receive such a license would
require PayPal to change its business practices or features in
ways that would adversely affect PayPals international
expansion plans and could require PayPal to suspend providing
services to customers in one or more countries.
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The current regulatory environment for Voice over Internet
Protocol (VoIP) is unclear, and Skypes business could be
harmed by new regulations or the application of existing
regulations to its products. |
The current regulatory environment for VoIP is unclear.
Skypes VoIP communications products are not currently
subject to all of the same regulations that apply to traditional
telephony. VoIP companies are generally subject to different
regulatory regimes in different countries, and in some cases are
subject to lower regulatory fees and lesser regulatory
requirements. Governments may impose increased fees, taxes, and
administrative burdens on VoIP companies. Increased fees could
include interconnection fees and access charges payable to local
exchange carriers to carry and terminate traffic, contributions
to the Universal Service Fund in the United States and
elsewhere, and other charges. New laws and regulations may
require Skype to meet various emergency service requirements,
disability access requirements, consumer protection
requirements, number assignment and portability requirements,
and interception or wiretapping requirements, such as the
Communications Assistance for Law Enforcement Act. Such
regulations could result in substantial costs depending on the
technical changes required to 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 of the VoIP
telephony market and popularity of VoIP telephony products
heighten the risk that governments will seek to regulate VoIP
telephony and the Internet. Competitors, including the incumbent
telephone companies, may devote substantial lobbying efforts to
seek greater protection for their existing businesses and
increased regulation of VoIP. In the United States, various
state legislatures are considering legislation to impose their
own requirements and taxes on VoIP. Increased regulatory
requirements on VoIP would increase Skypes costs, and, as
a result, our business would suffer.
Regulatory agencies may require Skype to conform to rules that
are unsuitable for VoIP communications technologies, that are
difficult or impossible to comply with due to the nature of IP
routing, or that are unnecessary or unreasonable in light of the
manner in which Skypes products are offered to customers.
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example, while suitable alternatives may be developed in the
future, the current IP network does not enable Skype to identify
the geographic origin of the traffic traversing the Internet or
to provide detailed calling information about
computer-to-computer
communications, either of which may make complying with future
regulatory requirements, such as emergency service requirements,
difficult or impossible. If Skype were subject to regulations
that are costly or impossible for it to comply with given its
technology, its business would be adversely affected.
In many countries in which Skype operates or provides VoIP
products, the laws that may relate to its offerings are unclear.
We cannot be certain that Skype or its customers are currently
in full compliance with regulatory or other legal requirements
in all countries in which Skype is used, that Skype or its
customers will be able to comply with existing or future
requirements, or that Skype or its customers will continue in
full compliance with any requirements. Skypes failure or
the failure of those with whom Skype transacts business to
comply with these requirements could materially adversely affect
our business, financial condition and results of operations.
New rules and regulations with respect to VoIP are being
considered in various countries around the world. Such new rules
and regulations could increase our costs of doing business or
prevent us from delivering our products and offerings over the
Internet, which could adversely affect Skypes customer
base, and thus its revenue.
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Our businesses depend on continued and unimpeded access to
the Internet. Internet service providers may be able to block,
degrade, or charge us or our users additional fees for our
offerings. |
Our customers rely on access to the Internet to use our products
and services. In many cases that access is provided by companies
that compete with at least some of our offerings, including
incumbent telephone companies, cable companies, mobile
communications companies, and large Internet service providers.
Some of these providers have stated that they may take measures
that could degrade, disrupt, or increase the cost of
customers use of Skype and possibly our other
offerings by restricting or prohibiting the use of
their lines for our offerings, by filtering, blocking or
delaying the packets containing the data associated with our
products, or by charging increased fees to us or our users for
use of their lines to provide our offerings. These activities
are technically feasible and may be permitted in the
U.S. after recent regulatory changes, including recent
decisions by the U.S. Supreme Court and Federal
Communications Commission. In addition, Internet service
providers could attempt to charge us each time our customers use
our offerings, or could charge us for delivery of email to our
customers. Worldwide, a number of companies have announced plans
to take such actions or are selling products designed to
facilitate such actions. Interference with our offerings or
higher charges for access to our offerings, whether paid by us
or by our customers, could cause us to lose existing customers,
impair our ability to attract new customers, and harm our
revenue and growth.
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New and existing regulations could harm our
business. |
We are subject to the same foreign and domestic laws as other
companies conducting business on and off the Internet. Today,
there are still relatively few laws specifically directed
towards online services. However, due to the increasing
popularity and use of the Internet and online services, many
laws relating to the Internet are being debated at all levels of
government around the world and it is possible that such laws
and regulations will be adopted. These laws and regulations
could cover issues such as user privacy, freedom of expression,
pricing, fraud, content and quality of products and services,
taxation, advertising, intellectual property rights, and
information security. It is not clear how existing laws
governing issues such as property ownership, copyrights and
other intellectual property issues, taxation, libel and
defamation, obscenity, and personal privacy apply to online
businesses. The vast majority of these laws were adopted prior
to the advent of the Internet and related technologies and, as a
result, do not contemplate or address the unique issues of the
Internet and related technologies. Those laws that do reference
the Internet, such as the U.S. Digital Millennium Copyright
Act and the European Unions Directive on Distance Selling
and Electronic Commerce have begun to be interpreted by the
courts and implemented by the EU Member States, but their
applicability and scope remain somewhat uncertain. As our
activities and the types of goods listed on our website expand,
regulatory agencies or courts may claim or hold that we or our
users are either subject to
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licensure or prohibited from conducting our business in their
jurisdiction, either with respect to our services in general, or
in order to allow the sale of certain items, such as real
estate, event tickets, cultural goods, boats, and automobiles.
Numerous states and foreign jurisdictions, including the State
of California, where our headquarters are located, have
regulations regarding auctions and the handling of
property by secondhand dealers or
pawnbrokers. No final legal determination has been
made as to whether the California regulations apply to our
business (or that of our users) and little precedent exists in
this area. Several states and some foreign jurisdictions have
attempted, and may attempt in the future, to impose such
regulations upon us or our users. Attempted enforcement of these
laws against some of our users appears to be increasing and such
attempted enforcements could harm our business. In 2002,
Illinois amended its auction law to provide for a special
regulatory regime for Internet auction listing
services, and we have registered as an Internet auction
listing service in Illinois. Although this registration has not
had a negative impact on our business to date, other regulatory
and licensure claims could result in costly litigation or could
require us to change the way we or our users do business in ways
that increase costs or reduce revenues or force us to prohibit
listings of certain items for some locations. We could also be
subject to fines or other penalties, and any of these outcomes
could harm our business.
In addition, because our services are accessible worldwide, and
we facilitate sales of goods to users worldwide, foreign
jurisdictions may claim that we are required to comply with
their laws. For example, the Australian high court has ruled
that a U.S. website in certain circumstances must comply
with Australian laws regarding libel. As we expand and localize
our international activities, we become obligated to comply with
the laws of the countries in which we operate. Laws regulating
Internet companies outside of the U.S. may be less
favorable than those in the U.S., giving greater rights to
consumers, content owners, and users. Compliance may be more
costly or may require us to change our business practices or
restrict our service offerings relative to those in the
U.S. Our failure to comply with foreign laws could subject
us to penalties ranging from criminal prosecution to bans on our
services.
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Our business is subject to online security risks,
including security breaches and identity theft. |
To succeed, online commerce and communications must provide a
secure transmission of confidential information over public
networks. Our security measures may not prevent security
breaches that could harm our business. Currently, a significant
number of our users authorize us to bill their credit card
accounts directly for all transaction fees charged by us.
PayPals users routinely provide credit card and other
financial information. We rely on encryption and authentication
technology licensed from third parties to provide the security
and authentication to effect secure transmission of confidential
information, including customer credit card numbers. Advances in
computer capabilities, new discoveries in the field of
cryptography or other developments may result in a compromise or
breach of the technology used by us to protect transaction data.
In addition, any party who is able to illicitly obtain a
users password could access the users transaction
data. An increasing number of websites have reported breaches of
their security. Any compromise of our security could harm our
reputation and, therefore, our business. In addition, a party
who is able to circumvent our security measures could
misappropriate proprietary information, or cause interruptions
in our operations, damage our computers or those of our users,
or otherwise damage our reputation and business.
Our servers are also vulnerable to computer viruses, physical or
electronic break-ins, and similar disruptions, and we have
experienced
denial-of-service
type attacks on our system that have made all or portions of our
websites unavailable for periods of time. We may need to expend
significant resources to protect against security breaches or to
address problems caused by breaches. These issues are likely to
become more difficult as we expand the number of places where we
operate. Security breaches could damage our reputation and
expose us to a risk of loss or litigation and possible
liability. Our insurance policies carry low coverage limits,
which may not be adequate to reimburse us for losses caused by
security breaches.
Our users, as well as those of other prominent Internet
companies, have been and will continue to be targeted by parties
using fraudulent emails to misappropriate passwords, credit card
numbers, or other personal information or to introduce viruses
through trojan horse programs to our users
computers. These
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emails appear to be legitimate emails sent by eBay, PayPal,
Skype, or a user of one of those businesses, but direct
recipients to fake websites operated by the sender of the email
or request that the recipient send a password or other
confidential information via email or download a program. We
actively pursue the parties responsible for these attempts at
misappropriation, and we have developed tools to detect, and
help users detect, fake websites and unauthorized access to
customer accounts and we encourage our users to divulge
sensitive information only after they have verified that they
are on our legitimate websites, but we cannot entirely eliminate
these types of activities.
Some businesses and security consultants have expressed concern
over the potential for Skypes software to create security
vulnerabilities on its users computers. While we believe
Skypes software is safe and does not pose a security risk
to its users, the perception that Skypes software is
unsafe could hamper its adoption, and any actual security breach
could damage Skypes reputation and expose us to a risk of
loss or litigation and possible liability.
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PayPals failure to manage customer funds properly
would harm its business. |
PayPals ability to manage and account accurately for
customer funds requires a high level of internal controls.
PayPal has neither an established operating history nor proven
management experience in maintaining, over a long term, these
internal controls. As PayPals business continues to grow,
it must strengthen its internal controls accordingly.
PayPals success requires significant public confidence in
its ability to handle large and growing transaction volumes and
amounts of customer funds. Any failure to maintain necessary
controls or to manage accurately customer funds could diminish
customer use of PayPals product severely.
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Our failure to manage growth could harm our
business. |
We are currently expanding our headcount, facilities, and
infrastructure in the U.S. and internationally. We anticipate
that further expansion will be required as we continue to expand
into new lines of business and geographic areas. This expansion
has placed, and we expect it will continue to place, a
significant strain on our management, operational, and financial
resources. The areas that are put under strain by our growth
include the following:
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Our Websites. We must constantly add new hardware, update
software and add new engineering personnel to accommodate the
increased use of our and our subsidiaries websites and the
new products and features we regularly introduce. This upgrade
process is expensive, and the increased complexity of our
websites and the need to support multiple platforms as our
portfolio of brands grows increases the cost of additional
enhancements. Failure to upgrade our technology, features,
transaction processing systems, security infrastructure, or
network infrastructure to accommodate increased traffic or
transaction volume could harm our business. Adverse consequences
could include unanticipated system disruptions, slower response
times, degradation in levels of customer support, impaired
quality of users experiences of our services, impaired
quality of services for third-party application developers using
our externally accessible Application Programming Interface, or
API, and delays in reporting accurate financial information. We
may be unable to effectively upgrade and expand our systems in a
timely manner or smoothly integrate any newly developed or
purchased technologies or businesses with our existing systems,
and any failure to do so could result in problems on our sites.
For example, in October 2004, we experienced unscheduled
downtime on the PayPal website over a period of five days
related to system upgrades. Despite our efforts to increase site
scalability and reliability, our infrastructure could prove
unable to handle a larger volume of customer transactions. Some
of our more recently acquired businesses may be particularly
subject to this risk given their shorter histories and, in some
cases, higher growth rates. Any failure to accommodate
transaction growth could impair customer satisfaction, lead to a
loss of customers, impair our ability to add customers, or
increase our costs, all of which would harm our business.
Further, steps to increase the reliability and redundancy of our
systems are expensive, reduce our margins, and may not be
successful in reducing the frequency or duration of unscheduled
downtime. |
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Customer Account Billing. Our revenues depend on prompt
and accurate billing processes. In 2004, we completed a
significant project to enhance our billing software. Problems
with the conversion to the new billing system during the second
and third quarters of 2004 caused incorrect account balance
totals to be displayed for some users. While these problems have
been corrected and we believe that no users were overcharged,
our failure to grow our transaction-processing capabilities to
accommodate the increasing number of transactions that must be
billed on any of our websites would harm our business and our
ability to collect revenue. |
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Customer Support. We are expanding our customer support
operations to accommodate the increased number of users and
transactions on our websites and the increased level of trust
and safety activity we provide worldwide. If we are unable to
provide these operations in a cost-effective manner, users of
our websites may have negative experiences, current and future
revenues could suffer, and our operating margins may decrease. |
We must continue to hire, train, and manage new employees at a
rapid rate. If our new hires perform poorly, if we are
unsuccessful in hiring, training, managing, and integrating
these new employees, or if we are not successful in retaining
our existing employees, our business may be harmed. To manage
the expected growth of our operations and personnel, we will
need to improve our transaction processing, operational and
financial systems, procedures, and controls. This is a special
challenge as we acquire new operations with different systems.
Our current and planned personnel, systems, procedures, and
controls may not be adequate to support our future operations.
The additional headcount and capital investments we are adding
increase our cost base, which will make it more difficult for us
to offset any future revenue shortfalls by expense reductions in
the short term.
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Our business is adversely affected by anything that causes
our users to spend less time on their computers, including
seasonal factors and national events. |
Anything that diverts our users from their customary level of
usage of our websites could adversely affect our business. We
would therefore be adversely affected by geopolitical events
such as war, the threat of war, or terrorist activity, and
natural disasters, such as hurricanes or earthquakes. Similarly,
our results of operations historically have been seasonal
because many of our users reduce their activities on our
websites with the onset of good weather during the summer
months, and on and around national holidays.
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We depend on the continued growth of online commerce and
communications. |
The business of selling goods over the Internet, particularly
through online trading, is dynamic and relatively new. Concerns
about fraud, privacy, and other problems may discourage
additional consumers from adopting the Internet as a medium of
commerce. In countries such as the U.S. and Germany, where our
services and online commerce generally have been available for
some time and the level of market penetration of our services is
high, acquiring new users for our services may be more difficult
and costly than it has been in the past. In order to expand our
user base, we must appeal to and acquire consumers who
historically have used traditional means of commerce to purchase
goods. If these consumers prove to be less active than our
earlier users, and we are unable to gain efficiencies in our
operating costs, including our cost of acquiring new customers,
our business could be adversely impacted.
The success of Skype depends on continued growth in its number
of users, which in turn depends on wider public acceptance of
VoIP. The VoIP communications medium is in its early stages, and
it may not develop a broad audience. Potential new users may
view VoIP as unattractive relative to traditional telephone
services for a number of reasons, including the need to purchase
computer headsets, the need to leave a personal computer on in
order to communicate with Skype, or the perception that the
price advantage for VoIP is insufficient to justify the
perceived inconvenience. Potential users may also view more
familiar online communication methods, such as
e-mail or instant
messaging, as sufficient for their communications needs.
Managers of some large private branch exchange, or PBX, systems
in businesses, universities, government agencies, and other
institutions may refuse to allow the use of Skype due to
concerns over security, server
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usage, or for other reasons. If VoIP does not achieve wide
public acceptance, our Skype business will be adversely affected.
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Use of our services for illegal purposes could harm our
business. |
The law relating to the liability of providers of online
services for the activities of their users on their service is
currently unsettled in the United States and internationally. We
are aware that certain goods, such as weapons, adult material,
tobacco products, alcohol, and other goods that may be subject
to regulation, have been listed and traded on our service. We
may be unable to prevent our users from selling unlawful goods
or selling goods in an unlawful manner, and we may be subject to
allegations of civil or criminal liability for unlawful
activities carried out by users through our service. We have
been subject to several lawsuits based upon such allegations. In
December 2004, an executive of Baazee.com, our Indian
subsidiary, was arrested in connection with a users
listing of a pornographic video clip on that site. Similarly,
our Korean subsidiary and one of its employees were found
criminally liable for listings on the Korean subsidiarys
website. In order to reduce our exposure to this liability, we
have prohibited the listing of certain items and increased the
number of personnel reviewing questionable items. In the future,
we may implement other protective measures that could require us
to spend substantial resources or discontinue certain service
offerings. Any costs incurred as a result of potential liability
relating to the sale of unlawful goods or the unlawful sale of
goods could harm our business. In addition, we have received
significant and continuing media attention relating to the
listing or sale of unlawful goods using our services. This
negative publicity could damage our reputation and diminish the
value of our brand names. It also could make users reluctant to
continue to use our services.
PayPals payment system is also susceptible to potentially
illegal or improper uses. These may include illegal online
gambling, fraudulent sales of goods or services, illicit sales
of prescription medications or controlled substances, piracy of
software and other intellectual property, money laundering, bank
fraud, child pornography trafficking, prohibited sales of
alcoholic beverages or tobacco products, and online securities
fraud. PayPals acceptable use policy enables PayPal to
fine users in certain jurisdictions up to $500 or take legal
action to recover its losses for certain violations of that
policy, including online gambling and illegal sales of
prescription medications. Despite measures PayPal has taken to
detect and lessen the risk of this kind of conduct, illegal
activities could still be funded using PayPal.
PayPal is subject to anti-money laundering laws and regulations
that prohibit, among other things, its involvement in
transferring the proceeds of criminal activities. Although
PayPal has adopted a program to comply with these laws and
regulations, any errors or failure to implement the program
properly could lead to lawsuits, administrative action, and
prosecution by the government. In July 2003, PayPal agreed with
the U.S. Attorney for the Eastern District of Missouri that
it would pay $10 million as a civil forfeiture to settle
allegations that its provision of services to online gambling
merchants violated provisions of the USA PATRIOT Act and further
agreed to have its compliance program reviewed by an independent
audit firm. PayPal is also subject to regulations that require
it to report suspicious activities involving transactions of
$2,000 or more and may be required to obtain and keep more
detailed records on the senders and recipients in certain
transfers of $3,000 or more. The interpretation of suspicious
activities in this context is uncertain. Future regulations
under the USA PATRIOT Act may require PayPal to revise the
procedures it uses to verify the identity of its customers and
to monitor international transactions more closely. As PayPal
localizes its service in other countries, additional
verification and reporting requirements could apply. These
regulations could impose significant costs on PayPal and make it
more difficult for new customers to join its network. PayPal
could be required to learn more about its customers before
opening an account, to obtain additional verification of
customers and to monitor its customers activities more
closely. These requirements, as well as any additional
restrictions imposed by credit card associations, could raise
PayPals costs significantly and reduce the attractiveness
of its product. Failure to comply with federal, state or foreign
country money laundering laws could result in significant
criminal and civil lawsuits, penalties, and forfeiture of
significant assets.
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We are subject to intellectual property and other
litigation. |
In April 2001, two of our European subsidiaries, eBay GmbH and
eBay International AG, were sued by Montres Rolex S.A. and
certain of its affiliates in the regional court of Cologne,
Germany. The suit subsequently was transferred to the regional
court in Düsseldorf, Germany. Rolex alleged that our
subsidiaries were infringing Rolexs trademarks as a result
of users selling counterfeit Rolex watches through our German
website. The suit also alleged unfair competition. Rolex sought
an order enjoining the sale of Rolex-branded watches on the
website as well as damages. In December 2002, a trial was held
in the matter and the court ruled in favor of eBay on all causes
of action. Rolex appealed the ruling to the Higher Regional
Court of Düsseldorf, and the appeal was heard in October
2003. In February 2004, the court rejected Rolexs appeal
and ruled in our favor. Rolex has appealed the ruling to the
German Federal Supreme Court, and a hearing is expected in
December 2006. In September 2004, the German Federal Supreme
Court issued its written opinion in favor of Rolex in a case
involving an unrelated company, ricardo.de AG, but somewhat
comparable legal theories. Although it is not yet clear what the
ultimate effect of the reasoning of the German Federal Supreme
Courts ricardo.de decision will have when applied to eBay,
we believe the Courts decision has resulted in an increase
in similar litigation against us in Germany, although we do not
currently believe that it will require a significant change in
our business practices.
In September 2001, MercExchange LLC filed a complaint against
us, our Half.com subsidiary and ReturnBuy, Inc. in the
U.S. District Court for the Eastern District of Virginia
(No. 2:01-CV-736)
alleging infringement of three patents (relating to online
consignment auction technology, multiple database searching and
electronic consignment systems) and seeking a permanent
injunction and damages (including treble damages for willful
infringement). In October 2002, the court granted in part our
summary judgment motion, effectively invalidating the patent
related to online auction technology and rendering it
unenforceable. This ruling left only two patents in the case.
Trial of the matter began in April 2003. In May 2003, the jury
returned a verdict finding that eBay had willfully infringed one
and Half.com had willfully infringed both of the patents in the
suit, awarding $35 million in compensatory damages. Both
parties filed post-trial motions, and in August 2003, the court
entered judgment for MercExchange in the amount of approximately
$30 million plus pre-judgment interest and post-judgment
interest in an amount to be determined, while denying
MercExchanges request for an injunction and
attorneys fees. We appealed the verdict and judgment in
favor of MercExchange and MercExchange filed a cross-appeal of
the granting in part of our summary judgment motion and the
denial of its request for an injunction and attorneys fees.
In March 2005, the U.S. Court of Appeals for the Federal
Circuit issued a ruling in the appeal of the MercExchange patent
litigation suit which, among other things (1) invalidated
all claims asserted against eBay and Half.com arising out of the
multiple database search patent and reduced the verdict amount
by $4.5 million; (2) upheld the electronic consignment
system patent; (3) affirmed the district courts
refusal to award attorneys fees or enhanced damages
against us; (4) reversed the district courts order
granting summary judgment in our favor regarding the auction
patent; and (5) reversed the district courts refusal
to grant an injunction and remanded that issue to the district
court for further proceedings. In May 2005, the Court of Appeals
for the Federal Circuit granted our petition to stay the mandate
in the case in order to allow us to petition the
U.S. Supreme Court for review on certain issues. We filed
our petition for review with the U.S. Supreme Court in July
2005, and in November 2005, the Court granted our petition for
review. Oral arguments in the case were heard by the Court in
March 2006, and the Courts decision is expected in the
second quarter of 2006. In parallel with the federal court
proceedings, at our request, the U.S. Patent and Trademark
Office is actively reexamining each of the patents in suit,
having found that substantial questions exist regarding the
validity of the claims contained in them. In January 2005, the
Patent and Trademark Office issued an initial ruling rejecting
all of the claims contained in the patent that related to online
auctions; in March 2005, the Patent and Trademark Office issued
an initial ruling rejecting all of the claims contained in the
patent that related to electronic consignment systems; and in
May 2005, the Patent and Trademark Office issued an initial
ruling rejecting all of the claims contained in the patent that
related to multiple database searching. In March 2006, the
Patent and Trademark Office affirmed its earlier ruling
rejecting the claims contained in the patent that related to
electronic consignment systems. Even if successful, our
litigation of these matters will continue to be costly. In
addition, as a precautionary measure, we have modified certain
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functionality of our websites and business practices in a manner
which we believe would avoid any further infringement. For this
reason, we believe that any injunction that might be issued by
the district court will not have any impact on our business. We
also believe we have appropriate reserves for this litigation.
Nonetheless, if we are not successful in appealing or modifying
the courts ruling, and if the modifications to the
functionality of our websites and business practices are not
sufficient to make them non-infringing, we would likely be
forced to pay significant additional damages and licensing fees
and/or modify our business practices in an adverse manner.
In August 2002, Charles E. Hill & Associates, Inc.
filed a lawsuit in the U.S. District Court for the Eastern
District of Texas
(No. 2:02-CV-186)
alleging that we and 17 other companies, primarily large
retailers, infringed three patents owned by Hill generally
relating to electronic catalog systems and methods for
transmitting and updating data at a remote computer. The suit
seeks an injunction against continuing infringement, unspecified
damages, including treble damages for willful infringement, and
interest, costs, expenses, and fees. The case was transferred to
the U.S. District Court for the Southern District of
Indiana in January 2003, but was transferred back to the
U.S. District Court for the Eastern District of Texas in
December 2003. A claim construction hearing was held in August
2005. In February 2006, we entered into and paid for a
settlement agreement with the plaintiffs in the case under which
we will be licensed under all of the patents at issue.
In February 2002, PayPal was sued in California state court (No.
CV-805433) in a purported class action alleging that its
limiting access to customer accounts and failure to promptly
restore access to legitimate accounts violates California state
consumer protection laws and is an unfair business practice and
a breach of PayPals User Agreement. This action was
re-filed with a different named plaintiff in June 2002
(No. CV-808441),
and a similar action was also filed in the U.S. District
Court for the Northern District of California in June 2002
(No. C-02-2777).
In March 2002, PayPal was sued in the U.S. District Court
for the Northern District of California
(No. C-02-1227) in
a purported class action alleging that its limiting access to
customer accounts and failure to promptly restore access to
legitimate accounts violates federal and state consumer
protection and unfair business practice laws. The two federal
court actions were consolidated into a single case, and the
state court action was stayed pending developments in the
federal case. In June 2004, the parties announced that they had
reached a proposed settlement. The settlement received approval
from the federal court on November 2, 2004, and the state
court action was dismissed with prejudice in March 2005. In the
settlement, PayPal does not acknowledge that any of the
allegations in the case are true. Under the terms of the
settlement, certain PayPal account holders are eligible to
receive payment from a settlement fund of $9.25 million,
less administrative costs and the amount awarded to
plaintiffs counsel by the court. That sum is being
distributed to class members who have submitted timely claims in
accordance with the settlements plan of allocation. The
plan of allocation for the portion of the settlement fund that
remains undistributed was approved by the District Court in
March 2006. Substantially all of the cost associated with the
settlement was reserved in 2003.
In July 2004, a purported class action lawsuit was filed by two
eBay users in Superior Court of the State of California, County
of Santa Clara (No. 104CV022708) alleging that eBay
engaged in improper billing practices as the result of problems
with the rollout of a new billing software system in the second
and third quarters of 2004. The lawsuit sought damages and
injunctive relief. An amended complaint was filed in January
2005, dropping one plaintiff, changing the capacity of the other
plaintiff to that of representative plaintiff, and adding seven
additional eBay users as plaintiffs. The amended complaint
expanded its claim to include numerous alleged improper billing
practices from September 2003 until the present. In February
2005, eBay filed a motion to strike and a demurrer seeking to
dismiss the complaint. In April 2005, the court sustained
portions of the demurrer, but granted the plaintiffs leave to
amend their complaint. The plaintiffs filed a second amended
complaint, dropping the last original plaintiff and again adding
new plaintiffs. We filed a motion to strike and a demurrer
regarding the plaintiffs second amended complaint. In July
2005, the court again sustained a portion of the demurrer and
again granted the plaintiffs leave to amend their complaint, and
the plaintiffs filed a third amended complaint. In December
2005, the plaintiffs filed a fourth amended complaint, dropping
several plaintiffs. In April 2006, the court approved a
settlement agreement entered into by the parties. Under the
terms of the settlement, the plaintiffs agreed to dismiss the
lawsuit and release eBay
56
from all claims, and eBay agreed to make a $250,000 payment
primarily directed to charity. The estimated settlement was
accrued in our consolidated income statement for the three
months ended March 31, 2006.
In February 2005, eBay was sued in Superior Court of the State
of California, County of Santa Clara (No. 105CV035930)
in a purported class action alleging that certain bidding
features of our site constitute shill bidding for
the purpose of artificially inflating bids placed by buyers on
the site. The complaint alleges violations of Californias
Auction Act, Californias Consumer Remedies Act, and unfair
competition. The complaint seeks injunctive relief, damages, and
a constructive trust. In April 2005, we filed a demurrer seeking
to dismiss the complaint, and a hearing on the demurrer was held
in February 2006. In March 2006, the parties reached tentative
agreement on the terms of a settlement. The court must approve
the terms of the settlement in order for it to become final. The
estimated settlement was accrued in our consolidated income
statement for the year ended December 31, 2005.
In March 2005, eBay, PayPal, and an eBay seller were sued in
Supreme Court of the State of New York, County of Kings
(No. 6125/05) in a purported class action alleging that
certain disclosures regarding PayPals Buyer Protection
Policy, users chargeback rights, and the effects of
users choice of funding mechanism are deceptive and/or
misleading. The complaint alleged misrepresentation on the part
of eBay and PayPal, breach of contract and deceptive trade
practices by PayPal, and that PayPal and eBay have jointly
violated the civil RICO statute (18 U.S.C.
Section 1961(4)). In April 2005, eBay and PayPal removed
the case to the U.S. District Court for the Eastern
District of New York and the plaintiffs filed an amended
complaint in the U.S. District Court
(No. 05-CV-01720)
repeating the allegations of the initial complaint but dropping
the civil RICO allegations. The complaint seeks injunctive
relief, compensatory damages, and punitive damages. Following
several mediation sessions, the parties reached a tentative
settlement in December 2005 and executed a Memorandum of
Understanding in March 2006. The parties are engaged in the
process of finalizing the settlement documentation. The court
must approve the terms of the settlement in order for it to
become final. The estimated settlement was accrued in our
consolidated income statement for the year ended
December 31, 2005.
Other third parties have from time to time claimed, and others
may claim in the future, that we have infringed their
intellectual property rights. We have been notified of several
potential patent disputes, and expect that we will increasingly
be subject to patent infringement claims as our services expand
in scope and complexity. In particular, we expect to face
additional patent infringement claims involving services we
provide, including various aspects of our Payments and
Communications businesses. We have in the past been forced to
litigate such claims. We may also become more vulnerable to
third-party claims as laws such as the Digital Millennium
Copyright Act, the Lanham Act and the Communications Decency Act
are interpreted by the courts and as we expand geographically
into jurisdictions where the underlying laws with respect to the
potential liability of online intermediaries like ourselves are
either unclear or less favorable. These claims, whether
meritorious or not, could be time consuming and costly to
resolve, cause service upgrade delays, require expensive changes
in our methods of doing business, or could require us to enter
into costly royalty or licensing agreements.
From time to time, we are involved in other disputes or
regulatory inquiries that arise in the ordinary course of
business. The number and significance of these disputes and
inquiries are increasing as our business expands and our company
grows larger. Any claims or regulatory actions against us,
whether meritorious or not, could be time consuming, result in
costly litigation, require significant amounts of management
time, and result in the diversion of significant operational
resources.
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Government inquiries may lead to charges or
penalties. |
A large number of transactions occur on our websites. We believe
that government regulators have received a substantial number of
consumer complaints about both eBay and PayPal, which, while
small as a percentage of our total transactions, are large in
aggregate numbers. As a result, we have from time to time been
contacted by various foreign and domestic governmental
regulatory agencies that have questions about our operations and
the steps we take to protect our users from fraud. PayPal has
received inquiries regarding its restriction and disclosure
practices from the Federal Trade Commission and these and other
business
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practices from the attorneys general of a number of states. If
PayPals processes are found to violate federal or state
law on consumer protection and unfair business practices, it
could be subject to an enforcement action or fines. If PayPal
becomes subject to an enforcement action, it could be required
to restructure its business processes in ways that would harm
its business, and to pay substantial fines. Even if PayPal is
able to defend itself successfully, an enforcement action could
cause damage to its reputation, could consume substantial
amounts of its managements time and attention, and could
require PayPal to change its customer service and operations in
ways that could increase its costs and decrease the
effectiveness of its anti-fraud program. Both eBay and PayPal
are likely to receive additional inquiries from regulatory
agencies in the future, which may lead to action against either
company. We have responded to all inquiries from regulatory
agencies by describing our current and planned antifraud
efforts, customer support procedures, operating procedures and
disclosures. If one or more of these agencies is not satisfied
with our response to current or future inquiries, we could be
subject to fines or other penalties, or forced to change our
operating practices in ways that could harm our business.
We are subject to laws relating to the use and transfer of
personally identifiable information about our users, especially
for financial information and for users located outside of the
U.S. New laws in this area have been passed by several
jurisdictions, and other jurisdictions are considering imposing
additional restrictions. Violation of these laws, which in many
cases apply not only to third-party transactions but also to
transfers of information between ourselves and our subsidiaries,
and between ourselves, our subsidiaries, and other parties with
which we have commercial relations, could subject us to
significant penalties and negative publicity and could adversely
affect us.
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The listing or sale by our users of pirated or counterfeit
items may harm our business. |
We have received in the past, and we anticipate receiving in the
future, communications alleging that certain items listed or
sold through our service by our users infringe third-party
copyrights, trademarks and trade names, or other intellectual
property rights. Although we have sought to work actively with
the owners of intellectual property rights to eliminate listings
offering infringing items on our websites, some rights owners
have expressed the view that our efforts are insufficient.
Content owners and other intellectual property rights owners
have been active in defending their rights against online
companies, including eBay. Allegations of infringement of
intellectual property rights have resulted in litigation against
us from time to time, including litigation brought by
Tiffany & Co. and Robespierre, Inc. (doing business as
Nanette Lepore) in the U.S., Rolex S.A. in Germany, and a number
of other owners of intellectual property rights. In both the
Tiffany and Nanette Lepore cases, the plaintiffs seek to hold
eBay liable for counterfeit items listed on our sites by third
parties. Tiffany seeks, among other things, an injunction that
would require eBay to prevent sellers from listing 5 or more
Tiffany items, as well as damages. Nanette Lepore seeks, among
other things, to require eBay to block all listings offering
Nanette Lepore items, as well as damages. eBay anticipates that
a trial in the Tiffany case will be scheduled before the end of
2006. Recently, eBay successfully prevented Nanette Lepore from
obtaining a preliminary injunction. In the ruling, the court
found that eBays process for addressing the listing of
counterfeit items by third parties on its site was both
reasonable and adequate. While we have been largely successful
to date in defending against such litigation, more recent cases
have been based, at least in part, on different legal theories
than those of earlier cases, and there is no guarantee that we
will continue to be successful in our defense. In addition, a
public perception that counterfeit or pirated items are
commonplace on our site could damage our reputation and our
business. Litigation and negative publicity may increase as our
sites gain prominence in markets outside of the U.S., where the
laws may be unsettled or less favorable to us. Such litigation
is costly for us, could result in damage awards or increased
costs of doing business through adverse judgment or settlement,
could require us to change our business practices in expensive
ways, or could otherwise harm our business. Litigation against
other online companies could result in interpretations of the
law that could also require us to change our business practices
or otherwise increase our costs.
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We are subject to risks associated with information
disseminated through our service. |
The law relating to the liability of online services companies
for information carried on or disseminated through their
services is currently unsettled. Claims could be made against
online services companies under
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both U.S. and foreign law for defamation, libel, invasion of
privacy, negligence, copyright or trademark infringement, or
other theories based on the nature and content of the materials
disseminated through their services. Several private lawsuits
seeking to impose liability upon us under a number of these
theories have been brought against us. In addition, domestic and
foreign legislation has been proposed that would prohibit or
impose liability for the transmission over the Internet of
certain types of information. Our service features a Feedback
Forum, which includes information from users regarding other
users. Although all such feedback is generated by users and not
by us, claims of defamation or other injury have been made in
the past and could be made in the future against us for content
posted in the Feedback Forum. Several recent court decisions
have narrowed the scope of the immunity provided to Internet
service providers like us under the Communications Decency Act.
This trend, if continued, may increase our potential liability
to third parties for the user-provided content on our site. Our
liability for such claims may be higher in jurisdictions outside
the U.S. where laws governing Internet transactions are
unsettled. If we become liable for information provided by our
users and carried on our service in any jurisdiction in which we
operate, we could be directly harmed and we may be forced to
implement new measures to reduce our exposure to this liability.
This may require us to expend substantial resources or to
discontinue certain service offerings, which would negatively
affect our financial results. In addition, the increased
attention focused upon liability issues as a result of these
lawsuits and legislative proposals could harm our reputation or
otherwise impact the growth of our business. Any costs incurred
as a result of this potential liability could harm our business.
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Customer complaints or negative publicity about our
customer service could diminish use of our services. |
Customer complaints or negative publicity about our customer
service could severely diminish consumer confidence in and use
of our services. Measures we sometimes take to combat risks of
fraud and breaches of privacy and security can damage relations
with our customers. These measures heighten the need for prompt
and accurate customer service to resolve irregularities and
disputes. Effective customer service requires significant
personnel expense, and this expense, if not managed properly,
could significantly impact our profitability. Failure to manage
or train our customer service representatives properly could
compromise our ability to handle customer complaints
effectively. If we do not handle customer complaints
effectively, our reputation may suffer and we may lose our
customers confidence.
Because it is providing a financial service and operating in a
more regulated environment, PayPal, unlike eBay, must provide
telephone as well as email customer service and must resolve
certain customer contacts within shorter time frames. As part of
PayPals program to reduce fraud losses, it may temporarily
restrict the ability of customers to withdraw their funds if
those funds or the customers account activity are
identified by PayPals anti-fraud models as suspicious.
PayPal has in the past received negative publicity with respect
to its customer service and account restrictions, and has been
the subject of purported class action lawsuits and state
attorney general inquiries alleging, among other things, failure
to resolve account restrictions promptly. If PayPal is unable to
provide quality customer support operations in a cost-effective
manner, PayPals users may have negative experiences,
PayPal may receive additional negative publicity, its ability to
attract new customers may be damaged, and it could become
subject to additional litigation. Current and future revenues
could suffer, or its operating margins may decrease. In
addition, negative publicity about or experiences with
PayPals customer support could cause eBays
reputation to suffer or affect consumer confidence in the eBay
brands as a whole.
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Problems with third parties who provide services to us or
to our users could harm our business. |
A number of parties provide services to us or to our users that
benefit us. Such services include seller tools that automate and
manage listings, merchant tools that manage listings and
interface with inventory management software, storefronts that
help our users list items, and caching services that make our
sites load faster, among others. In some cases we have
contractual agreements with these companies that give us a
direct financial interest in their success, while in other cases
we have none. In either circumstance, financial, regulatory, or
other problems that prevent these companies from providing
services to us or our users could reduce the number of listings
on our websites or make completing transactions on our websites
more difficult, and thereby harm our business. Any security
breach at one of these companies could also affect our customers
59
and harm our business. Although we generally have been able to
renew or extend the terms of contractual arrangements with these
third party service providers on acceptable terms, there can be
no assurance that we will continue to be able to do so in the
future.
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We depend on key personnel. |
Our future performance depends substantially on the continued
services of our senior management and other key personnel and
our ability to retain and motivate them. The loss of the
services of any of our executive officers or other key employees
could harm our business. We do not have long-term employment
agreements with any of our key personnel, we do not maintain any
key person life insurance policies, and our Chief
Executive Officer and many other members of our senior
management team have fully vested the vast majority of their
equity incentives. Our new businesses all depend on attracting
and retaining key personnel. Our future success also will depend
on our ability to attract, train, retain and motivate highly
skilled technical, managerial, marketing, and customer support
personnel. Competition for these personnel is intense, and we
may be unable to successfully attract, integrate, or retain
sufficiently qualified personnel. In making employment
decisions, particularly in the Internet and high-technology
industries, job candidates often consider the value of the stock
options they are to receive in connection with their employment.
Fluctuations in our stock price may make it more difficult to
retain and motivate employees whose stock option strike prices
are substantially above current market prices. Similarly,
decreases in the number of unvested stock options held by
existing employees, either because their options have vested or
because the size of follow-on option grants has declined, may
make it more difficult to retain and motivate employees.
Skypes future success depends substantially upon the
continued services of its senior management and key personnel,
and the loss of their services could harm our business. Several
key members of Skypes engineering team are consultants,
not full time employees, who provide services to us and third
parties. Many of Skypes employees had equity in Skype
prior to its acquisition by eBay. Skype equity holders were
given the option of receiving their portion of the acquisition
consideration in the form of a lump-sum up-front payment or
receiving a lower up-front payment in exchange for the
possibility of receiving additional consideration in the form of
potential earn-out payments tied to the achievement of certain
performance targets prior to June 30, 2009. Several key
members of Skypes senior management and key employees
chose to receive less up-front consideration in exchange for the
possibility of receiving the performance-based earn-out
payments. Although eligible Skype employees have also been
granted eBay stock options, the earn-out payments are not tied
to continued employment with Skype or eBay, and key Skype
employees may choose to depart because of differences in
corporate culture, because they believe the earn-out targets
will be achieved without their contributions, or because they
believe the earn-out targets are not achievable. The loss of the
services of any of Skypes senior management or key
personnel could delay the development and introduction of new
features and products, and could harm our ability to grow
Skypes business.
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Our industry is intensely competitive, and other companies
or governmental agencies may allege that our behavior is
anti-competitive. |
eBays Marketplaces businesses currently or potentially
compete with a number of companies providing both particular
categories of goods and broader ranges of goods. The Internet
provides new, rapidly evolving and intensely competitive
channels for the sale of all types of goods. We expect
competition to intensify in the future. The barriers to entry
into these channels are relatively low, and current offline and
new competitors can easily launch online sites at a nominal cost
using commercially available software or partnering with any one
of a number of successful
e-commerce companies.
Our broad-based competitors include the vast majority of
traditional department, warehouse, discount, and general
merchandise stores (as well as the online operations of these
traditional retailers), emerging online retailers, online
classified services, and other shopping channels such as offline
and online home shopping networks. These include most
prominently: Wal-Mart, Target, Sears, Macys, JC Penney,
Costco, Office
60
Depot, Staples, OfficeMax, Sams Club, Amazon.com, Buy.com,
AOL.com, Yahoo! Shopping, MSN, QVC, and Home Shopping Network.
A number of companies have launched a variety of services that
provide new channels for buyers to find and buy items from
sellers of all sizes. We recently acquired Shopping.com Ltd., an
online shopping comparison site. Shopping.com competes with
sites such as Buy.com, Googles Froogle, In-Store.com,
MySimon.com, Nextag.com, Pricegrabber.com, Shopzilla, and Yahoo!
Product Search, which offer shopping search engines that allow
consumers to search the Internet for specified products.
Similarly, sellers are increasingly acquiring new customers by
paying for search-related advertisements on search engine sites
such as Google and Yahoo!. We use product search engines and
paid search advertising to channel users to our sites, but these
services also have the potential to divert users to other online
shopping destinations.
We also compete with many local, regional, and national
specialty retailers and exchanges in each of the major
categories of products offered on our site. For example,
category-specific competitors to offerings in our Business
& Industrial category include Alibaba, Ariba,
Bid4Assets, BidFreight.com, Buyer Zone, Commerce One, DotMed,
DoveBid, Go Industry, Grainger, IronPlanet, labx.com,
Liquidation.com, Machinetools.com, Oracle, Partsforindustry.com,
PurchasePro.com, Ritchie Brothers Auctioneers, Testmart, Tractor
Supply Company, and VerticalNet. In addition, many competitors
have been successful at establishing online marketplaces that
cater to a particular retail category, such as vehicles,
tickets, or sporting goods.
Our international Marketplaces websites compete with similar
online and offline channels in each of their vertical categories
in most countries. In addition, they compete with general online
e-commerce sites, such
as Quelle and Otto in Germany, Yahoo-Kimo in Taiwan, Daum and
Gmarket in South Korea, TaoBao and 1pai, a partnership between
Sina.com and Yahoo! in China, and Amazon in the U.K. and other
countries. In some of these countries, there are online sites
that have much larger customer bases and greater brand
recognition than we do, and in certain of these jurisdictions
there are competitors that may have a better understanding of
local culture and commerce than we do.
The principal competitive factors for eBay Marketplaces include
the following:
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ability to attract buyers and sellers; |
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volume of transactions and price and selection of goods; |
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customer service; and |
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brand recognition. |
With respect to our online competition, additional competitive
factors include:
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community cohesion, interaction and size; |
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system reliability; |
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reliability of delivery and payment; |
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website convenience and accessibility; |
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level of service fees; and |
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quality of search tools. |
Some current and potential competitors have longer operating
histories, larger customer bases and greater brand recognition
in other business and Internet sectors than we do. Other online
trading services may be acquired by, receive investments from,
or enter into other commercial relationships with larger,
well-established and well-financed companies. As a result, some
of our competitors with other revenue sources may be able to
devote more resources to marketing and promotional campaigns,
adopt more aggressive pricing policies and devote substantially
more resources to website and systems development than we can.
Some of our competitors have offered services for free and
others may do this as well. We may be unable to compete
successfully against current and future competitors. In
addition, certain offline competitors may encourage
manufacturers to limit or cease distribution of their products
to dealers who sell through online channels such
61
as eBay, or may attempt to use existing or future government
regulation to prohibit or limit online commerce in certain
categories of goods or services. The adoption by manufacturers
or government authorities of policies or regulations
discouraging the sales of goods or services over the Internet
could force eBay users to stop selling certain products on our
websites. Increased competition or anti-Internet distribution
policies or regulations may result in reduced operating margins,
loss of market share and diminished value of our brand.
Conversely, other companies and government agencies have in the
past and may in the future allege that our actions violate the
antitrust or competition laws of the U.S. or other
countries, or otherwise constitute unfair competition. Such
claims, even if without foundation, typically are very expensive
to defend, involve negative publicity and diversion of
management time and effort, and could result in significant
judgments against us.
In order to respond to changes in the competitive environment,
we may, from time to time, make pricing, service or marketing
decisions or acquisitions that could harm our profitability. For
example, we have implemented a buyer protection program that
generally insures items up to a value of $200, with a $25
deductible, for users with a non-negative feedback rating at no
cost to the user. PayPal has implemented a similar buyer
protection program covering losses from selected eBay sellers up
to $1,000, with no deductible. Depending on the amount and size
of claims we receive under these programs, these product
offerings could harm our profitability. In addition, certain
competitors may offer or continue to offer free shipping or
other transaction related services, which could be impractical
or inefficient for eBay users to match. New technologies may
increase the competitive pressures by enabling our competitors
to offer a lower cost service.
Although we have established Internet traffic arrangements with
several large online services and search engine companies, these
arrangements may not be renewed on commercially reasonable terms
or these companies may decide to promote competitive services.
Even if these arrangements are renewed, they may not result in
increased usage of our services. In addition, companies that
control user access to transactions through network access,
Internet browsers, or search engines, could promote our
competitors, channel current or potential users to their
vertically integrated electronic commerce sites or their
advertisers sites, attempt to restrict our access, or
charge us substantial fees for inclusion.
The market for PayPals product is emerging, intensely
competitive, and characterized by rapid technological change.
PayPal competes with existing online and off-line payment
methods, including, among others:
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credit card merchant processors that offer their services to
online merchants, including Cardservice International, Chase
Paymentech, First Data, iPayment and Wells Fargo; and payment
gateways, including CyberSource and Authorize.net; |
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Money remitters such as MoneyGram and Western Union, a
subsidiary of First Data; |
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Bill payment services, including CheckFree; |
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processors that provide online merchants the ability to offer
their customers the option of paying for purchases from their
bank account, including Certegy, PayByTouch and TeleCheck, a
subsidiary of First Data, or to pay on credit, including Bill Me
Later; |
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providers of traditional payment methods, particularly credit
cards, checks, money orders, and Automated Clearing House
transactions; and |
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issuers of stored value targeted at online payments, including
VisaBuxx, NetSpend and Next Estate. |
In addition, Google has stated it is developing a new payment
service.
Some of these competitors have longer operating histories,
significantly greater financial, technical, marketing, customer
service and other resources, greater name recognition, or a
larger base of customers in affiliated businesses than PayPal.
PayPals competitors may respond to new or emerging
technologies and changes in customer requirements faster and
more effectively than PayPal. They may devote greater resources
62
to the development, promotion, and sale of products and services
than PayPal, and they may offer lower prices. PayPal may be
forced to lower its prices in response. Competing services tied
to established banks and other financial institutions may offer
greater liquidity and engender greater consumer confidence in
the safety and efficacy of their services than PayPal.
Overseas, PayPal faces competition from similar channels and
payment methods. In each country, numerous banks provide
standard online credit card acquiring and processing services,
and these banks typically have leading market share. In
addition, PayPal faces competition from Visas Visa Direct,
MasterCards MoneySend, and Royal Bank of Scotlands
World Pay and Webpay Internationals Click & Buy
in the European Community, NOCHEX, Moneybookers, NETeller and
FirePay in the U.K., CertaPay and HyperWallet in Canada, Paymate
in Australia, Alipay and 99Bill in China and Inicis in South
Korea. In addition, in certain countries, such as Germany and
Australia, electronic funds transfer is a leading method of
payment for both online and offline transactions. As in the
U.S., established banks and other financial institutions that do
not currently offer online payments could quickly and easily
develop such a service.
The market for Skypes products is also emerging, intensely
competitive, and characterized by rapid technological change.
Many traditional telecommunications carriers and cable providers
offer, or have indicated that they plan to offer, VoIP products
or services that compete with the software Skype provides. In
addition, many Internet companies, including AOL, Google,
Microsoft, and Yahoo! offer, or have indicated that they plan to
offer in the near future, VoIP products that are similar to
Skypes. We expect VoIP competitors to continue to improve
the performance of their current products and introduce new
products, software, services, and technologies. If Skypes
competitors successfully introduce new products or enhance their
existing products, this could reduce the market for Skypes
products, increase price competition, or make Skypes
products obsolete. For example, Skypes competitors may
integrate more traditional methods of online communication that
do not involve VoIP technology, such as instant messaging, with
content and functionality that Skype does not have, or that is
superior to Skypes, which could lower Skypes
adoption rates, decrease its ability to attract new users or
cause its current users to migrate to a competing company. In
addition, some of Skypes competitors, such as
telecommunications carriers and cable television providers, may
be able to bundle services and products that Skype does not
offer. These could include various forms of wireless
communications, voice and data services, Internet access, and
cable television. This form of bundling would put Skype at a
competitive disadvantage if these providers can combine a
variety of service offerings at a single attractive price.
Furthermore, competitors may choose to make their services
interoperable with one another, rather than proprietary, which
could increase the attractiveness of their services relative to
Skype and decrease the value of Skypes network of users.
Many of Skypes current and potential competitors have
longer operating histories, are substantially larger, and have
greater financial, marketing, technical, and other resources.
Some also have greater name recognition and a larger installed
base of customers than Skype has. As a result of their greater
resources, many current and potential competitors may be able to
lower their prices substantially, thereby eroding some or all of
Skypes cost advantage.
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Our business depends on the development and maintenance of
the Internet infrastructure. |
The success of our services will depend largely on the
development and maintenance of the Internet infrastructure. This
includes maintenance of a reliable network backbone with the
necessary speed, data capacity, and security, as well as timely
development of complementary products, for providing reliable
Internet access and services. The Internet has experienced, and
is likely to continue to experience, significant growth in the
numbers of users and amount of traffic. The Internet
infrastructure may be unable to support such demands. In
addition, increasing numbers of users, increasing bandwidth
requirements, or problems caused by viruses,
worms, and similar programs may harm the performance
of the Internet. The backbone computers of the Internet have
been the targets of such programs. The Internet has experienced
a variety of outages and other delays as a result of damage to
portions of its infrastructure, and it could face
63
outages and delays in the future. These outages and delays could
reduce the level of Internet usage generally as well as the
level of usage of our services.
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We may be unable to protect or enforce our own
intellectual property rights adequately. |
We regard the protection of our trademarks, copyrights, patents,
domain names, trade dress, and trade secrets as critical to our
success. We aggressively protect our intellectual property
rights by relying on a combination of trademark, copyright,
patent, trade dress and trade secret laws, and through the
domain name dispute resolution system. We also rely on
contractual restrictions to protect our proprietary rights in
products and services. We have entered into confidentiality and
invention assignment agreements with our employees and
contractors, and confidentiality agreements with parties with
whom we conduct business in order to limit access to and
disclosure of our proprietary information. These contractual
arrangements and the other steps we have taken to protect our
intellectual property may not prevent misappropriation of our
technology or deter independent development of similar
technologies by others. We pursue the registration of our domain
names, trademarks, and service marks in the U.S. and
internationally. Effective trademark, copyright, patent, domain
name, trade dress, and trade secret protection is very expensive
to maintain and may require litigation. We must protect our
trademarks, patents, and domain names in an increasing number of
jurisdictions, a process that is expensive and may not be
successful in every location. For example, Skype is in the
process of applying to register the Skype name as a trademark
worldwide. In the EU, Skypes application is being opposed.
If this opposition to Skypes application were to be
successful, Skype might be forced to apply for trademark
registration in each individual EU country, resulting in
increased expenditures and damage to its business if its
application were rejected in individual countries. We have
licensed in the past, and expect to license in the future,
certain of our proprietary rights, such as trademarks or
copyrighted material, to others. These licensees may take
actions that diminish the value of our proprietary rights or
harm our reputation.
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We are subject to the risks of owning real
property. |
We own real property including land and buildings related to our
operations. We have little experience in managing real property.
Ownership of this property subjects us to risks, including:
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the possibility of environmental contamination and the costs
associated with fixing any environmental problems; |
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adverse changes in the value of these properties, due to
interest rate changes, changes in the neighborhoods in which the
properties are located, or other factors; |
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the possible need for structural improvements in order to comply
with zoning, seismic, disability act, or other
requirements; and |
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possible disputes with tenants, neighboring owners, or others. |
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Some anti-takeover provisions may affect the price of our
common stock. |
Our Board of Directors has the authority to issue up to
10,000,000 shares of preferred stock and to determine the
preferences, rights and privileges of those shares without any
further vote or action by the stockholders. The rights of the
holders of common stock may be harmed by rights granted to the
holders of any preferred stock that may be issued in the future.
Some provisions of our certificate of incorporation and bylaws
could have the effect of making it more difficult for a
potential acquirer to acquire a majority of our outstanding
voting stock. These include provisions that provide for a
classified board of directors, prohibit stockholders from taking
action by written consent and restrict the ability of
stockholders to call special meetings. We are also subject to
provisions of Delaware law that prohibit us from engaging in any
business combination with any interested stockholder for a
period of three years from the date the person became an
interested stockholder, unless certain conditions are met. This
restriction could have the effect of delaying or preventing a
change of control.
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Item 2: |
Unregistered Sales of Equity Securities and Use of
Proceeds |
None
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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 |
Audit Committee Pre-Approvals of Non-Audit Engagements
The Audit Committee of our Board of Directors has adopted a
policy requiring the pre-approval of any non-audit engagement of
PricewaterhouseCoopers LLP, or PwC, our independent registered
public accounting firm. In the event that we wish to engage PwC
to perform accounting, technical, diligence or other permitted
services not related to the services performed by PwC as our
independent registered public accounting firm, our internal
finance personnel will prepare a summary of the proposed
engagement, detailing the nature of the engagement, the reasons
why PwC is the preferred provider of such services and the
estimated duration and cost of the engagement. The report will
be provided to our Audit Committee or a designated committee
member, who will evaluate whether the proposed engagement will
interfere with the independence of PwC in the performance of its
auditing services. We intend to disclose all approved non-audit
engagements in the appropriate quarterly report on
Form 10-Q or
annual report on
Form 10-K.
During the quarter ended March 31, 2006, our Audit
Committee approved the non-audit engagement of PwC to perform
due diligence services related to certain potential acquisitions.
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Exhibit 10.01
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2003 Deferred Stock Unit Plan, as amended+* |
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Exhibit 10.02
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Form of 2003 Deferred Stock Unit Plan Electing Director Award
Agreement, as amended+* |
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Exhibit 10.03
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Form of 2003 Deferred Stock Unit Plan New Director Award
Agreement as amended+* |
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Exhibit 10.04
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Summary of Compensation Payable to Named Executive Officers+* |
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Exhibit 31.01
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Certification of eBays Chief Executive Officer, as
required by Section 302 of the Sarbanes-Oxley Act of 2002. |
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Exhibit 31.02
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Certification of eBays Chief Financial Officer, as
required by Section 302 of the Sarbanes-Oxley Act of 2002. |
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Exhibit 32.01
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Certification of eBays Chief Executive Officer, as
required by Section 906 of the Sarbanes-Oxley Act of 2002. |
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Exhibit 32.02
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Certification of eBays Chief Financial Officer, as
required by Section 906 of the Sarbanes-Oxley Act of 2002. |
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+ |
Indicates a management contract or compensatory plan or
arrangement. |
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* |
Previously filed with the companys Quarterly Report on
Form 10-Q filed on April 25, 2006. |
65
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
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eBay Inc. |
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Principal Executive Officer: |
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By: |
/s/ Margaret C. Whitman |
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Margaret C. Whitman |
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President and Chief Executive Officer |
Date: April 25, 2006
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Principal Financial Officer: |
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Robert H. Swan |
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Senior Vice President and Chief Financial Officer |
Date: April 25, 2006
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Principal Accounting Officer: |
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Douglas Jeffries |
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Vice President, Chief Accounting Officer |
Date: April 25, 2006
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INDEX TO EXHIBITS
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Exhibit 10.01
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2003 Deferred Stock Unit Plan, as amended+* |
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Exhibit 10.02
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Form of 2003 Deferred Stock Unit Plan Electing Director Award
Agreement, as amended+* |
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Exhibit 10.03
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Form of 2003 Deferred Stock Unit Plan New Director Award
Agreement as amended+* |
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Exhibit 10.04
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Summary of Compensation Payable to Named Executive Officers+* |
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Exhibit 31.01
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Certification of eBays Chief Executive Officer, as
required by Section 302 of the Sarbanes-Oxley Act of 2002. |
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Exhibit 31.02
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Certification of eBays Chief Financial Officer, as
required by Section 302 of the Sarbanes-Oxley Act of 2002. |
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Exhibit 32.01
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Certification of eBays Chief Executive Officer, as
required by Section 906 of the Sarbanes-Oxley Act of 2002. |
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Exhibit 32.02
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Certification of eBays Chief Financial Officer, as
required by Section 906 of the Sarbanes-Oxley Act of 2002. |
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+ |
Indicates a management contract or compensatory plan or
arrangement. |
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* |
Previously filed with the companys Quarterly Report on
Form 10-Q filed on April 25, 2006. |
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