e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006.
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the Transition Period
from to .
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Commission file number
000-24821
eBay Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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77-0430924
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(State or other jurisdiction
of
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)
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Registrants telephone number, including area code:
(408) 376-7400
Securities registered pursuant to Section 12(b) of the
Securities Exchange Act of 1934:
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Title of each class
Common stock
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Name of exchange on which
registered
The Nasdaq Global Select Market
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Securities registered pursuant to Section 12(g) of the
Securities Exchange Act of 1934:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Exchange Act 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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. 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.
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 June 30, 2006, the aggregate market value of the
registrants common stock held by non-affiliates of the
registrant was $34,640,900,000 based on the closing sale price
as reported on The Nasdaq Global Select Market.
Indicate the number of shares outstanding of each of the
registrants classes of common stock, as of the latest
practicable date.
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Class
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Outstanding as of February 16, 2007
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Common Stock, $0.001 par
value per share
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1,368,973,770 shares
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DOCUMENTS
INCORPORATED BY REFERENCE
Part III incorporates information by reference from the
definitive proxy statement for the registrants Annual
Meeting of Stockholders to be held on or about June 14,
2007.
eBay
Inc.
Form 10-K
For the Fiscal Year Ended December 31, 2006
TABLE OF CONTENTS
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PART I
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, will,
should, expect, anticipate,
believe, estimate, intend,
plan and other similar expressions. You should
consider our forward-looking statements in light of the risks
discussed in Item 1A: Risk Factors, as well as
our consolidated financial statements, related notes, and the
other financial information appearing elsewhere in this report
and our other filings with the Securities and Exchange
Commission, or the SEC. We assume no obligation to update any
forward-looking statements.
ITEM 1: BUSINESS
Overview
eBay Inc. was formed as a sole proprietorship in September 1995
and was incorporated in California in May 1996. In April 1998,
we reincorporated in Delaware and in September 1998 we completed
the initial public offering of our common stock. Our principal
executive offices are located at 2145 Hamilton Avenue,
San Jose, California 95125, and our telephone number is
(408) 376-7400.
When we refer to we, our or
eBay in this Annual Report on
Form 10-K,
we mean the current Delaware corporation (eBay Inc.) and its
California predecessor, as well as all of our consolidated
subsidiaries. When we refer to eBay.com we mean the
online marketplace located at www.ebay.com and its
localized counterparts. When we refer to PayPal we
mean the online payments platform located at
www.paypal.com. When we refer to
Skype we mean the Voice over Internet Protocol, or
VoIP, offerings provided by our subsidiary Skype Technologies
S.A.
Our purpose is to pioneer new communities around the world built
on commerce, sustained by trust and inspired by opportunity. To
achieve our purpose, we operate three primary business segments:
Marketplaces, Payments and Communications. 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. Our Marketplaces
segment enables online commerce through a variety of platforms,
including the traditional eBay.com platform and our other online
platforms, such as Shopping.com, classifieds websites and
Rent.com. The wide array of websites that comprise our
Marketplaces segment bring together millions of buyers and
sellers every day on a local, national and international basis.
Our Payments segment, which consists of PayPal, enables
individuals and businesses to securely, easily and quickly send
and receive payments online. Our Communications segment, which
consists of Skype, enables VoIP calls between Skype users, and
also provides Skype users low-cost connectivity to traditional
fixed-line and mobile telephones.
Marketplaces
Our Marketplaces segment is comprised of online commerce
platforms that enable a global community of buyers and sellers
to interact and trade with one another. Our goal is to create,
maintain, and expand the functionality, safety,
ease-of-use
and reliability of our online commerce platforms while, at the
same time, supporting the growth and success of our community of
users. On any given day, there are more than a hundred million
items available through auction-style and fixed-price trading.
Marketplaces
Value Proposition
We seek to attract buyers and sellers to our community by
offering:
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Buyers
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Sellers
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Selection
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Access to broad markets
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Value
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Cost effective
marketing and distribution
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Convenience
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Ability to maximize
selling prices
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Entertainment
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Opportunity to
increase sales
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We believe our Marketplaces segment websites make inefficient
markets more efficient because:
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Our global community of users can easily and inexpensively
communicate, exchange information and complete transactions;
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Our Marketplaces include more than a hundred million items,
creating a wide variety and selection of goods;
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We bring buyers and sellers together for lower fees than
traditional intermediaries; and
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Our Marketplaces provide for efficient information exchange.
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In particular, large markets with broad buyer and seller bases,
wide product ranges, and moderate shipping costs have been
successful on our Marketplaces platforms. Generally speaking,
our marketplaces are most effective, relative to available
alternatives, at addressing markets of new and scarce goods,
end-of-life
products and used and vintage items.
Global
Community of Buyers and Sellers
We have aggregated a significant number of buyers, sellers, and
items listed for sale, which, in turn, has resulted in a vibrant
online commerce environment. Our sellers generally enjoy high
conversion rates and our buyers enjoy an extensive selection of
broadly-priced goods and services. Key components of our
community philosophy are maintaining honest and open
marketplaces and treating individual users with respect. We seek
to maintain the satisfaction and loyalty of our buyers and
sellers by offering a variety of community and support features,
such as announcement and bulletin boards, customer support
boards and personal pages, as well as other topical or
category-specific information exchanges. By applying a
consistent set of policies to our community, we seek to create a
level playing field that lets individuals and businesses of all
types and sizes access broad markets and compete equally.
Our success has resulted largely from the growth of our
community of confirmed registered users, which has increased in
size from approximately two million at the end of 1998 to
approximately 222 million as of December 31, 2006. As
of December 31, 2006, we had approximately 82 million
active users on the eBay.com platforms, compared to
approximately 72 million at the end of 2005. We define an
active user as any user who bid on, bought, or listed an item
during the most recent
12-month
period.
Marketplaces
Platforms
Our Marketplaces platforms are fully automated, topically
arranged, and
easy-to-use
online services that seek to provide availability 24 hours
a day, seven days a week, enabling sellers to list items for
sale and buyers to bid for and purchase items of interest, and
all users to browse through listed items from any place in the
world at any time. The platforms include software tools and
services, available either for no charge or for a fee, that
allow buyers and sellers to trade with one another more easily
and efficiently. The Marketplaces platforms consist of our core
online commerce platform, eBay.com, and adjacent platforms
consisting of Shopping.com, our classifieds websites and
Rent.com. Marketplaces earns revenue from listing, feature and
final value fees paid by sellers, lead referral fees and
advertising fees.
eBay.com
Platform
Our Marketplaces core platform, eBay.com, includes our
traditional auction format, fixed price format and eBay Stores.
We offer the core platform on localized sites in 24 countries.
Auction
Listing Format
At the core of our Marketplaces platform are our traditional
auction format listings, in which a seller will select a minimum
price for opening bids, with the option to set a reserve price
for the item, which is the minimum price at which the seller is
willing to sell the item. A seller with appropriate feedback
ratings can also sell in a Multiple
Item Auction format, which allows a seller to sell
multiple identical items to the highest bidders.
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Fixed
Price Listing Format
Our fixed price format allows for a faster selling and buying
experience as opposed to waiting for the auction period to
expire. Sellers with appropriate feedback ratings can choose to
use the Buy-It-Now feature at the time of the listing, which
allows sellers to name a price at which they would be willing to
sell the item to any buyer. Our Half.com subsidiary also
provides a fixed price, person-to person
e-commerce
website that allows people to buy and sell previously owned
books, movies, music and games at discounted prices. In 2006,
all fixed priced trading accounted for approximately 36% of
eBays gross merchandise volume, or GMV, which is the total
value of all successfully closed listings on eBay.coms
trading platforms.
eBay
Stores
eBay Stores enables sellers to show all of their listings and to
describe their respective businesses through customized pages.
eBay Stores provide useful tools for sellers to build, manage,
promote, and track their business. Store Inventory
Format listings allow sellers to list items at a lower
insertion fee and higher final value fee than regular auction
and fixed price listings, for a minimum 30-day listing duration.
As of December 31, 2006, there were nearly 600,000 online
storefronts established by users in locations around the world.
Other
Marketplaces Platforms
Shopping.com
Shopping.com is a comparison shopping website that allows
shoppers to compare millions of products from thousands of
stores and helps merchants increase their sales. Shopping.com
offers one of the largest product catalogs on the
Internet searchable by thousands of
attributes along with a consumer review service
through Epinions.com, which helps users make informed buying
decisions.
Classifieds
Websites
Our classifieds websites are available in hundreds of cities and
regions around the world and are designed to help people meet,
share ideas and trade on a local level. Our classifieds websites
include Kijiji, Gumtree.com, LoQUo.com, Intoko, Marktplaats.nl
and mobile.de. In addition, we have a minority equity investment
in craigslist, Inc., which operates the craigslist
classifieds websites around the world.
Rent.com
Rent.com is a leading U.S. Internet listing website in the
apartment and rental housing industry. The website is designed
as a more effective means of bringing apartments seekers and
apartment managers together.
Key
Services for Buyers and Sellers
We have developed a number of features in our eBay.com platform
in the areas of Trust and Safety, Customer Support and
Value-Added Tools and Services, as well as a Loyalty Program.
These features are designed to make users more comfortable
dealing with unknown trading partners and completing commerce
transactions on the Internet.
Trust and
Safety
Feedback Forum: Our Feedback Forum encourages
each user to provide comments on other users with whom he or she
trades and lets every user view other users profiles,
which include feedback ratings and comments by other users.
Every registered user has a feedback profile that may contain
compliments, criticisms and other comments by users who have
conducted business with that person. The Feedback Forum requires
feedback to be related to specific transactions and provides an
easy tool for users to match specific transactions with the user
names of their trading partners. This information is recorded in
a profile that includes a feedback rating for the person with
feedback sorted according to whether it was given over the past
month, six months, or twelve months. Users who develop positive
reputations have color-coded star symbols displayed next to
their user names to indicate the number of positive feedback
ratings they have received. The Feedback Forum has several
automated features
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designed to detect and prevent some forms of abuse, such as a
user leaving positive feedback about himself or herself through
multiple accounts.
SafeHarbor Program: We also offer the
SafeHarbor program, which provides guidelines for trading,
provides information to resolve user disputes and responds to
reports of misuse of the eBay service. eBays SafeHarbor
staff investigates users complaints of possible misuse of
the eBay service and takes appropriate action, including issuing
warnings to users, ending and removing listings, or suspending
users from bidding on or listing items for sale. The complaints
the SafeHarbor staff investigates include various forms of bid
manipulation, malicious posting of negative feedback and posting
of illegal items for sale.
Verified Rights Owner (VeRO) Program: The
Verified Rights Owner (VeRO) Program lets intellectual property
rights owners request the removal of listings that offer items
or contain materials that infringe on their rights. This helps
protect community members from purchasing items that may be
counterfeit or otherwise unauthorized.
Customer
Support
We devote resources to providing personalized, accurate and
timely support services to our community of users. Buyers and
sellers can contact us through a variety of means, including
email, online text chat and, in certain circumstances,
telephone. We are focusing our resources on increasing our
accessibility and capacity, expanding our category-specific
support, extending our online self-help features, and improving
our systems and processes to allow us to provide the most
efficient and effective support possible.
Value-Added
Tools and Services
eBay users have access to a variety of pre-trade and
post-trade tools and services to enhance their user
experience and to make trading faster, easier and safer for
them. Pre-trade tools and services are intended to
simplify the listing process. Post-trade tools and
services are designed to make transactions easier and more
convenient to complete.
These tools and services include: Turbo Lister, eBay
Blackthorne, ProStores, Selling Manager and Selling Manager Pro,
which help automate the selling process; Picture Services, which
enables sellers to include pictures in their listings; the
Shipping Calculator, which makes it easier for buyers and
sellers to calculate shipping costs; Shipping Labels, which
allows sellers to print certain postage and UPS labels; Shipment
Tracking, which enables sellers to track their shipped packages;
the eBay Toolbar, which helps eBay users stay connected with
eBay wherever they are on the Internet; eBay Sales Reports and
eBay Sales Reports Plus, which provide sales and fee information
to sellers; eBay Market Research, which enables sellers to
analyze sales in categories across the site; Reviews and Guides,
which assists shoppers in making more informed choices; and
PayPal, which facilitates the online exchange of funds. We
currently provide these services directly or through contractual
arrangements with third parties.
Loyalty
Program
PowerSeller program: PowerSellers are
eBays top sellers who have sustained a consistent high
volume of monthly sales and who have a high level of positive
feedback. Members of the PowerSeller program get a range of
special benefits, including prioritized customer support,
promotional offers, eBay promotional merchandise, advanced
selling education, opportunities to participate in research, and
other special rewards. The PowerSeller program is free of charge
and a special PowerSeller icon is located next to the
sellers user name if the seller qualifies for the program.
Marketplaces
Growth Strategy
We intend to achieve our mission of creating the worlds
leading
e-commerce
franchise by building upon our core Marketplaces business and
building our adjacent businesses.
We will continue to grow our core Marketplaces business by
enhancing our products, improving Trust and Safety and extending
our product offerings into new formats, categories and
geographies. Our product
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enhancements are focused on improving the user experience to
increase buyer satisfaction and activity levels which we believe
will improve our conversion rates and, in turn, lead to higher
GMV. For example, in 2006, we introduced eBay Express, a
specialty destination site for buyers looking to purchase new
merchandise at fixed prices. eBay Express targets existing
registered users in an effort to increase their purchasing
activity. Improvements to our Trust and Safety policies are
designed to ensure that buyers have a safe trading experience to
drive repeat business.
Another element of our growth strategy is to build adjacent
businesses. These adjacencies, which offer opportunities for
growth beyond our core GMV businesses, include new formats and
new monetization models. We will continue to grow our
alternative format businesses Shopping.com and our
classifieds websites. In addition, we intend to expand our
monetization models through advertising partnerships and the
development of a
pay-per-call
platform.
Payments
Our global payments platform, PayPal, enables any individual or
business with an email address to securely, easily and quickly
send and receive payments online. We believe our global payments
platform makes online commerce more efficient compared to
traditional payment methods such as checks, money orders, and
credit cards via merchant accounts. These traditional payment
methods present various obstacles to the online commerce
experience, including lengthy processing time, inconvenience,
and high costs. PayPal delivers a product well-suited for all
online merchants and individuals by allowing them to send and
receive online payments securely, conveniently and
cost-effectively. The PayPal network builds on the existing
financial infrastructure of bank accounts and credit cards to
create a global, real-time payment solution.
PayPal
Value Proposition
Providing more efficient and effective payment methods is
essential to creating a faster, easier and safer online commerce
experience. Traditional payment methods such as checks, money
orders and credit cards processed through merchant accounts, all
present various obstacles to the online commerce experience,
including lengthy processing time, inconvenience and high costs.
Our PayPal online payments solution allows its account holders,
as well as users of other online businesses, to pay for their
transactions securely, easily and quickly.
Buyer
Value Proposition
PayPal enables buyers to pay merchants without sharing their
sensitive financial information with them. To make payments,
buyers need to disclose only their email addresses to
recipients. Many buyers wary of disclosing financial information
online find this high level of personal privacy attractive.
Buyers also benefit from PayPals buyer protection program.
Seller
Value Proposition
PayPal offers online merchants an
all-in-one
payment processing solution that is less expensive than most
merchant accounts, offers industry-leading fraud prevention, and
enables merchants to conduct business with approximately
133 million PayPal customer accounts in over 100 markets.
PayPal also offers merchants the ability to maintain a direct
relationship with their customers.
A merchant can open a PayPal account and begin accepting credit
card payments within a few minutes. Merchants are approved
instantly for a PayPal account, and do not need to provide a
personal guaranty, acquire any specialized hardware, prepare an
application, contact a payment gateway or encrypt customer data.
Furthermore, PayPal charges lower transaction fees than most
merchant accounts, and charges no setup fees and no recurring
monthly fees.
The account-based nature of PayPals network helps us to
detect and prevent fraud when funds enter the PayPal network, as
funds move within the network, and when they leave. Sellers can
also reduce the risk of transaction losses due to unauthorized
credit card use and fraudulent chargebacks, if they comply with
PayPals Seller Protection Policy.
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PayPal
Overview
Joining
the Network
PayPal offers three types of accounts: Personal, Business, and
Premier. A new account holder typically opens an account to send
money for an eBay purchase or a purchase on another website, a
payment for services rendered, or for a payment to an individual
in lieu of cash. Allowing new account holders to join the
network when they make or receive payments encourages
PayPals natural, user-driven growth. PayPals account
sign-up
process asks each new account holder to provide PayPal his or
her name, street address, phone number, and email address. The
account holders email address serves as the unique account
identifier. PayPal also offers customers who sell on their own
websites the ability to accept credit card payments from buyers
without requiring the buyer to open a PayPal account.
Buyers make payments at the PayPal website, at an item listing
on eBay.com or another online business or platform where the
seller has integrated PayPals Instant Purchase Feature, or
at the sites of merchants that have integrated PayPals
Website Payments feature. To make a payment at PayPals
website, a buyer logs in to his or her account and enters the
recipients email address and the amount of the payment. To
make a payment through Instant Purchase or Website Payments, a
buyer selects an item for purchase, confirms the payment
information and enters his or her email address and password to
authorize the payment. PayPal debits the money from the
buyers PayPal balance, credit card, or bank account and
credits it to the recipients PayPal balance. In the case
of an eCheck payment, the transaction is held until the funds
have cleared the senders bank, which typically takes three
to five business days. In turn, the recipient can make payments
to others or withdraw his or her funds at any time via check (in
the U.S.), electronic funds transfer, or via a PayPal-branded
debit card (which is only available to U.S. users).
PayPal earns revenues in five ways. First, PayPal earns
transaction fees when a Business or Premier account receives a
payment. Second, PayPal earns a foreign exchange fee when an
account holder converts a balance from one currency to another.
Third, PayPal may earn fees when a user withdraws money to a
non-U.S. bank
account, depending on the amount of the withdrawal. Fourth,
PayPal earns a return on certain customer balances. Finally,
PayPal may earn ancillary revenues from a suite of financial
products, including the PayPal-branded debit card, the
PayPal-branded credit card and the PayPal Buyer Credit offering.
We incur funding costs on payments at varying levels based on
the source of the payment, with costs associated with credit
card and debit card funded payments being significantly higher
than bank account or balance-funded payments. U.S. account
holders who choose to maintain PayPal balances in
U.S. dollars have the ability to sweep balances into the
PayPal Money Market Fund. This Money Market Fund, which is
invested in a portfolio managed by Barclays Global
Fund Advisors, bore a current compound annual yield of
5.02% as of January 3, 2007.
Verification
of Account Holders
To fund payments from their bank accounts in the United States,
account holders must first become verified by PayPal. The
primary method for verification is our Random Deposit technique.
Under this technique, PayPal makes two deposits ranging from 1
to 99 cents to the account holders bank account. To verify
ownership of the account, the account holder then enters the two
amounts as a four-digit code at the PayPal website. In addition
to allowing funding through bank accounts, verification also
removes some spending limits on account holders accounts
and gives them reputational advantages when transacting with
other members of the PayPal community.
Withdrawing
Money
Each account holder in the U.S. and, as of December 31,
2006, in 34 other markets, may withdraw money from his or her
PayPal account through an electronic fund transfer to his or her
bank account or, in the U.S., by a mailed check from PayPal.
Automated Clearing House, or ACH, withdrawals may take three to
five business days to arrive in the account holders bank
account, depending on the bank. However, everyone who can
receive funds can withdraw to a U.S. bank account. Mailed
checks may take one to two weeks to arrive, and PayPal charges
$1.50 per check. Qualifying PayPal business users in the
U.S. can receive a PayPal ATM/debit card, which provides
instant liquidity to their PayPal account balances. ATM/debit
cardholders can withdraw cash, for a $1.00 fee per
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transaction, from any ATM connected to the Cirrus or Maestro
networks and can make purchases at any merchant accepting
MasterCard.
PayPals
Trust and Safety Programs
We have developed a number of PayPal trust and safety programs,
including PayPals Seller Protection and Buyer Protection
Programs. These programs provide additional protection to
certain account holders who pay, or receive payment, for their
transactions through PayPal. PayPals Seller Protection
Program covers sellers for up to $5,000 per year on certain
reversed transactions. PayPals Buyer Protection Program
covers qualified purchases on eBay.com for up to $2,000 coverage
at no cost (with different terms for transactions denominated in
non-U.S. currencies).
In addition, our Fraud Investigation Team focuses on identifying
and preventing fraud before it occurs, detecting fraud in
process, mitigating loss if fraud does occur and delivering
information to law enforcement around the world to better combat
online fraud.
PayPal
Growth Strategy
We seek to extend our leading position and become the online
payment network of choice around the world. To establish PayPal
as the global payment standard in online payments, we intend to
focus on, among other things, increased adoption of PayPal on
Marketplaces, expansion of PayPals Merchant Services,
which are services for merchants who sell through their own
websites, and further development of online financial products.
Marketplaces
PayPals services are integrated into the checkout flow of
the eBay.com platform in our key markets, including the U.S.,
Germany, the U.K. and Canada. In 2006, eBay.com generated more
than $52 billion in GMV. PayPal, in turn, generated over
$24 billion of total payment volume from eBay.com
transactions.
We intend to increase PayPals penetration of GMV on the
eBay.com platform through product innovation, integrate PayPal
onto the other platforms within our Marketplaces segment and
expand PayPals global presence. We intend to strengthen
PayPals penetration into the payments area on the
Marketplaces platforms by continuing to integrate with eBay
listings and new formats, focus on buyer protection programs and
adding product features important to the Marketplaces community.
Our expansion into an increased number of international markets
and currencies makes cross-border transactions easier and more
efficient, benefiting both Marketplaces and PayPal.
Merchant
Services
We intend to continue to market our global payments solution to
spur our growth as a payment solution for sole proprietors and
small, medium, and large businesses. Our Merchant Services
business offers a differentiated product solution for each
merchant segment sole proprietor, small and medium
businesses, and large merchants while providing a
cost-effective and safe payment solution in all segments.
We intend to grow our global Merchant Services business by
enhancing our product offering, leveraging our multiple sales
channels to expand our network of merchants and developing our
global footprint.
Financial
Products
We will continue to identify transactions and markets not served
adequately by existing payment systems and seek to develop
product features that improve upon those legacy systems. In
addition, we will seek to expand the breadth of products and
services available to our account holders and have begun
offering financial products like the PayPal branded debit card,
PayPal branded credit card and the PayPal Buyer Credit Offering.
Furthermore, we are developing a mobile payments solution and
launched Go Mobile with PayPal during 2006 as a foundation for
our mobile platform.
Communications
We added the Communications segment upon our acquisition of
Skype in October 2005. Skype is a Luxembourg-based company that
was established in 2003.
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Skype
Value Proposition
Our vision is to give our users the ability to communicate
freely at home, at work and on the move. Skype offers a simple,
convenient and cost-effective way for people anywhere in the
world to call landlines and mobile phones over the Internet.
People around the world using Skype can make free voice and
video calls to anyone else on Skype, as well as send instant
messages, transfer files and participate in Skypecasts, which
are live, moderated conversations with up to 100 people.
Skype
Overview
Skype is one of the worlds fastest-growing Internet
communication products, providing free and unlimited voice,
video and instant messaging conversations between people using
the Skype software. Skype earns revenues from premium features
such as making and receiving calls to and from landline and
mobile phones, voicemail, call forwarding and personalization
including ringtones and avatars. Skype is available in
28 languages.
User
Base
As of December 31, 2006, Skype had approximately
171 million registered users and is used in almost every
country around the world. The Skype software is easy to download
and install, and enables people to make free voice and video
calls to any other person on Skype, as well as send instant
messages and transfer files.
In addition to free calls to other registered Skype users,
people can also take advantage of Skypes premium features,
including SkypeOut (calls from Skype to traditional landlines or
mobile phones), SkypeIn (a number which can be called from a
normal phone anywhere in the world) and Skype Voicemail (takes
calls when users are busy or offline).
In 2006, we launched several promotions globally as well as
locally, and they drove significant user growth in registered
users, especially in Asia. We intend to migrate users to higher
value premium offerings.
Ecosystem
Skype has a large and expanding ecosystem of hardware and
software products created by third parties that extend, enable
or improve the experience of using Skype. We are focused on
further developing this ecosystem of more than 50 hardware
partners and more than 150 Skype Certified devices to broaden
the appeal of Skype to a wider group of people who want to use
Skype away from the computer, no matter where they happen to be.
This is especially true for people who want to take advantage of
the mobile Skype experience, which has already been downloaded
more than five million times and is available on more than 120
different models of mobile devices.
Skype
Growth Strategy
To expand upon Skypes position as a leading, global
Internet communications company, we will continue to focus on
new user acquisition and conversion of users to premium
offerings, while further developing around two broad areas of
Skypes business: existing telephony products and new
e-commerce
opportunities. Part of our strategy to acquire new users is to
achieve a desktop presence. In order to do this, we have
partnered with certain computer manufacturers to include Skype
in their new computers.
Existing
Telephony Products
Our strategy for driving growth from existing telephony products
relies on new user acquisition, a better product and innovative
new features. In 2007, we launched a new global pricing
structure that gives users an
easy-to-understand
all-in-one
Skype package. This packages offers a simple, convenient and
cost-effective way for consumers worldwide to call landlines and
mobile phones over the Internet.
To continue growing the number of people using Skype, and to
improve the Skype experience, we will work with our partners to
introduce new Skype Certified devices and accessories, many of
which eliminate the need for a computer to make Skype calls over
the Internet.
8
In addition to working with our partners we will continue to
make Skype Certified products available directly to our users
through Skypes webstore as well as through other retail
channels.
New
E-Commerce
Opportunities
We plan on expanding Skypes presence within our existing
businesses because communication via
e-mail
the traditional way for buyers and sellers to
communicate can be a source of friction in the
online shopping experience, primarily because of delays in
response time. Skype enables us to create new channels for
e-commerce
activity by reducing friction in the online shopping experience.
Communication via Skype allows buyers and sellers to benefit
from being able to communicate directly with each other in an
instantaneous and private environment.
Other
Items
Employees
As of December 31, 2006, eBay Inc. and its subsidiaries
employed approximately 13,200 people (including
approximately 600 temporary employees), approximately 7,900 of
whom were located in the U.S. (including approximately 300
temporary employees).
Competition
We encounter vigorous competition in our businesses from
numerous sources. Our users can find, buy, sell, and pay for
similar items through a variety of competing channels. These
include, but are not limited to, online and offline retailers,
distributors, liquidators, import and export companies,
auctioneers, catalog and mail-order companies, classifieds,
directories, search engines, products of search engines,
virtually all online and offline commerce participants
(consumer-to-consumer,
business-to-consumer
and
business-to-business),
online and offline shopping channels and networks. As our
product offerings continue to broaden into new categories of
items and new commerce formats, we expect to face additional
competition from other online and offline channels for those new
offerings. We also compete on the basis of price, product
selection, and services. For our PayPal service, our users may
choose to pay through a variety of alternative means, including
other online payment services, offline payment methods such as
cash, check or money order, and traditional online or offline
credit card merchant accounts. For our Communications segment,
our users may choose to use their local telephone companies,
cable providers, and other VoIP providers. To compete
effectively, we may need to expend significant resources in
technology and marketing. These efforts may be expensive and
could reduce our margins and have a material adverse effect on
our business, financial position, operating results, and cash
flows and reduce the trading price of our stock. We believe that
we will be able to maintain profitability by preserving and
expanding the abundance and diversity of our users online
community and enhancing our user experience, but we may not be
able to continue to manage our operating expenses to mitigate a
decline in consolidated net income. For more information
regarding these risks, see the information in
Item 1A: Risk Factors under the caption
Our industry is intensely competitive.
Seasonality
We have historically experienced our strongest quarter of
sequential growth in our fourth quarter. We expect transaction
activity patterns on our websites to increasingly mirror general
consumer buying patterns as our business continues to mature.
Our expectation is that Skypes business will experience
seasonally slower growth during holiday and vacation periods.
Technology
Marketplaces
and Payments
Our Marketplaces and Payments platforms utilize a combination of
proprietary technologies and services as well as technologies
and services provided by others, We have developed intuitive
user interfaces, customer tools and transaction processing,
database and network applications that enable our users to
reliably and securely complete transactions on our sites. Our
technology infrastructure simplifies the storage and processing
of large
9
amounts of data, eases the deployment and operation of
large-scale global products and services and automates much of
the administration of large-scale clusters of computers. Our
infrastructure has been designed around industry-standard
architectures to reduce downtime in the event of outages or
catastrophic occurrences. We are continually improving our
technology to enhance the customer experience and to increase
efficiency, scalability and security. For information regarding
technology related risks, see the information in
Item 1A: Risk Factors under the caption
Our failure to manage growth could harm our business.
Communications
Skypes VoIP communications and other services are
delivered through a
peer-to-peer
network architecture whereby users joining the network provide
much of the technology resources that enable the Skype services.
To access Skypes services, users download Skype software
over the Internet. Skype utilizes a combination of proprietary
technologies and services as well as technologies and services
provided by others to design, develop and support its software
products. For more information regarding Skypes technology
risks, see the information in Item 1A: Risk
Factors under the caption Skype depends on key
technology that is licensed from third parties.
Intellectual
Property
We regard the protection of our trademarks, copyrights, patents,
domain names, trade dress and trade secrets as critical to our
success. We have entered into confidentiality and invention
assignment agreements with our employees and contractors, and
nondisclosure agreements with parties with whom we conduct
business in order to limit access to and disclosure of our
proprietary information.
We aggressively protect our intellectual property rights by
relying on a combination of trademark, copyright, patent, trade
dress and trade secret laws and by using the domain name dispute
resolution system. As a result, we actively pursue the
registration of our trademarks, copyrights, patents and domain
names in the U.S. and other major countries. The expansion of
our business has required us to protect our trademarks, patents
and domain names in an increasing number of jurisdictions, a
process that is expensive, may require litigation, and may not
be successful in every location. We have registered or applied
to register for our eBay trademark in the U.S. and
over 50
non-U.S. jurisdictions
and have in place an active program to continue securing the
eBay, PayPal, and Skype
domain names in major
non-U.S. jurisdictions.
If we are unable to secure our trademarks or domain names, we
could be adversely affected in any jurisdiction in which our
trademarks or domain names we are not registered.
Third parties have from time to time claimed, and others may
claim in the future, that we have infringed their intellectual
property rights. We currently are involved in several such legal
proceedings. Please see the information in Item 3:
Legal Proceedings and in Item 1A: Risk
Factors under the captions We are subject to patent
litigation and We may be unable to protect or
enforce our own intellectual property rights adequately.
Segments
and Geographic Information
For an analysis of financial information about our segments as
well as our geographic areas, see Note 4
Segments to our consolidated financial statements included
elsewhere in this Annual Report on
Form 10-K.
Available
Information
Our Internet address is www.ebay.com. Our investor
relations website is located at
http://investor.ebay.com. We make available
free of charge on our investor relations website under SEC
Filings our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and amendments to those reports as soon as reasonably
practicable after we electronically file or furnish such
materials to the SEC.
ITEM 1A: RISK
FACTORS
The risks and uncertainties described below are not the only
ones we face. Other events that we do not currently anticipate
or that we currently deem immaterial also may affect our results
of operations and financial condition.
10
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 and
further monetize the Skype business;
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our ability to successfully integrate and manage other recent
and prospective acquisitions;
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regulatory actions imposing obligations on our businesses or our
users;
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the actions of our competitors, including the introduction of
new sites, services, and products;
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consumer confidence in the safety and security of transactions
using our websites or technology and our ability to manage the
costs of our user protection programs;
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the costs and results of litigation that involves us;
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the cost and availability of online and traditional advertising,
and the success of our brand building and marketing campaigns;
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new laws or regulations, or interpretations of existing laws or
regulations, that harm our business models or restrict the
Internet, electronic commerce, online payments, or online
communications;
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our ability to comply with the requirements of entities whose
services are required for our operations, such as credit card
associations;
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our ability to develop product enhancements at a reasonable cost
and to develop programs and features in a timely manner;
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our ability to upgrade and develop our systems, infrastructure,
and customer service capabilities to accommodate growth and to
improve our websites at a reasonable cost while maintaining 24/7
operations;
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technical difficulties or service interruptions involving our
websites or services provided to us or our users by third
parties;
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our ability to increase the acceptance of PayPal by online
merchants outside of the eBay Marketplaces;
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our ability to expand PayPals product offerings outside of
the U.S. (including our ability to obtain any necessary
regulatory approvals);
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our ability to manage PayPals transaction loss and credit
card chargeback rates and payment funding mix;
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our ability to continue Skypes growth and to find
mechanisms to more effectively monetize it;
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our ability to attract new personnel in a timely and effective
manner and to retain key employees;
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the continued financial strength of our technology suppliers and
other parties with whom we have commercial relations;
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continued consumer acceptance of the Internet as a medium for
commerce and communication in the face of increasing publicity
about fraud, spoofing, viruses, and other dangers of the
Internet;
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general economic conditions and those economic conditions
specific to the Internet and
e-commerce
industries; and
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geopolitical events such as war, threat of war, or terrorist
actions.
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The increased variety of services offered on our websites makes
it difficult for us to forecast the level or source of our
revenues or earnings accurately. In view of the rapidly evolving
nature of our business and our limited operating history, we
believe that
period-to-period
comparisons of our operating results may not be meaningful, and
you should not rely upon them as an indication of future
performance. We do not have backlog, and substantially all of
our net revenues each quarter come from transactions involving
sales or payments during that quarter. Due to the inherent
difficulty in forecasting revenues it is also difficult to
forecast income statement expenses as a percentage of net
revenues. Quarterly and annual income statement expenses as a
percentage of net revenues may be significantly different from
historical or projected rates. Our operating results in one or
more future quarters may fall below the expectations of
securities analysts and investors. In that event, the trading
price of our common stock would almost certainly decline.
We may
not maintain our level of profitability or rates of
growth.
We believe that our continued profitability and growth will
depend in large part on our ability to do the following:
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attract new users, keep existing users active on our websites
and services, and increase the activity levels of our active
users;
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react to changes in consumer use of the Internet and develop new
services, as well as new sources of revenues from our existing
services;
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manage the costs of our business, including the costs associated
with maintaining and enhancing our websites, customer support,
transaction and chargeback rates, user protection programs, and
international and product expansion;
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maintain sufficient transaction volume to attract buyers and
sellers;
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cost effectively increase the awareness of our brands; and
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provide our customers with superior community, customer support,
and trading, communication, and payment experiences.
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We invest heavily in marketing and promotion, customer support,
and further development of the operating infrastructure for our
core and recently acquired operations. Some of this investment
entails long-term contractual commitments. As a result, we may
be unable to adjust our spending rapidly enough to compensate
for any unexpected revenue shortfall, which may harm our
profitability. In addition, we are spending in advance of
anticipated growth, which may also harm our profitability.
Growth rates in our most established markets, such as Germany
and the U.S., have declined over time and may continue to do so
as the existing base of users and transactions becomes larger.
As our penetration in established markets grows, we will
increasingly need to rely on keeping existing users active and
increasing their activity level on our sites for growth in those
markets. In addition, our Marketplaces business is facing
increased competitive pressure, particularly in Asia. Because a
large percentage of PayPal transactions originate on the eBay
platform, declines in growth rates in major eBay Marketplace
markets also adversely affect PayPals growth rate. The
expected future growth of our PayPal, Skype, and Shopping.com
businesses may also cause downward pressure on our profit margin
because those businesses have lower gross margins than our eBay
trading platforms.
There
are many risks associated with our international
operations.
Our international expansion has been rapid and 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% and
48%, respectively, of our net revenues in 2005 and 2006.
Expansion into international markets requires management
attention and resources and requires us to localize our services
to
12
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 that understand the local market better than we
do, and we may not benefit from
first-to-market
advantages. We may not be successful in expanding into
particular international markets or in generating revenues from
foreign operations. For example, in 2002 we withdrew our eBay
marketplace offering from the Japanese market, and in late 2006
we announced a change to our strategy in China by entering into
a joint venture with a local Chinese company. Even if we are
successful in developing new markets, we expect the costs of
operating new sites to exceed our net revenues for at least
12 months in most countries. As we continue to expand
internationally, including through the expansion of PayPal,
Skype, Shopping.com, and Kijiji, we are subject to risks of
doing business internationally, including the following:
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regulatory requirements, including regulation of Internet
services, communications, auctioneering, professional selling,
distance selling, banking, and money transmitting, that may
limit or prevent the offering of our services in some
jurisdictions, prevent enforceable agreements between sellers
and buyers, prohibit the listing of certain categories of goods,
require product changes, require special licensure, subject us
to special taxes, or limit the transfer of information between
eBay and our affiliates;
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legal uncertainty regarding our liability for the listings and
other content provided by our users, including uncertainty as a
result of legal systems that are less developed with respect to
the Internet, unique local laws, and lack of clear precedent or
applicable law;
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difficulties in integrating with local payment providers,
including banks, credit and debit card associations, and
electronic fund transfer systems or with the local
telecommunications infrastructure;
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differing levels of retail distribution, shipping,
communications, and Internet infrastructures;
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different employee/employer relationships and the existence of
workers councils and labor unions;
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difficulties in staffing and managing foreign operations;
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challenges associated with joint venture relationships,
including dependence on our joint venture partners;
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difficulties in implementing and maintaining adequate internal
controls;
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longer payment cycles, different accounting practices, and
greater problems in collecting accounts receivable;
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potentially adverse tax consequences, including local taxation
of our fees or of transactions on our websites;
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higher telecommunications and Internet service provider costs;
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strong local competitors;
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different and more stringent user protection, data protection,
and other laws;
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cultural ambivalence towards, or non-acceptance of, online
trading;
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seasonal reductions in business activity;
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expenses associated with localizing our products, including
offering customers the ability to transact business in the local
currency;
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laws and business practices that favor local competitors or
prohibit foreign ownership of certain businesses;
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profit repatriation restrictions, foreign currency exchange
restrictions, and exchange rate fluctuations;
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volatility in a specific countrys or regions
political or economic conditions; and
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differing intellectual property laws.
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Some of these factors may cause our international costs of doing
business to exceed our comparable domestic costs. As we expand
our international operations and have additional portions of our
international revenues denominated in foreign currencies, we
also could become subject to increased difficulties in
collecting accounts
13
receivable, repatriating money without adverse tax consequences,
and risks relating to foreign currency exchange rate
fluctuations. The impact of currency exchange rate fluctuations
is discussed in more detail under We are exposed to
fluctuations in currency exchange rates, 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. During 2006, hostilities escalated between
Israel and Hamas in the Gaza Strip and between Israel and
Hezbollah, based in Lebanon. The future of peace efforts between
Israel and its neighboring countries remains uncertain.
Increased hostilities or terrorism within Israel or armed
hostilities between Israel and neighboring states could make it
more difficult for us to continue our operations in Israel,
which could increase our costs. In addition, many of
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.
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 many of our internationally focused websites are exposed to
foreign exchange rate fluctuations as the financial results of
the applicable subsidiaries are translated from the local
currency into U.S. dollars upon consolidation. If the
U.S. dollar weakens against foreign currencies, the
translation of these foreign currency denominated transactions
will result in increased net revenues, operating expenses, and
net income. Similarly, our net revenues, operating expenses, and
net income will decrease if the U.S. dollar strengthens
against foreign currencies. Net revenues in the twelve-month
period ended December 31, 2006 were positively impacted by
foreign currency translation of $40 million, compared to
the same period of the prior year. Operating income in the
twelve-month period ended December 31, 2006 was positively
impacted by foreign currency translation of $14 million,
compared to the same period of the prior year. As exchange rates
vary, net sales and other operating results, when translated,
may differ materially from expectations. In particular, to the
extent the U.S. dollar strengthens against the Euro and
British Pound, our European revenues and profits will be reduced
as a result of these translation adjustments. In addition, to
the extent the U.S. dollar strengthens against the Euro and
the British Pound, cross-border trade related to purchases of
dollar-denominated goods by
non-U.S. purchasers
may decrease, and that decrease may not be offset by a
corresponding increase in cross-border trade involving purchases
by U.S. buyers of goods denominated in other currencies.
While we from time to time enter into transactions to hedge
portions of our foreign currency translation exposure, it is
impossible to perfectly predict or completely eliminate the
effects of this exposure.
We are
subject to patent litigation.
We have repeatedly been sued for allegedly infringing other
parties patents. Some of these suits are ongoing, as
described under the heading Item 3: Legal
Proceedings, below. We have been notified of several other
potential patent disputes, and expect that we will increasingly
be subject to patent infringement claims as our services expand
in scope and complexity. In particular, we expect that we may
face additional patent infringement claims involving various
aspects of our Payments and Communications businesses. These
claims, whether meritorious or not, are time consuming and
costly to resolve, and could require expensive changes in our
methods of doing business, or could require us to enter into
costly royalty or licensing agreements.
14
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 regarding these and
other business practices from the attorneys general of a number
of states. In September 2006, PayPal entered into a settlement
agreement with the attorneys general of a number of states under
which it agreed to pay $1.7 million to the attorneys
general, shorten and streamline its user agreement, increase
educational messaging to users about funding choices, and
communicate more information regarding protection programs to
users. 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 enforcement actions, 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.
The
listing or sale by our users of pirated or counterfeit items may
harm our business.
We have received in the past, and we anticipate receiving in the
future, communications alleging that certain items listed or
sold through our service by our users infringe third-party
copyrights, trademarks and trade names, or other intellectual
property rights. Although we have sought to work actively with
the owners of intellectual property rights to eliminate listings
offering infringing items on our websites, some rights owners
have expressed the view that our efforts are insufficient.
Content owners and other intellectual property rights owners
have been active in asserting their rights against online
companies, including eBay. Allegations of infringement of
intellectual property rights have resulted in litigation against
us from time to time, including litigation brought by
Tiffany & Co. and Robespierre, Inc. (doing business as
Nanette Lepore) in the U.S., Rolex S.A. in Germany, Louis
Vuitton Malletier and Christian Dior Couture in France, and a
number of other owners of intellectual property rights. The
plaintiffs in these cases seek to hold eBay liable for
counterfeit items listed on our sites by third parties, for the
misuse of trademarks in listings or in connection with paid
search advertisements, or for alleged violations of selective
distribution channel laws. Tiffany seeks, among other things,
injunctive relief and damages. A trial in the Tiffany case has
been scheduled for May 2007. Nanette Lepore sought, among other
things, to require eBay to block all listings offering Nanette
Lepore items, as well as damages. The court denied Nanette
Lepores request for a preliminary injunction, and found
that eBays process for addressing the listing of
counterfeit items by third parties on its site was both
reasonable and adequate. Nanette Lepore initially appealed the
ruling, but subsequently abandoned its appeal. Other luxury
brand owners have also filed suit against us or have threatened
to do so. In addition, we may be subject to criminal penalties
if the authorities feel we have aided in the sale of counterfeit
goods. While to date we have been largely successful in
defending against such litigation, more recent cases have been
based, at least in part, on different legal theories than those
of earlier cases, and there is no guarantee that we will
continue to be successful in defending against such litigation.
In particular, plaintiffs in recent cases have argued that we
are not entitled to safe harbors under the Digital Millennium
Copyright Act in the U.S. or as a hosting provider in the
European Union because of the active nature of our involvement
with our sellers, and that, whether or not such safe harbors are
available, we should be found liable because we have not
adequately removed counterfeit listings or effectively suspended
users who have created such listings. In addition, a public
perception that counterfeit or pirated items are commonplace on
our site could damage our reputation and our business.
Litigation and negative publicity may increase as our sites gain
prominence in markets outside of the U.S., where
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the laws may be unsettled or less favorable to us. Such
litigation is costly for us, could result in damage awards or
increased costs of doing business through adverse judgment or
settlement, could require us to change our business practices in
expensive ways, or could otherwise harm our business. Litigation
against other online companies could result in interpretations
of the law that could also require us to change our business
practices or otherwise increase our costs.
We are
subject to general litigation and regulatory
disputes.
From time to time, we are involved in other disputes or
regulatory inquiries that arise in the ordinary course of
business. The number and significance of these disputes and
inquiries are increasing as our business expands and our company
grows larger. We have in the past been forced to litigate such
claims. We may also become more vulnerable to third-party claims
as laws such as the Digital Millennium Copyright Act, the Lanham
Act and the Communications Decency Act are interpreted by the
courts and as we expand geographically into jurisdictions where
the underlying laws with respect to the potential liability of
online intermediaries such as ourselves are either unclear or
less favorable. 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.
Acquisitions
could result in operating difficulties, dilution, and other
harmful consequences.
We have acquired a number of businesses in the past, and we
expect to continue to evaluate and consider a wide array of
potential strategic transactions, including business
combinations, acquisitions and dispositions of businesses,
technologies, services, products and other assets. At any given
time we may be engaged in discussions or negotiations with
respect to one or more of these types of transactions. Any of
these transactions could be material to our financial condition
and results of operations. The process of integrating any
acquired business may create unforeseen operating difficulties
and expenditures and is itself risky. The areas where we may
face difficulties include:
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diversion of management time, as well as a shift of focus from
operating the businesses to issues related to integration and
administration, particularly given the large number and size and
varying scope of our recent acquisitions, and, in the case of
Skype, the complex earn-out structure associated with the
transaction;
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declining employee morale and retention issues resulting from
changes in, or acceleration of, compensation, or changes in
management, reporting relationships, future prospects, or the
direction of the business;
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the need to integrate each companys accounting,
management, information, human resource and other administrative
systems to permit effective management, and the lack of control
if such integration is delayed or not implemented;
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the need to implement controls, procedures and policies
appropriate for a larger public company at companies that prior
to acquisition had lacked such controls, procedures and
policies; and
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in some cases, the need to transition operations, users, and
customers onto our existing platforms.
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Foreign acquisitions involve special risks, including those
related to integration of operations across different cultures
and languages, currency risks, and the particular economic,
political, and regulatory risks associated with specific
countries. Moreover, we may not realize the anticipated benefits
of any or all of our acquisitions, or may not realize them in
the time frame expected. For example, we have yet to realize
significant revenue benefits from the integration of Skype into
listings on eBay sites. Future acquisitions or mergers may
result in a need to issue additional equity securities, spend
our cash, or incur debt, liabilities, or amortization expenses
related to intangible assets, any of which could reduce our
profitability and harm our business.
System
failures could harm our business.
We have experienced system failures from time to time, and any
interruption in the availability of our websites will reduce our
current revenues and profits, could harm our future revenues and
profits, and could subject us to regulatory scrutiny.
eBays primary website has been interrupted for periods of
up to 22 hours, and our PayPal site
16
has suffered intermittent unavailability for periods as long as
five days. Any unscheduled interruption in our services results
in an immediate, and possibly substantial, loss of revenues.
Frequent or persistent interruptions in our services could cause
current or potential users to believe that our systems are
unreliable, leading them to switch to our competitors or to
avoid our sites, and could permanently harm our reputation and
brands. Reliability is particularly critical for PayPal,
especially as it seeks to expand its Merchant Services business.
Because PayPal is a regulated financial entity, frequent or
persistent site interruptions could lead to 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.
Our
growth will depend on our ability to develop our brands, and
these efforts may be costly.
Our historical growth has been largely attributable to word of
mouth, and to frequent and high visibility national and local
media coverage. We believe that continuing to strengthen our
brands will be critical to achieving widespread acceptance of
our services, and will require an increased focus on active
marketing efforts across all of our brands. The demand for and
cost of online and traditional advertising have been increasing,
and may continue to increase. Accordingly, we will need to spend
increasing amounts of money on, and devote greater resources to,
advertising, marketing, and other efforts to create and maintain
brand loyalty among users. During 2004 and 2005, we
significantly increased the number of brands we are supporting,
adding Rent.com, Shopping.com, Kijiji, and Skype, among others.
Each of these brands requires its own resources, increasing the
costs of our branding efforts. Brand promotion activities may
not yield increased revenues, and even if they do, any increased
revenues may not offset the expenses incurred in building our
brands. If we do attract new users to our services, they may not
conduct transactions using our services on a regular basis. If
we fail to promote and maintain our brands, or if we incur
substantial expenses in an unsuccessful attempt to promote and
maintain our brands, our business would be harmed.
Our
business and users may be subject to sales tax and other
taxes.
The application of indirect taxes (such as sales and use tax,
value-added tax, or VAT, goods and services tax, business tax,
and gross receipt tax) to
e-commerce
businesses such as eBay and to our users is a complex and
evolving issue. Many of the fundamental statutes and regulations
that impose these taxes were established before the growth of
the Internet and
e-commerce.
In many cases, it is not clear how existing statutes apply to
the Internet or electronic commerce or communications conducted
over the Internet. In addition, some jurisdictions have
implemented or may implement laws specifically addressing the
Internet or some aspect of electronic commerce or communications
on the Internet. The application of existing, new, or future
laws could have adverse effects on our business.
Several proposals have been made at the U.S. state and
local level that would impose additional taxes on the sale of
goods and services through the Internet. These proposals, if
adopted, could substantially impair the growth of
e-commerce,
and could diminish our opportunity to derive financial benefit
from our activities. The U.S. federal governments
moratorium on states and other local authorities imposing access
or discriminatory taxes on the Internet is scheduled to expire
in November 2007. This moratorium does not prohibit federal,
state, or local authorities from collecting taxes on our income
or from collecting taxes that are due under existing tax rules.
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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 the federal government or
foreign countries may seek to impose a tax collection or
reporting or record-keeping obligation on companies such as eBay
and PayPal that engage in or facilitate
e-commerce.
Such an obligation could be imposed by legislation intended to
improve tax compliance or if eBay were ever deemed to be the
legal agent of eBay sellers by a jurisdiction in which eBay
operates. Imposition of a record keeping or tax collecting
requirement would harm our business. Foreign authorities may
also require eBay to help ensure compliance by our users with
local laws regulating professional sellers, including tax
requirements. In addition, we have periodically received
requests from tax authorities in some foreign jurisdictions for
information regarding the transactions of large classes of
sellers on our sites, and in some cases we may be legally
obligated to provide this data. Requirements that we disclose
sellers transaction records to tax authorities, and any
use of those records to investigate, collect taxes from, or
prosecute sellers, could decrease seller activity on our sites
and harm our business.
In July 2003, in compliance with the changes brought about by
the European Union, or 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 or tax-related reporting
requirements could harm our users and our business. There have
been, and will continue to be, substantial ongoing costs
associated with complying with the various indirect tax
requirements in the numerous markets in which eBay conducts or
will conduct business.
Failure
to deal effectively with fraudulent transactions and customer
disputes would increase our loss rate and harm our
business.
PayPals highly automated and liquid payment service makes
PayPal an attractive target for fraud. In configuring its
service, PayPal faces an inherent trade-off between customer
convenience and security. Identity thieves and those committing
fraud using stolen credit card or bank account numbers can
potentially steal large amounts of money from businesses such as
PayPal. We believe that several of PayPals current and
former competitors in the electronic payments business have gone
out of business or significantly restricted their businesses
largely due to losses from this type of fraud. While PayPal uses
advanced anti-fraud technologies, we expect that technically
knowledgeable criminals will continue to attempt to circumvent
PayPals anti-fraud systems. In addition, PayPals
service could be subject to employee fraud or other internal
security breaches, and PayPal would be required to reimburse
customers for any funds stolen as a result of such breaches.
Merchants could also request reimbursement, or stop using
PayPal, if they are affected by buyer fraud.
PayPal incurs substantial losses from merchant fraud, including
claims from customers that merchants have not performed or that
their goods or services do not match the merchants
description. PayPal also incurs losses from claims that the
customer did not authorize the purchase, from buyer fraud, from
erroneous transmissions, and from customers who have closed bank
accounts or have insufficient funds in them to satisfy payments.
In addition to the direct costs of such losses, if they are
related to credit card transactions and become excessive they
could result in PayPal losing the right to accept credit cards
for payment. If PayPal were unable to accept credit cards, the
velocity of trade on eBay could decrease, in which case our
business would further suffer. PayPal has been assessed
substantial fines for excess charge-backs in the past, and
excessive charge-backs may arise in the future. PayPal has taken
measures to detect and reduce the risk of fraud, but these
measures need to be continually improved and may
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not be effective against new forms of fraud or in connection
with new product offerings. If these measures do not succeed,
our business will suffer. PayPals fraud loss rate
increased significantly in the second half of 2006.
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. In January 2007, this
program was revised to refund buyers who use PayPal up to $200
in most eBay transactions, and up to $2,000 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 may seek to collect
reimbursement from the seller, but may not be able to receive
any funds from the seller. The PayPal buyer protection program
has increased PayPals loss rate and could cause future
fluctuations in PayPals loss rate. For the years ended
December 31, 2005 and 2006, PayPals transaction loss
totaled $73.8 million and $126.4 million, representing
0.27% and 0.33% of PayPals total payment volume,
respectively.
eBay faces similar risks with respect to fraudulent activities
on its websites. eBay periodically receives complaints from
users who may not have received the goods that they had
purchased. In some cases individuals have been arrested and
convicted for fraudulent activities using our websites. eBay
also receives complaints from sellers who have not received
payment for the goods that a buyer had contracted to purchase.
Non-payment may occur because of miscommunication, because a
buyer has changed his or her mind and decided not to honor the
contract to purchase the item, or because the buyer bid on the
item maliciously, in order to harm either the seller or eBay. In
some European jurisdictions, buyers may also have the right to
withdraw from a sale made by a professional seller within a
specified time period.
While eBay can suspend the accounts of users who fail to fulfill
their payment or delivery obligations to other users, eBay does
not have the ability to require users to make payment or deliver
goods, or otherwise make users whole other than through our
limited buyer protection programs. Other than through these
programs, eBay does not compensate users who believe they have
been defrauded by other users, although users who pay through
PayPal may have reimbursement rights from their credit card
company or bank, which in turn will seek reimbursement from
PayPal. eBay also periodically receives complaints from buyers
as to the quality of the goods purchased. We expect to continue
to receive communications from users requesting reimbursement or
threatening or commencing legal action against us if no
reimbursement is made. Our liability for these sort of claims is
only beginning to be clarified and may be higher in some
non-U.S. jurisdictions
than it is in the U.S. Litigation involving liability for
third-party actions could be costly for us, divert management
attention, result in increased costs of doing business, lead to
adverse judgments, or otherwise harm our business. In addition,
affected users will likely complain to regulatory agencies that
could take action against us, including imposing fines or
seeking injunctions.
Negative publicity and user sentiment generated as a result of
fraudulent or deceptive conduct by users of our eBay and PayPal
services could damage our reputation, reduce our ability to
attract new users or retain our current users, and diminish the
value of our brand names.
The
current regulatory environment for Voice over Internet Protocol
(VoIP) is uncertain, and Skypes business could be harmed
by new regulations or the application of existing regulations to
its products.
The current regulatory environment for VoIP is uncertain and
rapidly changing. Skypes voice communications products are
currently subject to very few, if any, of the same regulations
that apply to traditional telephony and to
VoIP-based
telephone replacement services. VoIP companies are generally
subject to different regulatory regimes in different countries,
and in most cases are subject to lower, or no, regulatory fees
and lesser, or no, specific regulatory requirements. Governments
may impose new or increased fees, taxes, and administrative
burdens on VoIP companies, or Skype may change its product
offerings in a manner that makes it become subject to
telecommunications regulations. Increased fees could include
access and other charges payable to local exchange carriers to
carry and terminate traffic, contributions to federal or state
Universal Service Funds in the United States and elsewhere, and
other charges. New laws and regulations may require Skype to
meet various emergency service requirements, disability access
requirements, user protection requirements, number assignment
and portability requirements, and interception or wiretapping
requirements, such as the Communications Assistance for Law
Enforcement Act in the U.S. and similar laws in other
jurisdictions. Such regulations could result in substantial
costs depending on the technical changes required to accommodate
the requirements, and any increased costs could erode
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Skypes pricing advantage over competing forms of
communication. Regulations that decrease the degree of privacy
for users of Skypes products could also slow its adoption.
The increasing growth and popularity of the VoIP telephony and
Internet communications market heighten the risk that
governments will seek to regulate VoIP and Internet
communications. Competitors, including the incumbent telephone
companies, may devote substantial lobbying efforts to seek
greater protection for their existing businesses and increased
regulation of VoIP. In the United States, various state
legislatures and regulatory agencies are considering whether to
impose their own requirements and taxes on VoIP. Increased
regulatory requirements on VoIP would increase Skypes
costs, and, as a result, our business would suffer.
Regulatory agencies may require Skype to conform to rules that
are difficult or impossible for it to comply with due to the
nature of its communications technologies, which could adversely
affect its business. For example, while suitable alternatives
may be developed in the future, Skype is currently unable to
identify the exact geographic origin of the traffic traversing
the Internet or to provide detailed calling information about
computer-to-computer
communications, either of which may make complying with future
regulatory requirements, such as emergency service requirements,
difficult or impossible.
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. 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.
Skype
depends on key technology that is licensed from third
parties.
Skype licenses technology underlying certain key components of
its software from third parties it does not control, including
the technology underlying its
peer-to-peer
architecture and firewall traversal technology, and the audio
and video compression/decompression used to provide high sound
and video quality. Although Skype has contracts in place with
its third party technology providers, there can be no assurance
that the licensed technology or other technology that we may
seek to license in the future will continue to be available on
commercially reasonable terms, or at all. The loss of, or
inability to maintain, existing licenses could result in a
decrease in service quality 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.
Our
businesses depend on continued and unimpeded access to the
Internet. Internet service providers may be able to block,
degrade, or charge us for our users additional fees for
our offerings.
Our customers rely on access to the Internet to use our products
and services. In many cases that access is provided by companies
that compete with at least some of our offerings, including
incumbent telephone companies, cable companies, mobile
communications companies, and large Internet service providers.
Some of these providers have stated that they may take measures
that could degrade, disrupt, or increase the cost of
customers use of our offerings by restricting or
prohibiting the use of their lines for our offerings, by
filtering, blocking, delaying, or degrading the packets
containing the data associated with our products, or by charging
increased fees to us or our users for use of their lines to
provide our offerings. Some of these providers have
contractually restricted their customers access to
Skypes offerings through their terms of service with their
customers. These activities are technically feasible and may be
permitted by applicable law. In addition, Internet service
providers could attempt to charge us each time our customers use
our offerings. Worldwide, a number of companies have announced
plans to take such actions or are selling products designed to
facilitate such actions. Interference with our offerings or
higher
20
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.
Changes
to credit card association fees, rules, or practices could harm
PayPals business.
Because PayPal is not a bank, it cannot belong to or directly
access credit card associations, such as Visa and MasterCard. As
a result, PayPal must rely on banks or payment processors to
process transactions, and must pay a fee for this service. From
time to time, credit card associations may increase the
interchange fees that they charge for each transaction using one
of their cards. MasterCard and Visa each implemented increases
in their interchange fees for credit cards in April 2005.
PayPals credit card processors have the right to pass any
increases in interchange fees on to PayPal as well as increase
their own fees for processing. These increased fees increase
PayPals operating costs and reduce its profit margins.
PayPal is also required by its processors to comply with credit
card association operating rules, and PayPal has agreed to
reimburse its processors for any fines they are assessed by
credit card associations as a result of any rule violations by
PayPal. The credit card associations and their member banks set
and interpret the credit card rules. Some of those member banks
compete with PayPal. Visa, MasterCard, American Express, or
Discover could adopt new operating rules or re-interpret
existing rules that PayPal or its processors might find
difficult or even impossible to follow. As a result, PayPal
could lose its ability to give customers the option of using
credit cards to fund their payments. If PayPal were unable to
accept credit cards, its business would be seriously damaged. In
addition, the velocity of trade on eBay could decrease and our
business would further suffer.
PayPal is required to comply with credit card associations
special operating rules for Internet payment services. PayPal
and its credit card processors have implemented specific
business processes for merchant customers in order to comply
with these rules, but any failure to comply could result in
fines, the amount of which would be within Visas and
MasterCards discretion. PayPal also could be subject to
fines from MasterCard and Visa if it fails to detect that
merchants are engaging in activities that are illegal or that
are considered high risk, primarily the sale of
certain types of digital content. For high risk
merchants, PayPal must either prevent such merchants from using
PayPal or register such merchants with MasterCard and Visa and
conduct additional monitoring with respect to such merchants.
PayPal has incurred fines from its credit card processor
relating to PayPals failure to detect the use of its
service by high risk merchants. The amount of these
fines has not been material, but any additional fines in the
future would likely be for larger amounts, could become
material, and could result in a termination of PayPals
ability to accept credit cards or changes in PayPals
process for registering new customers, which would seriously
damage PayPals business.
Changes
in PayPals funding mix could adversely affect
PayPals results.
PayPal pays significant transaction fees when senders fund
payment transactions using credit cards, nominal fees when
customers fund payment transactions by electronic transfer of
funds from bank accounts, and no fees when customers fund
payment transactions from an existing PayPal account balance.
Senders fund a significant portion of PayPals payment
volume using credit cards, and PayPals financial success
will remain highly sensitive to changes in the rate at which its
senders fund payments using credit cards. Senders may prefer
funding using credit cards rather than bank account transfers
for a number of reasons, including the ability to dispute and
reverse charges if merchandise is not delivered or is not as
described, the ability to earn frequent flier miles or other
incentives offered by credit cards, the ability to defer
payment, or a reluctance to provide bank account information to
PayPal. In addition, some products that PayPal is introducing as
it expands its business are expected to have a higher rate of
credit card funding than PayPals current rate. In
September 2006, PayPal entered into a settlement agreement with
the attorneys general of a number of states under which it
agreed to pay $1.7 million to the attorneys general,
shorten and streamline its user agreement, and communicate more
information regarding protection programs to users. Also in
September 2006, PayPal announced that it had reached a
preliminary settlement agreement under which it agreed to pay
approximately $3.5 million into a settlement fund for the
benefit of a class represented by plaintiffs in a suit that
alleged, among other things, that PayPals disclosure
regarding the effects of users choice of funding mechanism
was deceptive. Although PayPal did not admit any liability for
any of the allegations in the two cases, the required changes to
our disclosure practices under the settlement agreements could
result in increased use of credit card funding, which would harm
PayPals business.
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If
PayPal were found to be subject to or in violation of any
U.S. laws or regulations governing banking, money
transmission, or electronic funds transfers, it could be subject
to liability and forced to change its business
practices.
A number of U.S. states have enacted legislation regulating
money transmitters. To date, PayPal has obtained licenses in 36
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, 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
or could be subject to fines and penalties. 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
1.7 million transactions per day during the year ended
December 31, 2006, and any violations could expose PayPal
to significant liability. Any negative change in the
publics perception of PayPals compliance with
privacy laws and policies could also negatively impact
PayPals business.
PayPals
status under banking or financial services laws or other laws in
markets outside the U.S. is unclear.
PayPal currently allows its customers with credit cards to send
payments from 103 markets, and to receive payments in 49 of
those markets. In 35 of these 49 markets, customers can withdraw
funds to local bank accounts, and in eight of these markets
customers can withdraw funds by receiving a bank draft in the
mail. PayPal offers customers the ability to send or receive
payments denominated in 17 currencies. 25 of the 103 markets
whose residents can use the PayPal service are members of the
European Union, and PayPal provides localized versions of its
service to customers in the EU through PayPal (Europe) Ltd., a
wholly-owned subsidiary of PayPal that is licensed in the United
Kingdom to operate as an Electronic Money Institution. PayPal
(Europe) implements its localized services in EU countries
through an expedited passport notification process
through the United Kingdom regulator to regulators in other EU
member states, pursuant to EU Directives. PayPal (Europe) has
22
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 United Kingdom 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 markets other than the U.S., European Union, Australia and
China, PayPal serves its customers through PayPal Private Ltd.,
a wholly-owned subsidiary of PayPal that is based in Singapore.
In many of these markets, it is not clear whether PayPals
Singapore-based service is subject to local law or, if it is
subject to local law, whether such local law requires a payment
processor like PayPal to be licensed as a bank or financial
institution or otherwise. Even if PayPal is not currently
required to obtain a license in those countries, future
localization or targeted marketing of PayPals service in
those countries could require licensure 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.
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 a limited operating history and management experience
in managing these internal controls. As PayPals business
continues to grow, it must strengthen its internal controls
accordingly. PayPals success requires significant public
confidence in its ability to handle large and growing
transaction volumes and amounts of customer funds. Any failure
to maintain necessary controls or to manage accurately customer
funds could diminish customer use of PayPals product
severely.
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. Adopted and proposed laws and
regulations cover issues such as user privacy, freedom of
expression, pricing, fraud, content and quality of products and
services, taxation, tax-related reporting of business activity,
advertising, intellectual property rights, and information
security. It is not clear how existing laws governing issues
such as property ownership, copyrights and other intellectual
property issues, taxation, libel and defamation, obscenity, and
personal privacy apply to online businesses. The majority of
these laws were adopted prior to the advent of the Internet and
related technologies and, as a result, do not contemplate or
address the unique issues of the Internet and related
technologies. Those laws that do reference the Internet, such as
the U.S. Digital Millennium Copyright Act and the European
Unions Directive on Distance Selling and Electronic
Commerce, have begun to be interpreted by the courts and
implemented by the EU Member States, but their applicability and
scope remain somewhat uncertain. As our activities and the types
of goods listed on our websites expand, including through
acquisitions such as our recent acquisition of StubHub, an
online ticket marketplace, regulatory agencies or courts may
claim or hold that we or our users are either subject to
licensure or prohibited from conducting our business in their
jurisdiction, either with respect to our services in general, or
in order to allow the sale of certain items, such as real
estate, event tickets, cultural goods, boats, and automobiles.
Numerous states and foreign jurisdictions, including the State
of California, where our headquarters are located, have
regulations regarding auctions and the handling of
property by secondhand dealers or
pawnbrokers. No final legal determination has been
made as to whether the California regulations apply to our
business (or that of our users) and little precedent exists in
this area. Several states and some foreign jurisdictions have
attempted, and may attempt in the future, to impose such
regulations upon us or our users. Attempted enforcement
23
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. A number of the lawsuits
against us relating to trademark issues seek to have our
websites subject to unfavorable local laws. 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. In addition, we may be subject to overlapping legal or
regulatory regimes that impose conflicting requirements on us.
Our failure to comply with foreign laws could subject us to
penalties ranging from criminal prosecution to bans on our
services.
Our
tickets business is subject to regulatory, competitive, and
other risks that could harm this business.
Our tickets business, which includes our recently-acquired
StubHub business, is subject to numerous risks. Many
jurisdictions have laws and regulations covering the resale of
event tickets, and some jurisdictions prohibit the resale of
event tickets at prices above the face value of the tickets. In
addition, new laws and regulations may be passed that would
limit our or our users ability to continue this business.
Regulatory agencies or courts may claim or hold that we are
responsible for ensuring that our users comply with these laws
and regulations or that we or our users are either subject to
licensure or prohibited from reselling event tickets in their
jurisdictions.
Some event organizers and professional sports teams have
expressed concern about the resale of their event tickets on our
sites, and in November 2006 the New England Patriots filed suit
against StubHub alleging that StubHubs resale activities
violate Massachusetts ticket resale laws and constitute
intentional interference with the teams relationship with
its season ticket holders. Such litigation could result in
damage awards, could require us to change our business practices
in harmful ways, or could otherwise negatively affect our
tickets business. Our tickets business is also subject to
seasonal fluctuations and the general economic and business
conditions that impact the sporting events and live
entertainment industries. Our tickets business also faces
significant competition from a number of sources, including
ticketing service companies (such as TicketMaster and
Tickets.com), event organizers (such as professional sports
teams and leagues), ticket brokers, and other online and offline
ticket resellers (such as TicketsNow and RazorGator). If we are
unable to effectively compete with these competitors, our
tickets business could be harmed.
Our
business is subject to online security risks, including security
breaches and identity theft.
To succeed, online commerce and communications must provide a
secure transmission of confidential information over public
networks. Our security measures may not detect or prevent
security breaches that could harm our business. Currently, a
significant number of our users authorize us to bill their
credit card accounts directly for all transaction fees charged
by us. PayPals users routinely provide credit card and
other financial information. We rely on encryption and
authentication technology licensed from third parties to provide
the security and authentication to effect secure transmission of
confidential information, including customer credit card
numbers. Advances in computer capabilities, new discoveries in
the field of cryptography or other developments may result in a
compromise or breach of the technology used by us to protect
transaction data. In addition, any party who is able to
illicitly obtain a users password could access the
users transaction data. An increasing number of websites
have reported breaches of their security. Any compromise of our
security could harm our reputation and, therefore, our business.
In addition, a party that is able to circumvent our security
measures could misappropriate proprietary information, cause
interruption in our operations, damage our computers or those of
our users, or otherwise damage
24
our reputation and business. Under credit card rules and our
contract with our card processors, if there is a breach of
credit card information that we store, or that is stored by
PayPals direct credit card processing customers, we could
be liable to the credit card issuing banks for their cost of
issuing new cards and related expenses.
Our servers are also vulnerable to computer viruses, physical or
electronic break-ins, and similar disruptions, and we have
experienced
denial-of-service
type attacks on our system that have made all or portions of our
websites unavailable for periods of time. We may need to expend
significant resources to protect against security breaches or to
address problems caused by breaches. These issues are likely to
become more difficult as we expand the number of places where we
operate. Security breaches could damage our reputation and
expose us to a risk of loss or litigation and possible
liability. Our insurance policies carry low coverage limits,
which may not be adequate to reimburse us for losses caused by
security breaches.
Our users, as well as those of other prominent Internet
companies, have been and will continue to be targeted by parties
using fraudulent spoof emails to misappropriate
passwords, credit card numbers, or other personal information or
to introduce viruses through trojan horse programs
to our users computers. These emails appear to be
legitimate emails sent by eBay, PayPal, Skype, or a user of one
of those businesses, but direct recipients to fake websites
operated by the sender of the email or request that the
recipient send a password or other confidential information via
email or download a program. Despite our efforts to mitigate
spoof
e-mails
through product improvements and user education,
spoof remains a serious problem that may damage our
brand, discourage use of our websites, and increase our costs.
Some businesses and security consultants have expressed concern
over the potential for Skypes software to create security
vulnerabilities on its users computers. While we believe
Skypes software is safe and does not pose a security risk
to its users, the perception that Skypes software is
unsafe could hamper its adoption, and any actual security breach
could damage Skypes reputation and expose us to a risk of
loss or litigation and possible liability.
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. Problems with
our conversion to a new billing system during the second and
third quarters of 2004 caused incorrect account balance totals
to be displayed for some users. While these problems have been
corrected and we believe that no users were overcharged, our
failure to grow our transaction-processing capabilities to
accommodate the increasing number of transactions that must be
billed on any of our websites would harm our business and our
ability to collect revenue.
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Customer Support. We are expanding our
customer support operations to accommodate the increased number
of users and transactions on our websites and the increased
level of user protection activity we provide worldwide. If we
are unable to provide these operations in a cost-effective
manner, users of our websites may have negative experiences,
current and future revenues could suffer, and our operating
margins may decrease.
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We must continue to hire, train, and manage new employees at a
rapid rate. If our new hires perform poorly, if we are
unsuccessful in hiring, training, managing, and integrating
these new employees, or if we are not successful in retaining
our existing employees, our business may be harmed. To manage
the expected growth of our operations and personnel, we will
need to improve our transaction processing, operational and
financial systems, procedures, and controls. This is a special
challenge as we acquire new operations with different systems.
Our current and planned personnel, systems, procedures, and
controls may not be adequate to support our future operations.
The additional headcount and capital investments we are adding
increase our cost base, which will make it more difficult for us
to offset any future revenue shortfalls by expense reductions in
the short term.
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
26
provision of services to online gambling merchants violated
provisions of the USA PATRIOT Act and further agreed to have its
compliance program reviewed by an independent audit firm. PayPal
is also subject to regulations that require it to report
suspicious activities involving transactions of $2,000 or more
and may be required to obtain and keep more detailed records on
the senders and recipients in certain transfers of $3,000 or
more. The interpretation of suspicious activities in this
context is uncertain. Future regulations under the USA PATRIOT
Act may require PayPal to revise the procedures it uses to
verify the identity of its customers and to monitor
international transactions more closely. As PayPal localizes its
service in other countries, additional verification and
reporting requirements could apply. These regulations could
impose significant costs on PayPal and make it more difficult
for new customers to join its network. PayPal could be required
to learn more about its customers before opening an account, to
obtain additional verification of customers and to monitor its
customers activities more closely. These requirements, as
well as any additional restrictions imposed by credit card
associations, could raise PayPals costs significantly and
reduce the attractiveness of its product. Failure to comply with
federal, state or foreign country money laundering laws could
result in significant criminal and civil lawsuits, penalties,
and forfeiture of significant assets.
We are
subject to risks associated with information disseminated
through our service.
The law relating to the liability of online services companies
for information carried on or disseminated through their
services is currently unsettled. Claims could be made against
online services companies under both U.S. and foreign law for
defamation, libel, invasion of privacy, negligence, copyright or
trademark infringement, or other theories based on the nature
and content of the materials disseminated through their
services. Several private lawsuits seeking to impose liability
upon us under a number of these theories have been brought
against us. In addition, domestic and foreign legislation has
been proposed that would prohibit or impose liability for the
transmission over the Internet of certain types of information.
Our service features a Feedback Forum, which includes
information from users regarding other users. Although all such
feedback is generated by users and not by us, claims of
defamation or other injury have been made in the past and could
be made in the future against us for content posted in the
Feedback Forum. Several recent court decisions have narrowed the
scope of the immunity provided to Internet service providers
like us under the Communications Decency Act. This trend, if
continued, may increase our potential liability to third parties
for the user-provided content on our site. Our liability for
such claims may be higher in jurisdictions outside the
U.S. where laws governing Internet transactions are
unsettled. If we become liable for information provided by our
users and carried on our service in any jurisdiction in which we
operate, we could be directly harmed and we may be forced to
implement new measures to reduce our exposure to this liability.
This may require us to expend substantial resources or to
discontinue certain service offerings, which would negatively
affect our financial results. In addition, the increased
attention focused upon liability issues as a result of these
lawsuits and legislative proposals could harm our reputation or
otherwise impact the growth of our business. Any costs incurred
as a result of this potential liability could harm our business.
Customer
complaints or negative publicity about our customer service
could diminish use of our services.
Customer complaints or negative publicity about our customer
service could severely diminish consumer confidence in and use
of our services. Measures we sometimes take to combat risks of
fraud and breaches of privacy 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,
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among other things, failure to resolve account restrictions
promptly. If PayPal is unable to provide quality customer
support operations in a cost-effective manner, PayPals
users may have negative experiences, PayPal may receive
additional negative publicity, its ability to attract new
customers may be damaged, and it could become subject to
additional litigation. As a result, current and future revenues
could suffer, or its operating margins may decrease. In
addition, negative publicity about or experiences with
PayPals customer support could cause eBays
reputation to suffer or affect consumer confidence in the eBay
brands as a whole.
Problems
with third parties who provide services to us or to our users
could harm our business.
A number of parties provide services to us or to our users that
benefit us. Such services include seller tools that automate and
manage listings, merchant tools that manage listings and
interface with inventory management software, storefronts that
help our users list items, and caching services that make our
sites load faster, among others. In some cases we have
contractual agreements with these companies that give us a
direct financial interest in their success, while in other cases
we have none. PayPal is dependent on the processing companies
and banks that link PayPal to the credit card and bank clearing
networks. Financial, regulatory, or other problems that prevent
these companies from providing services to us or our users could
reduce the number of listings on our websites or make completing
transactions or payments on our websites more difficult, and
thereby harm our business. Any security breach at one of these
companies could also affect our customers and harm our business.
Although we generally have been able to renew or extend the
terms of contractual arrangements with these third party service
providers on acceptable terms, there can be no assurance that we
will continue to be able to do so in the future.
We
depend on key personnel.
Our future performance depends substantially on the continued
services of our senior management and other key personnel and
our ability to retain and motivate them. The loss of the
services of any of our executive officers or other key employees
could harm our business. We do not have long-term employment
agreements with any of our key personnel, we do not maintain any
key person life insurance policies, and our Chief
Executive Officer and many other members of our senior
management team have fully vested the vast majority of their
in-the-money
equity incentives. Our new businesses all depend on attracting
and retaining key personnel. Our future success also will depend
on our ability to attract, train, retain and motivate highly
skilled technical, managerial, marketing, and customer support
personnel. Competition for these personnel is intense, and we
may be unable to successfully attract, integrate, or retain
sufficiently qualified personnel. In making employment
decisions, particularly in the Internet and high-technology
industries, job candidates often consider the value of the stock
options they are to receive in connection with their employment.
Fluctuations in our stock price may make it more difficult to
retain and motivate employees whose stock option strike prices
are substantially above current market prices. Similarly,
decreases in the number of unvested
in-the-money
stock options held by existing employees, whether because our
stock price has declined, options have vested, or because the
size of follow-on option grants 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. A number of Skypes employees had equity in Skype
prior to its acquisition by eBay. Skype equity holders were
given the option of receiving their portion of the acquisition
consideration in the form of a lump-sum up- front payment or
receiving a lower up-front payment in exchange for the
possibility of receiving additional consideration in the form of
potential earn-out payments tied to the achievement of certain
performance targets prior to June 30, 2009. Several key
members of Skypes senior management and key employees
chose to receive less up-front consideration in exchange for the
possibility of receiving the performance-based earn-out
payments. Although eligible Skype employees have also been
granted eBay stock options, the earn-out payments are not tied
to continued employment with Skype or eBay, and key Skype
employees may choose to depart because of differences in
corporate culture, because they believe the earn-out targets
will be achieved without their contributions, or because they
believe the earn-out targets are not achievable. The loss of the
services of any of Skypes senior management or key
personnel could delay the development and introduction of new
features and products, and could harm our ability to grow
Skypes business.
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Our
industry is intensely competitive, and other companies or
governmental agencies may allege that our behavior is
anti-competitive.
Marketplaces
Marketplaces businesses currently or potentially compete with a
number of companies providing both particular categories of
goods and broader ranges of goods. The Internet provides new,
rapidly evolving and intensely competitive channels for the sale
of all types of goods. We expect competition to intensify in the
future. The barriers to entry into these channels are relatively
low, and current offline and new competitors can easily launch
online sites at a nominal cost using commercially available
software or partnering with any one of a number of successful
e-commerce
companies.
Our broad-based competitors include the vast majority of
traditional department, warehouse, discount, and general
merchandise stores (as well as the online operations of these
traditional retailers), emerging online retailers, online
classified services, and other shopping channels such as offline
and online home shopping networks. These include most
prominently: Wal-Mart, Target, Sears, Macys, JC Penney,
Costco, Office Depot, Staples, OfficeMax, Sams Club,
Amazon.com, Buy.com, AOL.com, Yahoo! Shopping, MSN, QVC, and
Home Shopping Network.
A number of companies have launched a variety of services that
provide new channels for buyers to find and buy items from
sellers of all sizes, including online aggregation and
classifieds sites such as Oodle.com, Google Base, and Microsoft
Live Expo. In 2005, we acquired Shopping.com Ltd., an online
shopping comparison site. Shopping.com competes with sites such
as Buy.com, Googles Froogle, 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
Home & Garden category include: Ace Hardware, Baby
Style, Baby Universe, Bed, Bath & Beyond, Brookstone,
Burpee.com, Crate & Barrel, Do-It-Best Hardware, Ethan
Allen, Frontgate, Harbor Freight, IKEA, HomeBase, Home Depot,
Kohls, Lamps Plus, Lowes, Linens n Things, OSH,
Pier One, Pottery Barn, Restoration Hardware, Smith &
Hawken, Spiegel, Tuesday Morning, True Value Hardware, and
Williams-Sonoma.
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, and Amazon in the United
Kingdom and other countries. In some of these countries, there
are online sites that have much larger customer bases and
greater brand recognition than we do, and in certain of these
jurisdictions there are competitors that may have a better
understanding of local culture and commerce than we do.
The principal competitive factors for Marketplaces include the
following:
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ability to attract buyers and sellers;
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volume of transactions and price and selection of goods;
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customer service; and
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brand recognition.
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With respect to our online competition, additional competitive
factors include:
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community cohesion, interaction and size;
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website
ease-of-use
and accessibility;
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system reliability;
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reliability of delivery and payment;
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level of service fees; and
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quality of search tools.
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Some current and potential competitors have longer operating
histories, larger customer bases and greater brand recognition
in other business and Internet sectors than we do. Other online
trading services may be acquired by, receive investments from,
or enter into other commercial relationships with larger,
well-established and well-financed companies. As a result, some
of our competitors with other revenue sources may be able to
devote more resources to marketing and promotional campaigns,
adopt more aggressive pricing policies and devote substantially
more resources to website and systems development than we can.
Some of our competitors have offered services for free and
others may do this as well. We may be unable to compete
successfully against current and future competitors. In
addition, certain offline competitors may encourage
manufacturers to limit or cease distribution of their products
to dealers who sell through online channels such as eBay, or may
attempt to use existing or future government regulation to
prohibit or limit online commerce in certain categories of goods
or services. The adoption by manufacturers or government
authorities of policies or regulations discouraging the sales of
goods or services over the Internet could force eBay users to
stop selling certain products on our websites. Increased
competition or anti-Internet distribution policies or
regulations may result in reduced operating margins, loss of
market share and diminished value of our brand.
Conversely, other companies and government agencies have in the
past and may in the future allege that our actions violate the
antitrust or competition laws of the U.S. or other
countries, or otherwise constitute unfair competition. Such
claims, even if without foundation, typically are very expensive
to defend, involve negative publicity and diversion of
management time and effort, and could result in significant
judgments against us.
In order to respond to changes in the competitive environment,
we may, from time to time, make pricing, service or marketing
decisions or acquisitions that could harm our profitability. For
example, PayPal has implemented a buyer protection program
generally covering losses for eBay transactions paid with PayPal
up to $200 and covering losses from selected eBay sellers up to
$2,000, with no deductible. Depending on the amount and size of
claims we receive under these programs, these product offerings
could harm our profitability. Similarly, in July 2006 we
announced pricing and product changes related to our store
inventory format that may reduce the revenue and profits of that
format. In addition, certain competitors may offer or continue
to offer free shipping or other transaction related services,
which could be impractical or inefficient for eBay users to
match. New technologies may increase the competitive pressures
by enabling our competitors to offer a lower cost service.
Although we have established Internet traffic arrangements with
several large online services and search engine companies, these
arrangements may not be renewed on commercially reasonable terms
or these companies may decide to promote competitive services.
Even if these arrangements are renewed, they may not result in
increased usage of our services. In addition, companies that
control user access to transactions through network access,
Internet browsers, or search engines, could promote our
competitors, channel current or potential users to their
vertically integrated electronic commerce sites or their
advertisers sites, attempt to restrict our access, or
charge us substantial fees for inclusion. Search engines may
increasingly become a starting point for online shopping, and as
the costs of operating an online store decline, online sellers
may increasingly sell goods through multiple channels, which
could reduce the number and value of transactions these sellers
conduct through our sites.
PayPal
The market for PayPals product is emerging, intensely
competitive, and characterized by rapid technological change.
PayPal competes with existing online and off-line payment
methods, including, among others:
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credit card merchant processors that offer their services to
online merchants, including Cardservice International, Chase
Paymentech, First Data, iPayment and Wells Fargo; and payment
gateways, including CyberSource and Authorize.net;
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money remitters such as MoneyGram and Western Union;
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bill payment services, including CheckFree;
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30
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processors that provide online merchants the ability to offer
their customers the option of paying for purchases from their
bank account, including Certegy, PayByTouch and TeleCheck, a
subsidiary of First Data, or to pay on credit, including Bill Me
Later;
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providers of traditional payment methods, particularly credit
cards, checks, money orders, and Automated Clearing House
transactions;
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issuers of stored value targeted at online payments, including
VisaBuxx, NetSpend and Next Estate; and
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Google Checkout, which enables the online payment of merchants
using credit cards.
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Some of these competitors have longer operating histories,
significantly greater financial, technical, marketing, customer
service and other resources, greater name recognition, or a
larger base of customers in affiliated businesses than PayPal.
PayPals competitors may respond to new or emerging
technologies and changes in customer requirements faster and
more effectively than PayPal. They may devote greater resources
to the development, promotion, and sale of products and services
than PayPal, and they may offer lower prices. For example,
Google Checkout recently extended its free payment processing
promotion through the end of 2007. Promotions such as this may
force PayPal to lower its prices in response. Competing services
tied to established banks and other financial institutions may
offer greater liquidity and engender greater consumer confidence
in the safety and efficacy of their services than PayPal.
Overseas, PayPal faces competition from similar channels and
payment methods. In each country, numerous banks provide
standard online credit card acquiring and processing services,
and these banks typically have leading market share. In
addition, PayPal faces competition from Visas Visa Direct,
MasterCards MoneySend, and Royal Bank of Scotlands
World Pay and Webpay Internationals Click & Buy
in the European Community, NOCHEX, Moneybookers, NETeller and
FirePay in the United Kingdom, CertaPay and HyperWallet in
Canada, Paymate in Australia, Alipay and 99Bill in China and
Inicis in South Korea. In addition, in certain countries, such
as Germany and Australia, electronic funds transfer is a leading
method of payment for both online and offline transactions. As
in the U.S., established banks and other financial institutions
that do not currently offer online payments could quickly and
easily develop such a service.
Skype
The market for Skypes products is also emerging, intensely
competitive, and characterized by rapid technological change.
Many traditional telecommunications carriers and cable providers
offer, or have indicated that they plan to offer, VoIP products
or services that compete with the software Skype provides. In
addition, many established Internet companies, including AOL,
Google, Microsoft, and Yahoo, as well as newer companies, offer,
or have indicated that they plan to offer in the near future,
products that are similar to Skypes. We expect competitors
to continue to improve the performance of their current products
and introduce new products, software, services, and
technologies. If Skypes competitors successfully introduce
new products or enhance their existing products, this could
reduce the market for Skypes products, increase price
competition, or make Skypes products obsolete, 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.
31
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, a recently
announced joint venture between EachNet and Tom Online, and a
PayPal subsidiary. EachNet and PayPal are Delaware corporations
and foreign persons under the laws of the PRC are subject to
many of the risks of doing business internationally described
above in There are many risks associated with our
international operations. The PRC currently regulates its
Internet sector through regulations restricting the scope of
foreign investment and through the enforcement of content
restrictions on the Internet. While many aspects of these
regulations remain unclear, they purport to limit and require
licensing of various aspects of the provision of Internet
information services. These regulations have created substantial
uncertainties regarding the legality of foreign investments in
PRC Internet companies, including the entities through which we
do business in the PRC, and the business operations of such
companies. In order to meet local ownership and regulatory
licensing requirements, EachNet is operated through a
foreign-owned enterprise indirectly owned by eBays
European operating entity, which acts in cooperation with a
local PRC company owned by certain local employees. The PayPal
China website is operated through a foreign-owned enterprise
owned by a PayPal subsidiary, which acts in cooperation with a
local PRC company owned by certain local employees. We believe
the current ownership structures of EachNet, the joint venture
between EachNet and Tom Online, and PayPal 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 identify and negotiate a new business
relationship to act in cooperation with a local PRC entity that
is not owned by local employees and has a substantial operating
history, and to obtain prior approval of the relationship 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 any of the entities through
which we do business in the PRC were found to be in violation of
any existing or future PRC laws or regulations, they could be
subject to fines and other financial penalties, have their
business and Internet content provider licenses revoked, or be
forced to discontinue business entirely. In addition, any
finding of a violation of PRC laws or regulations by any of the
entities through which we do business in the PRC could make it
more difficult for us to launch new or expanded services in the
PRC.
Although Skype does not conduct operations in the PRC directly,
it makes its software available through a joint venture with Tom
Online and its software is used by residents of the PRC. PRC
regulations surrounding VoIP telephony are unclear and the PRC
or one or more of its provinces may adopt regulations or enforce
existing regulations that restrict or prohibit the use of
Skypes software.
Our
business may be adversely affected by factors that cause our
users to spend less time on our websites, including seasonal
factors, national events and increased usage of other
websites.
Anything that diverts our users from their customary level of
usage of our websites could adversely affect our business. We
would therefore be adversely affected by geopolitical events
such as war, the threat of war, or terrorist activity, and
natural disasters, such as hurricanes or earthquakes. Similarly,
our results of operations historically have been seasonal
because many of our users reduce their activities on our
websites with the onset of good weather during the summer
months, and on and around national holidays. In addition,
increased usage of social networking or other entertainment
websites may decrease the amount of time users spend on our
websites, which could adversely affect our financial results.
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
32
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 still in its early
stages, and it may not develop a broad audience. Skype users may
be required to purchase computer headsets, or leave a personal
computer on to communicate, and they may believe that the price
advantage for VoIP is insufficient to justify the perceived
inconvenience. Potential users may also view more familiar
online communication methods, such as
e-mail or
instant messaging, as sufficient for their communications needs.
Managers of some large private branch exchange, or PBX, systems
in businesses, universities, government agencies, and other
institutions may refuse to allow the use of Skype due to
concerns over security, server usage, or for other reasons. If
VoIP does not achieve wide public acceptance, our Skype business
will be adversely affected.
Our
business depends on the development and maintenance of the
Internet infrastructure.
The success of our services will depend largely on the
development and maintenance of the Internet infrastructure. This
includes maintenance of a reliable network backbone with the
necessary speed, data capacity, and security, as well as timely
development of complementary products, for providing reliable
Internet access and services. The Internet has experienced, and
is likely to continue to experience, significant growth in the
numbers of users and amount of traffic. The Internet
infrastructure may be unable to support such demands. In
addition, increasing numbers of users, increasing bandwidth
requirements, or problems caused by viruses,
worms, and similar programs may harm the performance
of the Internet. The backbone computers of the Internet have
been the targets of such programs. The Internet has experienced
a variety of outages and other delays as a result of damage to
portions of its infrastructure, and it could face outages and
delays in the future. These outages and delays could reduce the
level of Internet usage generally as well as the level of usage
of our services.
We may
be unable to protect or enforce our own intellectual property
rights adequately.
We regard the protection of our trademarks, copyrights, patents,
domain names, trade dress, and trade secrets as critical to our
success. We aggressively protect our intellectual property
rights by relying on a combination of trademark, copyright,
patent, trade dress and trade secret laws, and through the
domain name dispute resolution system. We also rely on
contractual restrictions to protect our proprietary rights in
products and services. We have entered into confidentiality and
invention assignment agreements with our employees and
contractors, and confidentiality agreements with parties with
whom we conduct business in order to limit access to and
disclosure of our proprietary information. These contractual
arrangements and the other steps we have taken to protect our
intellectual property may not prevent misappropriation of our
technology or deter independent development of similar
technologies by others. We pursue the registration of our domain
names, trademarks, and service marks in the U.S. and
internationally. Effective trademark, copyright, patent, domain
name, trade dress, and trade secret protection is very expensive
to maintain and may require litigation. We must protect our
trademarks, patents, and domain names in an increasing number of
jurisdictions, a process that is expensive and may not be
successful in every location. For example, Skype is in the
process of applying to register the Skype name as a trademark
worldwide. In the EU, Skypes application is being opposed.
If this opposition to Skypes application were to be
successful, Skype might be forced to apply for trademark
registration in each individual EU country, resulting in
increased expenditures and damage to its business if its
application were rejected in individual countries. We have
licensed in the past, and expect to license in the future,
certain of our proprietary rights, such as trademarks or
copyrighted material, to others. These licensees may take
actions that diminish the value of our proprietary rights or
harm our reputation.
33
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.
ITEM 1B: UNRESOLVED
STAFF COMMENTS
Not applicable.
ITEM 2: PROPERTIES
We own and lease various properties in the United States and in
24 other countries around the world. We use the properties for
executive and administrative offices, data centers, product
development offices and customer service offices. Our corporate
headquarters of approximately 150,000 square feet are
located in San Jose, California. As of December 31,
2006, our owned and leased properties provided us with aggregate
square footage of approximately 1.5 million and
1.6 million, respectively. As of December 31, 2006,
the total square footage generally used by our Marketplaces,
Payments and Communications segments was approximately
1.7 million, 1.1 million and 100,000 respectively.
From time to time we consider various alternatives related to
our long-term facilities needs. While we believe our existing
facilities are adequate to meet our immediate needs, it may
become necessary to lease or acquire additional or alternative
space to accommodate any future growth.
ITEM 3: LEGAL
PROCEEDINGS
In April 2001, two of our European subsidiaries, eBay GmbH and
eBay International AG, were sued by Montres Rolex S.A. and
certain of its affiliates in the regional court of Cologne,
Germany. The suit subsequently was transferred to the regional
court in Düsseldorf, Germany. Rolex alleged that our
subsidiaries were infringing Rolexs trademarks as a result
of users selling counterfeit Rolex watches through our German
website. The suit also alleged unfair competition. Rolex sought
an order enjoining the sale of Rolex-branded watches on the
website as well as damages. In December 2002, a trial was held
in the matter and the court ruled in favor of eBay on all causes
of action. Rolex appealed the ruling to the Higher Regional
Court of Düsseldorf, and the appeal was heard in October
2003. In February 2004, the court rejected Rolexs appeal
and ruled in our favor. Rolex appealed the ruling to the German
Federal Supreme Court, a hearing took place before that court in
December 2006, and a decision is
34
expected in the first half of 2007. In September 2004, the
German Federal Supreme Court issued its written opinion in favor
of Rolex in a case involving an unrelated company, ricardo.de
AG, but somewhat comparable legal theories. Although it is not
yet clear what the ultimate effect of the reasoning of the
German Federal Supreme Courts ricardo.de decision will
have when applied to eBay, we believe the Courts decision
has resulted in an increase in similar litigation against us in
Germany, although we do not currently believe that it will
require a significant change in our business practices.
In August 2006, Louis Vuitton Malletier and Christian Dior
Couture filed two lawsuits in the Paris Court of Commerce
against eBay Inc. and eBay International AG. The complaint
alleges we have violated French tort law by negligently
broadcasting listings posted by third parties offering
counterfeit items bearing plaintiffs trademarks, and by
purchasing certain advertising keywords. The plaintiffs seek
approximately EUR 35 million in damages. In or about
September 2006 Parfums Christian Dior, Kenzo Parfums, Parfums
Givenchy, and Guerlain Société also filed a lawsuit in
the Paris Court of Commerce against eBay Inc. and eBay
International AG. The complaint alleges that we have interfered
with the selective distribution network plaintiffs have
set up in France and the European Union by allowing third
parties to post listings offering genuine perfumes and cosmetics
for sale on our sites. The plaintiffs in this suit seek
approximately EUR 9 million in damages and injunctive
relief. We filed our initial briefs responding to the first
complaint in February 2007, and initial briefs in response to
the second complaint are due in April 2007. We believe that we
have meritorious defenses to these suits and intend to defend
ourselves vigorously. Other luxury brand owners have also filed
suit against us or have threatened to do so.
In September 2001, MercExchange LLC filed a complaint against
us, our Half.com subsidiary and ReturnBuy, Inc. in the
U.S. District Court for the Eastern District of Virginia
(No. 2:01-CV-736)
alleging infringement of three patents (relating to online
consignment auction technology, multiple database searching and
electronic consignment systems) and seeking a permanent
injunction and damages (including treble damages for willful
infringement). Following a trial in 2003, the jury returned a
verdict finding that we had willfully infringed the patents
relating to multiple database searching and electronic
consignment systems, and the court entered judgment for
MercExchange in the amount of approximately $30 million,
plus pre-judgment interest and post-judgment interest. In May
2006, following appeals to the U.S. Court of Appeals for
the Federal Circuit and the U.S. Supreme Court, the Supreme
Court remanded the case back to the district court for further
action. In parallel with the federal court proceedings, at our
request, the U.S. Patent and Trademark Office agreed to
reexamine each of the patents in suit, finding that substantial
questions existed regarding the validity of the claims contained
in them. In separate actions in 2005, the Patent and Trademark
Office initially rejected all of the claims contained in the
three patents in suit. In March 2006, the Patent and Trademark
Office reiterated its earlier ruling rejecting the claims
contained in the patent that underlies the jury verdict, which
relates to electronic consignment systems. We have requested
that the district court stay all proceedings in the case pending
the final outcome of the reexamination proceedings, and
MercExchange has renewed its request that the district court
grant an injunction. The district court recently allowed
additional discovery regarding these matters, and final briefs
regarding both claims are due in March 2007. Even if successful,
our litigation of these matters will continue to be costly. As a
precautionary measure, we have modified certain functionality of
our websites and business practices in a manner which we believe
avoids any infringement of the consignment patent. For this
reason, we believe that any injunction that might be issued by
the district court will not have any impact on our business. We
also believe we have appropriate reserves for this litigation.
Nonetheless, if the 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 June 2006, Net2Phone, Inc. filed a lawsuit in the
U.S. District Court for the District of New Jersey
(No. 06-2469)
alleging that eBay Inc., Skype Technologies S.A., and Skype Inc.
infringed five patents owned by Net2Phone relating to
point-to-point
Internet protocol. The suit seeks an injunction against
continuing infringement, unspecified damages, including treble
damages for willful infringement, and interest, costs, and fees.
We have filed an answer and counterclaims asserting that the
patents are invalid, unenforceable, and not infringed. The
parties are in the process of conducting discovery, and we
expect a trial date to be scheduled for 2008. We believe that we
have meritorious defenses and intend to defend ourselves
vigorously.
In August 2006, Peer Communications Corporation filed a lawsuit
in the U.S. District Court for the Eastern District of
Texas
(No. 6-06CV-370)
alleging that eBay Inc., Skype Technologies S.A., and Skype Inc.
infringed two
35
patents owned by Peer Communications relating to uniform network
access. The suit seeks an injunction against continuing
infringement, unspecified damages, and interest, costs, and
fees. The parties are in the process of conducting discovery,
and a trial date has been scheduled for October 2008. We believe
that we have meritorious defenses and intend to defend ourselves
vigorously.
In September 2006, Mangosoft Intellectual Property, Inc. filed a
lawsuit in the U.S. District Court for the Eastern District
of Texas
(No. 2-06CV-390)
alleging that eBay Inc., Skype Technologies S.A., and Skype
Software S.a.r.l. infringed a patent owned by Mangosoft relating
to dynamic directory services. The suit seeks an injunction
against continuing infringement, unspecified damages, and
interest, costs, and fees. We have filed an answer and
counterclaims asserting that the patents are invalid,
unenforceable, and not infringed. We expect to receive the
courts scheduling order shortly. We believe that we have
meritorious defenses and intend to defend ourselves vigorously.
Other third parties have from time to time claimed, and others
may claim in the future, that we have infringed their
intellectual property rights. We are subject to additional
patent disputes, and expect that we will increasingly be subject
to patent infringement claims as our services expand in scope
and complexity. In particular, we expect that we may face
additional patent infringement claims involving various aspects
of our Payments and Communications businesses. We have in the
past been forced to litigate such claims. We may also become
more vulnerable to third-party claims as laws such as the
Digital Millennium Copyright Act, the Lanham Act and the
Communications Decency Act are interpreted by the courts, and as
we expand geographically into jurisdictions where the underlying
laws with respect to the potential liability of online
intermediaries like ourselves are either unclear or less
favorable. We believe that additional lawsuits alleging that we
have violated copyright or trademark laws will be filed against
us, especially in Europe. Intellectual property claims, whether
meritorious or not, are time consuming and costly to resolve,
could require expensive changes in our methods of doing
business, or could require us to enter into costly royalty or
licensing agreements.
From time to time, we are involved in other disputes or
regulatory inquiries that arise in the ordinary course of
business. The number and significance of these disputes and
inquiries are increasing as our business expands and our company
grows larger. Any claims or regulatory actions against us,
whether meritorious or not, could be time consuming, result in
costly litigation, require significant amounts of management
time, and result in the diversion of significant operational
resources.
ITEM 4: SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no submissions of matters to a vote of security
holders during the quarter ended December 31, 2006.
36
PART II
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ITEM 5:
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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Price
Range of Common Stock
Our common stock has been traded on The Nasdaq Global Select
Market (formerly the Nasdaq National Market) under the symbol
EBAY since September 24, 1998. The following
table sets forth the high and low per share prices of our common
stock (after giving retroactive effect to all previous stock
splits for the periods indicated), as reported by The Nasdaq
Global Select Market.
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High
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Low
|
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Year Ended December 31, 2005
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First Quarter
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$
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58.89
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$
|
35.00
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Second Quarter
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40.94
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|
30.78
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Third Quarter
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44.98
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|
|
|
32.75
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Fourth Quarter
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47.60
|
|
|
|
37.22
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|
Year Ended December 31, 2006
|
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First Quarter
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|
$
|
47.86
|
|
|
$
|
36.93
|
|
Second Quarter
|
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40.82
|
|
|
|
28.20
|
|
Third Quarter
|
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|
29.48
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|
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|
22.83
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Fourth Quarter
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33.99
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27.00
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As of February 16, 2007, there were approximately 4,300
holders of record of our common stock, although we believe that
there are a significantly larger number of beneficial owners of
our common stock.
Dividend
Policy
We have never paid cash dividends on our stock and currently
anticipate that we will continue to retain any future earnings
for the foreseeable future.
Equity
Compensation Plan Information
The following table gives information about shares of our common
stock that may be issued upon the exercise of options, warrants
and rights under all of our existing equity compensation plans
as of December 31, 2006, including our 1996 Stock Option
Plan, 1997 Stock Option Plan, 1998 Employee Stock Purchase Plan,
1998 Equity Incentive Plan, 1998 Directors Stock Option
Plan, 1999 Global Equity Incentive Plan, 2001 Equity Incentive
Plan, and 2003 Deferred Stock Unit Plan, as well as shares of
our common stock that may be issued under individual
compensation arrangements that were not approved by our
stockholders, also referred to as our non-plan grants. No
warrants are outstanding under any of the foregoing plans.
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(a)
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(c)
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Number of
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|
|
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Number of Securities
|
|
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|
Securities
|
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(b)
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Remaining Available for
|
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to Be Issued
|
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Weighted Average
|
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Future Issuance under
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upon Exercise of
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Exercise Price of
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Equity Compensation Plans
|
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Outstanding Options,
|
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Outstanding Options,
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|
(Excluding Securities
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Plan Category
|
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Warrants and Rights
|
|
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Warrants and Rights
|
|
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Reflected in Column(a))
|
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Equity compensation plans approved
by security holders
|
|
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133,608,434
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(1)
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$
|
31.01
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(2)
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108,066,657
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(3)
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Equity compensation plans not
approved by security holders
|
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768,184
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(4)
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0.39
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|
|
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Total
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134,376,618
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$
|
30.83
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|
|
|
108,066,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
(1) |
|
Includes 36,056 shares of our common stock issuable
pursuant to deferred stock units, or DSUs, under our 2003
Deferred Stock Unit Plan, and 508,150 shares of our common
stock issuable pursuant to restricted stock units under our 1998
Equity Incentive Plan. DSUs and restricted stock units represent
an unfunded, unsecured right to receive shares of eBay common
stock (or, in the case of DSUs, the equivalent value thereof in
cash or property), and the value of DSUs and restricted stock
units varies directly with the price of eBays common stock. |
|
(2) |
|
Because DSUs and restricted stock units do not have an exercise
price, the 36,056 shares of our common stock issuable
pursuant to DSUs under our 2003 Deferred Stock Unit Plan and
508,150 shares of our common stock issuable pursuant to
restricted stock units under our 1998 Equity Incentive Plan are
not included in the calculation of weighted average exercise
price. |
|
(3) |
|
Includes 5,575,774 shares of our common stock remaining
reserved for future issuance under our 1998 Employee Stock
Purchase Plan, or the ESPP, as of December 31, 2006. Our
ESPP contains an evergreen provision that
automatically increases, on each January 1, the number of
securities reserved for issuance under the ESPP by the number of
shares purchased under the ESPP in the preceding calendar year,
provided that the aggregate number of shares reserved for
issuance under the ESPP may not exceed 36,000,000 shares.
As of December 31, 2006, an aggregate amount of
9,785,222 shares had been purchased under the ESPP since
its inception. An aggregate amount of 1,624,226 shares was
purchased under the ESPP in 2006, and the number of securities
available for issuance under the ESPP was increased by that
number on January 1, 2007, bringing the total number of
shares reserved for future issuance on January 1, 2007 to
7,200,000. None of our other equity compensation plans has an
evergreen provision. |
|
(4) |
|
Does not include: (i) 7,050 shares of our common
stock, with a weighted average exercise price of $2.73 per
share, to be issued upon exercise of outstanding options assumed
by us under the Half.com, Inc. 1999 Equity Compensation Plan;
(ii) 37,726 shares of our common stock, with a
weighted average exercise price of $0.77 per share, to be
issued upon exercise of outstanding options assumed by us under
the X.com Corporation 1999 Stock Plan;
(iii) 494,108 shares of our common stock, with a
weighted average exercise price of $9.14 per share, to be
issued upon exercise of outstanding options assumed by us under
the PayPal, Inc. 2001 Equity Incentive Plan;
(iv) 184,562 shares of our common stock, with a
weighted average exercise price of $9.47 per share, to be
issued upon exercise of outstanding options assumed by us under
the Shopping.com Ltd. 2003 Omnibus Stock Option and Restricted
Stock Incentive Plan; (v) 944,682 shares of our common
stock, with a weighted average exercise price of $36.30 per
share, to be issued upon exercise of outstanding options assumed
by us under the Shopping.com Ltd. 2004 Equity Incentive Plan; or
(vi) 1,118,794 shares of our common stock, with a
weighted average exercise price of $3.88 per share, to be
issued upon exercise of outstanding options assumed by us under
the Skype Technologies S.A. Stock Option Plan Rules. All of the
options and related plans referenced above were assumed by us in
connection with acquisitions. We cannot make subsequent grants
or awards of our equity securities under any of these plans.
Prior to each acquisition, the stockholders of the acquired
company approved the acquired companys plan. Our
stockholders, however, did not approve any of the plans in
connection with the acquisitions. |
The only outstanding non-plan grant as of December 31, 2006
relates to an individual compensation arrangement that was made
prior to the initial public offering of our common stock in
1998. At the time of this non-plan grant, members of our Board
of Directors, or Board, and their affiliates beneficially owned
in excess of 90% of our then outstanding equity and voting
interests. This non-plan grant was initially disclosed in our
initial public offering prospectus filed with the SEC on
September 25, 1998 under the headings
Management Director Compensation and
Compensation Arrangements. Except as set
forth below, the terms and conditions of this non-plan grant are
identical to the terms of options granted under our 1997 Stock
Option Plan, a copy of which was filed as an exhibit to our
S-1
Registration Statement
(No. 33-59097)
filed in connection with our initial public offering.
The outstanding non-plan grant involved the Boards grant
of an option to purchase 3,600,000 shares of our common
stock at an exercise price of $0.39 to Scott Cook upon his
joining our Board in June 1998 as an independent director. These
options granted to Mr. Cook were non-qualified options and
were immediately exercisable, with a term of 10 years.
These options fully vested in June 2002. Mr. Cook exercised
options to purchase 480,000 shares in
38
2002, exercised options to purchase 1,430,000 shares in
2003, exercised options to purchase 307,272 shares during
2005 and exercised options to purchase 614,544 shares
during 2006. As of December 31, 2006, options to purchase
768,184 shares remain outstanding under the non-plan grant.
Performance
Measurement Comparison
The graph below shows the cumulative total stockholder return of
an investment of $100 (and the reinvestment of any dividends
thereafter) on December 31, 2001 in (i) our common
stock, (ii) the Nasdaq National Market Index,
(iii) the S&P 500 Index and (iv) the GSTI Internet
Index. We were added to the S&P 500 Index on July 19,
2002. The GSTI Internet Index is a modified-capitalization
weighted index of 14 stocks representing the Internet industry,
including Internet content and access providers, Internet
software and service companies and
e-commerce
companies. Our stock price performance shown in the graph below
is not indicative of future stock price performance.
The following graph and related information shall not be deemed
soliciting material or be deemed to be
filed with the SEC, nor shall such information be
incorporated by reference into any future filing, except to the
extent that we specifically incorporate it by reference into
such filing.
39
Issuer
Purchases of Equity Securities
Stock repurchase activity during the three months ended
December 31, 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum Dollar
|
|
|
|
Total Number
|
|
|
Average Price
|
|
|
Shares Purchased as
|
|
|
Value that May Yet
|
|
|
|
of Shares
|
|
|
Paid
|
|
|
Part of Publicly
|
|
|
be Purchased Under
|
|
Period
|
|
Purchased(2)
|
|
|
per Share
|
|
|
Announced Programs
|
|
|
the Program(1)
|
|
|
October 1,
2006-October 31, 2006
|
|
|
720
|
|
|
$
|
29.10
|
|
|
|
|
|
|
$
|
1,333,458,652
|
|
November 1,
2006-November 30, 2006
|
|
|
19,626,163
|
|
|
$
|
33.02
|
|
|
|
19,625,603
|
|
|
$
|
685,455,407
|
|
December 1,
2006-December 31,
2006
|
|
|
10,921,107
|
|
|
$
|
32.23
|
|
|
|
10,920,547
|
|
|
$
|
333,459,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,547,990
|
|
|
|
|
|
|
|
30,546,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In July 2006, our Board authorized a stock repurchase program
for up to $2.0 billion of our common stock within two years
from the date of authorization. The stock repurchase program was
announced in July 2006. Under this program, in 2006, we
repurchased approximately 54.5 million shares at an average
price of $30.56 per share. As of December 31, 2006,
$333 million remained available for further purchases under
this program. In January 2007, our Board authorized the
expansion of the stock repurchase program to provide for the
repurchase of up to an additional $2.0 billion of our
common stock by January 2009. |
|
(2) |
|
Includes 1,840 shares of restricted stock repurchased from
employees, in addition to the 30.5 million shares
repurchased pursuant to our stock repurchase program. |
40
ITEM 6: SELECTED
FINANCIAL DATA
The following selected consolidated financial and supplemental
operating data should be read in conjunction with the
consolidated financial statements and notes thereto and
Managements Discussion and Analysis of Financial
Condition and Results of Operations appearing elsewhere in
this Annual Report on
Form 10-K.
The consolidated statement of income and the consolidated
balance sheet data for the years ended, and as of,
December 31, 2002, 2003, 2004, 2005 and 2006 are derived
from our audited consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006(2)
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Consolidated Statement of
Income Data(1):
|
Net revenues
|
|
$
|
1,214,100
|
|
|
$
|
2,165,096
|
|
|
$
|
3,271,309
|
|
|
$
|
4,552,401
|
|
|
$
|
5,969,741
|
|
Cost of net revenues
|
|
|
213,876
|
|
|
|
416,058
|
|
|
|
614,415
|
|
|
|
818,104
|
|
|
|
1,256,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,000,224
|
|
|
|
1,749,038
|
|
|
|
2,656,894
|
|
|
|
3,734,297
|
|
|
|
4,712,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
335,627
|
|
|
|
545,366
|
|
|
|
815,464
|
|
|
|
1,185,929
|
|
|
|
1,619,857
|
|
Product development
|
|
|
104,636
|
|
|
|
159,315
|
|
|
|
240,647
|
|
|
|
328,191
|
|
|
|
494,695
|
|
General and administrative
|
|
|
189,823
|
|
|
|
364,457
|
|
|
|
475,614
|
|
|
|
649,529
|
|
|
|
978,363
|
|
Amortization of acquired
intangible assets
|
|
|
15,941
|
|
|
|
50,659
|
|
|
|
65,927
|
|
|
|
128,941
|
|
|
|
197,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
646,027
|
|
|
|
1,119,797
|
|
|
|
1,597,652
|
|
|
|
2,292,590
|
|
|
|
3,289,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
354,197
|
|
|
|
629,241
|
|
|
|
1,059,242
|
|
|
|
1,441,707
|
|
|
|
1,422,956
|
|
Interest and other income, net
|
|
|
45,428
|
|
|
|
36,573
|
|
|
|
77,867
|
|
|
|
111,148
|
|
|
|
130,021
|
|
Interest expense
|
|
|
(1,492
|
)
|
|
|
(4,314
|
)
|
|
|
(8,879
|
)
|
|
|
(3,478
|
)
|
|
|
(5,916
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
accounting change, income taxes and minority interests
|
|
|
398,133
|
|
|
|
661,500
|
|
|
|
1,128,230
|
|
|
|
1,549,377
|
|
|
|
1,547,061
|
|
Provision for income taxes
|
|
|
(145,946
|
)
|
|
|
(206,738
|
)
|
|
|
(343,885
|
)
|
|
|
(467,285
|
)
|
|
|
(421,418
|
)
|
Minority interests
|
|
|
(2,296
|
)
|
|
|
(7,578
|
)
|
|
|
(6,122
|
)
|
|
|
(49
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
accounting change
|
|
|
249,891
|
|
|
|
447,184
|
|
|
|
778,223
|
|
|
|
1,082,043
|
|
|
|
1,125,639
|
|
Cumulative effect of accounting
change, net of tax(3)
|
|
|
|
|
|
|
(5,413
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
249,891
|
|
|
$
|
441,771
|
|
|
$
|
778,223
|
|
|
$
|
1,082,043
|
|
|
$
|
1,125,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share basic amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
accounting change
|
|
$
|
0.22
|
|
|
$
|
0.35
|
|
|
$
|
0.59
|
|
|
$
|
0.79
|
|
|
$
|
0.80
|
|
Cumulative effect of accounting
change
|
|
|
|
|
|
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share basic amounts
|
|
$
|
0.22
|
|
|
$
|
0.35
|
|
|
$
|
0.59
|
|
|
$
|
0.79
|
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share diluted amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
accounting change
|
|
$
|
0.21
|
|
|
$
|
0.34
|
|
|
$
|
0.57
|
|
|
$
|
0.78
|
|
|
$
|
0.79
|
|
Cumulative effect of accounting
change
|
|
|
|
|
|
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share diluted amounts
|
|
$
|
0.21
|
|
|
$
|
0.34
|
|
|
$
|
0.57
|
|
|
$
|
0.78
|
|
|
$
|
0.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,149,984
|
|
|
|
1,276,576
|
|
|
|
1,319,458
|
|
|
|
1,361,708
|
|
|
|
1,399,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
1,171,280
|
|
|
|
1,313,314
|
|
|
|
1,367,720
|
|
|
|
1,393,875
|
|
|
|
1,425,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,109,313
|
|
|
$
|
1,381,513
|
|
|
$
|
1,330,045
|
|
|
$
|
1,313,580
|
|
|
$
|
2,662,792
|
|
Short-term investments
|
|
|
89,690
|
|
|
|
340,576
|
|
|
|
682,004
|
|
|
|
774,650
|
|
|
|
542,103
|
|
Long-term investments
|
|
|
470,227
|
|
|
|
934,171
|
|
|
|
1,266,289
|
|
|
|
825,667
|
|
|
|
277,853
|
|
Working capital(5)
|
|
|
1,082,234
|
|
|
|
1,498,606
|
|
|
|
1,826,279
|
|
|
|
1,698,302
|
|
|
|
2,452,191
|
|
Total assets
|
|
|
4,040,226
|
|
|
|
5,820,134
|
|
|
|
7,991,051
|
|
|
|
11,788,986
|
|
|
|
13,494,011
|
|
Short-term obligations
|
|
|
2,970
|
|
|
|
2,840
|
|
|
|
124,272
|
(4)
|
|
|
|
|
|
|
|
|
Long-term obligations
|
|
|
13,798
|
|
|
|
124,476
|
(4)
|
|
|
75
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
3,556,473
|
|
|
|
4,896,242
|
|
|
|
6,728,341
|
|
|
|
10,047,981
|
|
|
|
10,904,632
|
|
|
|
|
(1) |
|
These results include acquired company results of operations
beginning on the date of acquisition. See Note 3 in the
notes to the consolidated financial statements, included
elsewhere in this Annual Report on Form
10-K, for a
summary of recent significant acquisitions. Certain prior year
amounts have been reclassified to conform to current years
presentation. |
|
(2) |
|
Net income for 2006 included stock-based compensation expense
under Statement of Financial Accounting Standards
(SFAS) No. 123 (revised 2004),
Share-Based Payment (FAS 123(R)) of
$219.8 million, net of tax. Because we implemented
FAS 123(R) as of January 1, 2006, prior periods do not
reflect stock-based compensation expense related to this new
accounting standard. See Note 12
Stock-Based Plans to the consolidated financial statements
included in this report. |
|
(3) |
|
The cumulative effect of the change in accounting principle
arises from the adoption of FIN 46, Consolidation of
Variable Interest Entities. |
|
(4) |
|
Includes a lease obligation totaling $122.5 million that
was reclassified as short-term in 2004 as the lease expired on
March 1, 2005, at which time we purchased the facility. |
|
(5) |
|
Working capital is calculated as the difference between total
current assets and total current liabilities. |
|
|
ITEM 7:
|
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, will,
should, expect, anticipate,
believe, estimate, intend,
plan and other similar expressions. You should
consider our forward- looking statements in light of the risks
discussed under the heading Risk Factors in
Item 1A above 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 consolidated financial statements and the
related notes that appear elsewhere in this document.
42
Overview
About
eBay Inc.
We operate three primary business segments, Marketplaces,
Payments and Communications. 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. Our Marketplaces segment provides
the infrastructure to enable online commerce in a variety of
platforms, including the traditional eBay.com platform, along
with our other online platforms, such as Shopping.com,
classifieds websites and Rent.com. Our wide array of
marketplaces websites brings together millions of buyers and
sellers every day on a local, national and international basis.
Our Payments segment, which consists of PayPal, enables
individuals or businesses to securely, easily and quickly send
and receive payments online. Our Communications segment, which
consists of Skype, enables VoIP calls between Skype users, and
also provides Skype users low-cost connectivity to traditional
fixed-line and mobile telephones.
Executive
Operating and Financial Summary
Our focus
is on key operating and financial metrics
Members of our senior management team regularly review key
operating metrics such as registered users, active users,
listings, gross merchandise volume, eBay stores, total accounts,
active accounts, total number of payments, total payment volume,
and transaction rates. 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 segments 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 marketing, product
development, international expansion, customer support and site
operations. We believe that an understanding of these key
operating and financial measures and how they change over time
is important to investors, analysts and other parties analyzing
our business results and future market opportunities.
2006
summary
In 2006, we generated nearly $6.0 billion in net revenues,
representing a 31%
year-over-year
growth rate; we earned nearly $1.4 billion in operating
income; and we closed the year with $3.5 billion in cash,
cash equivalents and investments after taking into account the
repurchase of approximately 54.5 million shares of our
common stock for an aggregate purchase price of
$1.7 billion. During 2006, we focused on integrating the
businesses we acquired in 2005, which allowed us to strengthen
our leadership position in each of our three key business areas
in the U.S. and abroad. We expanded our user base in all three
business segments, and as of December 31, 2006 we had
222 million eBay registered users; 133 million PayPal
accounts; and 171 million Skype registered users.
Our
expectations for growth
We expect that growth in our net revenues during 2007 will
result primarily from increased net transaction revenues across
our Marketplaces, Payments and Communications segments. We
expect to continue our investments in the areas of product
development, customer support and international expansion across
all segments. We believe these investments are necessary to
support the long-term demands of our growing business. In
addition, to the extent that the U.S. dollar fluctuates
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
impact our consolidated net revenues and, to the extent that
they are not hedged successfully, our net income.
The discussion of our consolidated financial results contained
herein is intended to assist those 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.
43
Seasonality
The following table sets forth, for the periods presented, our
total net revenues and the sequential quarterly growth of these
net revenues.
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|
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|
|
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Quarter Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(In thousands, except percentages)
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
756,239
|
|
|
$
|
773,412
|
|
|
$
|
805,876
|
|
|
$
|
935,782
|
|
Current quarter vs prior quarter
|
|
|
17
|
%
|
|
|
2
|
%
|
|
|
4
|
%
|
|
|
16
|
%
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
1,031,724
|
|
|
$
|
1,086,303
|
|
|
$
|
1,105,515
|
|
|
$
|
1,328,859
|
|
Current quarter vs prior quarter
|
|
|
10
|
%
|
|
|
5
|
%
|
|
|
2
|
%
|
|
|
20
|
%
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
1,390,419
|
|
|
$
|
1,410,784
|
|
|
$
|
1,448,637
|
|
|
$
|
1,719,901
|
|
Current quarter vs prior quarter
|
|
|
5
|
%
|
|
|
1
|
%
|
|
|
3
|
%
|
|
|
19
|
%
|
We expect transaction activity patterns on our websites to
increasingly mirror general consumer buying patterns, both
online and offline, as our business expands, with the strongest
sequential growth occurring in the fourth quarter. Our
expectation is that Skypes business will experience
seasonally slower growth during holiday and vacation periods.
44
Results
of Operations
Net
Revenues
The following table sets forth, for the periods presented,
the breakdown of net revenues by type, segment and geography. In
addition, we have provided a table of key metrics that drive our
revenue results.
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|
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|
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Percent
|
|
|
|
|
Percent
|
|
|
|
|
|
Year Ended
|
|
|
Change
|
|
Year Ended
|
|
|
Change
|
|
Year Ended
|
|
|
|
December 31,
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|
|
from
|
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December 31,
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|
from
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December 31,
|
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|
|
2004
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|
|
2004 to 2005
|
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2005
|
|
|
2005 to 2006
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|
2006
|
|
|
|
(In thousands, except percent changes)
|
|
|
Net Revenues by Type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net transaction revenues
Marketplaces
|
|
$
|
2,496,187
|
|
|
|
36%
|
|
|
$
|
3,402,301
|
|
|
|
24%
|
|
|
$
|
4,203,340
|
|
Payments
|
|
|
680,813
|
|
|
|
47%
|
|
|
|
1,001,915
|
|
|
|
40%
|
|
|
|
1,401,824
|
|
Communications
|
|
|
|
|
|
|
|
|
|
|
24,809
|
|
|
|
677%
|
|
|
|
192,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net transaction revenues
|
|
|
3,177,000
|
|
|
|
39%
|
|
|
|
4,429,025
|
|
|
|
31%
|
|
|
|
5,797,920
|
|
Advertising and other net revenues
|
|
|
94,309
|
|
|
|
31%
|
|
|
|
123,376
|
|
|
|
39%
|
|
|
|
171,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
3,271,309
|
|
|
|
39%
|
|
|
$
|
4,552,401
|
|
|
|
31%
|
|
|
$
|
5,969,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by
Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplaces
|
|
$
|
2,573,607
|
|
|
|
36%
|
|
|
$
|
3,499,137
|
|
|
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24%
|
|
|
$
|
4,334,290
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|
Payments
|
|
|
697,702
|
|
|
|
47%
|
|
|
|
1,028,455
|
|
|
|
40%
|
|
|
|
1,440,530
|
|
Communications
|
|
|
|
|
|
|
|
|
|
|
24,809
|
|
|
|
686%
|
|
|
|
194,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
3,271,309
|
|
|
|
39%
|
|
|
$
|
4,552,401
|
|
|
|
31%
|
|
|
$
|
5,969,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by
Geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
1,889,936
|
|
|
|
31%
|
|
|
$
|
2,471,273
|
|
|
|
26%
|
|
|
$
|
3,108,986
|
|
International
|
|
|
1,381,373
|
|
|
|
51%
|
|
|
|
2,081,128
|
|
|
|
37%
|
|
|
|
2,860,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
3,271,309
|
|
|
|
39%
|
|
|
$
|
4,552,401
|
|
|
|
31%
|
|
|
$
|
5,969,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2006, our reportable segments were changed to combine the
U.S. and International Marketplaces segments into one global
Marketplaces operating segment. We have recast our 2004 and 2005
segment data to conform to the current years presentation.
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Supplemental Operating
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplaces
Segment:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Confirmed registered users(2)
|
|
|
135.5
|
|
|
|
180.6
|
|
|
|
221.6
|
|
Active users(3)
|
|
|
56.1
|
|
|
|
71.8
|
|
|
|
81.8
|
|
Number of non-store listings(4)
|
|
|
1,339.9
|
|
|
|
1,689.6
|
|
|
|
1,996.1
|
|
Number of stores listings(4)
|
|
|
72.7
|
|
|
|
187.2
|
|
|
|
369.2
|
|
Gross merchandise volume(5)
|
|
$
|
34,168
|
|
|
$
|
44,299
|
|
|
$
|
52,474
|
|
Payments
Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accounts(6)
|
|
|
63.8
|
|
|
|
96.2
|
|
|
|
133.0
|
|
Active accounts(7)
|
|
|
20.2
|
|
|
|
28.1
|
|
|
|
37.6
|
|
Total number of payments(8)
|
|
|
339.9
|
|
|
|
480.7
|
|
|
|
610.7
|
|
Total payment volume(9)
|
|
$
|
18,915
|
|
|
$
|
27,485
|
|
|
$
|
37,752
|
|
Communications
Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered Users(10)
|
|
|
|
|
|
|
74.7
|
|
|
|
171.2
|
|
|
|
|
(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 eBay.coms platforms. |
|
(3) |
|
All users, excluding users of Half.com and Internet Auction, who
bid on, bought, or listed an item within the previous
12-month
period. |
|
(4) |
|
All store inventory listings on eBay.coms platforms during
the period, regardless of whether the listing subsequently
closed successfully. |
|
(5) |
|
Total value of all successfully closed items between users on
eBays trading platforms during the period, regardless of
whether the buyer and seller actually consummated the
transaction. |
|
(6) |
|
Cumulative total of all accounts opened, including users who
made payments using PayPal but have not registered, excluding
accounts that have been closed or locked and 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 period. |
|
(8) |
|
Total number of payments initiated through the PayPal system
during the period, excluding the payment gateway business,
regardless of whether the payment was actually sent
successfully, or was reversed, rejected, or pending at the end
of the period. |
|
(9) |
|
Total dollar volume of payments initiated through the PayPal
system during the period, excluding the payment gateway
business, regardless of whether the payment was actually sent
successfully, or was reversed, rejected, or was pending at the
end of the period. |
|
(10) |
|
Cumulative number of unique user accounts created on Skype. |
Our net transaction revenues from our Marketplaces segment are
derived primarily from listing, feature and final value fees
paid by sellers and lead referral fees. For our Payments
segment, net transaction revenues are generated primarily by
fees from payment processing services. Our Communications
segment primarily generates net transaction revenues from fees
charged to users to connect Skypes VoIP network to
traditional telecommunication networks. These fees are charged
on a per minute basis and we refer to these minutes as SkypeOut
minutes. Net revenues from advertising are derived principally
from the sale of advertisements for cash and through barter
arrangements. Other net revenues are derived principally from
contractual arrangements with third parties that provide
transaction services to eBay and PayPal users and interest
earned from banks on certain PayPal customer account balances.
46
Marketplaces
Net Transaction Revenues
Total net transaction revenues from Marketplaces increased 24%
in 2006 and 36% in 2005, compared to the respective prior year.
The growth in net transaction revenues was the result of
increased auction transaction activity, reflected in the growth
of the number of registered users, active users, listings and
gross merchandise volume.
The number of registered users increased 23% during 2006 to
221.6 million at December 31, 2006. The number of
registered users increased 33% during 2005 to 180.6 million at
December 31, 2005. The number of active users on eBay.com
increased 14% during 2006 to 81.8 million at
December 31, 2006. Active users increased 28% during 2005
to 71.8 million at December 31, 2005. We believe that
increases in user activity are largely the result of our
promotional efforts, our emphasis on helping our user community
be successful through the introduction of new site features and
functionality, our international expansion, and expanded trust
and safety programs.
The number of items listed on eBay.coms platforms
increased 26% to 2.4 billion in 2006, from 1.9 billion
in 2005, and increased 33% in 2005 from 1.4 billion in
2004. This percentage growth in listings was experienced across
our U.S. and international platforms. The number of stores
increased by 55% and 51% in 2006 and 2005, compared to the
respective prior year, due to the cost effective nature for
sellers to list items on our eBay Stores format.
Gross merchandise volume increased 18% in 2006 and 30% in 2005,
compared to the respective prior year. The increases in 2006 and
2005 resulted from the domestic and international growth in the
number of registered users, active users and listings. In
addition, there was gross merchandise volume growth across all
major categories, with the motors, consumer electronics,
clothing & accessories, computers, home &
garden, books/movies/music, sports, and collectibles categories
having the most significant dollar impact.
Marketplaces net transaction revenues earned internationally
totaled $2.1 billion in 2006, $1.7 billion in 2005 and
$1.2 billion in 2004, representing 50%, 49% and 46% of
total Marketplaces net transaction revenues, respectively.
Marketplaces net revenues were positively impacted by foreign
currency translation of approximately $30.6 million and
$6.7 million in 2006 and 2005, respectively. 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.
In 2007, we expect Marketplaces net transaction revenues to
continue to increase due to continued growth in the global
e-commerce
market.
Payments
Net Transaction Revenues
Payments net transaction revenues increased 40% in 2006 and 47%
in 2005, compared to the respective prior year. Payments net
transaction revenues as a percentage of total net transaction
revenues were 24% in 2006, 23% in 2005, and 21% in 2004. During
2006, over $37.8 billion in total payment volume was
transacted on the PayPal platform as compared to
$27.5 billion during 2005 and $18.9 billion during
2004. As of December 31, 2006, PayPal had
133.0 million accounts, compared to 96.2 million at
December 31, 2005 and 63.8 million accounts at
December 31, 2004. Net transaction revenues as a percentage
of total payment volume was 4% in all years presented.
The growth in our Payments net transaction revenues, in all
years, both in absolute terms and as a percentage of total net
transaction revenues, was primarily the result of increases in
PayPal transaction volume driven by the growth in PayPal
Merchant Services transactions, the higher penetration of PayPal
in the Marketplaces platforms and growth in gross merchandise
volume in the Marketplaces segment.
In 2006, our global Merchant Services total payment volume
increased 59% compared to 2005, generating total payment volume
of $13.3 billion. In 2005, our global Merchant Services
total payment volume increased 48% compared to 2004, generating
total payment volume of $8.4 billion. Furthermore, the growth in
Payments net transactions revenues in 2006 was positively
affected by PayPals continued penetration of Marketplaces
transactions which increased to 57.2% in 2006 from 52.7% in 2005
and 46.7% in 2004. Payments net transaction revenues have grown
in connection with the increase in our Marketplaces gross
merchandise volume which increased to $52.5 billion in 2006
compared to $44.3 billion in 2005 and $34.2 billion in 2004.
47
Net transaction revenues from Payments earned internationally
totaled $533.2 million in 2006, $364.5 million in 2005
and $207.6 million in 2004, representing 38.0%, 36.4% and
30.5% of total Payments segment net transaction revenues,
respectively. Payments net revenues were positively impacted by
foreign currency translation of approximately $4.3 million
and $5.3 million in 2006 and 2005, respectively. 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.
In 2007, we expect the Payments net transaction revenues to
increase in total and for net transaction revenues earned
internationally to increase in total and as a percentage of
Payments net transaction revenues. We expect to grow our
merchant service business and continue to drive higher
penetration rates on Marketplaces platforms. We also expect that
Payments net transaction revenues will increase as a percentage
of total net transaction revenues in 2007.
Communications
Net Transaction Revenues
Communications net transaction revenues were $192.8 million
in 2006 as compared to $24.8 million in 2005 (net revenues
from the acquisition date of October 14, 2005 through the
end of 2005). The increase in net revenues was primarily due to
a full year of revenues generated from our VoIP offerings in
2006. The cumulative number of Skype registered users increased
to 171.2 million at December 31, 2006 from
74.7 million at December 31, 2005. Additionally,
SkypeOut minutes increased to 4.1 billion, which resulted
in $177.7 million in revenue in 2006. The growth was due to
rapid user expansion.
Net transaction revenues from Communications earned
internationally totaled $163.7 million in 2006 and
$21.4 million in 2005, representing 85% and 87% of total
Communications net transaction revenues, respectively.
Communications net revenue was positively impacted by foreign
currency translation of approximately $5.1 million in 2006.
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 Communications net transaction revenues to increase
during 2007 as we expect to continue to increase both our user
base and product offerings.
Advertising
and Other Net Revenues
Advertising and other net revenues totaled $171.8 million
in 2006, $123.4 million in 2005 and $94.3 million in
2004. These amounts represented 3% of total net revenues for all
years presented. We continue to view our business as primarily
transaction-driven and we expect advertising and other net
revenues to continue to represent a relatively small proportion
of total net revenues during 2007.
48
Summary
of cost of net revenues, operating expenses, non-operating items
and provision for income taxes
The following table summarizes changes in cost of net revenues,
sales and marketing expense, product development expense,
general and administrative expense, amortization of acquired
intangible assets, interest and other income, net, interest
expense, provision for income taxes and minority interest (note
that 2006 amounts reflect the modified prospective adoption of
FAS 123(R)):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change from
|
|
|
Change from
|
|
|
|
Year Ended December 31,
|
|
|
2004 to 2005
|
|
|
2005 to 2006
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
In dollars
|
|
|
In %
|
|
|
In dollars
|
|
|
In %
|
|
|
|
(In thousands, except percentages)
|
|
|
Cost of net revenues
|
|
$
|
614,415
|
|
|
$
|
818,104
|
|
|
$
|
1,256,792
|
|
|
$
|
203,689
|
|
|
|
33
|
%
|
|
|
438,688
|
|
|
|
54
|
%
|
Sales and marketing
|
|
|
815,464
|
|
|
|
1,185,929
|
|
|
|
1,619,857
|
|
|
|
370,465
|
|
|
|
45
|
%
|
|
|
433,928
|
|
|
|
37
|
%
|
Product development
|
|
|
240,647
|
|
|
|
328,191
|
|
|
|
494,695
|
|
|
|
87,544
|
|
|
|
36
|
%
|
|
|
166,504
|
|
|
|
51
|
%
|
General and administrative
|
|
|
475,614
|
|
|
|
649,529
|
|
|
|
978,363
|
|
|
|
173,915
|
|
|
|
37
|
%
|
|
|
328,834
|
|
|
|
51
|
%
|
Amortization of acquired
intangible assets
|
|
|
65,927
|
|
|
|
128,941
|
|
|
|
197,078
|
|
|
|
63,014
|
|
|
|
96
|
%
|
|
|
68,137
|
|
|
|
53
|
%
|
Interest and other income, net
|
|
|
77,867
|
|
|
|
111,148
|
|
|
|
130,021
|
|
|
|
33,281
|
|
|
|
43
|
%
|
|
|
18,873
|
|
|
|
17
|
%
|
Interest expense
|
|
|
8,879
|
|
|
|
3,478
|
|
|
|
5,916
|
|
|
|
(5,401
|
)
|
|
|
−61
|
%
|
|
|
2,438
|
|
|
|
70
|
%
|
Provision for income taxes
|
|
|
343,885
|
|
|
|
467,285
|
|
|
|
421,418
|
|
|
|
123,400
|
|
|
|
36
|
%
|
|
|
(45,867
|
)
|
|
|
−10
|
%
|
Minority interests
|
|
|
6,122
|
|
|
|
49
|
|
|
|
4
|
|
|
|
(6,073
|
)
|
|
|
−99
|
%
|
|
|
(45
|
)
|
|
|
−92
|
%
|
As of January 1, 2006, we began accounting for stock-based
compensation under FAS 123(R), which requires the
recognition of the fair value of stock-based compensation. We
adopted FAS 123(R) using the modified prospective method
which requires the application of the accounting standard as of
January 1, 2006. In accordance with the modified
prospective method, the consolidated financial statements for
2004 and 2005 have not been restated to reflect, and do not
include, the impact of FAS 123(R). Stock-based compensation
expense related to stock options and employee stock purchases
for 2004, 2005 and 2006 was allocated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Cost of net revenues
|
|
$
|
233
|
|
|
$
|
1,881
|
|
|
$
|
32,981
|
|
Sales and marketing
|
|
|
136
|
|
|
|
8,696
|
|
|
|
96,547
|
|
Product development
|
|
|
654
|
|
|
|
6,468
|
|
|
|
81,489
|
|
General and administrative
|
|
|
4,809
|
|
|
|
14,727
|
|
|
|
106,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
expense
|
|
|
5,832
|
|
|
|
31,772
|
|
|
|
317,410
|
|
Tax benefit
|
|
|
(4,117
|
)
|
|
|
(13,023
|
)
|
|
|
(97,572
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense,
net of tax
|
|
$
|
1,715
|
|
|
$
|
18,749
|
|
|
$
|
219,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, there was approximately
$418.4 million of total unrecognized compensation cost,
excluding tax benefits, related to stock-based incentive awards
granted under our equity incentive plans. That cost is expected
to be recognized over a weighted-average period of three years.
Cost
of Net Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands, except percentages)
|
|
|
Cost of net revenues
|
|
$
|
614,415
|
|
|
$
|
818,104
|
|
|
$
|
1,256,792
|
|
As a percentage of net revenues
|
|
|
18.8
|
%
|
|
|
18.0
|
%
|
|
|
21.1
|
%
|
Cost of net revenues consists primarily of costs associated with
payment processing, customer support and site operations, and
Skype telecommunications costs. Significant cost components
include bank charges, credit card interchange and assessments,
other payment processing costs, employee compensation,
consultant costs and
49
facilities costs for our customer support and site operations,
depreciation of equipment and amortization of capitalized
product development costs and telecommunication costs.
The increase in cost of net revenues of $438.7 million
during 2006 was primarily due to an increase in payment
processing costs, Skype telecommunication costs, the development
and expansion of our customer support and site operations
infrastructure, and the effect of stock-based compensation
expense related to employee stock options and employee stock
purchases under FAS 123(R). Payment processing costs
increased approximately $114.5 million, or 30%, in 2006
compared to the prior year, due to the 37% increase in
PayPals total payment volume and increases in the
proportion of customer transactions funded with credit cards.
Skype telecommunications costs increased by $105.5 million
in 2006 compared to the prior year due to the inclusion of a
full year of Skypes costs. Aggregate customer support and
site operations costs (including stock-based compensation)
increased approximately $202.8 million, or 52%, in 2006
compared to the prior year. Expanding our global site and
support infrastructure contributed $161.2 million of this
increase as employee costs increased approximately
$44.7 million; we increased the use of contractors and
consultants by approximately $32.9 million; facility costs
increased approximately $28.9 million; and depreciation
expense associated with computer equipment and capitalized
software increased approximately $54.7 million. Stock-based
compensation expense of $33.0 million was included in cost
of revenues in 2006 compared to $1.9 million in 2005.
Stock-based compensation expense increased due to our
implementation of FAS 123(R) at the beginning of 2006.
The increase in cost of net revenues during 2005 was primarily
due to an increase in the volume of transactions on the
Marketplaces and Payments websites and continued development and
expansion of our customer support and site operations
infrastructure. Payment processing costs increased to
$403.1 million in 2005 from $305.1 million in 2004,
due to the increase in PayPals total payment volume and
increased payment processing costs related to the growth of our
Marketplaces activity. Aggregate customer support and site
operations costs increased approximately $88.4 million
during 2005, compared to the prior year.
Costs of net revenues are expected to increase in total and as a
percentage of net revenues during 2007 primarily due to growth
in Payments and Communications, each of which is growing faster
and has a lower gross margin than Marketplaces.
Sales
and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands, except percentages)
|
|
|
Sales and marketing
|
|
$
|
815,464
|
|
|
$
|
1,185,929
|
|
|
$
|
1,619,857
|
|
As a percentage of net revenues
|
|
|
24.9
|
%
|
|
|
26.1
|
%
|
|
|
27.1
|
%
|
Sales and marketing expenses consist primarily of advertising
costs, marketing programs and employee compensation for sales
and marketing staff.
Sales and marketing expenses increased in total and increased as
a percentage of total net revenues in 2006 due to our continued
investment in growing our global user base and the effect of
stock-based compensation expense related to employee stock
options and employee stock purchases under FAS 123(R).
Growth in advertising and marketing costs as well as
employee-related costs comprised the majority of the increases.
Combined advertising and marketing costs increased
$250.5 million in 2006, compared to the prior year, due to
an increase in global television and online marketing campaigns.
Employee-related costs, not including stock-based compensation
expense, increased by $69.3 million in 2006 as we continued
to expand our domestic and international operations. Sales and
marketing staff increased from approximately 2,500 at
December 31, 2005 to approximately 2,700 at
December 31, 2006. Stock-based compensation expense of
$96.5 million was included in sales and marketing expense
in 2006 compared to $8.7 million in 2005. Stock-based
compensation expense increased due to our implementation of
FAS 123(R) at the beginning of 2006.
Sales and marketing expenses increased in total and increased as
a percentage of total net revenues in 2005 due to our continued
investment in growing our global user base. Growth in
advertising and marketing costs as well as employee-related
costs comprised the majority of the increases. Combined
advertising and marketing costs increased $228.8 million in
2005, compared to the prior year. This increase, both in dollars
and as a percentage of net revenues, was primarily the result of
international expansion and industry-wide increases in Internet
50
marketing rates, partially offset by marketing efficiencies.
Employee-related costs increased by $97.4 million in 2005
as we continued to expand our domestic and international
operations.
Sales and marketing expenses are expected to increase in total
during 2007 because of expected increases in our online
marketing expense to attract new customers and increase user
activity across our businesses. Sales and marketing expenses as
a percentage of net revenues are expected to decrease during
2007 due to the growth in Payments and Communications, each of
which, has lower sales and marketing expenses than Marketplaces.
Product
Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands, except percentages)
|
|
|
Product development
|
|
$
|
240,647
|
|
|
$
|
328,191
|
|
|
$
|
494,695
|
|
As a percentage of net revenues
|
|
|
7.4
|
%
|
|
|
7.2
|
%
|
|
|
8.3
|
%
|
Product development expenses consist primarily of employee
compensation, consultant costs, facilities costs and
depreciation on equipment. Product development expenses are net
of required capitalization of major site and other product
development efforts, including the development of our next
generation platform architecture, migration of certain
platforms, seller tools and PayPal services integration
projects. These capitalized costs totaled $67.9 million in
2006, $37.1 million in 2005 and $41.3 million in 2004,
and are reflected as a cost of net revenues when amortized in
future periods.
The increase in product development expense of
$166.5 million during 2006 was primarily due to employees
added, including contractors and consultants, to support various
platform and software development initiatives in our
Marketplaces, Payments and Communications segments and the
effect of stock-based compensation expense related to employee
stock options and employee stock purchases under
FAS 123(R). Employee related and consultant costs,
excluding stock-based compensation, increased by approximately
$61.5 million in 2006 compared to the prior year. Our
product development staff increased from approximately 2,200 at
December 31, 2005 to approximately 2,500 at
December 31, 2006. Stock-based compensation expense of
$81.5 million was included in product development expense
in 2006 compared to $6.5 million in 2005. Stock-based
compensation expense increased due to our implementation of
FAS 123(R) at the beginning of 2006.
The increase in product development expenses in 2005, as
compared to the prior year, was primarily the result of
increased headcount to support various platform development
initiatives in our Marketplaces, Payments and Communications
segments. Employee related costs increased by $63.9 million
compared to the prior year. Our product development staff
increased nearly 50% from approximately 1,500 at
December 31, 2004 to approximately 2,200 at
December 31, 2005.
Product development expenses are expected to increase in total
and remain consistent as a percentage of net revenues in 2007,
as we develop new site features and functionality and continue
to improve and expand operations across all businesses.
General
and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands, except percentages)
|
|
|
General and administrative
|
|
$
|
475,614
|
|
|
$
|
649,529
|
|
|
$
|
978,363
|
|
As a percentage of net revenues
|
|
|
14.5
|
%
|
|
|
14.3
|
%
|
|
|
16.4
|
%
|
General and administrative expenses consist primarily of
employee compensation, consultant costs, provisions for
transaction losses associated with our Payments segment,
facilities costs, depreciation of equipment, provision for
doubtful accounts, payroll taxes on employee stock options,
insurance and professional fees.
The increase in general and administrative expenses of
$328.8 million during 2006 was primarily due to increased
employee-related costs, consultant costs, higher Payments
transaction loss expenses, and the effect of stock-based
compensation expense related to employee stock options and
employee stock purchases under FAS 123(R). Employee-related
costs and consultant costs increased by approximately
$112.6 million during 2006 as compared to the prior year
due to our continued focus on user protection programs. We
increased our general and administrative employee headcount from
approximately 4,200 at December 31, 2005 to 4,900 at
51
December 31, 2006, of which, approximately 450 employees
were added to support our consumer protection programs.
Transaction loss rate in our Payments segment, which is the
transaction loss expense as a percentage of total payment
volume, increased to 0.33% in 2006 compared to 0.27% in 2005,
causing an increase in expense of approximately
$52.7 million. The increase in the transaction loss rate
was primarily due to higher levels of credit card chargebacks
from unauthorized credit card transactions. The higher levels of
credit card chargebacks is due to strategically entering into
new customer segments (new countries and direct card processing)
which have higher loss rates. Stock-based compensation expense
of $106.4 million was included in general and
administrative expense in 2006 compared to $14.7 million in
2005. Stock-based compensation expense increased due to our
implementation of FAS 123(R) at the beginning of 2006.
General and administrative expenses increased in total and
remained consistent as a percentage of net revenues in 2005 as
compared to the prior year. The dollar increase was due
primarily to employee related and facilities costs.
Employee-related costs increased by approximately
$111.3 million during 2005 as compared to the prior year.
We increased our general and administrative employees from
approximately 2,700 at December 31, 2004 to approximately
4,200 at December 31, 2005. This increase related primarily
to the addition of employees in our trust and safety and
corporate functions. Facilities costs increased by approximately
$48.2 million during 2005 as compared to the prior year.
PayPals transaction loss expense increased by
approximately $23.3 million, to $73.8 million during
the year ended December 31, 2005, reflecting the increase
in activity in the Payments segment in addition to the expansion
of our PayPal Buyer Protection Program. PayPals
transaction loss expense rate, which is the transaction loss
expense as a percentage of PayPals total payment volume,
was constant at 0.27% in 2005 and 2004.
With our continued investment across all areas of our business
and related corporate functions, particularly in our consumer
protection programs, we expect general and administrative
expenses to increase during 2007, but decrease as a percentage
of net revenues as general and administrative expenses are
expected to grow slower than net revenues.
Amortization
of Acquired Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands, except percentages)
|
|
|
Amortization of acquired
intangible assets
|
|
$
|
65,927
|
|
|
$
|
128,941
|
|
|
$
|
197,078
|
|
As a percentage of net revenues
|
|
|
2.0
|
%
|
|
|
2.8
|
%
|
|
|
3.3
|
%
|
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,
payments and communications. These purchase transactions
generally result in the creation of acquired intangible assets
with finite lives and lead to a corresponding increase in the
amortization expense in future periods. We amortize intangible
assets over the period of estimated benefit, using the
straight-line method and estimated useful lives ranging from one
to eight years. The increase in amortization of acquired
amortizable intangibles during 2006 and 2005 compared to prior
years is due to the business acquisitions consummated during
2006, 2005 and 2004.
Amortization of acquired intangible assets may increase should
we make additional acquisitions in the future.
Interest
and Other Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands, except percentages)
|
|
|
Interest and other income, net
|
|
$
|
77,867
|
|
|
$
|
111,148
|
|
|
$
|
130,021
|
|
As a percentage of net revenues
|
|
|
2.4
|
%
|
|
|
2.4
|
%
|
|
|
2.2
|
%
|
Interest and other income, net consists primarily of interest
earned on cash, cash equivalents and investments as well as
foreign exchange transaction gains and losses and other
non-operating transactions.
Our interest and other income, net increased in total and
remained relatively constant as a percentage of net revenues
during 2006 as compared to the prior year, primarily as a result
of increased interest income due to increased cash, cash
equivalents and investments balances and higher interest rates
offset by the lower cash balances
52
due to our stock repurchase activity in 2006. The
weighted-average interest rate of our portfolio increased to
3.8% in 2006 from 2.9% in 2005.
Our interest and other income, net increased in total and
remained consistent as a percentage of net revenues during 2005
as compared to 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 increased to
2.9% in 2005 from 1.7% in 2004.
We expect that interest and other income, net, will decline
slightly during 2007 compared to 2006, as a result of lower cash
balances due to our stock repurchase program. Our expectation
for interest and other income, net, for 2007 excludes the
potential effects from any future acquisitions we may make.
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands, except percentages)
|
|
|
Interest expense
|
|
$
|
8,879
|
|
|
$
|
3,478
|
|
|
$
|
5,916
|
|
As a percentage of net revenues
|
|
|
0.3
|
%
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
Interest expense consists of interest charges on tax
contingencies, legal accruals, capital leases and our
consolidated lease arrangement related to our San Jose
headquarters office facilities. In 2007, interest expense may be
impacted by our decision to utilize our line of credit. See
additional discussion of our line of credit in
Note 8 Commitments and
Contingencies to our consolidated financial statements
included elsewhere in this Annual Report on
Form 10-K.
Provision
for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands, except percentages)
|
|
|
Provision for income taxes
|
|
$
|
343,885
|
|
|
$
|
467,285
|
|
|
$
|
421,418
|
|
As a percentage of net revenues
|
|
|
10.5
|
%
|
|
|
10.3
|
%
|
|
|
7.1
|
%
|
Effective tax rate
|
|
|
30
|
%
|
|
|
30
|
%
|
|
|
27
|
%
|
The provision for income taxes differs from the amount computed
by applying the statutory U.S. federal rate principally due
to state taxes, subsidiary losses for which we have not provided
a benefit and other factors that increase the effective tax
rate, offset by decreases resulting from foreign income with
lower effective tax rates and tax credits.
The lower effective tax rates in 2006 as compared to 2005 and
2004 resulted primarily from the expansion of our international
businesses and from changes in our operations in international
markets. We expect the effective tax rate for 2007 to be
consistent with 2006.
Impact
of Foreign Currency Translation
During 2006, 2005 and 2004, our international net revenues,
based upon the country in which the seller, payment recipient,
Skype users Internet protocol address, advertiser or other
service provider is located, accounted for approximately 48%,
46% and 42%, of our consolidated net revenues, respectively. The
growth in our international operations has increased our
exposure to foreign currency fluctuations. Net revenues and
related expenses generated from most international locations are
denominated in the functional currencies of the local countries,
and primarily include Euros, British pounds, Korean won,
Canadian dollars, Australian dollars, Chinese renminbi, and
Indian rupees. Our results of operations and certain of our
inter-company balances associated with our international
locations are exposed to foreign exchange rate fluctuations. The
statements of income of our international operations are
translated into U.S. dollars at the average exchange rates
in each applicable period. If the U.S. dollar weakens
against foreign currencies, the translation of these
foreign-currency-denominated transactions will result in
increased consolidated net revenues, operating expenses, and net
income. Similarly, our net revenues, operating expenses, and net
income will decrease if the U.S. dollar strengthens against
foreign currencies.
53
Net revenues were positively impacted by foreign currency
translation by approximately $40.1 million in 2006 and
$12.0 million in 2005 as compared to the same periods of
the prior year. Operating income was positively impacted by
foreign currency translation by approximately $14.4 million
in 2006 and $5.6 million in 2005, as compared to the same
periods of the prior year.
We expect our international operations will continue to grow in
significance. 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 7A: Quantitative and Qualitative Disclosure
About Market Risk under the caption Foreign Currency
Risk for additional discussion of the impact of foreign
currency translation and related hedging activities.
Foreign
Currency Exposures
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
future cash flows, including revenues and expenses, denominated
in currencies other than the relevant entitys functional
currency. Our primary economic exposures include future royalty
receivables, customer collections, and vendor payments. Changes
in the relevant entitys functional currency value will
cause fluctuations in the cash flows we expect to receive when
these cash flows are realized or settled. We may enter into
foreign exchange forward contracts or other derivatives to hedge
the value of a portion of these cash flows. We account for these
foreign exchange contracts as cash flow hedges. The effective
portion of the derivatives gain or loss is initially
reported as a component of accumulated other comprehensive
income (loss) and subsequently reclassified into earnings when
the transaction is settled.
Earnings Translation Exposure: As our
international operations grow, fluctuations in the foreign
currencies create volatility in our reported results of
operations because we are required to consolidate the results of
operations of our foreign denominated subsidiaries. We may
decide to purchase forward exchange contracts or other
instruments to offset the earnings impact of currency
fluctuations. Such contracts will be
marked-to-market
on a monthly basis and any unrealized gain or loss will be
recorded in interest and other income, net.
Employee
Stock-Based Incentive Plans
We continue to believe that employee stock-based incentive plans
represent an appropriate and essential component of our overall
compensation program. We grant stock-based awards to
substantially all employees and believe that this broad-based
program helps us to attract, motivate, and retain high quality
employees, to the ultimate benefit of our stockholders. We
granted a limited number of restricted stock units and
restricted stock awards to employees during 2006. Stock options,
restricted stock units and restricted stock awards granted
during the years ended December 31, 2006 and 2005, net of
cancellations/forfeitures, represented less than 2% of our total
common stock outstanding as of December 31, 2006 and 2005.
A substantial portion of our stock-based awards granted during
the year were granted to existing employees.
54
Liquidity
and Capital Resources
Cash
Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Consolidated Cash Flow
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
1,285,315
|
|
|
$
|
2,009,891
|
|
|
$
|
2,247,791
|
|
Investing activities
|
|
|
(2,013,220
|
)
|
|
|
(2,452,731
|
)
|
|
|
228,853
|
|
Financing activities
|
|
|
647,669
|
|
|
|
471,606
|
|
|
|
(1,260,687
|
)
|
Effect of exchange rates on cash
and cash equivalents
|
|
|
28,768
|
|
|
|
(45,231
|
)
|
|
|
133,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
$
|
(51,468
|
)
|
|
$
|
(16,465
|
)
|
|
$
|
1,349,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have generated annual cash provided by operating activities
in amounts greater than net income in 2006, 2005 and 2004 due
primarily to non-cash charges to earnings and the tax benefit on
the exercise of stock options. Non-cash charges to earnings
included stock-based compensation, depreciation and amortization
on our long-term assets, provision for doubtful accounts and
authorized credits resulting from increasing revenues and the
provision for transaction losses related to PayPal.
Prior to adopting FAS 123(R), we presented all tax benefits
resulting from the exercise of stock options as operating cash
flows in the consolidated statement of cash flows.
FAS 123(R) requires cash flows resulting from excess tax
benefits to be classified as a part of cash flows from financing
activities. Excess tax benefits represent tax benefits related
to exercised options in excess of the associated deferred tax
asset for such options. As a result of adopting FAS 123(R),
$92.4 million of excess tax benefits for 2006 have been
reported as a cash inflow from financing activities. In
addition, as a substantial portion of the companys net
operating losses and carryforward credits have now been
utilized, cash will be required for tax payments in the
U.S. going forward. Total U.S. and foreign income tax
payments will be dependent on our taxable income and are
estimated to be in the range of $650-$700 million in 2007.
In 2007, we expect operating cash flows to increase, primarily
driven by higher net income.
The net cash provided by investing activities in 2006 was
primarily due to the movement of investments to cash and cash
equivalents to fund our stock repurchase program. The net cash
used in investing activities in 2005 and 2004 reflected
primarily the movement of cash and cash equivalents between cash
and cash equivalents and investments, the purchase of property
and equipment, and acquisitions. Purchases of property and
equipment, net totaled $515.4 million in 2006,
$338.3 million in 2005, and $292.8 million in 2004.
Purchases of property and equipment in 2006, 2005 and 2004
related mainly to purchases of computer equipment and software
to support our site operations, customer support and
international expansion. Cash expended for acquisitions, net of
cash acquired, totaled approximately $45.5 million in 2006,
$2.7 billion in 2005, and $1.0 billion in 2004. In
2006, net cash payments for acquisitions consisted of the cash
payment, net of cash acquired, for the acquisition of
Tradera.com. In 2005, net cash payments for acquisitions
consisted primarily of the cash payment, net of cash acquired
for the acquisition of Rent.com, certain international
classifieds websites, Shopping.com, Skype and the payment
gateway business acquired from VeriSign. In 2004, our cash
acquisitions included the acquisition of mobile.de, Baazee.com,
and Marktplaats.nl, as well as an additional ownership interest
in Internet Auction Co. In 2007, we expect to continue to
purchase property and equipment and we may acquire businesses
with cash that would impact investing cash flows.
The net cash flows used in financing activities of
$1.3 billion in 2006 was primarily due to the repurchase of
approximately 54.5 million shares of common stock for an
aggregate purchase price of approximately $1.7 billion,
offset by the proceeds from stock options totaling
$313.5 million. Prior to 2006, we had not repurchased our
common stock under a stock repurchase program. The net cash
flows provided by financing activities in 2005 and 2004 were due
primarily to proceeds from stock option exercises. Proceeds from
stock option exercises totaled $599.8 million in 2005 and
$650.6 million in 2004. Our future cash flows from stock
options are difficult to project
55
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
has increased relative to historical levels. In July 2006, our
Board authorized the repurchase of up to $2.0 billion of
the companys common stock within two years from the date
of authorization. During 2006, we repurchased approximately
54.5 million shares of our common stock at an average price
of $30.56 per share for an aggregate purchase price of
$1.7 billion. As of December 31, 2006,
$0.3 billion remained available for further purchases under
this program. In January 2007, our Board authorized, and the
Company announced, an expansion of the stock repurchase program
to provide for the repurchase of up to an additional
$2.0 billion of our common stock over the next two years.
Share repurchases under our repurchase program may take a
variety of forms, including structured stock repurchase programs
and other derivative transactions. We expect to continue to
repurchase our common stock in 2007, thereby impacting financing
cash flows.
The positive effect of exchange rates on cash and cash
equivalents during 2006 and 2004 was due to the weakening of the
U.S. dollar against other foreign currencies, primarily the
Euro. The negative effect of exchange rates on cash and cash
equivalents during 2005 was due to the strengthening of the
U.S. dollar against other foreign currencies, primarily the
Euro.
In November 2006, we entered into a credit agreement which
provides for an unsecured $1 billion five-year revolving
credit facility. Loans under the credit agreement will bear
interest at either (i) LIBOR plus a margin ranging from
0.25 percent to 0.45 percent or (ii) a formula
based on the prime rate or on the federal funds effective rate.
Subject to certain conditions stated in the credit agreement, we
may borrow, prepay and reborrow amounts under the credit
facility at any time during the term of the credit agreement.
Funds borrowed under the credit agreement may be used for
working capital, capital expenditures, acquisitions and other
general corporate purposes. In February 2007, we borrowed
against the line of credit in the amount of $160 million.
We believe that existing cash, cash equivalents and investments
of approximately $3.5 billion, together with cash generated
from operations and cash available through the existing credit
agreement, will be sufficient to fund our operating activities,
capital expenditures, stock repurchases and other obligations
for the foreseeable future.
Commitments
and Contingencies
We have certain fixed contractual obligations and commitments
that include future estimated payments. Changes in our business
needs, cancellation provisions, changing interest rates, and
other factors may result in actual payments differing from the
estimates. We cannot provide certainty regarding the timing and
amounts of payments. We have presented below a summary of the
most significant assumptions used in our determination of
amounts presented in the tables, in order to assist in the
review of this information within the context of our
consolidated financial position, results of operations, and cash
flows. The following table summarizes our fixed contractual
obligations and commitments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Purchase
|
|
|
|
|
Payments Due By Year Ending December 31,
|
|
Leases
|
|
|
Obligations
|
|
|
Total
|
|
|
2007
|
|
$
|
44,178
|
|
|
$
|
180,633
|
|
|
$
|
224,811
|
|
2008
|
|
|
41,536
|
|
|
|
64,908
|
|
|
|
106,444
|
|
2009
|
|
|
35,637
|
|
|
|
29,436
|
|
|
|
65,073
|
|
2010
|
|
|
29,476
|
|
|
|
16,396
|
|
|
|
45,872
|
|
2011
|
|
|
25,420
|
|
|
|
19,347
|
|
|
|
44,767
|
|
Thereafter
|
|
|
102,094
|
|
|
|
|
|
|
|
102,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
278,341
|
|
|
$
|
310,720
|
|
|
$
|
589,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease amounts include minimum rental payments under
our non-cancelable operating leases for office facilities, as
well as limited computer and office equipment that we utilize
under lease arrangements. The amounts presented are consistent
with contractual terms and are not expected to differ
significantly, unless a substantial change in our headcount
needs requires us to exit an office facility early or expand our
occupied space.
56
Purchase obligation amounts include minimum purchase commitments
for advertising, capital expenditures (computer equipment,
software applications, engineering development services,
construction contracts) and other goods and services that were
entered into through our ordinary course of business. For those
contractual arrangements in which there are significant
performance requirements, we have developed estimates to project
expected payment obligations. These estimates have been
developed based upon historical trends, when available, and our
anticipated future obligations. Given the significance of such
performance requirements within our advertising and other
arrangements, actual payments could differ significantly from
these estimates.
In conjunction with our Skype acquisition, we have certain
earn-out payment commitments, not included in table above, that
are contingent upon Skype achieving certain net revenues, gross
profit margin-based targets and active user targets. See
Note 3 Business Combinations, Goodwill
and Intangible Assets of the consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K.
Off-Balance
Sheet Arrangements
As of December 31, 2006, we had no off-balance sheet
arrangements that have, or are reasonably likely to have, a
current or future material effect on our consolidated financial
condition, results of operations, liquidity, capital
expenditures or capital resources. All customer funds held by
PayPal as an agent or custodian on behalf of our customers are
not reflected in our consolidated balance sheets. These funds
include funds held in the U.S. that are deposited in bank
accounts insured by the Federal Deposit Insurance Corporation
and funds that customers choose to invest in PayPals Money
Market Fund totaling approximately $1.5 billion and
$1.2 billion as of December 31, 2006 and 2005,
respectively.
Indemnification
Provisions
In the ordinary course of business we have included limited
indemnification provisions in certain of our agreements with
parties with whom we have commercial relations, including our
standard marketing, promotions and
application-programming-interface license agreements. Under
these contracts, we generally indemnify, hold harmless, and
agree to reimburse the indemnified party for losses suffered or
incurred by the indemnified party in connection with claims by
any third party with respect to domain names, trademarks, logos
and other branding elements to the extent that such marks are
applicable to our performance under the subject agreement. In a
limited number of agreements, we have provided an indemnity for
other types of third-party claims, substantially all of which
are indemnities related to copyrights, trademarks, and patents.
In our PayPal business, we have provided an indemnity to our
payment processors in the event of certain third-party claims or
card association fines against the processor arising out of
conduct by PayPal. It is not possible to determine the maximum
potential loss under these indemnification provisions due to our
limited history of prior indemnification claims and the unique
facts and circumstances involved in each particular provision.
To date, no significant costs have been incurred, either
individually or collectively, in connection with our
indemnification provisions.
Critical
Accounting Policies, Judgments and Estimates
General
The preparation of our consolidated financial statements and
related notes requires us to make judgments, estimates and
assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of
contingent assets and liabilities. We have based our estimates
on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily
apparent from other sources. Our senior management has discussed
the development, selection and disclosure of these estimates
with the Audit Committee of our Board of Directors. Actual
results may differ from these estimates under different
assumptions or conditions.
An accounting policy is considered to be critical if it requires
an accounting estimate to be made based on assumptions about
matters that are highly uncertain at the time the estimate is
made, and if different estimates that reasonably could have been
used, or changes in the accounting estimates that are reasonably
likely to occur periodically, could materially impact the
consolidated financial statements. We believe the following
critical
57
accounting policies reflect the more significant estimates and
assumptions used in the preparation of the consolidated
financial statements. The following descriptions of critical
accounting policies, judgments and estimates should be read in
conjunction with our consolidated financial statements and other
disclosures included in this report.
Provisions
for Doubtful Accounts and Authorized Credits
We are exposed to losses due to uncollectible accounts and
credits to sellers. Provisions for these items represent our
estimate of actual losses and credits based on our historical
experience, are monitored monthly, and are made at the time the
related revenue is recognized. The provision for doubtful
accounts is recorded as a charge to operating expense, while the
authorized credits are recorded as a reduction of revenues. The
following table illustrates the provision related to doubtful
accounts and authorized credits as a percentage of net revenues
for 2004, 2005, and 2006 (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Net revenues
|
|
$
|
3,271,309
|
|
|
$
|
4,552,401
|
|
|
$
|
5,969,741
|
|
Provision for doubtful accounts
and authorized credits
|
|
$
|
90,942
|
|
|
$
|
89,499
|
|
|
$
|
100,729
|
|
Provision for doubtful accounts
and authorized credits as a % of net revenues
|
|
|
2.78
|
%
|
|
|
1.97
|
%
|
|
|
1.69
|
%
|
Historically, our actual losses and credits have been consistent
with these provisions. However, future changes in trends could
result in a material impact to future consolidated statements of
income and cash flows. Based on our results for the year ended
December 31, 2006, a 25 basis point deviation from our
estimates would have resulted in an increase or decrease in
operating income of approximately $14.9 million. The
following analysis demonstrates, for illustrative purposes only,
the potential effect a 25 basis point deviation from our
estimates would have upon our consolidated financial statements
and is not intended to provide a range of exposure or expected
deviation (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
−25 Basis
|
|
|
|
|
|
+25 Basis
|
|
|
|
Points
|
|
|
2006
|
|
|
Points
|
|
|
Provision for doubtful accounts
and related authorized credits
|
|
$
|
85,805
|
|
|
$
|
100,729
|
|
|
$
|
115,653
|
|
Income from operations
|
|
|
1,437,880
|
|
|
|
1,422,956
|
|
|
|
1,408,032
|
|
Net income
|
|
|
1,140,563
|
|
|
|
1,125,639
|
|
|
|
1,110,715
|
|
Diluted earnings per share
|
|
$
|
0.80
|
|
|
$
|
0.79
|
|
|
$
|
0.78
|
|
Provision
for Transaction Losses
Our Payments segment is exposed to transaction losses due to
credit card and other payment misuse, as well as non-performance
of sellers who accept payment through PayPal. We establish
allowances for estimated losses arising from processing customer
transactions, such as charge-backs for unauthorized credit card
use and merchant-related charge-backs due to non-delivery of
goods or services, Automated Clearing House, or ACH, returns,
buyer protection program claims and debit card overdrafts. These
allowances represent an accumulation of the estimated amounts
necessary to provide for transaction losses incurred as of the
reporting date, including those of which we have not yet been
notified. The allowances, which involve the use of actuarial
techniques, are monitored monthly and are updated based on
actual claims data reported by our claims processors. The
allowances are based on known facts and circumstances, internal
factors including our experience with similar cases, historical
trends involving loss payment patterns and the mix of
transaction and loss types. The provision for transaction losses
is reflected as a general and administrative expense in our
consolidated statement of income. At December 31, 2006, the
allowance for transaction losses totaled $79.5 million and
was included in other current assets and accrued expenses and
other current liabilities in our consolidated balance sheet.
58
The following table illustrates the provision for transaction
losses as a percentage of total payment volume from PayPal
operations for the years ended December 31, 2004, 2005 and
2006 (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Total payment volume
|
|
$
|
18,915,000
|
|
|
$
|
27,485,000
|
|
|
$
|
37,752,000
|
|
Transaction loss expense
|
|
$
|
50,459
|
|
|
$
|
73,773
|
|
|
$
|
126,439
|
|
As a % of total payment volume
|
|
|
0.27
|
%
|
|
|
0.27
|
%
|
|
|
0.33
|
%
|
Determining appropriate allowances for transaction losses is an
inherently uncertain process, and ultimate losses may vary from
the current estimates. We regularly update our allowance
estimates as new facts become known and events occur that may
impact the settlement or recovery of losses. The allowances are
maintained at a level we deem appropriate to adequately provide
for losses incurred at the balance sheet date. Based on our
results for the year ended December 31, 2006, a five basis
point deviation from our estimates would have resulted in an
increase or decrease in our operating expenses of approximately
$18.9 million. The following analysis demonstrates, for
illustrative purposes only, the potential effect a five basis
point deviation from our estimates would have upon our
consolidated financial statements for the year ended
December 31, 2006, and is not intended to provide a range
of exposure or expected deviation (in thousands, except per
share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
−5 Basis
|
|
|
|
|
|
+5 Basis
|
|
|
|
Points
|
|
|
2006
|
|
|
Points
|
|
|
Transaction loss expense
|
|
$
|
107,562
|
|
|
$
|
126,439
|
|
|
$
|
145,315
|
|
Income from operations
|
|
|
1,441,832
|
|
|
|
1,422,956
|
|
|
|
1,404,079
|
|
Net income
|
|
|
1,144,515
|
|
|
|
1,125,639
|
|
|
|
1,106,762
|
|
Diluted earnings per share
|
|
$
|
0.80
|
|
|
$
|
0.79
|
|
|
$
|
0.78
|
|
Legal
Contingencies
In connection with certain pending litigation and other claims,
we have estimated the range of probable loss and provided for
such losses through charges to our consolidated statement of
income. These estimates have been based on our assessment of the
facts and circumstances at each balance sheet date and are
subject to change based upon new information and future events.
From time to time, we are involved in disputes that arise in the
ordinary course of business, and we do not expect this trend to
change in the future. We are currently involved in certain legal
proceedings as discussed in Item 3: Legal
Proceedings and Note 8 Commitments
and Contingencies Litigation and Other Legal
Matters to our consolidated financial statements included
elsewhere in this Annual Report on
Form 10-K.
We believe that we have meritorious defenses to the claims
against us, and we will defend ourselves vigorously. However,
even if successful, our defense against certain actions will be
costly and could divert our managements time. If the
plaintiffs were to prevail on certain claims, we might be forced
to pay significant damages and licensing fees, modify our
business practices or even be prohibited from conducting a
significant part of our business. Any such results could
materially harm our business and could result in a material
adverse impact on the financial position, results of operations
or cash flows of all or any of our three businesses.
Accounting
for Income Taxes
We are required to recognize a provision for income taxes based
upon the taxable income and temporary differences for each of
the tax jurisdictions in which we operate. This process requires
a calculation of taxes payable under currently enacted tax laws
around the world and an analysis of temporary differences
between the book and tax bases of our assets and liabilities,
including various accruals, allowances, depreciation and
amortization. The tax effect of these temporary differences and
the estimated tax benefit from our tax net operating losses are
reported as deferred tax assets and liabilities in our
consolidated balance sheet. We also assess the likelihood that
our net deferred tax assets will be realized from future taxable
income. To the extent we believe that it is more likely than not
that some portion or all of the deferred tax asset will not be
realized, we establish a valuation allowance. At
December 31, 2006, we had a valuation allowance on certain
foreign net operating losses based on our assessment
59
that it is more likely than not that the deferred tax asset will
not be realized. To the extent we establish a valuation
allowance or change the allowance in a period, we reflect the
change with a corresponding increase or decrease in our tax
provision in our consolidated statement of income.
Our U.S. businesses generate sufficient cash flow to fully
fund their operating requirements, and we expect that profits
earned outside the U.S. will be fully utilized to fund our
continued international expansion. Accordingly, we have not
provided for U.S. federal income and foreign withholding
taxes on
non-U.S. subsidiaries
undistributed earnings as of December 31, 2006, because
such earnings are intended to be reinvested indefinitely. In the
event that our future international expansion plans change and
such amounts are not reinvested indefinitely, we would be
subject to U.S. income taxes partially offset by foreign
tax credits.
The following table illustrates the effective tax rates for
2004, 2005, and 2006 (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Provision for income taxes
|
|
$
|
343,885
|
|
|
$
|
467,285
|
|
|
$
|
421,418
|
|
As a % of income before income
taxes
|
|
|
30
|
%
|
|
|
30
|
%
|
|
|
27
|
%
|
Historically, these provisions have adequately provided for our
actual income tax liabilities. Our future effective tax rates
could be adversely affected by earnings being lower than
anticipated in countries where we have lower statutory rates and
higher than anticipated in countries where we have higher
statutory rates, by changes in the valuations of our deferred
tax assets or liabilities, or by changes or interpretations in
tax laws, regulations or accounting principles. In addition, we
are subject to the continuous examination of our income tax
returns by the Internal Revenue Service and other tax
authorities. We regularly assess the likelihood of adverse
outcomes resulting from these examinations to determine the
adequacy of our provision for income taxes.
Based on our results for the year ended December 31, 2006,
a one-percentage point change in our provision for income taxes
as a percentage of income before taxes would have resulted in an
increase or decrease in the provision of approximately
$15.5 million. The following analysis demonstrates, for
illustrative purposes only, the potential effect such a
one-percentage point deviation change would have upon our
consolidated financial statements and is not intended to provide
a range of exposure or expected deviation (in thousands, except
per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
−100 Basis
|
|
|
|
|
|
+100 Basis
|
|
|
|
Points
|
|
|
2006
|
|
|
Points
|
|
|
Provision for income taxes
|
|
$
|
405,947
|
|
|
$
|
421,418
|
|
|
$
|
436,889
|
|
Income from operations
|
|
|
1,438,427
|
|
|
|
1,422,956
|
|
|
|
1,407,485
|
|
Net income
|
|
|
1,141,110
|
|
|
|
1,125,639
|
|
|
|
1,110,168
|
|
Diluted earnings per share
|
|
$
|
0.80
|
|
|
$
|
0.79
|
|
|
$
|
0.78
|
|
Advertising
and Other Revenues
A portion of our net revenues result from fees associated with
advertising and other services. Net revenues from advertising
are derived principally from the sale of online advertisements
for cash and through barter arrangements. Other net revenues are
derived principally from contractual arrangements with third
parties that provide transaction services to eBay and PayPal
users and interest earned from banks on certain PayPal customer
account balances. Advertising and other net revenues, including
barter transactions, totaled 3% of our consolidated net revenues
for each of the years ended December 31, 2004, 2005 and
2006, and were primarily generated by our Marketplaces segment.
Revenue from barter arrangements totaled $1.4 million in
2006, $6.7 million in 2005 and $13.3 million in 2004.
Certain judgments are involved in the determination of the
appropriate revenue recognition, including, but not limited to,
the assessment and allocation of fair values in multiple element
arrangements, the appropriateness of gross or net revenue
recognition and, for barter transactions, the existence of
comparable cash transactions to establish fair values. Our
advertising and other net revenues may be affected by the
financial condition of the parties with whom we have these
relationships and by the success of online services and
promotions in general. Unlike our transaction revenues,
advertising and other net revenues are derived from a relatively
concentrated customer base.
60
Goodwill
and Intangible Assets
The purchase price of an acquired company is allocated between
intangible assets and the net tangible assets of the acquired
business with the residual of the purchase price recorded as
goodwill. The determination of the value of the intangible
assets acquired involves certain judgments and estimates. These
judgments can include, but are not limited to, the cash flows
that an asset is expected to generate in the future and the
appropriate weighted average cost of capital.
At December 31, 2006 our goodwill totaled $6.5 billion
and our identifiable intangible assets totaled
$683.0 million. We assess the impairment of goodwill of our
reportable units annually, or more often if events or changes in
circumstances indicate that the carrying value may not be
recoverable. This assessment is based upon a discounted cash
flow analysis and analysis of our market capitalization. The
estimate of cash flow is based upon, among other things, certain
assumptions about expected future operating performance and an
appropriate discount rate determined by our management. Our
estimates of discounted cash flows may differ from actual cash
flows due to, among other things, economic conditions, changes
to its business model or changes in operating performance.
Additionally, certain estimates of discounted cash flows involve
businesses with limited financial history and developing revenue
models which increase the risk of differences between the
projected and actual performance. Significant differences
between these estimates and actual cash flows could materially
affect our future financial results. We completed our annual
goodwill impairment test as of August 31, 2006 and
determined that no adjustment to the carrying value of goodwill
for any of our reportable units was required. We have determined
that no events or circumstances from that date through
December 31, 2006 indicate that a further assessment was
necessary. There was no impairment of goodwill or identifiable
intangible assets in 2006, 2005 and 2004.
Stock-Based
Compensation
On January 1, 2006, we adopted FAS 123(R), which
requires the measurement and recognition of compensation expense
for all share-based payment awards made to our employees and
directors including employee stock options and employee stock
purchases based on estimated fair values. Stock-based
compensation expense recognized for 2006 was
$317.4 million, which consisted of stock-based compensation
expense related to stock options and employee stock purchases.
For 2005 and 2004, stock-based compensation expense of
$31.8 million and $5.8 million, respectively, was
recognized under previous accounting standards. See
Note 12 Stock-Based Plans to our
consolidated financial statements included elsewhere in this
Annual Report on
Form 10-K
for additional information.
We calculated the fair value of each option award on the date of
grant using the Black-Scholes option pricing model. The
determination of fair value of share-based payment awards on the
date of grant using an option-pricing model is affected by our
stock price as well as assumptions regarding a number of highly
complex and subjective variables. The use of a Black-Scholes
model requires extensive actual employee exercise behavior data
and a number of complex assumptions including expected life,
expected volatility, risk-free interest rate and dividend yield.
The weighted-average grant-date fair value of stock options
granted during 2006 was $10.47 per share, using the
Black-Scholes model with the following weighted-average
assumptions:
|
|
|
Risk-free interest rates
|
|
4.7%
|
Expected life
|
|
3 years
|
Dividend yield
|
|
0%
|
Expected volatility
|
|
36%
|
Our computation of expected volatility for 2006 was based on a
combination of historical and market-based implied volatility
from traded options on our stock. Prior to 2006, our computation
of expected volatility was based on historical volatility. Our
computation of expected life was determined based on historical
experience of similar awards, giving consideration to the
contractual terms of the stock-based awards, vesting schedules
and expectations of future employee behavior. The interest rate
for periods within the contractual life of the award is based on
the U.S. Treasury yield curve in effect at the time of
grant.
61
Recent
Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board
(FASB) issued Financial Interpretation No. 48,
Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109
(FIN 48), which is a change in accounting for
income taxes. Among other provisions, FIN 48: specifies how
tax benefits for uncertain tax positions are to be recognized,
measured, and derecognized in financial statements; requires
certain disclosures of uncertain tax matters; specifies how
reserves for uncertain tax positions should be classified on the
balance sheet; and provides transition and interim-period
guidance. FIN 48 is effective for fiscal years beginning
after December 15, 2006 and as a result, is effective for
us in the first quarter of 2007. We have not yet completed our
evaluation of the impact of adoption on our consolidated
financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (FAS 157). FAS 157
establishes a framework for measuring fair value and expands
disclosures about fair value measurements. The changes to
current practice resulting from the application of this
statement relate to the definition of fair value, the methods
used to measure fair value, and the expanded disclosures about
fair value measurements. We will be required to adopt the
provisions on FAS 157 beginning with our first quarter
ending March 31, 2007. We do not believe that the adoption
of the provisions of FAS 157 will materially impact our
consolidated financial statements.
Effective December 31, 2006, we adopted the recognition and
disclosure provisions of SFAS No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans an amendment of FASB Statements No. 87,
88, 106, and 132(R), (FAS 158). These provisions did
not materially impact our consolidated financial statements.
FAS 158 requires an employer to recognize the over-funded
or under-funded status of a defined benefit pension and other
postretirement plan (other than a multiemployer plan) as an
asset or liability in its statement of financial position and to
recognize changes in that funded status in the year in which the
changes occur through comprehensive income of a business entity.
This statement also requires plan assets and obligations to be
measured as of the employers balance sheet date. The
measurement provision of this statement will be effective for
years beginning after December 15, 2008 with early adoption
encouraged. We have not yet adopted the measurement date
provisions of this statement.
In 2006, we adopted Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements When
Quantifying Misstatements in Current Year Financial
Statements (SAB 108), which provides interpretive
guidance on how the effects of the carryover or reversal of
prior year misstatements should be considered in quantifying a
current year misstatement. The adoption of SAB 108 did not
impact our consolidated financial statements.
ITEM 7A: 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 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 December 31,
2006, our fixed-income investments earned a pretax yield of
approximately 4.7%, 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 $1.3 million.
62
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 the years ended
December 31, 2006, 2005 or 2004 relating to the
other-than-temporary
impairment in the fair value of equity investments. At
December 31, 2006, the total carrying value of our equity
instruments and equity method investments was $65.5 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, certain
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
December 31, 2006, we held balances in cash, cash
equivalents and investments outside the U.S. totaling
approximately $2.3 billion.
Transaction
Exposure
As of December 31, 2006, we had outstanding forward foreign
exchange hedge contracts with notional values equivalent to
approximately $188.4 million with maturity dates within
31 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.
Translation
Exposure
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
year ended December 31, 2006, was a net translation gain of
approximately $588.2 million. This gain is recognized as an
adjustment to stockholders equity through accumulated
other comprehensive income. Additionally, foreign exchange rate
fluctuations may adversely impact our consolidated results of
operations as exchange rate fluctuations on transactions
denominated in currencies other than our functional currencies
result in gains and losses that are reflected in our
consolidated statement of income.
We consolidate the earnings of our international subsidiaries by
converting them into U.S. dollars in accordance with
SFAS No. 52 Foreign Currency Translation
(FAS 52). Such earnings will fluctuate when there is a
change in foreign currency exchange rates. We enter into
transactions to hedge portions of our foreign currency
denominated earnings translation exposure using either forward
exchange contracts or other instruments. All contracts that
hedge translation exposure mature ratably over the quarter in
which they are executed. During the year ended December 31,
2006, the realized gains and losses related to these hedges were
not significant.
A hypothetical uniform 10% strengthening or weakening in the
value of the U.S. dollar relative to the Euro, British
pound and Korean won in which our revenues and profits are
denominated would result in a decrease/increase to operating
income of approximately $110 million. There are inherent
limitations in the sensitivity analysis presented, primarily due
to the assumption that foreign exchange rate movements are
linear and instantaneous. As a result, the analysis is unable to
reflect the potential effects of more complex market changes
that could arise, which may positively or negatively affect
income.
63
Economic
Exposure
We currently charge our international subsidiaries on a monthly
basis for their use of intellectual property and technology and
for certain corporate services provided by eBay and PayPal.
These charges are denominated in Euros and these forecasted
inter-company transactions represent a foreign currency cash
flow exposure. To reduce foreign exchange risk relating to these
forecasted inter-company transactions, we entered into forward
exchange contracts or other instruments during the year ended
December 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 SFAS 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 years ended December 31, 2004,
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 losses, net
of gains, recorded to accumulated other comprehensive income as
of December 31, 2004 was $140.2 million and
$3.4 million, respectively. 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 December 31, 2005 was $203.0 million and
$200,000 respectively. We did not have any economic hedges in
place as of December 31, 2006.
ITEM 8: FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and accompanying notes
listed in Part IV, Item 15(a)(1) of this Annual Report
on
Form 10-K
are included elsewhere in this Annual Report.
|
|
ITEM 9:
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
Not applicable.
|
|
ITEM 9A:
|
CONTROLS
AND PROCEDURES
|
Evaluation of disclosure controls and
procedures. Based on the evaluation of our
disclosure controls and procedures (as defined in the
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, or the Exchange Act)
required by Exchange Act
Rules 13a-15(b)
or
15d-15(b),
our principal executive officer and our principal financial
officer have concluded that as of the end of the period covered
by this report, our disclosure controls and procedures were
effective.
Changes in internal controls. There were no
changes in our internal controls over financial reporting as
defined in Exchange Act
Rule 13a-15(f)
that occurred during our most recently completed fiscal quarter
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Managements Report on Internal Control Over Financial
Reporting. Our management is responsible for
establishing and maintaining adequate internal control over
financial reporting. Our management, including our principal
executive officer and principal financial officer, conducted an
evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on its evaluation under the framework in
Internal Control Integrated Framework, our
management concluded that our internal control over financial
reporting was effective as of December 31, 2006. Our
managements assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2006 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report that is included
elsewhere in this Annual Report on
Form 10-K.
64
ITEM 9B: OTHER
INFORMATION
Not applicable.
PART III
|
|
ITEM 10:
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Incorporated by reference from our Proxy Statement for our 2007
Annual Meeting of Stockholders to be filed with the SEC within
120 days after the end of the year ended December 31,
2006.
Code of
Ethics, Governance Guidelines and Committee Charters
We have adopted a Code of Business Conduct and Ethics
that applies to all eBay employees. We have also adopted a
Code of Ethics for Senior Financial Officers that applies
to our senior financial officers, including our principal
executive officer, principal financial officer and principal
accounting officer. The Code of Ethics for Senior Financial
Officers is posted on our website at
http://investor.ebay.com/governance.cfm. We will post any
amendments to or waivers from the Code of Ethics for Senior
Financial Officers at that location.
We have also adopted Governance Guidelines for the Board of
Directors and a written committee charter for each of our
Audit Committee, Compensation Committee, and Corporate
Governance and Nominating Committee. Each of these documents is
available on our website at
http://investor.ebay.com/governance.cfm.
|
|
ITEM 11:
|
EXECUTIVE
COMPENSATION
|
Incorporated by reference from our Proxy Statement for our 2007
Annual Meeting of Stockholders to be filed with the SEC within
120 days after the end of the year ended December 31,
2006.
|
|
ITEM 12:
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
Incorporated by reference from our Proxy Statement for our 2007
Annual Meeting of Stockholders to be filed with the SEC within
120 days after the end of the year ended December 31,
2006.
|
|
ITEM 13:
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Incorporated by reference from our Proxy Statement for our 2007
Annual Meeting of Stockholders to be filed with the SEC within
120 days after the end of the year ended December 31,
2006.
|
|
ITEM 14:
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Incorporated by reference from our Proxy Statement for our 2007
Annual Meeting of Stockholders to be filed with the SEC within
120 days after the end of the year ended December 31,
2006.
65
All other schedules have been omitted because the information
required to be set forth therein is not applicable or is shown
in the financial statements or notes thereto.
3. Exhibits.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filed with
|
|
Incorporated by Reference
|
No.
|
|
Exhibit Description
|
|
this 10-K
|
|
Form
|
|
File No.
|
|
Date Filed
|
|
2.01
|
|
Sale and Purchase Agreement dated
as of September 11, 2005, by and among Registrant, Skype
Technologies S.A. and the parties identified on Schedule 1
thereto.
|
|
|
|
8-K
|
|
000-24821
|
|
9/15/2005
|
2.02
|
|
Earn Out Agreement dated as of
September 11, 2005, by and among Registrant, Skype
Technologies S.A. and the parties identified on Schedule I
thereto.
|
|
|
|
8-K
|
|
000-24821
|
|
9/15/2005
|
2.03
|
|
Form of Option Assumption
Agreement.
|
|
|
|
8-K
|
|
000-24821
|
|
10/18/2005
|
2.04
|
|
Form of EMI Rollover Agreement.
|
|
|
|
8-K
|
|
000-24821
|
|
10/18/2005
|
2.05
|
|
Amendment No. 1 to Earn Out
Agreement dated as of December 29, 2005, by and among
Registrant, Skype Technologies S.A. and the parties identified
on Schedule I thereto.
|
|
|
|
10-K
|
|
000-24821
|
|
2/24/2006
|
3.01
|
|
Registrants Amended and
Restated Certificate of Incorporation.
|
|
|
|
10-Q
|
|
000-24821
|
|
7/27/2005
|
3.02
|
|
Registrants Amended and
Restated By-laws.
|
|
|
|
10-Q
|
|
000-24821
|
|
11/13/1998
|
4.01
|
|
Form of Specimen Certificate for
Registrants Common Stock.
|
|
|
|
S-1
|
|
333-59097
|
|
8/19/1998
|
4.02
|
|
Registration Rights Agreement
dated as of September 11, 2005, by and among Registrant and
the parties identified on Schedule I thereto.
|
|
|
|
8-K
|
|
000-24821
|
|
9/15/2005
|
10.01+
|
|
Form of Indemnity Agreement
entered into by Registrant with each of its directors and
executive officers.
|
|
|
|
S-1
|
|
333-59097
|
|
7/15/1998
|
10.02+
|
|
Registrants 1996 Stock
Option Plan, as amended.
|
|
|
|
S-1
|
|
333-59097
|
|
7/15/1998
|
10.03+
|
|
Registrants 1997 Stock
Option Plan, as amended.
|
|
X
|
|
|
|
|
|
|
10.04+
|
|
Registrants 1998 Equity
Incentive Plan, as amended.
|
|
X
|
|
|
|
|
|
|
10.05+
|
|
Form of Stock Bonus Agreement
under Registrants 1998 Equity Incentive Plan.
|
|
|
|
10-Q
|
|
000-24821
|
|
10/27/2004
|
10.06+
|
|
Form of Stock Option Agreement
under Registrants 1998 Equity Incentive Plan.
|
|
|
|
10-Q
|
|
000-24821
|
|
10/27/2004
|
10.07+
|
|
Form of Restricted Stock Unit
Agreement under Registrants 1998 Equity Incentive Plan.
|
|
X
|
|
|
|
|
|
|
10.08+
|
|
Registrants Amended and
Restated 1998 Employee Stock Purchase Plan.
|
|
|
|
S-8
|
|
333-117913
|
|
8/4/2004
|
10.09+
|
|
Registrants
1998 Directors Stock Option Plan, as amended.
|
|
X
|
|
|
|
|
|
|
10.10+
|
|
Registrants 1999 Global
Equity Incentive Plan, as amended.
|
|
X
|
|
|
|
|
|
|
10.11+
|
|
Form of Stock Option Agreement
under Registrants 1999 Global Equity Incentive Plan.
|
|
|
|
10-Q
|
|
000-24821
|
|
10/27/2004
|
10.12+
|
|
Form of Restricted Stock Unit
Agreement under Registrants 1999 Global Equity Incentive
Plan.
|
|
X
|
|
|
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filed with
|
|
Incorporated by Reference
|
No.
|
|
Exhibit Description
|
|
this 10-K
|
|
Form
|
|
File No.
|
|
Date Filed
|
|
10.13+
|
|
Registrants 2001 Equity
Incentive Plan, as amended.
|
|
X
|
|
|
|
|
|
|
10.14+
|
|
Form of Stock Option Agreement
under Registrants 2001 Equity Incentive Plan.
|
|
|
|
10-Q
|
|
000-24821
|
|
10/27/2004
|
10.15+
|
|
Registrants 2003 Deferred
Stock Unit Plan, as amended.
|
|
X
|
|
|
|
|
|
|
10.16+
|
|
Form of 2003 Deferred Stock Unit
Plan Electing Director Award Agreement, as amended.
|
|
|
|
10-Q
|
|
000-24821
|
|
4/25/2006
|
10.17+
|
|
Form of 2003 Deferred Stock Unit
Plan New Director Award Agreement, as amended.
|
|
|
|
10-Q
|
|
000-24821
|
|
4/25/2006
|
10.18+
|
|
eBay Incentive Plan.
|
|
|
|
10-Q
|
|
000-24821
|
|
7/27/2005
|
10.19+
|
|
Summary of Compensation Payable to
Named Executive Officers.
|
|
|
|
10-Q
|
|
000-24821
|
|
4/25/2006
|
10.20+
|
|
Employment Letter Agreement dated
January 16, 1998, between Margaret C. Whitman and
Registrant.
|
|
|
|
S-1
|
|
333-59097
|
|
8/19/1998
|
10.21+
|
|
Stock Option Agreement dated
June 9, 1998 between Registrant and Scott D. Cook.
|
|
|
|
10-K
|
|
000-24821
|
|
3/31/2003
|
10.22+
|
|
Employment Letter Agreement dated
August 20, 1998, between Michael R. Jacobson and Registrant.
|
|
|
|
S-1
|
|
333-59097
|
|
9/1/1998
|
10.23+
|
|
Offer Letter to William C. Cobb
dated November 22, 2000.
|
|
|
|
10-K
|
|
000-24821
|
|
3/25/2002
|
10.24+
|
|
Offer Letter to John Donahoe dated
November 16, 2004.
|
|
|
|
8-K
|
|
000-24821
|
|
2/24/2005
|
10.25+
|
|
Offer Letter to Elizabeth Axelrod
dated December 7, 2004 and addendum thereto dated
February 16, 2005.
|
|
|
|
8-K
|
|
000-24821
|
|
3/10/2005
|
10.26+
|
|
Offer Letter to Robert H. Swan
dated February 10, 2006.
|
|
|
|
8-K
|
|
000-24821
|
|
2/21/2006
|
10.27+
|
|
Letter Agreement regarding
supplemental relocation assistance dated July 12, 2006 to
Robert H. Swan.
|
|
|
|
8-K
|
|
000-24821
|
|
7/13/2006
|
10.28+
|
|
Separation Agreement dated as of
August 8, 2006 between Registrant and Maynard Webb.
|
|
|
|
10-Q
|
|
000-24821
|
|
10/30/2006
|
10.29+
|
|
Separation Agreement dated as of
September 11, 2006 between Registrant and Jeffrey Jordan.
|
|
|
|
10-Q
|
|
000-24821
|
|
10/30/2006
|
10.30+
|
|
Consulting Agreement dated as of
September 11, 2006 between Registrant and Jeffrey Jordan.
|
|
|
|
10-Q
|
|
000-24821
|
|
10/30/2006
|
10.31
|
|
Credit Agreement, dated as of
November 7, 2006, by and among Registrant, Bank of America,
N.A., as Administrative Agent, and the other lenders named from
time to time therein.
|
|
|
|
8-K
|
|
000-24821
|
|
11/13/2006
|
21.01
|
|
List of Subsidiaries.
|
|
X
|
|
|
|
|
|
|
23.01
|
|
PricewaterhouseCoopers LLP consent.
|
|
X
|
|
|
|
|
|
|
24.01
|
|
Power of Attorney (see signature
page).
|
|
X
|
|
|
|
|
|
|
31.01
|
|
Certification of Registrants
Chief Executive Officer, as required by Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
X
|
|
|
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filed with
|
|
Incorporated by Reference
|
No.
|
|
Exhibit Description
|
|
this 10-K
|
|
Form
|
|
File No.
|
|
Date Filed
|
|
31.02
|
|
Certification of Registrants
Chief Financial Officer, as required by Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
X
|
|
|
|
|
|
|
32.01
|
|
Certification of Registrants
Chief Executive Officer, as required by Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
X
|
|
|
|
|
|
|
32.02
|
|
Certification of Registrants
Chief Financial Officer, as required by Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
X
|
|
|
|
|
|
|
|
|
|
+ |
|
Indicates a management contract or compensatory plan or
arrangement |
|
(b) |
|
See the Exhibits listed under Item 15
(a) (3) above. |
|
(c) |
|
The financial statement schedules required by this item are
listed under Item 15 (a) (2) above. |
69
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of eBay Inc.:
We have completed integrated audits of eBay Inc.s
consolidated financial statements and of its internal control
over financial reporting as of December 31, 2006, in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our opinions, based on our
audits, are presented below.
Consolidated
financial statements and financial statement
schedule
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of eBay Inc. and
its subsidiaries at December 31, 2006 and December 31,
2005, and the results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2006 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
index appearing under Item 15(a)(2) presents fairly, in all
material respects, the information set forth therein when read
in conjunction with the related consolidated financial
statements. These financial statements and financial statement
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit of financial statements includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
As discussed in Note 1 to the consolidated financial
statements, the Company changed the manner in which it accounts
for share-based compensation in 2006.
Internal
control over financial reporting
Also, in our opinion, managements assessment, included in
Managements Report on Internal Control Over Financial
Reporting appearing under Item 9A, that the Company
maintained effective internal control over financial reporting
as of December 31, 2006 based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects,
based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control
Integrated Framework issued by the COSO. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on managements
assessment and on the effectiveness of the Companys
internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting
in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made
70
only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
San Jose, California
February 27, 2007
71
eBay
Inc.
CONSOLIDATED
BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands, except
|
|
|
|
par value amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,313,580
|
|
|
$
|
2,662,792
|
|
Short-term investments
|
|
|
774,650
|
|
|
|
542,103
|
|
Accounts receivable, net
|
|
|
322,788
|
|
|
|
393,195
|
|
Funds receivable from customers
|
|
|
255,282
|
|
|
|
399,297
|
|
Restricted cash
|
|
|
29,702
|
|
|
|
12,738
|
|
Other current assets
|
|
|
487,235
|
|
|
|
960,461
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
3,183,237
|
|
|
|
4,970,586
|
|
Long-term investments
|
|
|
825,667
|
|
|
|
277,853
|
|
Property and equipment, net
|
|
|
801,602
|
|
|
|
998,196
|
|
Goodwill
|
|
|
6,120,079
|
|
|
|
6,544,278
|
|
Intangible assets, net
|
|
|
823,280
|
|
|
|
682,977
|
|
Other assets
|
|
|
35,121
|
|
|
|
20,121
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,788,986
|
|
|
$
|
13,494,011
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
55,692
|
|
|
$
|
83,392
|
|
Funds payable and amounts due to
customers
|
|
|
586,651
|
|
|
|
1,159,952
|
|
Accrued expenses and other current
liabilities
|
|
|
578,557
|
|
|
|
681,669
|
|
Deferred revenue and customer
advances
|
|
|
81,940
|
|
|
|
128,964
|
|
Income taxes payable
|
|
|
182,095
|
|
|
|
464,418
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,484,935
|
|
|
|
2,518,395
|
|
Deferred tax liabilities, net
|
|
|
215,682
|
|
|
|
31,784
|
|
Other liabilities
|
|
|
40,388
|
|
|
|
39,200
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,741,005
|
|
|
|
2,589,379
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
(Note 8)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common Stock, $0.001 par
value; 3,580,000 shares authorized; 1,404,183 and
1,368,512 shares outstanding
|
|
|
1,412
|
|
|
|
1,431
|
|
Additional paid-in capital
|
|
|
7,272,742
|
|
|
|
8,034,282
|
|
Unearned stock-based compensation
|
|
|
(45,540
|
)
|
|
|
|
|
Treasury stock at cost, 7,531 and
62,250 shares
|
|
|
(274
|
)
|
|
|
(1,669,428
|
)
|
Retained earnings
|
|
|
2,716,511
|
|
|
|
3,842,150
|
|
Accumulated other comprehensive
income
|
|
|
103,130
|
|
|
|
696,197
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
10,047,981
|
|
|
|
10,904,632
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,788,986
|
|
|
$
|
13,494,011
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
72
eBay
Inc.
CONSOLIDATED
STATEMENT OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net revenues
|
|
$
|
3,271,309
|
|
|
$
|
4,552,401
|
|
|
$
|
5,969,741
|
|
Cost of net revenues
|
|
|
614,415
|
|
|
|
818,104
|
|
|
|
1,256,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,656,894
|
|
|
|
3,734,297
|
|
|
|
4,712,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
815,464
|
|
|
|
1,185,929
|
|
|
|
1,619,857
|
|
Product development
|
|
|
240,647
|
|
|
|
328,191
|
|
|
|
494,695
|
|
General and administrative
|
|
|
475,614
|
|
|
|
649,529
|
|
|
|
978,363
|
|
Amortization of acquired
intangible assets
|
|
|
65,927
|
|
|
|
128,941
|
|
|
|
197,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,597,652
|
|
|
|
2,292,590
|
|
|
|
3,289,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,059,242
|
|
|
|
1,441,707
|
|
|
|
1,422,956
|
|
Interest and other income, net
|
|
|
77,867
|
|
|
|
111,148
|
|
|
|
130,021
|
|
Interest expense
|
|
|
(8,879
|
)
|
|
|
(3,478
|
)
|
|
|
(5,916
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
minority interests
|
|
|
1,128,230
|
|
|
|
1,549,377
|
|
|
|
1,547,061
|
|
Provision for income taxes
|
|
|
(343,885
|
)
|
|
|
(467,285
|
)
|
|
|
(421,418
|
)
|
Minority interests
|
|
|
(6,122
|
)
|
|
|
(49
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
778,223
|
|
|
$
|
1,082,043
|
|
|
$
|
1,125,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.59
|
|
|
$
|
0.79
|
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.57
|
|
|
$
|
0.78
|
|
|
$
|
0.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,319,458
|
|
|
|
1,361,708
|
|
|
|
1,399,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
1,367,720
|
|
|
|
1,393,875
|
|
|
|
1,425,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
73
eBay
Inc.
CONSOLIDATED
STATEMENT OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net income
|
|
$
|
778,223
|
|
|
$
|
1,082,043
|
|
|
$
|
1,125,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
139,523
|
|
|
|
(140,459
|
)
|
|
|
588,150
|
|
Unrealized gains (losses) on
investments
|
|
|
(8,703
|
)
|
|
|
1,922
|
|
|
|
8,327
|
|
Unrealized gains (losses) on cash
flow hedges
|
|
|
5,525
|
|
|
|
1,297
|
|
|
|
(194
|
)
|
Estimated tax benefit/(provision)
on above items
|
|
|
1,102
|
|
|
|
(1,272
|
)
|
|
|
(3,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
137,447
|
|
|
|
(138,512
|
)
|
|
|
593,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
915,670
|
|
|
$
|
943,531
|
|
|
$
|
1,718,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
74
eBay
Inc.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
1,307
|
|
|
$
|
1,347
|
|
|
$
|
1,412
|
|
Common stock issued
|
|
|
40
|
|
|
|
65
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
1,347
|
|
|
|
1,412
|
|
|
|
1,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in-capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
3,936,776
|
|
|
|
4,855,983
|
|
|
|
7,272,742
|
|
Common stock issued
|
|
|
650,985
|
|
|
|
1,862,199
|
|
|
|
331,899
|
|
Stock-based compensation
|
|
|
6,239
|
|
|
|
107,981
|
|
|
|
326,616
|
|
Stock option income tax benefit
|
|
|
261,983
|
|
|
|
446,579
|
|
|
|
148,565
|
|
Reclassification to additional
paid-in-capital
on adoption of FAS 123(R)
|
|
|
|
|
|
|
|
|
|
|
(45,540
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
4,855,983
|
|
|
|
7,272,742
|
|
|
|
8,034,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
(2,008
|
)
|
|
|
(4,825
|
)
|
|
|
(45,540
|
)
|
Unearned stock-based compensation,
net
|
|
|
(4,068
|
)
|
|
|
(64,726
|
)
|
|
|
|
|
Amortization of unearned
stock-based compensation
|
|
|
1,251
|
|
|
|
24,011
|
|
|
|
|
|
Reclassification to additional
paid-in-capital
on adoption of FAS 123(R)
|
|
|
|
|
|
|
|
|
|
|
45,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
(4,825
|
)
|
|
|
(45,540
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock at cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
(274
|
)
|
|
|
(274
|
)
|
|
|
(274
|
)
|
Common stock repurchased
|
|
|
|
|
|
|
|
|
|
|
(1,669,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
(274
|
)
|
|
|
(274
|
)
|
|
|
(1,669,428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
856,245
|
|
|
|
1,634,468
|
|
|
|
2,716,511
|
|
Net income
|
|
|
778,223
|
|
|
|
1,082,043
|
|
|
|
1,125,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
1,634,468
|
|
|
|
2,716,511
|
|
|
|
3,842,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
104,196
|
|
|
|
241,642
|
|
|
|
103,130
|
|
Change in unrealized gain (loss)
on investments, net of tax
|
|
|
(5,392
|
)
|
|
|
1,169
|
|
|
|
5,033
|
|
Change in unrealized gain (loss)
on cash flow hedges, net of tax
|
|
|
3,315
|
|
|
|
778
|
|
|
|
(116
|
)
|
Foreign currency translation
adjustment
|
|
|
139,523
|
|
|
|
(140,459
|
)
|
|
|
588,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
241,642
|
|
|
|
103,130
|
|
|
|
696,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
$
|
6,728,341
|
|
|
$
|
10,047,981
|
|
|
$
|
10,904,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
1,298,586
|
|
|
|
1,338,608
|
|
|
|
1,404,183
|
|
Common stock issued
|
|
|
40,022
|
|
|
|
65,575
|
|
|
|
19,048
|
|
Common stock repurchased
|
|
|
|
|
|
|
|
|
|
|
(54,719
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
1,338,608
|
|
|
|
1,404,183
|
|
|
|
1,368,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
75
eBay
Inc.
CONSOLIDATED
STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
778,223
|
|
|
$
|
1,082,043
|
|
|
$
|
1,125,639
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
and authorized credits
|
|
|
90,942
|
|
|
|
89,499
|
|
|
|
100,729
|
|
Provision for transaction losses
|
|
|
50,459
|
|
|
|
73,773
|
|
|
|
126,439
|
|
Depreciation and amortization
|
|
|
253,690
|
|
|
|
378,165
|
|
|
|
544,552
|
|
Stock-based compensation expense
|
|
|
5,832
|
|
|
|
31,772
|
|
|
|
317,410
|
|
Tax benefit on the exercise of
stock options
|
|
|
261,983
|
|
|
|
267,142
|
|
|
|
148,565
|
|
Excess tax benefits from
stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
(92,371
|
)
|
Deferred income taxes
|
|
|
28,652
|
|
|
|
91,690
|
|
|
|
(227,850
|
)
|
Minority interests
|
|
|
6,122
|
|
|
|
49
|
|
|
|
4
|
|
Changes in assets and liabilities,
net of acquisition effects:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(105,540
|
)
|
|
|
(151,993
|
)
|
|
|
(169,750
|
)
|
Funds receivable and customer
accounts
|
|
|
(44,751
|
)
|
|
|
(132,606
|
)
|
|
|
(146,900
|
)
|
Other current assets
|
|
|
(312,756
|
)
|
|
|
(49,371
|
)
|
|
|
(443,530
|
)
|
Other non-current assets
|
|
|
(308
|
)
|
|
|
(4,612
|
)
|
|
|
10,126
|
|
Accounts payable
|
|
|
(33,975
|
)
|
|
|
564
|
|
|
|
32,986
|
|
Funds payable and amounts due to
customers
|
|
|
216,967
|
|
|
|
251,870
|
|
|
|
575,137
|
|
Accrued expenses and other
liabilities
|
|
|
39,618
|
|
|
|
17,013
|
|
|
|
(31,026
|
)
|
Deferred revenue and customer
advances
|
|
|
20,061
|
|
|
|
3,646
|
|
|
|
47,859
|
|
Income taxes payable
|
|
|
30,096
|
|
|
|
61,247
|
|
|
|
329,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
1,285,315
|
|
|
|
2,009,891
|
|
|
|
2,247,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and
equipment, net
|
|
|
(292,838
|
)
|
|
|
(338,281
|
)
|
|
|
(515,448
|
)
|
Proceeds from sale of corporate
aircraft
|
|
|
|
|
|
|
28,290
|
|
|
|
|
|
Purchases of investments
|
|
|
(1,754,808
|
)
|
|
|
(1,324,353
|
)
|
|
|
(583,263
|
)
|
Maturities and sales of investments
|
|
|
1,079,548
|
|
|
|
1,928,539
|
|
|
|
1,380,227
|
|
Acquisitions, net of cash acquired
|
|
|
(1,036,476
|
)
|
|
|
(2,732,230
|
)
|
|
|
(45,505
|
)
|
Other
|
|
|
(8,646
|
)
|
|
|
(14,696
|
)
|
|
|
(7,158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
investing activities
|
|
|
(2,013,220
|
)
|
|
|
(2,452,731
|
)
|
|
|
228,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common
stock, net
|
|
|
650,638
|
|
|
|
599,845
|
|
|
|
313,482
|
|
Repurchases of common stock
|
|
|
|
|
|
|
|
|
|
|
(1,666,540
|
)
|
Excess tax benefits from
stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
92,371
|
|
Payment of headquarters facility
lease obligation
|
|
|
|
|
|
|
(126,390
|
)
|
|
|
|
|
Principal payments on long-term
obligations
|
|
|
(2,969
|
)
|
|
|
(1,849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
647,669
|
|
|
|
471,606
|
|
|
|
(1,260,687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
28,768
|
|
|
|
(45,231
|
)
|
|
|
133,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
(51,468
|
)
|
|
|
(16,465
|
)
|
|
|
1,349,212
|
|
Cash and cash equivalents at
beginning of period
|
|
|
1,381,513
|
|
|
|
1,330,045
|
|
|
|
1,313,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of period
|
|
$
|
1,330,045
|
|
|
$
|
1,313,580
|
|
|
$
|
2,662,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
8,234
|
|
|
$
|
3,478
|
|
|
$
|
5,916
|
|
Cash paid for income taxes
|
|
|
13,875
|
|
|
|
40,256
|
|
|
|
179,169
|
|
Non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock options assumed
pursuant to acquisition
|
|
|
|
|
|
|
107,862
|
|
|
|
|
|
Common stock issued for acquisition
|
|
|
|
|
|
|
1,262,674
|
|
|
|
18,436
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
76
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Note 1
The Company and Summary of Significant Accounting
Policies:
The
Company
eBay Inc. (eBay) was incorporated in California in
May 1996, and reincorporated in Delaware in April 1998.
eBays purpose is to pioneer new communities around the
world, built on commerce, sustained by trust, and inspired by
opportunity. eBay 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 has three operating segments: Marketplaces, Payments and
Communications. The Marketplaces segment enables online commerce
through a variety of different platforms, including the
traditional eBay auction site, our classifieds websites, and our
comparison shopping site, Shopping.com. 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.
Use of
estimates
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, 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.
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. 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.
Certain prior period balances have been reclassified to conform
to the current period presentation.
Fair
value of financial instruments
Cash and cash equivalents are short-term, highly liquid
investments with original or remaining maturities of three
months or less when purchased. Our financial instruments,
including cash, cash equivalents, accounts
77
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
receivable, funds receivable, accounts payable, and funds
payable are carried at cost, which approximates their fair value
because of the short-term maturity of these instruments.
Short and long-term investments, which include marketable equity
securities and government and corporate bonds, are classified as
available-for-sale
and reported at fair value using the specific identification
method. Unrealized gains and losses are excluded from earnings
and reported as a component of other comprehensive income
(loss), net of related estimated tax provisions or benefits.
Additionally, we assess whether an
other-than-temporary
impairment loss on our investments has occurred due to declines
in fair value or other market conditions. Declines in fair value
that are considered other than temporary are recorded as an
impairment of investments in the consolidated statement of
income.
Derivative
instruments
We recognize all derivative instruments on the balance sheet at
fair value. Changes in the fair value (i.e., gains or losses) of
the derivatives are recorded each period in the consolidated
statement of income or accumulated other comprehensive income
(loss). For a derivative designated as a cash flow hedge, the
gain or loss on the derivative is initially reported as a
component of accumulated other comprehensive income (loss) and
subsequently reclassified into the consolidated statement of
income when the hedged transaction affects earnings. For
derivatives recognized as a fair value hedge, the gain or loss
on the derivative in the period of change and the offsetting
loss or gain of the hedged item attributed to the hedged risk,
are recognized in the consolidated statement of income. For
derivatives not recognized as hedges, the gain or loss on the
derivative in the period of change is recognized as interest and
other income, net.
Concentrations
of credit risk
Our cash, cash equivalents, accounts receivable and funds
receivable are potentially subject to concentration of credit
risk. Cash and cash equivalents are placed with financial
institutions that management believes are of high credit
quality. Our accounts receivable are derived from revenue earned
from customers located in the U.S. and internationally. Accounts
receivable balances are settled through customer credit cards,
debit cards, and PayPal accounts, with the majority of accounts
receivable collected upon processing of credit card
transactions. We maintain an allowance for doubtful accounts
receivable and authorized credits based upon our historical
experience. Historically, such losses have been within our
expectations. However, unexpected or significant future changes
in trends could result in a material impact to future statements
of income or cash flows. Due to the relatively small dollar
amount of individual accounts receivable, we generally do not
require collateral on these balances. The provision for doubtful
accounts is recorded as a charge to general and administrative
expense, while the provision for authorized credits is
recognized as a reduction of net revenues.
During the years ended December 31, 2004, 2005, and 2006,
no customers accounted for more than 10% of net revenues. As of
December 31, 2005 and 2006, no customers accounted for more
than 10% of net accounts receivable.
Allowances
for transaction losses
Our Payments segment is exposed to transaction losses due to
fraud, as well as non-performance of customers. We establish
allowances for estimated losses arising from processing customer
transactions, such as charge-backs for unauthorized credit card
use and merchant related charge-backs due to non-delivery of
goods or services, Automated Clearing House, or ACH, returns,
and debit card overdrafts. These allowances represent an
accumulation of the estimated amounts necessary to provide for
transaction losses incurred as of the reporting date, including
those to which we have not yet been notified. The allowances,
which involve the use of actuarial techniques, are monitored
monthly and are updated based on actual claims data reported by
our claims processors. The allowances are based on known facts
and circumstances, internal factors including our experience
with similar cases, historical trends involving loss payment
patterns and the mix of transaction and loss types. Additions to
the
78
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
allowance, in the form of provisions, are reflected as a general
and administrative expense in our consolidated statement of
income. At December 31, 2005 and 2006, the allowance for
transaction losses totaled $50.3 million and
$79.5 million, respectively, and was included as an offset
to other current assets and accrued expenses and other current
liabilities in our consolidated balance sheet.
Foreign
currency
The majority of our foreign subsidiaries use the local currency
of their respective countries as their functional currency.
Assets and liabilities are translated at exchange rates
prevailing at the balance sheet dates. Revenues, costs and
expenses are translated into United States dollars at average
exchange rates for the period. Gains and losses resulting from
translation are recorded as a component of accumulated other
comprehensive income (loss).
Realized gains and losses from foreign currency transactions are
recognized as interest and other income, net.
Funds
receivable and funds payable to customers
Funds receivable and payable relate to our Payments segment and
arise due to the time taken to clear transactions through
external payment networks. When customers fund their account
using their bank account or credit card, or withdraw money from
their bank account or through a debit card transaction, there is
a clearing period before the cash is received or sent by PayPal,
usually one to three business days for U.S. transactions,
and up to five business days for international transactions.
Hence, these funds are treated as a receivable or payable until
the cash is settled.
Customer
accounts
Based on differences in regulatory requirements and commercial
law in the jurisdictions where PayPal operates, PayPal holds
customer balances either as direct claims against PayPal or as
an agent or custodian on behalf of PayPals customers.
Customer balances held as direct claims against PayPal are
included on our consolidated balance sheet as customer accounts
with an offsetting current liability in funds payable and
amounts due to customers. The customer accounts can be invested
only in specified types of liquid assets. Customer accounts on
our consolidated balance sheet as of December 31, 2006
included approximately $180 million from direct
non-custodial customer relationships established in conjunction
with PayPals Asia Pacific headquarters during 2006.
All customer funds held by PayPal as an agent or custodian on
behalf of our customers are not reflected in our consolidated
balance sheet. These off-balance sheet funds total approximately
$1.2 billion and $1.5 billion as of December 31,
2005 and 2006, respectively. These off-balance sheet funds
include funds held in the U.S. that are deposited in bank
accounts insured by the Federal Deposit Insurance Corporation
and funds that customers choose to invest in PayPals Money
Market Fund.
Property
and equipment
Property and equipment are stated at historical cost less
accumulated depreciation. Depreciation and amortization are
computed using the straight-line method over the estimated
useful lives of the assets, generally, one to three years for
computer equipment and software, up to 30 years for
buildings and building improvements, ten years for aviation
equipment, the shorter of five years or the term of the lease
for leasehold improvements, three years for furniture and
fixtures and three years for vehicles.
Goodwill
and 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. Intangible assets
resulting from the acquisitions of entities accounted for using
the purchase method of accounting are estimated by management
based on the fair value of assets received. Identifiable
intangible assets are comprised of purchased customer lists and
user base, trademarks
79
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and trade names, developed technologies, and other intangible
assets. Identifiable intangible assets are being amortized over
the period of estimated benefit using the straight-line method
and estimated useful lives ranging from one to eight years.
Goodwill is not subject to amortization, but is subject to at
least an annual assessment for impairment, applying a fair-value
based test.
Impairment
of long-lived assets
We evaluate long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of a
long-lived asset may not be recoverable. An asset is considered
impaired if its carrying amount exceeds the future net cash flow
the asset is expected to generate. If an asset is considered to
be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds its
fair market value. We assess the recoverability of our
long-lived and intangible assets by determining whether the
unamortized balances can be recovered through undiscounted
future net cash flows of the related assets. The amount of
impairment, if any, is measured based on projected discounted
future net cash flows.
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 conducted our annual
impairment test as of August 31, 2006 and determined there
was no impairment. There were no events or circumstances from
that date through December 31, 2006 that would impact this
assessment.
Revenue
recognition
Our net revenues result from transaction, advertising and other
fees generated in our Marketplaces, Payments and Communications
segments. Revenues are recognized when evidence of an
arrangement exists, the fee is fixed and determinable, no
significant obligation remains and collection of the receivable
is reasonably assured.
Our Marketplaces segment generates transaction revenues for
listing and feature fees and lead referral fees. Listing and
feature fee revenues are recognized ratably over the estimated
period of the listing, while revenues related to final value
fees are recognized at the time that the transaction is
successfully concluded. A transaction is considered successfully
concluded when at least one buyer has bid above the
sellers specified minimum price or reserve price,
whichever is higher, at the end of the transaction term. Lead
referral fee revenue is generated from lead referral fees based
on the number of times a user clicks through to a
merchants website from our websites. Lead referral fees
are recognized in the period in which the user clicks through to
the merchants website.
Our Payments segment earns transaction revenues from processing
transactions for certain customers. Revenues resulting from a
payment processing transaction is recognized once the
transaction is complete.
Our Communications segment revenues are recognized when the
related service offering is provided. The majority of
Communications segment transaction revenues are prepaid. We
record customer advances for prepaid amounts in excess of
revenues recognized.
Our advertising revenues are derived principally from the sale
of online advertisements. To date, the duration of our
advertising contracts has ranged from one week to five years,
but is generally one week to one year. Advertising revenues on
contracts are recognized as impressions (i.e., the
number of times that an advertisement appears in pages viewed by
users of our websites) are delivered or ratably over the term of
the agreement where such agreements provide for minimum monthly
or quarterly advertising commitments or where such commitments
are fixed throughout the term. Barter transactions are valued on
amounts realized in similar cash transactions occurring within
six months prior to the date of the barter transaction. To the
extent that significant delivery obligations remain
80
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
at the end of a period or collection of the resulting account
receivable is not considered probable, revenues are deferred
until the obligation is satisfied or the uncertainty is
resolved. These amounts are included in deferred revenues in our
consolidated balance sheet. Revenue from barter arrangements
totaled $13.3 million, $6.7 million and
$1.4 million for the years ended December 31, 2004,
2005 and 2006, respectively, with the reciprocal arrangements
being recognized as an operating expense. In general, the
services are received in the same period in which the reciprocal
services are provided. In certain circumstances, we are required
to record, as a reduction of revenue, payments to a party who is
also a customer. These payments primarily consist of certain
promotional activities which result in payments to our users.
Our other revenues are derived principally from contractual
arrangements with third parties that provide transaction
services to eBay and PayPal users and interest earned from banks
on certain PayPal customer account balances. Revenues from
contractual arrangements with third parties are recognized as
the contracted services are delivered to end users. Revenues
from interest income are recognized when earned.
We evaluate whether payments made to customers or revenues
earned from vendors have a separate identifiable benefit and
whether they are fairly valued in determining the appropriate
classification of the related revenues and expense. For revenue
agreements with multiple deliverables we ensure all undelivered
elements are accounted for at fair value.
Provisions for doubtful accounts, transaction losses and
authorized credits are made at the time of revenue recognition
based upon our historical experience. The provision for doubtful
accounts and transaction losses are recorded as charges to
operating expense, while the provision for authorized credits is
recognized as a reduction of net revenues.
Product
development costs
Costs related to the planning and post implementation phases of
our website development efforts are recorded as an operating
expense. Direct costs incurred in the development phase are
capitalized and amortized over the products estimated
useful life of one to three years as charges to cost of net
revenues.
Advertising
expense
We expense the costs of producing advertisements at the time
production occurs and expense the cost of communicating
advertising in the period during which the advertising space or
airtime is used. Internet advertising expenses are recognized
based on the terms of the individual agreements, which is
generally over the greater of the ratio of the number of
impressions delivered over the total number of contracted
impressions,
pay-per-click,
or on a straight-line basis over the term of the contract.
Advertising expenses totaled $459.5 million,
$665.1 million and $871.0 million during the years
ended December 31, 2004, 2005, and 2006, respectively.
Stock-based
compensation
On January 1, 2006, we adopted Statement of Financial
Accounting Standards (SFAS) No. 123 (revised
2004), Share-Based Payment (FAS 123(R)), which
requires companies to recognize in the statement of operations
all share-based payments to employees, including grants of
employee stock options, based on their fair value. The statement
eliminates the ability to account for share-based compensation
transactions, as we formerly did, using the intrinsic value
method as prescribed by Accounting Principles Board, or APB,
Opinion No. 25, Accounting for Stock Issued to
Employees.
We adopted FAS 123(R) using the modified prospective
method, which requires the application of the accounting
standard as of January 1, 2006. Our consolidated financial
statements as of and for the year ended December 31, 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 12 Stock-Based Plans for
further details.
81
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 consolidated statement of income
during 2006 included compensation expense for stock-based
payment awards granted prior to, but not yet vested as of,
January 1, 2006 based on the grant date fair value
estimated in accordance with the pro forma provisions of
FAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosures
(FAS 148) and compensation expense for the stock-based
payment awards granted subsequent to December 31, 2005,
based on the grant date fair value estimated in accordance with
FAS 123(R). As stock-based compensation expense recognized
in the statement of income for 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.
FAS No. 123(R) prohibits recognition of a deferred tax
asset for an excess tax benefit that has not been realized. We
will recognize a benefit from stock-based compensation in equity
if an incremental tax benefit is realized by following the
ordering provisions of the tax law. In addition, we account for
the indirect effects of stock-based compensation on the research
tax credit and the foreign tax credit through the income
statement.
Income
taxes
We account for income taxes using an asset and liability
approach, which requires the recognition of taxes payable or
refundable for the current year and deferred tax liabilities and
assets for the future tax consequences of events that have been
recognized in our financial statements or tax returns. The
measurement of current and deferred tax assets and liabilities
is based on provisions of enacted tax laws; the effects of
future changes in tax laws or rates are not anticipated. If
necessary, the measurement of deferred tax assets is reduced by
the amount of any tax benefits that are not expected to be
realized based on available evidence.
Recent
accounting pronouncements
In July 2006, the Financial Accounting Standards Board
(FASB) issued Financial Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48), which is a change in accounting for
income taxes. Among other provisions, FIN 48 specifies how
tax benefits for uncertain tax positions are to be recognized,
measured, and derecognized in financial statements; requires
certain disclosures of uncertain tax matters; specifies how
reserves for uncertain tax positions should be classified on the
balance sheet; and provides transition and interim-period
guidance. FIN 48 is effective for fiscal years beginning
after December 15, 2006 and as a result, is effective for
us in the first quarter of 2007. We have not yet completed our
evaluation of the impact of adoption on our consolidated
financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (FAS 157). FAS 157
establishes a framework for measuring fair value and expands
disclosures about fair value measurements. The changes to
current practice resulting from the application of this
Statement relate to the definition of fair value, the methods
used to measure fair value, and the expanded disclosures about
fair value measurements. We will be required to adopt the
provisions on FAS 157 beginning with our first quarter
ending March 31, 2007. We do not believe that the adoption
of the provisions of FAS 157 will materially impact our
consolidated financial statements.
Effective December 31, 2006 we adopted the recognition and
disclosure provisions of SFAS No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans an amendment of FASB Statements No. 87,
88, 106, and 132(R), (FAS 158). These provisions did
not materially impact our consolidated financial statements.
FAS 158 requires an employer to recognize the over-funded
or under-funded status of a defined benefit pension and other
postretirement plan (other than a multiemployer plan) as an
asset or liability in its statement of financial position and to
recognize changes in that funded status in the year in which the
changes occur through comprehensive income of a business entity.
This statement also requires plan assets and obligations to be
82
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
measured as of the employers balance sheet date. The
measurement provision of this statement will be effective for
years beginning after December 15, 2008 with early adoption
encouraged. We have not yet adopted the measurement date
provisions of this statement.
In 2006, we adopted Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements When
Quantifying Misstatements in Current Year Financial
Statements (SAB 108), which provides interpretive
guidance on how the effects of the carryover or reversal of
prior year misstatements should be considered in quantifying a
current year misstatement. The adoption of SAB 108 did not
impact our consolidated financial statements.
Note 2
Net Income Per Share:
Basic net income per share is computed by dividing the net
income for the period by the weighted average number of common
shares outstanding during the period. Diluted net income per
share is computed by dividing the net income for the period by
the weighted average number of shares of common stock and
potentially dilutive common stock outstanding during the period.
The dilutive effect of outstanding options, restricted stock
units and nonvested stock is reflected in diluted earnings per
share by application of the treasury stock method, which in 2006
includes consideration of stock-based compensation required by
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
778,223
|
|
|
$
|
1,082,043
|
|
|
$
|
1,125,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
1,319,548
|
|
|
|
1,361,748
|
|
|
|
1,403,455
|
|
Weighted average unvested common
stock subject to repurchase
|
|
|
(90
|
)
|
|
|
(40
|
)
|
|
|
(4,204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic calculation
|
|
|
1,319,458
|
|
|
|
1,361,708
|
|
|
|
1,399,251
|
|
Weighted average effect of
dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average unvested common
stock subject to repurchase
|
|
|
90
|
|
|
|
40
|
|
|
|
4,204
|
|
Employee stock options
|
|
|
48,172
|
|
|
|
32,127
|
|
|
|
22,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted calculation
|
|
|
1,367,720
|
|
|
|
1,393,875
|
|
|
|
1,425,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.59
|
|
|
$
|
0.79
|
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.57
|
|
|
$
|
0.78
|
|
|
$
|
0.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The calculation of diluted income per share excludes all
anti-dilutive shares. For the years ended December 31,
2004, 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
3.4 million, 26.7 million and 73.7 million
shares, respectively.
83
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 3
Business Combinations, Goodwill and Intangible Assets:
Through both domestic and international acquisitions, we have
continued to expand our business. The following table summarizes
our purchase acquisitions in 2005 and 2006 with aggregate
purchase prices in excess of $50 million (in thousands,
except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible
|
|
Identifiable
|
|
Deferred
|
|
Unearned
|
|
|
|
Aggregate
|
|
|
Year
|
|
Assets/
|
|
Intangible
|
|
Tax
|
|
Stock-Based
|
|
|
|
Purchase
|
Company Name
|
|
Acquired
|
|
(Liabilities)
|
|
Assets
|
|
Liabilities
|
|
Compensation
|
|
Goodwill
|
|
Price
|
|
Rent.com
|
|
|
2005
|
|
|
$
|
18,050
|
|
|
$
|
61,800
|
|
|
$
|
(24,924
|
)
|
|
$
|
|
|
|
$
|
380,439
|
|
|
$
|
435,365
|
|
International classified websites
|
|
|
2005
|
|
|
|
(201
|
)
|
|
|
13,800
|
|
|
|
(3,786
|
)
|
|
|
|
|
|
|
71,771
|
|
|
|
81,584
|
|
Shopping.com
|
|
|
2005
|
|
|
|
145,898
|
|
|
|
133,600
|
|
|
|
(29,683
|
)
|
|
|
16,759
|
|
|
|
418,711
|
|
|
|
685,285
|
|
Skype
|
|
|
2005
|
|
|
|
(1,610
|
)
|
|
|
280,300
|
|
|
|
(71,474
|
)
|
|
|
55,249
|
|
|
|
2,330,961
|
|
|
|
2,593,426
|
|
Verisigns Payment Gateway
Business
|
|
|
2005
|
|
|
|
(8,804
|
)
|
|
|
106,600
|
|
|
|
|
|
|
|
|
|
|
|
275,989
|
|
|
|
373,785
|
|
Tradera.com
|
|
|
2006
|
|
|
|
2,949
|
|
|
|
6,200
|
|
|
|
|
|
|
|
|
|
|
|
43,120
|
|
|
|
52,269
|
|
Tangible net assets were valued at their respective carrying
amounts as we believe that these amounts approximated their
current fair values at the respective acquisition dates. The
valuation of identifiable intangible assets acquired reflects
managements estimates based on, among other factors, use
of established valuation methods. Such assets consist of
customer lists and user base, trademarks and trade names,
developed technologies and other acquired intangible assets
including contractual agreements. Identifiable intangible assets
are amortized over the period of estimated benefit using the
straight-line method and the estimated useful lives of one to
eight years. We believe the straight-line method of amortization
represents our best estimate of 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 each
business combination. The following table summarizes our
acquired intangible assets by type related to the above purchase
acquisitions (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
Customer
|
|
Trade
|
|
|
|
Other
|
|
Acquired
|
|
|
Year
|
|
List/
|
|
name/
|
|
Developed
|
|
Intangible
|
|
Intangible
|
Company Name
|
|
Acquired
|
|
User Base
|
|
Trademarks
|
|
Technologies
|
|
Assets
|
|
Assets
|
|
Rent.com
|
|
|
2005
|
|
|
$
|
34,500
|
|
|
$
|
18,000
|
|
|
$
|
8,200
|
|
|
$
|
1,100
|
|
|
$
|
61,800
|
|
International classified websites
|
|
|
2005
|
|
|
|
2,600
|
|
|
|
11,200
|
|
|
|
|
|
|
|
|
|
|
|
13,800
|
|
Shopping.com
|
|
|
2005
|
|
|
|
73,600
|
|
|
|
38,700
|
|
|
|
21,300
|
|
|
|
|
|
|
|
133,600
|
|
Skype
|
|
|
2005
|
|
|
|
27,700
|
|
|
|
243,800
|
|
|
|
8,000
|
|
|
|
800
|
|
|
|
280,300
|
|
Verisigns Payment Gateway
Business
|
|
|
2005
|
|
|
|
86,700
|
|
|
|
400
|
|
|
|
19,500
|
|
|
|
|
|
|
|
106,600
|
|
Tradera.com
|
|
|
2006
|
|
|
|
4,600
|
|
|
|
1,000
|
|
|
|
600
|
|
|
|
|
|
|
|
6,200
|
|
The results of operations for periods prior to our acquisition
for each acquisition during 2004, 2005 and 2006, both
individually and in the aggregate, except for Skype, were not
material to our consolidated statement of income and,
accordingly, pro forma results of operations have not been
presented.
Rent.com
On February 23, 2005, we acquired Viva Group, Inc., which
does business under the name Rent.com, for a cash purchase price
of approximately $415 million plus payments for net cash
and investments of approximately $18 million. Rent.com is
an Internet listing website in the apartment and rental housing
industry. The acquisition better enables our expansion into the
online real estate market and is consistent with our strategy of
growing our global online marketplaces. The total purchase price
recorded was approximately $435 million, including
approximately $2 million in estimated acquisition-related
expenses. We accounted for the acquisition as a non-
84
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
taxable purchase transaction and, accordingly, the purchase
price has been allocated to the tangible and intangible assets
acquired and liabilities assumed on the basis of their
respective estimated fair values on the acquisition date.
The estimated useful economic lives of the identifiable
intangible assets acquired in the Rent.com acquisition are six
years for the customer list, five years for the trade name,
three years for the developed technology and the advertising
relationships, and one year for the user base.
International
Classifieds Websites
During the second quarter of 2005, we announced our acquisitions
of three international classifieds websites, Gumtree.com, LoQUo,
and opusforum, which operate in select international cities.
These acquisitions were made to help us expand our global
network of classifieds websites and to create a more efficient
place for local consumers to come together online. The aggregate
purchase price recorded for these acquisitions was approximately
$81.6 million, including approximately $1.3 million in
estimated acquisition-related expenses. We accounted for two of
these acquisitions as non-taxable and one as a taxable purchase
transaction and, accordingly, the purchase price for each
acquisition has been allocated to the tangible and intangible
assets acquired and liabilities assumed on the basis of their
respective estimated fair values on the applicable acquisition
date.
The estimated useful economic lives of the identifiable
intangible assets acquired in these acquisitions are five years
for both the trade names and for the customer lists.
Shopping.com
On August 30, 2005, we acquired Shopping.com Ltd., or
Shopping.com, for a purchase price of approximately
$685.3 million. We acquired all outstanding shares of
Shopping.coms common stock for $21 per share in cash
totaling approximately $634.5 million and we assumed
Shopping.coms outstanding common stock options, valued at
approximately $43.2 million. The total purchase price also
includes approximately $7.6 million in estimated
acquisition-related expenses. Shopping.com is a provider of
online comparison shopping and consumer reviews. This
acquisition is consistent with our strategy of growing our
global online marketplaces and we believe that it will create a
premier online shopping experience for individuals and
businesses of all sizes. We accounted for the acquisition as a
taxable purchase transaction and, accordingly, the purchase
price has been allocated to the tangible and intangible assets
acquired and liabilities assumed on the basis of their
respective estimated fair values on the acquisition date.
The intrinsic value of Shopping.coms unvested common stock
options assumed in the acquisition totaled approximately
$16.8 million and was recorded as unearned stock-based
compensation. The unearned stock-based compensation relating to
the unvested options is being amortized on an accelerated basis
over the remaining vesting period of less than one year to four
years, consistent with the graded vesting approach under FASB
Interpretation No. 28.
The estimated useful economic lives of the identifiable
intangible assets acquired in the Shopping.com acquisition are
four years for the customer base and five years for the trade
names and the developed technology.
Skype
On October 14, 2005, we acquired all of the outstanding
securities of Skype Technologies S.A. (Skype), for a
total initial consideration of approximately $2.6 billion,
plus potential performance-based payments of up to approximately
$1.3 billion (based on the Euro-dollar exchange rate at the
time of the acquisition). In addition, we agreed to assume
Skypes stock options outstanding as of the closing date
and convert them into options to acquire approximately
1.9 million shares of our common stock. The initial
consideration of approximately $2.6 billion was comprised
of approximately $1.3 billion in cash and 32.8 million
shares of our common stock. For accounting purposes, the stock
portion of the initial consideration was valued at approximately
$1.3 billion based on the average closing price of our
common stock surrounding the acquisition announcement date of
September 12, 2005.
85
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The shares of our common stock issued in connection with the
acquisition are subject to certain contractual restrictions on
resale. Additionally, the assumed options have been valued at
$64.6 million and were included as part of the purchase
price. We accounted for the acquisition as a non-taxable
purchase transaction, and accordingly, the purchase price was
allocated to the tangible and intangible assets acquired and
liabilities assumed based on their respective fair values at the
acquisition date.
In addition to the initial consideration, the maximum amount
potentially payable under the performance-based earn-out is
approximately 1.1 billion, or approximately
$1.5 billion (based on a U.S. dollar to Euro exchange
rate of $1.32), and would be payable in cash or common stock, at
our discretion. The earn-out payments are contingent upon Skype
achieving certain net revenue, gross profit margin-based and
active user targets. Base earn-out payments of up to an
aggregate of approximately 877 million, or
approximately $1.2 billion (based on a U.S. dollar to
Euro exchange rate of $1.32), weighted equally among the three
targets, would be payable if the targets are achieved over any
four-quarter period commencing on January 1, 2006 through
June 30, 2009. Additional bonus earn-out payments of up to
an aggregate of approximately 292 million, or
approximately $386 million (based on a U.S. dollar to
Euro exchange rate of $1.32), weighted equally among the three
targets, would be payable if Skype exceeds the targets during
calendar year 2008. Any contingent earn-out payments made would
be accounted for as additional purchase price and would increase
goodwill. As of December 31, 2006, the targets had not been
met and accordingly, no payments had been made.
The intrinsic value of Skypes unvested common stock
options assumed in the acquisition totaled approximately
$55.2 million and was recorded, prior to the adoption of
FAS 123(R), as unearned stock-based compensation. The
unearned stock-based compensation relating to the unvested
options will be amortized on an accelerated basis over the
remaining vesting period of approximately three years,
consistent with the graded vesting approach under FASB
Interpretation No. 28.
The estimated useful economic lives of the identifiable
intangible assets acquired in the Skype acquisition are five
years for registered user technology and trade names, two years
for existing technology, and one year for network access
agreements.
Supplemental information on an unaudited pro forma basis, as if
the Skype acquisition were completed at the beginning of the
years 2004 and 2005, is as follows (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
Net revenues
|
|
$
|
3,277,534
|
|
|
$
|
4,594,954
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
684,905
|
|
|
$
|
944,057
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
$
|
0.49
|
|
|
$
|
0.66
|
|
|
|
|
|
|
|
|
|
|
The unaudited pro forma supplemental information is based on
estimates and assumptions, which eBay believes are reasonable.
The average foreign exchange rates during years 2004 and 2005
were used in preparing the supplemental information. The
unaudited pro forma supplemental information prepared by
management is not necessarily indicative of the results of
income in future periods or the results that actually would have
been realized had eBay and Skype been a combined company during
the specified periods.
VeriSigns
Payment Gateway Business
On November 18, 2005, we acquired VeriSigns payment
gateway business for a purchase price of approximately
$373.8 million, consisting of $370.0 million in cash
and $3.8 million in estimated acquisition-related expenses.
The payment gateway is a real-time, scalable Internet payment
platform that allows merchants to authorize, process and manage
online payments. Additionally, we have signed a multi-year
security technology agreement with VeriSign, Inc. that calls for
us to invest in the deployment of its technologies that enable
and better
86
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
protect online transactions, including the purchase of up to one
million two-factor authentication tokens that we will distribute
to our customers.
We accounted for the acquisition as a taxable purchase
transaction and, accordingly, the purchase price has been
allocated to the tangible and intangible assets acquired and
liabilities assumed on the basis of their respective estimated
fair values on the acquisition date. The estimated useful
economic lives of the identifiable intangible assets acquired in
the acquisition are five years for registered user base and
existing technology and one year for the trade names.
Tradera.com
On April 24, 2006, we acquired all of the outstanding
equity securities of Tradera.com, an online auction-style
marketplace in Sweden, for a total purchase price of
approximately $52.3 million, including approximately
$0.6 million in estimated acquisition-related expenses. We
anticipate that this acquisition will allow us to expand our
online auction-style marketplace in Sweden. We accounted for the
acquisition as a taxable purchase transaction, and, accordingly,
the purchase price has been allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis
of their respective estimated fair values on the acquisition
date. The estimated useful economic lives of the identifiable
intangible assets acquired in the acquisition are four years for
user base and one year for developed technology and trade name.
The final purchase price allocation will depend upon the
completion of our integration plan in the second quarter of 2007.
Goodwill
Goodwill information for each segment is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Goodwill
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
Acquired
|
|
|
Adjustments
|
|
|
2006
|
|
|
Segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplaces
|
|
$
|
2,486,870
|
|
|
$
|
43,120
|
|
|
$
|
118,037
|
|
|
$
|
2,648,027
|
|
Payments
|
|
|
1,348,385
|
|
|
|
|
|
|
|
248
|
|
|
|
1,348,633
|
|
Communications
|
|
|
2,312,184
|
|
|
|
|
|
|
|
262,795
|
|
|
|
2,574,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,147,439
|
|
|
$
|
43,120
|
|
|
$
|
381,080
|
|
|
$
|
6,571,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in goodwill acquired during the year ended
December 31, 2006 resulted from our acquisition of the
outstanding shares of Tradera.com. Adjustments to goodwill
during the year ended December 31, 2006, resulted primarily
from foreign currency translation adjustments.
Investments accounted for under the equity method of accounting
are classified on our balance sheet as long-term investments.
Such investments include identifiable intangible assets,
deferred tax liabilities and goodwill. Goodwill related to our
equity method investments totaled approximately
$27.4 million as of December 31, 2005 and 2006.
87
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Intangible
Assets
The components of acquired identifiable intangible assets are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
December 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
|
|
$
|
545,527
|
|
|
$
|
(240,340
|
)
|
|
$
|
305,187
|
|
|
6
|
Trademarks and trade names
|
|
|
443,565
|
|
|
|
(75,571
|
)
|
|
|
367,994
|
|
|
5
|
|
|
480,358
|
|
|
|
(171,390
|
)
|
|
|
308,968
|
|
|
5
|
Developed technologies
|
|
|
101,971
|
|
|
|
(45,882
|
)
|
|
|
56,089
|
|
|
4
|
|
|
103,351
|
|
|
|
(63,912
|
)
|
|
|
39,439
|
|
|
4
|
All other
|
|
|
36,450
|
|
|
|
(14,761
|
)
|
|
|
21,689
|
|
|
4
|
|
|
58,115
|
|
|
|
(26,232
|
)
|
|
|
31,883
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,108,643
|
|
|
$
|
(281,611
|
)
|
|
$
|
827,032
|
|
|
|
|
$
|
1,187,351
|
|
|
$
|
(501,874
|
)
|
|
$
|
685,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of our acquired identifiable intangible assets are subject
to amortization. Acquired identifiable intangible assets are
comprised of customer lists and user base, trademarks and trade
names, developed technologies, and other acquired intangible
assets including patents and contractual agreements. No
significant residual value is estimated for the intangible
assets. The increase in intangible assets during the year ended
December 31, 2006 resulted primarily from certain
intangible assets acquired as part of our acquisition of the
outstanding shares of Tradera.com. The net carrying amount of
intangible assets related to our equity investments, included
above, totaled approximately $3.8 million and
$2.5 million, as of December 31, 2005 and 2006,
respectively. Aggregate amortization expense for intangible
assets totaled $70.2 million, $136.4 million and
$220.0 million for the years ended December 31, 2004,
2005 and 2006, respectively. Included in amortization of
intangibles for the year ended December 31, 2006 is a
charge of $10.9 million for in-process research and
development related to an asset purchase completed during the
period.
Expected future intangible asset amortization from acquisitions
completed as of December 31, 2006 is as follows (in
thousands):
|
|
|
|
|
Fiscal Years:
|
|
|
|
|
2007
|
|
$
|
202,545
|
|
2008
|
|
|
194,018
|
|
2009
|
|
|
172,708
|
|
2010
|
|
|
97,176
|
|
2011
|
|
|
13,604
|
|
Thereafter
|
|
|
5,426
|
|
|
|
|
|
|
|
|
$
|
685,477
|
|
|
|
|
|
|
Note 4
Segments:
Operating segments are based upon our internal organization
structure, the manner in which our operations are managed, the
criteria used by our Chief Operating Decision Maker (CODM) to
evaluate segment performance and the availability of separate
financial information. As a result of developments in our
business and changes in the manner in which our CODM evaluates
the performance of our Marketplaces segment and determines the
allocation of resources among segments, during the third quarter
of 2006, the U.S. and International Marketplaces operating
segments were considered components of one global Marketplaces
operating segment. We have recast our operating segment data for
2004 and 2005 to reflect three segments: Marketplaces, Payments
and Communications.
88
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Marketplaces segment includes our global online 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. Since October 14, 2005, the results from our
Communications segment reflect Skype operations.
Direct contribution consists of net revenues from external
customers less direct costs. Direct costs include specific costs
of net revenues, sales and marketing expenses, and general and
administrative expenses over which segment managers have direct
discretionary control, such as advertising and marketing
programs, customer support expenses, bank charges, site
operations expenses, product development expenses, billing
operations, certain technology and facilities expenses,
transaction expenses, provisions for doubtful accounts,
authorized credits and transaction losses. Segment managers do
not have discretionary control over expenses such as our
corporate center costs (consisting of certain costs such as
corporate management, human resources, finance and legal),
amortization of intangible assets and stock-based compensation
expenses, as they are not evaluated in the measurement of
segment performance. We have also recast our direct costs to
reflect changes in the current management of site operations
cost, product development, billing operations, and certain
technology and facilities expenses as direct costs.
The following table summarizes the financial performance of our
reporting segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004
|
|
|
|
Marketplaces
|
|
|
Payments
|
|
|
Consolidated
|
|
|
Net revenues from external
customers
|
|
$
|
2,573,607
|
|
|
$
|
697,702
|
|
|
$
|
3,271,309
|
|
Direct costs
|
|
|
1,476,965
|
|
|
|
512,946
|
|
|
|
1,989,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct contribution
|
|
|
1,096,642
|
|
|
|
184,756
|
|
|
|
1,281,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses and indirect
costs of net revenues
|
|
|
|
|
|
|
|
|
|
|
222,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
1,059,242
|
|
Interest and other income, net
|
|
|
|
|
|
|
|
|
|
|
77,867
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(8,879
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
minority interests
|
|
|
|
|
|
|
|
|
|
$
|
1,128,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
Marketplaces
|
|
|
Payments
|
|
|
Communications
|
|
|
Consolidated
|
|
|
Net revenues from external
customers
|
|
$
|
3,499,137
|
|
|
$
|
1,028,455
|
|
|
$
|
24,809
|
|
|
$
|
4,552,401
|
|
Direct costs
|
|
|
2,008,215
|
|
|
|
725,616
|
|
|
|
25,821
|
|
|
|
2,759,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct contribution
|
|
|
1,490,922
|
|
|
|
302,839
|
|
|
|
(1,012
|
)
|
|
|
1,792,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses and indirect
costs of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
351,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,441,707
|
|
Interest and other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111,148
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,549,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
Marketplaces
|
|
|
Payments
|
|
|
Communications
|
|
|
Consolidated
|
|
|
Net revenues from external
customers
|
|
$
|
4,334,290
|
|
|
$
|
1,440,530
|
|
|
$
|
194,921
|
|
|
$
|
5,969,741
|
|
Direct costs
|
|
|
2,503,961
|
|
|
|
1,102,919
|
|
|
|
221,819
|
|
|
|
3,828,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct contribution
|
|
|
1,830,329
|
|
|
|
337,611
|
|
|
|
(26,898
|
)
|
|
|
2,141,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses and indirect
costs of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
718,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,422,956
|
|
Interest and other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130,021
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,916
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,547,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables summarize the allocation of net revenues
and the long-lived assets based on geography (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
U.S. net revenues
|
|
$
|
1,889,936
|
|
|
$
|
2,471,273
|
|
|
$
|
3,108,986
|
|
International net revenues
|
|
|
1,381,373
|
|
|
|
2,081,128
|
|
|
|
2,860,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
3,271,309
|
|
|
$
|
4,552,401
|
|
|
$
|
5,969,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
U.S. long-lived tangible
assets
|
|
$
|
659,423
|
|
|
$
|
750,353
|
|
|
$
|
917,887
|
|
International long-lived tangible
assets
|
|
|
80,069
|
|
|
|
86,370
|
|
|
|
100,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
739,492
|
|
|
$
|
836,723
|
|
|
$
|
1,018,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues attributed to the U.S. and International
geographies are based upon the country in which the seller,
payment recipient, advertiser or
end-to-end
service provider is located. The United Kingdom and Germany
accounted for greater than 10% of our total net revenues for the
years ended December 31, 2004, 2005, and 2006,
respectively. Long-lived assets attributed to the U.S. and
International geographies are based upon the country in which
the asset is located or owned.
90
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 5 Investments:
At December 31, 2005 and 2006, short and long-term
investments were classified as
available-for-sale
securities, except for restricted cash, and are 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
|
|
$
|
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
|
|
$
|
1,065
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,065
|
|
Corporate debt securities
|
|
|
665,418
|
|
|
|
115
|
|
|
|
(1,921
|
)
|
|
|
663,612
|
|
Government and agency securities
|
|
|
110,450
|
|
|
|
|
|
|
|
(1,409
|
)
|
|
|
109,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
776,933
|
|
|
$
|
115
|
|
|
$
|
(3,330
|
)
|
|
$
|
773,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
$
|
12,684
|
|
|
$
|
54
|
|
|
$
|
|
|
|
$
|
12,738
|
|
Corporate debt securities
|
|
|
433,192
|
|
|
|
36
|
|
|
|
(640
|
)
|
|
|
432,588
|
|
Government and agency securities
|
|
|
109,652
|
|
|
|
1
|
|
|
|
(138
|
)
|
|
|
109,515
|
|
Time deposits and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
555,528
|
|
|
$
|
91
|
|
|
$
|
(778
|
)
|
|
$
|
554,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
$
|
2,045
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,045
|
|
Corporate debt securities
|
|
|
210,159
|
|
|
|
158
|
|
|
|
|
|
|
|
210,317
|
|
Government and agency securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
212,204
|
|
|
$
|
158
|
|
|
$
|
|
|
|
$
|
212,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the fair value and gross
unrealized losses of our short-term and long-term investments,
aggregated by type of investment instrument and length of time
that individual securities have been in a continuous unrealized
loss position, at December 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Corporate debt securities
|
|
$
|
52,887
|
|
|
$
|
(15
|
)
|
|
$
|
142,546
|
|
|
$
|
(612
|
)
|
|
$
|
195,433
|
|
|
$
|
(627
|
)
|
Government and agency securities
|
|
|
|
|
|
|
|
|
|
|
91,886
|
|
|
|
(151
|
)
|
|
|
91,886
|
|
|
|
(151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
52,887
|
|
|
$
|
(15
|
)
|
|
$
|
234,432
|
|
|
$
|
(763
|
)
|
|
$
|
287,319
|
|
|
$
|
(778
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our investment portfolio consists of both corporate and
government securities that have a maximum maturity of three
years. The longer the duration of these securities, the more
susceptible they are to changes in market interest rates and
bond yields. As yields increase, those securities purchased with
a lower
yield-at-cost
show a
mark-to-market
unrealized loss. All unrealized losses are due to changes in
interest rates and bond yields. We expect to realize the full
value of all these investments upon maturity or sale. As of
December 31, 2006, the losses on these securities have an
average remaining duration of approximately two months.
Restricted cash is held primarily in money market funds and
interest bearing accounts for letters of credit related
primarily to various lease arrangements.
The estimated fair value of short and long-term investments
classified by date of contractual maturity at December 31,
2006 are as follows (in thousands):
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
One year or less (including
restricted cash of $12,738)
|
|
$
|
554,841
|
|
One year through two years
|
|
|
176,794
|
|
Two years through three years
|
|
|
33,523
|
|
Restricted cash and investments of
$2,045 in 10 years and thereafter
|
|
|
2,045
|
|
|
|
|
|
|
|
|
$
|
767,203
|
|
|
|
|
|
|
Equity
and cost method investments
We have certain investments accounted for using the equity and
cost method of accounting totaling $51.9 million in 2005
and $65.5 million in 2006. The total of these investments,
including identifiable intangible assets, deferred tax
liabilities and goodwill, are classified on our balance sheet as
long-term investments. Our consolidated results of operations
include, as a component of other income, our share of the net
income or loss of the equity method investments together with
amortization expense relating to acquired intangible assets. Our
share of the results of investees results of operations is
not significant for any period presented.
Note 6
Derivative Instruments:
Transaction
Exposure
As of December 31, 2006, we had outstanding forward foreign
exchange hedge contracts with notional values equivalent to
approximately $188.4 million with maturity dates within
31 days. The hedge contracts are used to offset changes in
non-US dollar denominated functional currency value of assets
and liabilities as a result of foreign exchange rate
fluctuations. Transaction gains and losses on the contracts and
the assets and liabilities are recognized each period in
interest and other income, net.
92
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Translation
Exposure
We consolidate the earnings of our international subsidiaries by
converting them into U.S. dollars in accordance with
Financial Accounting Standards No. 52 Foreign
Currency Translation (FAS 52). Such earnings will
fluctuate when there is a change in foreign currency exchange
rates. We enter into transactions to hedge portions of our
foreign currency denominated earnings translation exposure using
either forward exchange contracts or other instruments. All
contracts that hedge translation exposure mature ratably over
the quarter in which they are executed. During the years ended
December 31, 2005 and 2006, the realized gains and losses
related to these hedges were not significant.
Economic
Exposure
We currently charge our international subsidiaries on a monthly
basis for their use of intellectual property and technology and
for certain corporate services provided by eBay and by 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 year ended
December 31, 2006. The objective of the forward contracts
is to better 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 Financial
Accounting Standards No. 133 Accounting for
Derivative Instruments and Hedging Activities
(FAS 133), we expect the hedge of certain of these
forecasted transactions 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 accumulated 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 other income, net,
related to the forward contracts that do not receive hedge
accounting treatment pursuant to FAS 133. During the years
ended December 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 losses, net of gains, recorded to
accumulated other comprehensive income as of December 31,
2005 was $203 million and $200,000, respectively. We did
not have any economic hedges in place as of December 31,
2006.
Note 7
Balance Sheet Components:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Accounts receivable,
net:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
396,373
|
|
|
$
|
476,060
|
|
Allowance for doubtful accounts
|
|
|
(62,507
|
)
|
|
|
(68,401
|
)
|
Allowance for authorized credits
|
|
|
(11,078
|
)
|
|
|
(14,464
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
322,788
|
|
|
$
|
393,195
|
|
|
|
|
|
|
|
|
|
|
93
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Other current assets:
|
|
|
|
|
|
|
|
|
Customer accounts
|
|
$
|
324,595
|
|
|
$
|
763,757
|
|
Prepaid expenses
|
|
|
44,610
|
|
|
|
64,003
|
|
Deferred tax assets, net
|
|
|
59,274
|
|
|
|
67,879
|
|
Other
|
|
|
58,756
|
|
|
|
64,822
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
487,235
|
|
|
$
|
960,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Property and equipment,
net:
|
|
|
|
|
|
|
|
|
Computer equipment and software
|
|
$
|
916,782
|
|
|
$
|
1,274,282
|
|
Land and buildings, including
building improvements
|
|
|
319,821
|
|
|
|
355,222
|
|
Leasehold improvements
|
|
|
121,766
|
|
|
|
197,835
|
|
Furniture and fixtures
|
|
|
56,881
|
|
|
|
77,915
|
|
Aviation equipment and other
|
|
|
40,968
|
|
|
|
40,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,456,218
|
|
|
|
1,946,090
|
|
Accumulated depreciation
|
|
|
(654,616
|
)
|
|
|
(947,894
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
801,602
|
|
|
$
|
998,196
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2004, 2005 and 2006, we
capitalized $41.3 million, $37.1 million and
$79.6 million of software development costs, respectively,
the majority of which relates to major site and other product
development efforts. Total depreciation expense on our property
and equipment was $183.5 million in 2004,
$240.6 million in 2005 and $324.6 million in 2006.
During 2005, we sold a corporate aircraft at net book value for
proceeds of $28.3 million.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Accrued expenses and other
current liabilities:
|
|
|
|
|
|
|
|
|
Acquisition related accrued
expenses
|
|
$
|
27,513
|
|
|
$
|
11,092
|
|
Compensation and related benefits
|
|
|
139,080
|
|
|
|
162,889
|
|
Advertising
|
|
|
96,502
|
|
|
|
97,416
|
|
Contractors and consultants
|
|
|
31,904
|
|
|
|
59,371
|
|
Professional fees
|
|
|
61,328
|
|
|
|
62,940
|
|
Transaction loss reserve
|
|
|
20,246
|
|
|
|
32,140
|
|
VAT accrual
|
|
|
43,257
|
|
|
|
61,653
|
|
Other current liabilities
|
|
|
158,727
|
|
|
|
194,168
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
578,557
|
|
|
$
|
681,669
|
|
|
|
|
|
|
|
|
|
|
94
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Certain transactions that result in overdrafts are included in
the transaction loss reserve and are recorded as an offset to
other current assets. As of December 31, 2005 and
December 31, 2006, these balances were $30.0 million
and $47.5 million, respectively.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Accumulated other comprehensive
income
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
$
|
108,308
|
|
|
$
|
696,458
|
|
Unrealized gains on investments
|
|
|
(8,848
|
)
|
|
|
(521
|
)
|
Unrealized gains on cash flow
hedges
|
|
|
194
|
|
|
|
|
|
Estimated tax benefit on above
items
|
|
|
3,476
|
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
103,130
|
|
|
$
|
696,197
|
|
|
|
|
|
|
|
|
|
|
Note 8
Commitments and Contingencies:
Lease
Arrangements
We have lease obligations under certain other non-cancelable
operating leases. Future minimum rental payments under our
non-cancelable operating leases, at December 31, 2006, are
as follows (in thousands):
|
|
|
|
|
|
|
Operating
|
|
Year Ending December 31,
|
|
Leases
|
|
|
2007
|
|
$
|
44,178
|
|
2008
|
|
|
41,536
|
|
2009
|
|
|
35,637
|
|
2010
|
|
|
29,476
|
|
2011
|
|
|
25,420
|
|
Thereafter
|
|
|
102,094
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
278,341
|
|
|
|
|
|
|
Rent expense in the years ended December 31, 2004, 2005 and
2006 totaled $7.7 million, $14.4 million, and
$25.8 million respectively. As a result of various
subleasing arrangements that we have entered into, we are
expecting approximately $9.4 million in sublease income
through 2012. There were no material capital leases at
December 31, 2005 and 2006.
Line
of Credit
In November 2006, we entered into a credit agreement which
provides for an unsecured $1 billion five-year revolving
credit facility. Loans under the credit agreement will bear
interest at either (i) LIBOR plus a margin ranging from
0.25 percent to 0.45 percent or (ii) a formula
based on the Bank of America, or Agents, prime rate or on
the federal funds effective rate. Subject to certain conditions
stated in the credit agreement, we may borrow, prepay and
reborrow amounts under the credit facility at any time during
the term of the credit agreement. Funds borrowed under the
credit agreement may be used for working capital, capital
expenditures, acquisitions and other general corporate purposes
of eBay and its subsidiaries. We entered into the credit
agreement in order to enhance our financial flexibility. As of
December 31, 2006, we had not borrowed any funds under the
credit agreement.
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
95
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
appealed the ruling to the German Federal Supreme Court, a
hearing took place before that court in December 2006, and a
decision is expected in the first half of 2007. In September
2004, the German Federal Supreme Court issued its written
opinion in favor of Rolex in a case involving an unrelated
company, ricardo.de AG, but somewhat comparable legal theories.
Although it is not yet clear what the ultimate effect of the
reasoning of the German Federal Supreme Courts ricardo.de
decision will have when applied to eBay, we believe the
Courts decision has resulted in an increase in similar
litigation against us in Germany, although we do not currently
believe that it will require a significant change in our
business practices.
In August 2006, Louis Vuitton Malletier and Christian Dior
Couture filed two lawsuits in the Paris Court of Commerce
against eBay Inc. and eBay International AG. The complaint
alleges we have violated French tort law by negligently
broadcasting listings posted by third parties offering
counterfeit items bearing plaintiffs trademarks, and by
purchasing certain advertising keywords. The plaintiffs seek
approximately EUR 35 million in damages. In or about
September 2006 Parfums Christian Dior, Kenzo Parfums, Parfums
Givenchy, and Guerlain Société also filed a lawsuit in
the Paris Court of Commerce against eBay Inc. and eBay
International AG. The complaint alleges that we have interfered
with the selective distribution network plaintiffs have
set up in France and the European Union by allowing third
parties to post listings offering genuine perfumes and cosmetics
for sale on our sites. The plaintiffs in this suit seek
approximately EUR 9 million in damages and injunctive
relief. We filed our initial briefs responding to the first
complaint in February 2007, and initial briefs in response to
the second complaint are due in April 2007. We believe that we
have meritorious defenses to these suits and intend to defend
ourselves vigorously. Other luxury brand owners have also filed
suit against us or have threatened to do so.
In September 2001, MercExchange LLC filed a complaint against
us, our Half.com subsidiary and ReturnBuy, Inc. in the
U.S. District Court for the Eastern District of Virginia
(No. 2:01-CV-736)
alleging infringement of three patents (relating to online
consignment auction technology, multiple database searching and
electronic consignment systems) and seeking a permanent
injunction and damages (including treble damages for willful
infringement). Following a trial in 2003, the jury returned a
verdict finding that we had willfully infringed the patents
relating to multiple database searching and electronic
consignment systems, and the court entered judgment for
MercExchange in the amount of approximately $30 million,
plus pre-judgment interest and post-judgment interest. In May
2006, following appeals to the U.S. Court of Appeals for
the Federal Circuit and the U.S. Supreme Court, the Supreme
Court remanded the case back to the district court for further
action. In parallel with the federal court proceedings, at our
request, the U.S. Patent and Trademark Office agreed to
reexamine each of the patents in suit, finding that substantial
questions existed regarding the validity of the claims contained
in them. In separate actions in 2005, the Patent and Trademark
Office initially rejected all of the claims contained in the
three patents in suit. In March 2006, the Patent and Trademark
Office reiterated its earlier ruling rejecting the claims
contained in the patent that underlies the jury verdict, which
relates to electronic consignment systems. We have requested
that the district court stay all proceedings in the case pending
the final outcome of the reexamination proceedings, and
MercExchange has renewed its request that the district court
grant an injunction. The district court recently allowed
additional discovery regarding these matters, and final briefs
regarding both claims are due in March 2007. Even if successful,
our litigation of these matters will continue to be costly. As a
precautionary measure, we have modified certain functionality of
our websites and business practices in a manner which we believe
avoids any infringement of the consignment patent. For this
reason, we believe that any injunction that might be issued by
the district court will not have any impact on our business. We
also believe we have appropriate reserves for this litigation.
Nonetheless, if the modifications to the functionality of our
websites and business practices are not
96
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 June 2006, Net2Phone, Inc. filed a lawsuit in the
U.S. District Court for the District of New Jersey
(No. 06-2469)
alleging that eBay Inc., Skype Technologies S.A., and Skype Inc.
infringed five patents owned by Net2Phone relating to
point-to-point
Internet protocol. The suit seeks an injunction against
continuing infringement, unspecified damages, including treble
damages for willful infringement, and interest, costs, and fees.
We have filed an answer and counterclaims asserting that the
patents are invalid, unenforceable, and not infringed. The
parties are in the process of conducting discovery, and we
expect a trial date to be scheduled for 2008. We believe that we
have meritorious defenses and intend to defend ourselves
vigorously.
In August 2006, Peer Communications Corporation filed a lawsuit
in the U.S. District Court for the Eastern District of
Texas
(No. 6-06CV-370)
alleging that eBay Inc., Skype Technologies S.A., and Skype Inc.
infringed two patents owned by Peer Communications relating to
uniform network access. The suit seeks an injunction against
continuing infringement, unspecified damages, and interest,
costs, and fees. The parties are in the process of conducting
discovery, and a trial date has been scheduled for October 2008.
We believe that we have meritorious defenses and intend to
defend ourselves vigorously.
In September 2006, Mangosoft Intellectual Property, Inc. filed a
lawsuit in the U.S. District Court for the Eastern District
of Texas
(No. 2-06CV-390)
alleging that eBay Inc., Skype Technologies S.A., and Skype
Software S.a.r.l. infringed a patent owned by Mangosoft relating
to dynamic directory services. The suit seeks an injunction
against continuing infringement, unspecified damages, and
interest, costs, and fees. We have filed an answer and
counterclaims asserting that the patents are invalid,
unenforceable, and not infringed. We expect to receive the
courts scheduling order shortly. We believe that we have
meritorious defenses and intend to defend ourselves vigorously.
Other third parties have from time to time claimed, and others
may claim in the future, that we have infringed their
intellectual property rights. We are subject to additional
patent disputes, and expect that we will increasingly be subject
to patent infringement claims as our services expand in scope
and complexity. In particular, we expect that we may face
additional patent infringement claims involving various aspects
of our Payments and Communications businesses. We have in the
past been forced to litigate such claims. We may also become
more vulnerable to third-party claims as laws such as the
Digital Millennium Copyright Act, the Lanham Act and the
Communications Decency Act are interpreted by the courts, and as
we expand geographically into jurisdictions where the underlying
laws with respect to the potential liability of online
intermediaries like ourselves are either unclear or less
favorable. We believe that additional lawsuits alleging that we
have violated copyright or trademark laws will be filed against
us, especially in Europe. Intellectual property claims, whether
meritorious or not, are time consuming and costly to resolve,
could require expensive changes in our methods of doing
business, or could require us to enter into costly royalty or
licensing agreements.
From time to time, we are involved in other disputes or
regulatory inquiries that arise in the ordinary course of
business. The number and significance of these disputes and
inquiries are increasing as our business expands and our company
grows larger. Any claims or regulatory actions against us,
whether meritorious or not, could be time consuming, result in
costly litigation, require significant amounts of management
time, and result in the diversion of significant operational
resources.
Indemnification
Provisions
In the ordinary course of business we have included limited
indemnification provisions in certain of our agreements with
parties with whom we have commercial relations, including our
standard marketing, promotions and
application-programming-interface license agreements. Under
these contracts, we generally indemnify, hold harmless, and
agree to reimburse the indemnified party for losses suffered or
incurred by the indemnified party in connection with claims by
any third party with respect to 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
97
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
number of agreements, we have provided an indemnity for other
types of third-party claims, substantially all of which are
indemnities related to copyrights, trademarks, and patents. In
our PayPal business, we have provided an indemnity to our
payment processors in the event of certain third-party claims or
card association fines against the processor arising out of
conduct by PayPal. It is not possible to determine the maximum
potential loss under these indemnification provisions due to our
limited history of prior indemnification claims and unique facts
and circumstances involved in each particular provision. To
date, no significant costs have been incurred, either
individually or collectively, in connection with our
indemnification provisions.
Note 9
Related Party Transactions:
We have entered into indemnification agreements with each of our
directors, executive officers and certain other officers. These
agreements require us to indemnify such individuals, to the
fullest extent permitted by Delaware law, for certain
liabilities to which they may become subject as a result of
their affiliation with us.
All contracts with related parties are at rates and terms that
we believe are comparable with those entered into with
independent third parties. There were no material related party
transactions in 2004, 2005 and 2006. As of December 31,
2006, there were no significant amounts payable or amounts
receivable from related parties.
Note 10
Preferred Stock:
We are authorized, subject to limitations prescribed by Delaware
law: to issue Preferred Stock in one or more series; to
establish the number of shares included within each series; to
fix the rights, preferences and privileges of the shares of each
wholly unissued series and any related qualifications,
limitations or restrictions; and to increase or decrease the
number of shares of any series (but not below the number of
shares of a series then outstanding) without any further vote or
action by the stockholders. At December 31, 2005 and 2006,
there were 10 million shares of $0.001 par value
Preferred Stock authorized for issuance, and no shares issued or
outstanding.
Note 11
Common Stock:
Our Certificate of Incorporation, as amended, authorizes us to
issue 3,580 million shares of common stock. A portion of
the shares outstanding are subject to repurchase or forfeiture
over a four-year period from the earlier of the issuance date or
employee hire date, as applicable. At December 31, 2005 and
2006 there were 40,000 and 551,676 shares subject to
repurchase rights or forfeiture, respectively.
At December 31, 2006, we had reserved 235.7 million
shares of common stock available for future issuance under our
stock option plans, including 137.1 million shares related
to outstanding stock options. In addition, as of
December 31, 2006, we had reserved approximately
4.0 million shares of common stock available for future
issuance under our deferred stock unit plan, and approximately
5.6 million shares of common stock available for future
issuance under our employee stock purchase plan.
Treasury
Stock
In July 2006, our Board of Directors authorized the repurchase
of up to $2.0 billion of the companys common stock
within two years from the date of authorization. The stock
repurchase program was announced in July 2006. During 2006, we
repurchased 54.5 million shares of our common stock at an
average price of $30.56 per share for an aggregate purchase
price of $1.7 billion. As of December 31, 2006,
$0.3 billion remained available for further purchases under
the July 2006 program. During 2006, we also repurchased
approximately 88,000 shares from employees.
These repurchased shares are recorded as treasury stock and are
accounted for under the cost method. No repurchased shares have
been retired.
98
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The stock repurchase program may be limited or terminated at any
time without prior notice. Stock repurchases under this program
may be made through a variety of open market and privately
negotiated transactions, including structured stock repurchase
transactions or other derivative transactions, at times and in
such amounts as management deems appropriate and will be funded
from the companys working capital or other financing
alternatives. The timing and actual number of shares repurchased
will depend on a variety of factors including corporate and
regulatory requirements, price and other market conditions. The
program is intended to comply with the volume, timing and other
limitations set forth in
Rule 10b-18
under the Securities Exchange Act of 1934.
Note 12
Stock-Based Plans:
Employee
Stock Purchase Plan
We have an employee stock purchase plan for all eligible
employees. Under the plan, shares of our common stock may be
purchased over an offering period with a maximum duration of two
years at 85% of the lower of the fair market value on the first
day of the applicable offering period or on the last day of the
six-month purchase period. Employees may purchase shares having
a value not exceeding 10% of their gross compensation during an
offering period. During the years ended December 31, 2004,
2005, and 2006, employees purchased approximately
1.2 million, 1.4 million, and 1.6 million shares
at average prices of $20.66, $25.55 and $27.32 per share,
respectively. At December 31, 2006, approximately
5.6 million shares of common stock were reserved for future
issuance. Our employee stock purchase plan contains an
evergreen provision that automatically increases, on
each January 1, the number of shares reserved for issuance
under the employee stock purchase plan by the number of shares
purchased under this plan in the preceding calendar year.
Deferred
Stock Unit Plan
We have a deferred stock unit plan under which deferred stock
units have been granted to new non-employee directors elected to
our Board of Directors after December 31, 2002. Under this
plan, each new director receives a one-time grant of deferred
stock units equal to the result of dividing $150,000 by the fair
market value of our common stock on the date of grant. Each
deferred stock unit constitutes an unfunded and unsecured
promise by us to deliver one share of our common stock (or the
equivalent value thereof in cash or property at our election).
Each deferred stock unit award granted to a new non-employee
director upon election to the Board vests 25% one year from the
date of grant, and at a rate of 2.08% per month thereafter.
If the services of the director are terminated at any time, all
rights to the unvested deferred stock units shall also
terminate. In addition, directors may elect to receive, in lieu
of annual retainer and committee chair fees and at the time
these fees would otherwise be payable (i.e., on a quarterly
basis in arrears for services provided), fully vested deferred
stock units with an initial value equal to the amount of these
fees. Deferred stock units are payable following the termination
of a directors tenure as a director. All eBay officers,
directors and employees are eligible to receive awards under the
plan, although, to date, awards have been made only to new
non-employee directors. As of December 31, 2006,
36,056 units have been awarded under this plan.
Other
Equity Incentive Plans
We have equity incentive plans for directors, officers and
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 December 31, 2006,
614.8 million shares were authorized under our equity
incentive plans. Shares of restricted stock and restricted stock
units issued under these plans that have not vested are subject
to repurchase by us or forfeiture at such times as determined by
the Board of Directors, typically three to five years. At
December 31, 2006, 98.5 million shares were available
for future grant.
99
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Employee
Savings Plans
We have a savings plan, which qualifies under
Section 401(k) of the Internal Revenue Code. Participating
employees may contribute up to 25% of their annual salary, but
not more than statutory limits. In 2004, 2005 and 2006, we
contributed one dollar for each dollar a participant
contributed, with a maximum contribution of $1,500 per
employee. Our
non-U.S. employees
are covered by various other savings plans. Our expenses for
these plans were $5.6 million in 2004, $8.6 million in
2005 and $14.9 million in 2006.
Stock-Based
Compensation
We adopted FAS 123(R) using the modified prospective
transition method beginning January 1, 2006. Accordingly,
during 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 2006
has been reduced for estimated forfeitures. When estimating
forfeitures, we consider voluntary termination behaviors as well
as trends of actual option forfeitures.
Valuation
Assumptions
We calculated the fair value of each option award on the date of
grant using the Black-Scholes option pricing model. The
following weighted-average assumptions were used for each
respective period:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2004
|
|
2005
|
|
2006
|
|
Risk-free interest rates
|
|
2.5%
|
|
3.8%
|
|
4.7%
|
Expected life
|
|
3 years
|
|
3 years
|
|
3 years
|
Dividend yield
|
|
0%
|
|
0%
|
|
0%
|
Expected volatility
|
|
49%
|
|
36%
|
|
36%
|
Our computation of expected volatility for 2006 was based on a
combination of historical and market-based implied volatility
from traded options on our stock. Prior to 2006, our computation
of expected volatility was based on historical volatility. Our
computation of expected life was determined based on historical
experience of similar awards, giving consideration to the
contractual terms of the stock-based awards, vesting schedules
and expectations of future employee behavior. The interest rate
for periods within the contractual life of the award is based on
the U.S. Treasury yield curve in effect at the time of
grant.
100
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock-Based
Compensation
Stock-based compensation expense related to stock options and
employee stock purchases for 2004, 2005 and 2006 was allocated
as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Cost of net revenues
|
|
$
|
233
|
|
|
$
|
1,881
|
|
|
$
|
32,981
|
|
Sales and marketing
|
|
|
136
|
|
|
|
8,696
|
|
|
|
96,547
|
|
Product development
|
|
|
654
|
|
|
|
6,468
|
|
|
|
81,489
|
|
General and administrative
|
|
|
4,809
|
|
|
|
14,727
|
|
|
|
106,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
expense
|
|
|
5,832
|
|
|
|
31,772
|
|
|
|
317,410
|
|
Tax benefit
|
|
|
(4,117
|
)
|
|
|
(13,023
|
)
|
|
|
(97,572
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense,
net of tax
|
|
$
|
1,715
|
|
|
$
|
18,749
|
|
|
$
|
219,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to adopting FAS 123(R), we presented all tax benefits
resulting from the exercise of stock options as operating cash
flows in our statements of cash flows. FAS 123(R) requires
cash flows resulting from excess tax benefits to be classified
as a part of cash flows from financing activities. Excess tax
benefits are realized tax benefits from tax deductions for
exercised options in excess of the deferred tax asset
attributable to stock compensation costs for such options. As a
result of adopting FAS 123(R), $92.4 million of excess
tax benefits for the year ended December 31, 2006 have been
classified as a financing cash inflow. Cash received from option
exercises under all share-based payment arrangements for the
years ended December 31, 2004, 2005 and 2006, was
$650.6 million, $599.8 million and
$313.5 million, respectively. Total stock-based
compensation costs included in capitalized development costs was
$8.8 million for the year ended December 31, 2006.
There was no stock-based compensation costs included in
capitalized development costs during 2005 and 2004.
Prior to the adoption of FAS 123(R), the intrinsic value of
Skypes and Shopping.coms unvested common stock
options assumed in the acquisition were recorded as unearned
stock-based compensation. Upon the adoption of FAS 123(R)
in January 2006, the unearned stock-based compensation balance
of $45.5 million was reclassified to additional paid-in
capital.
Pro Forma
Information for Periods Prior to the Adoption of
FAS 123(R)
Pro forma information regarding option grants made to our
employees and directors and employee stock purchases is as
follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
Net income, as reported
|
|
$
|
778,223
|
|
|
$
|
1,082,043
|
|
Add: Amortization of stock-based
compensation expense determined under the intrinsic value
method, net of tax
|
|
|
1,715
|
|
|
|
18,749
|
|
Deduct: Total stock-based
compensation expense determined under fair value based method,
net of tax
|
|
|
(190,935
|
)
|
|
|
(248,260
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
589,003
|
|
|
$
|
852,532
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic Reported
|
|
$
|
0.59
|
|
|
$
|
0.79
|
|
Pro forma
|
|
$
|
0.45
|
|
|
$
|
0.63
|
|
Diluted Reported
|
|
$
|
0.57
|
|
|
$
|
0.78
|
|
Pro forma
|
|
$
|
0.43
|
|
|
$
|
0.61
|
|
101
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Option Activity
The following table summarizes stock option activity under our
equity incentive plans as of and for the year ended
December 31, 2006 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Contractual Term
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
(in years)
|
|
Intrinsic Value
|
|
|
Outstanding at January 1, 2006
|
|
|
129,109
|
|
|
$
|
28.19
|
|
|
|
|
|
|
|
Granted and assumed
|
|
|
38,834
|
|
|
|
35.07
|
|
|
|
|
|
|
|
Exercised
|
|
|
(16,233
|
)
|
|
|
16.58
|
|
|
|
|
|
|
|
Forfeited/expired/cancelled
|
|
|
(15,096
|
)
|
|
|
37.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
136,614
|
|
|
|
30.53
|
|
|
6.62
|
|
$
|
644,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at
December 31, 2006
|
|
|
128,697
|
|
|
|
30.17
|
|
|
6.59
|
|
|
637,311
|
|
Options exercisable at
December 31, 2006
|
|
|
75,569
|
|
|
|
26.23
|
|
|
6.23
|
|
|
576,802
|
|
The aggregate intrinsic value was calculated as the difference
between the exercise price of the underlying awards and the
quoted price of our common stock for the 61.6 million
options that were
in-the-money
at December 31, 2006.
The weighted average grant-date fair value of options granted
during the years 2004, 2005 and 2006 was $12.12, $11.70 and
$10.47, respectively. During the years 2004, 2005 and 2006, the
aggregate intrinsic value of options exercised under our equity
incentive plans was $1,017.3 million, $719.2 million
and $283.6 million, respectively, determined as of the date
of option exercise. As of December 31, 2006, there was
approximately $395.1 million of total unrecognized
compensation cost related to stock options granted under our
equity incentive plans. That cost is expected to be recognized
over a weighted-average period of three years.
Restricted
Stock Units and Nonvested Shares
Restricted stock units and nonvested shares were awarded to
employees under our equity incentive plans. In general,
restricted stock units and nonvested shares vest over three to
five years and are subject to the employees continuing
service to the company. The cost of restricted stock units and
nonvested shares is determined using the fair value of our
common stock on the date of the grant. The compensation expense
is recognized over the vesting period.
102
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restricted
Stock Units Activity
A summary of the status of and changes in restricted stock units
granted under our equity incentive plans as of December 31,
2006 and changes during the year ended December 31, 2006 is
presented below (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant-Date Fair
|
|
|
|
Shares
|
|
|
Value (per share)
|
|
|
Outstanding at January 1, 2006
|
|
|
|
|
|
$
|
|
|
Awarded
|
|
|
526
|
|
|
|
28.13
|
|
Vested
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(18
|
)
|
|
|
28.15
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
508
|
|
|
|
28.13
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at
December 31, 2006
|
|
|
388
|
|
|
|
|
|
As of December 31, 2006, there was approximately
$10.5 million of unrecognized compensation cost related to
restricted stock units granted under our equity incentive plans.
That cost is expected to be recognized over a weighted-average
period of two years.
Nonvested
Shares Activity
A summary of the status of and changes in nonvested shares
granted under our equity incentive plans and assumed in
acquisitions as of December 31, 2006 and changes during the
year ended December 31, 2006 is presented below (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant-Date Fair
|
|
|
|
Shares
|
|
|
Value (per share)
|
|
|
Nonvested at January 1, 2006
|
|
|
40
|
|
|
$
|
43.82
|
|
Granted
|
|
|
721
|
|
|
|
33.12
|
|
Vested
|
|
|
(90
|
)
|
|
|
38.09
|
|
Forfeited
|
|
|
(105
|
)
|
|
|
39.15
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2006
|
|
|
566
|
|
|
|
39.72
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2006, the fair value of
awards vested under our stock plans was $2.5 million,
determined as of the date of vesting. There were no awards
vesting in 2005 and 2004. As of December 31, 2006, there
was approximately $12.8 million of unrecognized
compensation cost related to nonvested shares granted under our
equity incentive plans. That cost is expected to be recognized
over a weighted-average period of three years.
Non-stockholder
approved stock option grants
Prior to our initial public offering in 1998, our Board of
Directors approved three stock option grants outside of formally
approved stockholder plans to two independent directors upon
their joining our Board of Directors and to an executive officer
upon his hiring. All of such option grants vested over 25% one
year from the date of grant, with the remainder vesting at a
rate of 2.08% per month thereafter and expire 10 years
from the date of grant. The options granted to the independent
directors were immediately exercisable, subject to repurchase
rights held by us, which lapse over the vesting period. The
terms and conditions of such grants are otherwise identical to
nonqualified option grants made under the stock option plan in
effect at that time. At the time of such grants, members of our
Board of Directors (and their affiliates) beneficially owned in
excess of 90% of our then outstanding voting interests. We have
103
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
previously disclosed such option grants in our Prospectus filed
with the Securities and Exchange Commission on
September 25, 1998 in connection with our initial public
offering under the headings Management
Director Compensation and Management
Compensation Arrangements. Prior to 2004, one director and
the executive officer had exercised all available options under
their respective grants. At December 31, 2006, one grant
remained outstanding to one independent director, with
768,184 shares to be issued upon exercise of the
outstanding options at an average exercise price of $0.39. There
were no shares remaining available under these non-stockholder
approved plans for future grants as of December 31, 2006.
Note 13
Income Taxes:
The components of pretax income before cumulative effect of
accounting change and minority interest in consolidated
companies for the years ended December 31, 2004, 2005 and
2006 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
United States
|
|
$
|
820,892
|
|
|
$
|
943,575
|
|
|
$
|
776,553
|
|
International
|
|
|
307,338
|
|
|
|
605,802
|
|
|
|
770,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,128,230
|
|
|
$
|
1,549,377
|
|
|
$
|
1,547,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes is composed of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
246,795
|
|
|
$
|
382,925
|
|
|
$
|
460,262
|
|
State and local
|
|
|
57,099
|
|
|
|
89,717
|
|
|
|
122,396
|
|
Foreign
|
|
|
23,546
|
|
|
|
79,838
|
|
|
|
66,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
327,440
|
|
|
|
552,480
|
|
|
|
649,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
27,836
|
|
|
|
(37,651
|
)
|
|
|
(146,872
|
)
|
State and local
|
|
|
(3,565
|
)
|
|
|
(7,106
|
)
|
|
|
(32,331
|
)
|
Foreign
|
|
|
(7,826
|
)
|
|
|
(40,438
|
)
|
|
|
(48,647
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,445
|
|
|
|
(85,195
|
)
|
|
|
(227,850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
343,885
|
|
|
$
|
467,285
|
|
|
$
|
421,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a reconciliation of the difference between the
actual provision for income taxes and the provision computed by
applying the federal statutory rate of 35% for 2004, 2005, and
2006 to income before income taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Provision at statutory rate
|
|
$
|
394,881
|
|
|
$
|
542,282
|
|
|
$
|
541,471
|
|
Permanent differences:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign income taxed at different
rates
|
|
|
(82,267
|
)
|
|
|
(149,463
|
)
|
|
|
(230,350
|
)
|
Change in valuation allowance
|
|
|
2,000
|
|
|
|
12,587
|
|
|
|
35,652
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
26,179
|
|
State taxes, net of federal benefit
|
|
|
35,008
|
|
|
|
53,697
|
|
|
|
58,542
|
|
Tax credits
|
|
|
(6,975
|
)
|
|
|
(9,136
|
)
|
|
|
(1,142
|
)
|
Other
|
|
|
1,238
|
|
|
|
17,318
|
|
|
|
(8,934
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
343,885
|
|
|
$
|
467,285
|
|
|
$
|
421,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities are recognized for the
future tax consequences of differences between the carrying
amounts of assets and liabilities and their respective tax bases
using enacted tax rates in effect for the year in which the
differences are expected to reverse. Significant deferred tax
assets and liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss and credits
|
|
$
|
132,832
|
|
|
$
|
111,133
|
|
Accruals, allowances and
stock-based compensation
|
|
|
71,504
|
|
|
|
192,276
|
|
Net unrealized (gains) losses
|
|
|
9,616
|
|
|
|
4,024
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
213,952
|
|
|
|
307,433
|
|
Valuation allowance
|
|
|
(77,712
|
)
|
|
|
(69,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
136,240
|
|
|
|
237,656
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Acquisition-related intangibles
|
|
|
(212,702
|
)
|
|
|
(171,422
|
)
|
Depreciation and amortization
|
|
|
(79,946
|
)
|
|
|
(30,139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(292,648
|
)
|
|
|
(201,561
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(156,408
|
)
|
|
$
|
36,095
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, our federal, foreign and state net
operating loss carryforwards, or NOLs, for income tax purposes
were approximately $44.9 million, $324.6 million, and
$54.4 million, respectively. The utilization of a portion
of the NOLs is subject to an annual limitation under Section 382
of the Internal Revenue Code due to a change of ownership.
However, we do not believe such annual limitation will impact
our realization of the NOLs. If not utilized, the federal net
operating loss carryforwards will begin to expire in 2019, the
state net operating loss carryforwards will begin to expire in
2009, and the foreign net operating loss carryforwards will
begin to expire in 2009. As of December 31, 2006, our state
tax credit carryforwards for income tax purposes were
approximately $7.9 million. If not utilized, the state tax
credit carryforwards will begin to expire in 2015.
105
eBay
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We receive tax deductions from the gains realized by employees
on the exercise of certain non-qualified stock options for which
the benefit is recognized as a component of stockholders
equity. Historically, we have evaluated the deferred tax assets
relating to these stock option deductions along with our other
deferred tax assets and concluded that a valuation allowance is
not required for that portion of the total deferred tax assets
that are not considered more likely than not to be realized in
future periods. To the extent that the deferred tax assets with
a valuation allowance become realizable in future periods, we
will have the ability, subject to carryforward limitations, to
benefit from these amounts. When realized, the tax benefits of
tax deductions related to stock options are accounted for as an
increase to additional paid-in capital rather than a reduction
of the income tax provision. Our profitability coupled with the
level of stock option deductions generated during 2006 resulted
in the utilization of net operating losses related to deferred
tax assets for stock option deductions. Accordingly the
valuation allowance related to these deferred tax assets was
eliminated in 2006, resulting in an increase of
$42.9 million in additional paid-in capital. Beginning in
2006, deferred tax assets related to stock option deductions
were recognized in the periods when the benefit was received.
We have not provided for U.S. federal income and foreign
withholding taxes on $1.9 billion of
non-U.S. subsidiaries
undistributed earnings as of December 31, 2006, because
such earnings are intended to be indefinitely reinvested in the
operations and potential acquisitions of our International
operations. Upon distribution of those earnings in the form of
dividends or otherwise, we would be subject to U.S. income
taxes (subject to an adjustment for foreign tax credits). It is
not practicable to determine the income tax liability that might
be incurred if these earnings were to be distributed.
Note 14
Subsequent Events:
During January 2007, eBays Board of Directors
authorized the expansion of the share repurchase program to
provide for the repurchase of up to an additional
$2.0 billion of eBays common stock within the next
two years. See discussion of our stock repurchase program at
Note 11 Common Stock.
On February 13, 2007, we completed the acquisition of
StubHub, an online marketplace for the resale of event tickets,
for a total purchase price of approximately $307 million,
which included StubHubs net cash at the time of closing of
$21 million. Under the purchase method of accounting, the
total purchase price will be allocated to the tangible and
identifiable intangible assets acquired and liabilities assumed
based on their estimated fair values.
106
Supplementary
Data Quarterly Financial Data-Unaudited:
The following tables present certain unaudited consolidated
quarterly financial information for each of the eight quarters
ended December 31, 2006. This quarterly information has
been prepared on the same basis as the Consolidated Financial
Statements and includes all adjustments necessary to state
fairly the information for the periods presented.
Quarterly
Financial Data
(Unaudited, in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
1,031,724
|
|
|
$
|
1,086,303
|
|
|
$
|
1,105,515
|
|
|
$
|
1,328,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
845,355
|
|
|
$
|
894,463
|
|
|
$
|
905,140
|
|
|
$
|
1,089,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
256,291
|
|
|
$
|
291,560
|
|
|
$
|
254,971
|
|
|
$
|
279,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share-basic
|
|
$
|
0.19
|
|
|
$
|
0.22
|
|
|
$
|
0.19
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share-diluted
|
|
$
|
0.19
|
|
|
$
|
0.21
|
|
|
$
|
0.18
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,343,442
|
|
|
|
1,351,375
|
|
|
|
1,357,239
|
|
|
|
1,394,566
|
|
Diluted
|
|
|
1,382,150
|
|
|
|
1,379,088
|
|
|
|
1,387,038
|
|
|
|
1,426,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
1,390,419
|
|
|
$
|
1,410,784
|
|
|
$
|
1,448,637
|
|
|
$
|
1,719,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
1,106,822
|
|
|
$
|
1,113,901
|
|
|
$
|
1,128,642
|
|
|
$
|
1,363,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
248,282
|
|
|
$
|
249,994
|
|
|
$
|
280,896
|
|
|
$
|
346,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share-basic
|
|
$
|
0.18
|
|
|
$
|
0.18
|
|
|
$
|
0.20
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share-diluted
|
|
$
|
0.17
|
|
|
$
|
0.17
|
|
|
$
|
0.20
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,406,309
|
|
|
|
1,411,925
|
|
|
|
1,406,382
|
|
|
|
1,380,577
|
|
Diluted
|
|
|
1,437,581
|
|
|
|
1,435,757
|
|
|
|
1,426,112
|
|
|
|
1,402,749
|
|
107
eBay
Inc.
FINANCIAL
STATEMENT SCHEDULE
The Financial Statement Schedule II VALUATION
AND QUALIFYING ACCOUNTS is filed as part of this Annual Report
on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged/
|
|
|
Charged to
|
|
|
Charges
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Credited to
|
|
|
Other
|
|
|
Utilized/
|
|
|
End of
|
|
|
|
Period
|
|
|
Net Income
|
|
|
Account
|
|
|
Write-offs
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
Allowance for Doubtful Accounts
and Authorized Credits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004
|
|
$
|
48,069
|
|
|
$
|
90,942
|
|
|
|
|
|
|
$
|
(60,378
|
)
|
|
$
|
78,633
|
|
Year ended December 31, 2005
|
|
|
78,633
|
|
|
|
89,499
|
|
|
|
|
|
|
|
(94,547
|
)
|
|
|
73,585
|
|
Year ended December 31, 2006
|
|
|
73,585
|
|
|
|
100,729
|
|
|
|
|
|
|
|
(91,449
|
)
|
|
|
82,865
|
|
Allowance for PayPal
Transaction Losses*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004
|
|
|
25,798
|
|
|
|
50,459
|
|
|
|
|
|
|
|
(45,869
|
)
|
|
|
30,388
|
|
Year ended December 31, 2005
|
|
|
30,388
|
|
|
|
73,773
|
|
|
|
|
|
|
|
(53,889
|
)
|
|
|
50,272
|
|
Year ended December 31, 2006
|
|
|
50,272
|
|
|
|
126,439
|
|
|
|
|
|
|
|
(97,185
|
)
|
|
|
79,526
|
|
Tax Valuation
Allowance*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004
|
|
|
165,831
|
|
|
|
(7,229
|
)
|
|
|
57,526
|
|
|
|
|
|
|
|
216,128
|
|
Year ended December 31, 2005
|
|
|
216,128
|
|
|
|
13,196
|
|
|
|
3,240
|
|
|
|
(154,852
|
)
|
|
|
77,712
|
|
Year ended December 31, 2006
|
|
|
77,712
|
|
|
|
28,513
|
|
|
|
6,420
|
|
|
|
(42,868
|
)
|
|
|
69,777
|
|
|
|
* |
Prior year balances related to Allowance for PayPal Transaction
Losses and Tax Valuation Allowance were adjusted to conform to
the current years presentation.
|
108
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of
San Jose, State of California, on the 27th day of February,
2007.
eBay Inc.
|
|
|
|
By:
|
/s/ Margaret
C. Whitman
|
Margaret C. Whitman
President, Chief Executive Officer
and Director
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Margaret C.
Whitman, Robert H. Swan, Douglas Jeffries, and Michael R.
Jacobson, and each or any one of them, each with the power of
substitution, his or her
attorney-in-fact,
to sign any amendments to this report, with exhibits thereto and
other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that
each of said
attorneys-in-fact,
or his substitute or substitutes, may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
|
|
|
|
|
|
Principal Executive Officer:
|
|
Principal Financial Officer:
|
|
By:
|
|
/s/ Margaret
C.
Whitman Margaret
C. Whitman
President, Chief Executive Officer and
Director
|
|
By:
|
|
/s/ Robert
H. Swan
Robert
H. Swan
Senior Vice President, Chief Financial
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Accounting Officer:
|
|
|
|
|
|
By:
|
|
/s/ Douglas
Jeffries Douglas
Jeffries
Vice President, Chief Accounting Officer
|
109
Additional
Directors
|
|
|
|
|
|
|
By:
|
|
/s/ Pierre
M.
Omidyar Pierre
M. Omidyar
Founder, Chairman of the Board and Director
|
|
By:
|
|
/s/ Fred
D.
Anderson Fred
D. Anderson
Director
|
|
|
|
|
|
|
|
By:
|
|
/s/ Edward
W.
Barnholt Edward
W. Barnholt
Director
|
|
By:
|
|
/s/ Philippe
Bourguignon Philippe
Bourguignon
Director
|
|
|
|
|
|
|
|
By:
|
|
/s/ Scott
D.
Cook Scott
D. Cook
Director
|
|
By:
|
|
/s/ William
C.
Ford, Jr. William
C. Ford, Jr.
Director
|
|
|
|
|
|
|
|
By:
|
|
/s/ Robert
C.
Kagle Robert
C. Kagle
Director
|
|
By:
|
|
/s/ Dawn
G.
Lepore Dawn
G. Lepore
Director
|
|
|
|
|
|
|
|
By:
|
|
/s/ Richard
T.
Schlosberg, III Richard
T. Schlosberg, III
Director
|
|
By:
|
|
/s/ Thomas
J.
Tierney Thomas
J. Tierney
Director
|
Date: February 27, 2007
110
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filed with
|
|
Incorporated by Reference
|
No.
|
|
Exhibit Description
|
|
this 10-K
|
|
Form
|
|
File No.
|
|
Date Filed
|
|
2.01
|
|
Sale and Purchase Agreement dated
as of September 11, 2005, by and among Registrant, Skype
Technologies S.A. and the parties identified on Schedule 1
thereto.
|
|
|
|
8-K
|
|
000-24821
|
|
9/15/2005
|
2.02
|
|
Earn Out Agreement dated as of
September 11, 2005, by and among Registrant, Skype
Technologies S.A. and the parties identified on Schedule I
thereto.
|
|
|
|
8-K
|
|
000-24821
|
|
9/15/2005
|
2.03
|
|
Form of Option Assumption
Agreement.
|
|
|
|
8-K
|
|
000-24821
|
|
10/18/2005
|
2.04
|
|
Form of EMI Rollover Agreement.
|
|
|
|
8-K
|
|
000-24821
|
|
10/18/2005
|
2.05
|
|
Amendment No. 1 to Earn Out
Agreement dated as of December 29, 2005, by and among
Registrant, Skype Technologies S.A. and the parties identified
on Schedule I thereto.
|
|
|
|
10-K
|
|
000-24821
|
|
2/24/2006
|
3.01
|
|
Registrants Amended and
Restated Certificate of Incorporation.
|
|
|
|
10-Q
|
|
000-24821
|
|
7/27/2005
|
3.02
|
|
Registrants Amended and
Restated By-laws.
|
|
|
|
10-Q
|
|
000-24821
|
|
11/13/1998
|
4.01
|
|
Form of Specimen Certificate for
Registrants Common Stock.
|
|
|
|
S-1
|
|
333-59097
|
|
8/19/1998
|
4.02
|
|
Registration Rights Agreement
dated as of September 11, 2005, by and among Registrant and
the parties identified on Schedule I thereto.
|
|
|
|
8-K
|
|
000-24821
|
|
9/15/2005
|
10.01+
|
|
Form of Indemnity Agreement
entered into by Registrant with each of its directors and
executive officers.
|
|
|
|
S-1
|
|
333-59097
|
|
7/15/1998
|
10.02+
|
|
Registrants 1996 Stock
Option Plan, as amended.
|
|
|
|
S-1
|
|
333-59097
|
|
7/15/1998
|
10.03+
|
|
Registrants 1997 Stock
Option Plan, as amended.
|
|
X
|
|
|
|
|
|
|
10.04+
|
|
Registrants 1998 Equity
Incentive Plan, as amended.
|
|
X
|
|
|
|
|
|
|
10.05+
|
|
Form of Stock Bonus Agreement
under Registrants 1998 Equity Incentive Plan.
|
|
|
|
10-Q
|
|
000-24821
|
|
10/27/2004
|
10.06+
|
|
Form of Stock Option Agreement
under Registrants 1998 Equity Incentive Plan.
|
|
|
|
10-Q
|
|
000-24821
|
|
10/27/2004
|
10.07+
|
|
Form of Restricted Stock Unit
Agreement under Registrants 1998 Equity Incentive Plan.
|
|
X
|
|
|
|
|
|
|
10.08+
|
|
Registrants Amended and
Restated 1998 Employee Stock Purchase Plan.
|
|
|
|
S-8
|
|
333-117913
|
|
8/4/2004
|
10.09+
|
|
Registrants
1998 Directors Stock Option Plan, as amended.
|
|
X
|
|
|
|
|
|
|
10.10+
|
|
Registrants 1999 Global
Equity Incentive Plan, as amended.
|
|
X
|
|
|
|
|
|
|
10.11+
|
|
Form of Stock Option Agreement
under Registrants 1999 Global Equity Incentive Plan.
|
|
|
|
10-Q
|
|
000-24821
|
|
10/27/2004
|
10.12+
|
|
Form of Restricted Stock Unit
Agreement under Registrants 1999 Global Equity Incentive
Plan.
|
|
X
|
|
|
|
|
|
|
10.13+
|
|
Registrants 2001 Equity
Incentive Plan, as amended.
|
|
X
|
|
|
|
|
|
|
10.14+
|
|
Form of Stock Option Agreement
under Registrants 2001 Equity Incentive Plan.
|
|
|
|
10-Q
|
|
000-24821
|
|
10/27/2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filed with
|
|
Incorporated by Reference
|
No.
|
|
Exhibit Description
|
|
this 10-K
|
|
Form
|
|
File No.
|
|
Date Filed
|
|
10.15+
|
|
Registrants 2003 Deferred
Stock Unit Plan, as amended.
|
|
X
|
|
|
|
|
|
|
10.16+
|
|
Form of 2003 Deferred Stock Unit
Plan Electing Director Award Agreement, as amended.
|
|
|
|
10-Q
|
|
000-24821
|
|
4/25/2006
|
10.17+
|
|
Form of 2003 Deferred Stock Unit
Plan New Director Award Agreement, as amended.
|
|
|
|
10-Q
|
|
000-24821
|
|
4/25/2006
|
10.18+
|
|
eBay Incentive Plan.
|
|
|
|
10-Q
|
|
000-24821
|
|
7/27/2005
|
10.19+
|
|
Summary of Compensation Payable to
Named Executive Officers.
|
|
|
|
10-Q
|
|
000-24821
|
|
4/25/2006
|
10.20+
|
|
Employment Letter Agreement dated
January 16, 1998, between Margaret C. Whitman and
Registrant.
|
|
|
|
S-1
|
|
333-59097
|
|
8/19/1998
|
10.21+
|
|
Stock Option Agreement dated
June 9, 1998 between Registrant and Scott D. Cook.
|
|
|
|
10-K
|
|
000-24821
|
|
3/31/2003
|
10.22+
|
|
Employment Letter Agreement dated
August 20, 1998, between Michael R. Jacobson and Registrant.
|
|
|
|
S-1
|
|
333-59097
|
|
9/1/1998
|
10.23+
|
|
Offer Letter to William C. Cobb
dated November 22, 2000.
|
|
|
|
10-K
|
|
000-24821
|
|
3/25/2002
|
10.24+
|
|
Offer Letter to John Donahoe dated
November 16, 2004.
|
|
|
|
8-K
|
|
000-24821
|
|
2/24/2005
|
10.25+
|
|
Offer Letter to Elizabeth Axelrod
dated December 7, 2004 and addendum thereto dated
February 16, 2005.
|
|
|
|
8-K
|
|
000-24821
|
|
3/10/2005
|
10.26+
|
|
Offer Letter to Robert H. Swan
dated February 10, 2006.
|
|
|
|
8-K
|
|
000-24821
|
|
2/21/2006
|
10.27+
|
|
Letter Agreement regarding
supplemental relocation assistance dated July 12, 2006 to
Robert H. Swan.
|
|
|
|
8-K
|
|
000-24821
|
|
7/13/2006
|
10.28+
|
|
Separation Agreement dated as of
August 8, 2006 between Registrant and Maynard Webb.
|
|
|
|
10-Q
|
|
000-24821
|
|
10/30/2006
|
10.29+
|
|
Separation Agreement dated as of
September 11, 2006 between Registrant and Jeffrey Jordan.
|
|
|
|
10-Q
|
|
000-24821
|
|
10/30/2006
|
10.30+
|
|
Consulting Agreement dated as of
September 11, 2006 between Registrant and Jeffrey Jordan.
|
|
|
|
10-Q
|
|
000-24821
|
|
10/30/2006
|
10.31
|
|
Credit Agreement, dated as of
November 7, 2006, by and among Registrant, Bank of America,
N.A., as Administrative Agent, and the other lenders named from
time to time therein.
|
|
|
|
8-K
|
|
000-24821
|
|
11/13/2006
|
21.01
|
|
List of Subsidiaries.
|
|
X
|
|
|
|
|
|
|
23.01
|
|
PricewaterhouseCoopers LLP consent.
|
|
X
|
|
|
|
|
|
|
24.01
|
|
Power of Attorney (see signature
page).
|
|
X
|
|
|
|
|
|
|
31.01
|
|
Certification of Registrants
Chief Executive Officer, as required by Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
X
|
|
|
|
|
|
|
31.02
|
|
Certification of Registrants
Chief Financial Officer, as required by Section 302 of the
Sarbanes-Oxley Act of 2002.
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X
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Filed with
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Incorporated by Reference
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No.
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Exhibit Description
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this 10-K
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Form
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File No.
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Date Filed
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32.01
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Certification of Registrants
Chief Executive Officer, as required by Section 906 of the
Sarbanes-Oxley Act of 2002.
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X
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32.02
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Certification of Registrants
Chief Financial Officer, as required by Section 906 of the
Sarbanes-Oxley Act of 2002.
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X
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+ |
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Indicates a management contract or compensatory plan or
arrangement |