eBay 2006 Annual Report Download - page 54

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 PayPal’s 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 Skype’s 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 PayPal’s 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
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