eBay 1999 Annual Report Download - page 27

auction operations, B&B typically experiences its strongest revenue growth in the second and fourth quarters,
while Kruse International experiences its strongest revenue growth in the third quarter.
Due to the inherent difficulty in forecasting net revenues, it is also difficult to forecast income statement
expense categories as a percentage of net revenues. Quarterly and annual income statement expense categories
as a percentage of net revenues may be significantly different from historical or projected rates. In general, the
Company expects costs to increase in absolute dollars across all income statement categories. As more users
come to the site for practical and one-time items like computers and automobiles, the Company expects that the
number of transactions per registered user will continue to decline. Further, the Company expects its gross
margin to remain at levels lower than those experienced historically due primarily to the effects of depreciation
from recently purchased and expected future purchases of site equipment and software, increases in site
operations personnel and consulting costs, and growth within the customer support organization.
Although the operations and results of both B&B and Kruse show seasonal trends in net revenues and
expenses, annual results of operations are relatively stable when compared to the online business. These trends
may not be indicative of future results as the Company leverages the acquired companies’ expertise and expands
into premium online sales and online automobile sales. To a large extent, the changes in the consolidated results
of operations for the periods presented are due to the growth of the online business, thus discussions about year
over year changes will primarily focus on the online operation.
Net Revenues
The Company derives revenue from a variety of sources including: listing, success, and featured item fees
for transactions occurring online, and transaction related fees, commissions and rental income in traditional
auction operations. Neither Billpoint nor alando had significant operations prior to 1999, and no significant
revenue was generated from either company in 1999. The Company’s net revenues increased from $41.4 million
to $86.1 million in the years ended December 31, 1997 and 1998, and further increased to $224.7 million in the
year ended December 31, 1999. The increases from 1997 to 1998 and from 1998 to 1999 were almost solely the
result of increased use of the eBay site. Net revenues in the acquired Companies remaining comparable with
prior periods. Increases in online net revenues were a result of the growth of the eBay site, which is reflected in
the growth in the number of registered users, listings, and gross merchandise sales. The Company expects that
future revenue growth will be largely driven by the online services, including revenue derived from the Billpoint
services.
The Company has reviewed Securities and Exchange Commission Staff Accounting Bulletin (‘‘SAB’’)
No. 101, ‘‘Revenue Recognition in Financial Statements,’’ and its effect on the recognition of listing and featured
item fee revenue. Although the Company believes the effect of SAB 101 on historical listing and featured item
fee revenue is insignificant, eBay has adopted the provision for placement fee revenue in the first quarter of 2000.
As such, listing and featured item fee revenue will be recognized ratably over the estimated period of the listing
for sale.
Cost of Net Revenues
Cost of net revenues for online operations consists primarily of costs associated with customer support and
site operations. These costs include: compensation and allocated overhead for customer support and site
operations personnel, ISP connectivity charges and depreciation. Cost of net revenues in traditional auction
operations primarily includes: compensation for auction, appraisal, and customer support personnel and direct
auction costs, such as event site rental. Cost of net revenues increased in absolute dollars from $8.4 million or
20.3% of net revenues in 1997 to $16.1 million or 18.7% of net revenues in 1998, and further increased to
$57.6 million or 25.6% of net revenues in 1999. The increases from 1997 to 1998 and from 1998 to 1999 were
due almost entirely to the eBay online business, including the operations of alando and Billpoint in 1999.
Changes in offline cost of net revenues roughly paralleled the changes in net revenues during the periods
reported. Increases in absolute dollar expenditures for the eBay online service during the periods from 1997 to
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