eBay Inc. Reports Third Quarter 2008 Results

SAN JOSE, Calif.--(BUSINESS WIRE)--eBay Inc. (Nasdaq:EBAY) today reported financial results for its third quarter ended September 30, 2008. The ecommerce company posted third quarter revenue of $2.12 billion, up $228 million from the same period last year. Net income on a GAAP basis was $492 million, or $0.38 per diluted share, and non-GAAP net income was $592 million, or $0.46 per diluted share.

“Overall, we are pleased with the performance of the portfolio this past quarter,” said eBay Inc. President and CEO John Donahoe. “We took a number of steps during the quarter to further strengthen our business and better align our cost structure to invest and compete. We will continue to stay focused on connecting consumers on our various ecommerce platforms, maintaining financial discipline and capitalizing on new opportunities for growth.”

eBay continues to benefit from an increasingly diversified portfolio of businesses. While Marketplaces transaction revenue still represents a majority of revenue for the company, revenue growth rates were helped by growth in PayPal, Skype and global classifieds. The company’s global footprint helped it benefit year over year from strength in other currencies relative to the U.S. dollar.

GAAP operating margin increased to 24.7% for the quarter, compared to (49.6%) for the same period last year. Non-GAAP operating margin increased to 31.8% for the quarter, compared to 31.4% for the same period last year. The year-over-year increase in non-GAAP operating margin is due primarily to higher margins from each of the business units, which more than offset the growth from lower-margin businesses, primarily PayPal and Skype.

eBay Inc. generated $693 million of operating cash flow during the third quarter. Free cash flow during the quarter was $543 million.

Quarterly Business Highlights

• eBay Inc. was honored by the White House and U.S. Department of Commerce with the National Medal of Technology for leadership in technology and innovation that has enabled millions of entrepreneurs to participate in the global ecommerce market.
• Marc Andreessen, founder of Netscape, Loudcloud and Ning, joined the eBay Inc. board of directors.
• eBay Inc. repurchased approximately 25 million shares of its outstanding common stock at a cost of approximately $623 million. Since the inception of the stock repurchase program in the third quarter of 2006, the company has repurchased approximately $5.3 billion of its common stock.
• eBay lowered listing fees for the Buy It Now format by more than 70% and extended listing periods to 30 days, up from seven.
• The company’s global classifieds businesses averaged 84 million unique visitors per month during the quarter, representing an increase of 55% year-over-year.
• StubHub entered into a partnership with the NFL’s New York Jets franchise to auction personal seat licenses for the football team’s new stadium.
• PayPal launched merchant services deals with Walmart.com, William Hill (U.K.), Continental Airlines, American Eagle Outfitters, BagsOK (China), newegg (Canada) and OfficeMax, among others.
• Payment volume from PayPal’s merchant services business exceeded the volume received from the eBay marketplace for the first time.
• Skype surpassed 13 million concurrent users at certain peak times.
• Skype-to-Skype minutes reached nearly 16 billion, a 63% increase year over year.

Financial Highlights (presented in millions, except per share data and percentages)

		Third Quarter
		2008		2007		Change
Net revenue		$2,118		$1,889		$228		12%
GAAP
Net income (loss)		$492		($936)(a)		$1,428		-
Earnings (loss) per diluted share		$0.38		($0.69)(a)		$1.07		-
Non-GAAP
Net income		$592		$564		$28		5%
Earnings per diluted share		$0.46		$0.41		$0.05		11%

(a) Includes goodwill impairment charge of $1.39 billion recorded in the third quarter of 2007, which was not deductible for tax purposes.

Quarterly Business Unit Discussion

Marketplaces

The Marketplaces business unit, which consists of eBay, Shopping.com, StubHub, Kijiji and other ecommerce sites, had a solid third quarter, generating $1.38 billion in revenue, representing 4% year-over-year growth, 53% of which was generated outside the U.S. The business unit saw strong growth in advertising, StubHub and classifieds. Revenue from our text and graphical advertising partnerships grew 127% year over year. Gross merchandise volume was $14.28 billion for the quarter, a decrease of 1% over the third quarter of 2007. Marketplaces continues to focus on customer-facing initiatives designed to make transactions on the eBay platform safer and its various global sites easier to use, while enhancing selection in a uniquely eBay way.

Payments

PayPal had a strong quarter with $597 million in net revenue, an increase of 27% year-over-year. Net total payment volume (TPV) for the quarter was $14.81 billion, an increase of 28% year over year. The net revenue and net TPV growth was driven primarily by the continued excellent growth of merchant services globally and increased penetration on eBay. Global active registered accounts increased to 65.3 million, representing 19% year over year growth. Globally, PayPal will continue to focus on greater penetration into the Marketplaces business and the acquisition of new merchants.

Communications

Skype continued its robust growth trajectory, reporting $143 million in revenue for the quarter, representing 46% year-over-year growth. Skype added 32 million registered users in the quarter, ending the period with more than 370 million registered users around the world. In addition to growing its user base, Skype is focused on product strategies to enhance customer engagement.

Other Selected Financial Results

• Taxes — The GAAP effective tax rate for the quarter was 13%, compared to (4%) for the third quarter of 2007 and 19% for the second quarter of 2008. The non-GAAP effective tax rate for the quarter was 17% compared to 10% for the third quarter of 2007 and 22% for the second quarter of 2008. The decrease in the sequential non-GAAP effective tax rate is due to changes in the estimated geographic mix of the company’s taxable income for the year.
• Cash and cash equivalents — The company’s cash and cash equivalents totaled $3.34 billion at September 30, 2008, compared to $4.22 billion at December 31, 2007.

Other Updates

• On October 6, 2008, the company announced that it had entered into an agreement to acquire Bill Me Later, acquired Danish classifieds sites dba.dk and bilbasen.dk and planned to reduce its global workforce by approximately 10%.

Business Outlook

The following updated guidance reflects current business trends as well as the impact of the acquisitions and the impact of the reorganization of the company’s workforce noted above. The impact of the approximately $70-$80 million restructuring-related charge will be taken primarily in the fourth quarter and is included in GAAP guidance but excluded from non-GAAP guidance.

• Full year 2008 — eBay now expects net revenues in the range of $8.525 to $8.675 billion with GAAP earnings per diluted share in the range of $1.32 to $1.34 and non-GAAP earnings per diluted share in the range of $1.69 to $1.71.
• Fourth quarter 2008 — eBay expects net revenues in the range of $2.020 to $2.170 billion with GAAP earnings per diluted share in the range of $0.25 to $0.27 and non-GAAP earnings per diluted share in the range of $0.39 to $0.41.

Quarterly Conference Call

eBay will host a conference call to discuss third quarter results at 2:00 p.m. Pacific Time today. A live webcast of the conference call, together with a slide presentation that includes supplemental financial information and reconciliations of certain non-GAAP measures to their nearest comparable GAAP measures, can be accessed through the company’s Investor Relations web site at http://investor.ebay.com. In addition, an archive of the webcast will be accessible through the same link.

About eBay Inc.

Founded in 1995, eBay Inc. connects hundreds of millions of people around the world every day, empowering them to explore new opportunities and innovate together. eBay Inc. does this by providing the Internet platforms of choice for global commerce, payments and communications. Since its inception, eBay Inc. has expanded to include some of the strongest brands in the world, including eBay, PayPal, Skype, StubHub, Shopping.com, and others. eBay Inc. is headquartered in San Jose, California.

Non-GAAP Financial Measures

This press release includes the following financial measures defined as “non-GAAP financial measures” by the Securities and Exchange Commission, or SEC: non-GAAP net income, non-GAAP earnings per diluted share, non-GAAP operating margin, non-GAAP effective tax rate, and free cash flow. These measures may be different from non-GAAP financial measures used by other companies. The presentation of this financial information, which is not prepared under any comprehensive set of accounting rules or principles, is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with generally accepted accounting principles. For a reconciliation of these non-GAAP financial measures to the nearest comparable GAAP measures, see “Non-GAAP Measures of Financial Performance,” “Reconciliation of GAAP Operating Margin to Non-GAAP Operating Margin,” “Reconciliation of GAAP Net (Loss) Income to Non-GAAP Net Income,” “Reconciliation of GAAP to Non-GAAP Effective Tax Rate,” “Reconciliation of Operating Cash Flows to Free Cash Flow” and “Business Outlook” included in this press release.

Forward-Looking Statements

This press release contains forward-looking statements relating to the future performance of eBay and its consolidated subsidiaries that are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. The company’s actual results could differ materially from those predicted and reported results should not be considered as an indication of future performance. Factors that could cause or contribute to such differences include, but are not limited to: the impact of the credit crisis, possible economic downturn and other changes in political, business and economic conditions, including conditions that affect consumer confidence or ecommerce growth; fluctuations in foreign exchange rates; the company’s ability to profitably expand its business model to new types of merchandise and sellers; and, the company’s ability to profitably integrate, manage and grow businesses that have been acquired recently or may be acquired in the future; the company’s need to increasingly achieve growth from its existing users, particularly in its more established markets; the company’s ability to deal with the increasingly competitive ecommerce environment, including competition for its sellers from other trading sites and other means of selling, and competition for its buyers from other merchants, online and offline; the company’s need to manage an increasingly large enterprise with a broad range of businesses of varying degrees of maturity and in many different geographies; the effect of management changes and business initiatives; the company’s need and ability to manage other regulatory, tax and litigation risks as its services are offered in more jurisdictions and applicable laws become more restrictive and any changes the company may make to its product offerings in response to such risk; the regulatory, intellectual property, competitive and other risks specific to Skype; the competitive, regulatory, credit card association, and other risks specific to PayPal, especially as it continues to expand geographically; the company’s ability to upgrade and develop its systems, infrastructure and customer service capabilities at reasonable cost; and the company’s ability to maintain site stability and performance on all of its sites while adding new products and features in a timely fashion. Except as explicitly described, the forward-looking statements in this release do not include the potential impact of any acquisitions that may be announced and/or completed after the date hereof.

More information about factors that could affect the company’s operating results is included under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the company’s most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q, copies of which may be obtained by visiting the company’s investor relations web site at http://investor.ebay.com or the SEC’s web site at www.sec.gov. Undue reliance should not be placed on the forward-looking statements in this release, which are based on information available to the company on the date hereof. eBay assumes no obligation to update such statements.

eBay Inc. Unaudited Condensed Consolidated Balance Sheet (In Thousands)
		December 31, 2007			September 30, 2008
ASSETS
Current assets:
Cash and cash equivalents		$	4,221,191		$	3,342,717
Short-term investments			676,264			301,136
Accounts receivable, net			480,557			436,456
Funds receivable and customer accounts			1,513,578			1,555,835
Other current assets			230,915			372,202
Total current assets			7,122,505			6,008,346
Long-term investments			138,237			133,629
Property and equipment, net			1,120,452			1,215,469
Goodwill			6,257,153			6,172,133
Intangible assets, net			596,038			467,610
Other assets			131,652			242,970
Total assets		$	15,366,037		$	14,240,157
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	156,613		$	217,272
Funds payable and amounts due to customers			1,513,578			1,555,835
Accrued expenses and other current liabilities			1,151,139			804,634
Deferred revenue and customer advances			166,495			180,777
Income taxes payable			111,754			96,215
Total current liabilities			3,099,579			2,854,733
Deferred and other tax liabilities, net			510,557			639,926
Other liabilities			51,299			51,803
Total liabilities			3,661,435			3,546,462
Total stockholders’ equity			11,704,602			10,693,695
Total liabilities and stockholders' equity		$	15,366,037		$	14,240,157

eBay Inc. Unaudited Condensed Consolidated Statement of (Loss) Income (In Thousands, Except Per Share Amounts)
		Three Months Ended September 30,								Nine Months Ended September 30,
		2007				2008				2007				2008
Net revenues (2)		$	1,889,220			$	2,117,531			$	5,491,723			$	6,505,415
Cost of net revenues (1)			446,521				560,963				1,256,999				1,648,478
Gross profit			1,442,699				1,556,568				4,234,724				4,856,937
Operating expenses (1):
Sales and marketing			485,240				457,216				1,406,260				1,497,181
Product development			164,879				190,842				450,411				554,393
General and administrative			287,447				331,715				849,284				1,020,672
Amortization of acquired intangible assets			51,888				52,720				150,791				162,472
Impairment of goodwill			1,390,938				-				1,390,938				-
Total operating expenses			2,380,392				1,032,493				4,247,684				3,234,718
(Loss) income from operations (3)			(937,693	)			524,075				(12,960	)			1,622,219
Interest and other income, net			38,363				38,556				102,350				91,551
Interest expense			(2,728	)			11				(10,004	)			(3,474	)
(Loss) income before income taxes			(902,058	)			562,642				79,386				1,710,296
Provision for income taxes			(33,577	)			(70,423	)			(262,021	)			(298,014	)
Net (loss) income		$	(935,635	)		$	492,219			$	(182,635	)		$	1,412,282
Net (loss) income per share:
Basic		$	(0.69	)		$	0.38			$	(0.13	)		$	1.08
Diluted		$	(0.69	)		$	0.38			$	(0.13	)		$	1.07
Weighted average shares:
Basic			1,354,786				1,288,937				1,360,830				1,311,501
Diluted			1,354,786				1,297,484				1,360,830				1,322,126
(1) Includes stock-based compensation as follows:
Cost of net revenues		$	9,132			$	10,395			$	27,543			$	31,908
Sales and marketing			22,192				23,745				64,501				72,096
Product development			21,374				23,458				56,751				71,627
General and administrative			27,891				32,653				83,365				93,850
Total stock-based compensation		$	80,589			$	90,251			$	232,160			$	269,481

(2)	Net revenues for the three-month period ended September 30, 2008 were positively impacted by foreign currency translation of approximately $65 million compared to the same period of the prior year. Net revenues for the nine-month period ended September 30, 2008 were positively impacted by foreign currency translation of approximately $296 million compared to the same period of the prior year. On a sequential basis, net revenues for the three-month period ended September 30, 2008 were negatively impacted by foreign currency translation of approximately $36 million.
(3)	Operating income for the three-month period ended September 30, 2008 was positively impacted by foreign currency translation of approximately $44 million compared to the same period of the prior year. Operating income for the nine-month period ended September 30, 2008 was positively impacted by foreign currency translation of approximately $170 million compared to the same period of the prior year. On a sequential basis, operating income for the three-month period ended September 30, 2008 was negatively impacted by foreign currency translation of approximately $19 million.

eBay Inc. Unaudited Condensed Consolidated Statement of Cash Flows (In Thousands)
		Three Months Ended September 30,								Nine Months Ended September 30,
		2007				2008				2007				2008
Cash flows from operating activities: