eBay 2004 Annual Report Download - page 41

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. To the extent we establish a valuation allowance or change the allowance
in a period, we reÖect the change with a corresponding increase or decrease in our tax provision in our
consolidated statement of income. Where the change in the valuation allowance relates to the deduction for
employee stock option exercises, the change is reÖected as a credit to additional paid-in capital. As employee
stock option exercises are highly dependent upon our stock price, it is extremely diÇcult to predict the amount
of deductions that will be generated from future option exercises and, therefore, for us to ascertain the amount
of deferred tax assets related to employee stock option exercises that may be realized in future periods. At
December 31, 2004, we have maintained an allowance on certain net operating losses generated from
deductions for employee stock option expenses based on our assessment that it is more likely than not that the
deferred tax assets related to these net operating losses will not be realized. The deferred tax asset, net of a
valuation allowance of $158.6 million, totaled $58.1 million at December 31, 2004 and was oÅset by deferred
tax liabilities of $183.7 million resulting in a net deferred tax liability of $125.5 million. In addition, due to our
signiÑcant anticipated international expansion, we have not provided for U.S. federal income and foreign
withholding taxes on non-U.S. subsidiaries' undistributed earnings as of December 31, 2004, because such
earnings are intended to be reinvested indeÑnitely. In the event that our future international expansion plans
change and such amounts are not reinvested indeÑnitely, we would be subject to U.S. income taxes partially
oÅset by foreign tax credits. The following table illustrates the eÅective tax rates for 2002, 2003, and 2004 (in
thousands, except percentages):
Years Ended December 31,
2002 2003 2004
Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $145,946 $206,738 $ 343,885
EÅective tax rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37% 32% 30%
Historically, these provisions have adequately provided for our actual income tax liabilities. However,
unexpected or signiÑcant future changes in trends could result in a material impact to future consolidated
statements of income and cash Öows. Based on our results for the year ended December 31, 2004, 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 $11.3 million. The following analysis
demonstrates, for illustrative purposes only, the potential eÅect such a one-percentage point deviation change
would have upon our consolidated Ñnancial 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 2004 Points
Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 332,603 $ 343,885 $ 355,167
Income from operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,070,524 1,059,242 1,047,960
Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 789,505 778,223 766,941
Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.58 $ 0.57 $ 0.56
Advertising and Other Non-Transaction Revenues
A portion of our net revenues result from fees associated with advertising and other non-transaction
services in our U.S. Marketplace, International Marketplace and Payments segments. Net revenues from
advertising are derived principally from the sale of online banner and sponsorship advertisements for cash and
through barter arrangements. Other non-transaction net revenues are derived principally from contractual
arrangements with third parties that provide transaction services to eBay users and from oÉine services
provided by wholly-owned subsidiaries that were divested in the second half of 2002. Advertising and other
non-transaction net revenues, including barter transactions, totaled 9%, 2% and 3% of our consolidated net
revenues for the years ended December 31, 2002, 2003 and 2004, respectively, and were primarily generated
by our U.S. Marketplace segment. Revenue from barter arrangements totaled $10.1 million in both 2002 and
2003, and $13.3 million in 2004. Certain judgments are involved in the determination of the appropriate
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