eBay Earnings 2020-12-31
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the fiscal year ended December 31 , 2020
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the Transition Period from to .
Commission file number 001-37713
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
| , | ||||||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||
Registrant’s telephone number, including area code:
(408 ) 376-7008
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol | Name of exchange on which registered | ||||||
| Securities registered pursuant to Section 12(g) of the Act: | ||||||||
| None | ||||||||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | ||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 30, 2020, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $35,169,294,304 based on the closing sale price as reported on The Nasdaq Global Select Market.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy statement for the registrant’s 2021 Annual Meeting of Stockholders.
eBay Inc.
Form 10-K
For the Fiscal Year Ended December 31, 2020
TABLE OF CONTENTS
| Page | ||||||||
| Part I | ||||||||
| Item 1. | Business | |||||||
| Item 1A. | Risk Factors | |||||||
| Item 1B. | Unresolved Staff Comments | |||||||
| Item 2. | Properties | |||||||
| Item 3. | Legal Proceedings | |||||||
| Item 4. | Mine Safety Disclosures | |||||||
| Part II | ||||||||
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |||||||
| Item 6. | Selected Financial Data | |||||||
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||||
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | |||||||
| Item 8. | Financial Statements and Supplementary Data | |||||||
| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | |||||||
| Item 9A. | Controls and Procedures | |||||||
| Item 9B. | Other Information | |||||||
| Part III | ||||||||
| Item 10. | Directors, Executive Officers and Corporate Governance | |||||||
| Item 11. | Executive Compensation | |||||||
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |||||||
| Item 13. | Certain Relationships and Related Transactions, and Director Independence | |||||||
| Item 14. | Principal Accountant Fees and Services | |||||||
| Part IV | ||||||||
| Item 15. | Exhibits and Financial Statement Schedule | |||||||
| Item 16. | Form 10-K Summary | |||||||
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PART I
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that involve expectations, plans or intentions (such as those relating to future business, future results of operations or financial condition, including with respect to the ongoing effects of COVID-19, new or planned features or services, or management strategies including our strategic review). You can identify these forward-looking statements by words such as “may,” “will,” “would,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and other similar expressions. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those discussed in “Item 1A: Risk Factors” of this Annual Report on Form 10-K, as well as in our consolidated financial statements, related notes, and the other information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission (“SEC”). We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such 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 2025 Hamilton Avenue, San Jose, California, 95125, and our telephone number is (408) 376-7008. Unless otherwise expressly stated or the context otherwise requires, when we refer to “we,” “our,” “us,” or “eBay” in this annual report on Form 10-K, we mean eBay Inc. and its consolidated subsidiaries. Notably, on February 13, 2020, we completed the sale of StubHub to viagogo for $4.05 billion in cash, subject to certain adjustments, and on July 20, 2020, we entered into a definitive agreement to transfer our Classifieds business to Adevinta ASA (“Adevinta”). We believe that the transaction with Adevinta will close by the end of the first quarter of 2021, subject to receipt of certain regulatory approvals and other customary closing conditions.
eBay Inc. is a global commerce leader through our Marketplace platforms which connect millions of buyers and sellers in more than 190 markets around the world. The platforms include our online marketplace located at www.ebay.com and its localized counterparts, including off-platform businesses in South Korea, Japan, and Turkey, as well as eBay’s suite of mobile apps. Our platforms are accessible through an online experience (e.g. desktop and laptop computers), iOS and Android mobile devices (e.g. smartphones and tablets) and our application programming interfaces (“APIs,” platform access for third party software developers).
Agreement to Transfer eBay Classifieds Group
On July 20, 2020, we entered into a definitive agreement to transfer our Classifieds business to Adevinta for $2.5 billion in cash, subject to certain adjustments, and approximately 540 million shares in Adevinta. Together, the total consideration payable under the definitive agreement is valued at approximately $9.2 billion, based on the closing trading price of Adevinta’s outstanding shares on the Oslo Stock Exchange on July 17, 2020. We believe that the transaction will close by the end of the first quarter of 2021, subject to receipt of certain regulatory approvals and other customary closing conditions. Please see the information in “Item 1A: Risk Factors” under the caption “The closing of the proposed transfer of our Classifieds business is subject to various risks and uncertainties, may not be completed in accordance with expected plans or on the currently contemplated terms or timeline, or at all, and may not generate the anticipated returns to eBay, and the pending transfer may be disruptive to our Classifieds business.”
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Our Strategy
As a global commerce leader and third-party marketplace, our technologies and services are designed to provide buyers choice and a breadth of relevant inventory from around the globe, and to enable sellers’ access to eBay’s 185 million buyers worldwide. Our business model and pricing are designed so that our business is successful when our sellers are successful. We earn revenue primarily through fees collected on successfully closed sales and our growth drivers of managed payments and first-party advertising.
eBay’s strategy is to leverage technology to enhance the marketplace experience for our customers, to drive growth in Gross Merchandise Volume (as discussed below, “GMV”), while increasing the rate of revenue growth through our managed payments and advertising initiatives, and delivering healthy operating margins. Following the announcement of the StubHub and Classifieds transactions, we stated our intention as an enterprise focused on our Marketplace platforms to embark on a multi-year journey to build more compelling experiences for our consumers, become the partner of choice for sellers and strengthen trust in relationships with buyers.
eBay’s managed payments has continued to expand and scale globally following the expiration of the PayPal Operating Agreement in July 2020, delivering buyers and sellers a simplified end-to-end payments experience. Starting with five of our largest markets — the U.S., U.K., Germany, Australia and Canada — we have focused on transitioning business sellers to the new payments platform, and we launched managed payments for consumer sellers in the fourth quarter of 2020. As a result, as of December 31, 2020 there were over 1 million sellers active in managed payments. We also announced the first quarter of 2021 expansion plans to France, Italy, and Spain, along with enablement for eBay for Charity sellers in the U.S. and U.K. to leverage the experience. Through managed payments, we’re able to provide a simpler experience for current and next-generation customers, consistent with today’s retail standards. We can offer buyers more flexibility and choice in how they’d like to pay and offer sellers a more streamlined way to run their businesses. We continue to be on track to intermediate payments for the majority of our sellers in 2021 and to complete the full roll-out for payments by 2022.
Our advertising business remains focused on growing our Promoted Listings (a first-party advertising offering) while reducing non-strategic, third-party advertising. We are providing sellers with data-driven recommendations to optimize their conversion, while testing and building more technology features to drive growth, position eBay as the seller’s platform of choice, and surface relevant inventory to buyers.
Our Customer Offerings
We provide a number of features for our buyers and sellers that align with our approach to becoming the partner of choice for sellers and driving trusted buyer relationships. These offerings are designed to build trust and confidence on our platform, and drive GMV.
In order to further strengthen our buyers’ confidence and trust in our services, we offer “eBay Money Back Guarantee,” which allows buyers to receive their money back if the item they ordered does not arrive, is faulty or damaged, or does not match the listing. eBay Money Back Guarantee covers most items purchased on the eBay platform in the U.S., the U.K., Germany, and Australia, through a qualifying payment method. eBay also provides buyers with a “Best Price Guarantee,” which offers buyers in the U.S. 110% of the price difference if they find an item for less on a competitor’s website within 48 hours of making a purchase. In Australia, Best Price Guarantee beats deals from approved retailers by 5%, and in the U.K., offers price matching. In 2020, eBay launched "Authenticity Guarantee," our new independent authentication service on all watches sold over $2,000 in the U.S., and expanded the service to the collectible sneakers category, authenticating select sneaker styles and brands on the marketplace. Additionally, to meet consumer demand for top products, eBay launched a new destination to feature officially “Certified Refurbished” products from top brands.
On the eBay Marketplace platforms, the majority of transactions in the U.S., the U.K., and Germany include free shipping for buyers, and we encourage sellers to offer free returns. We also work to create confidence in our ability to meet buyers’ delivery and tracking expectations. In the U.K. and Australia, we launched eBay Virtual Tracking Number to substantially increase package tracking and provide buyers and sellers with ease and confidence.
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To become the partner of choice for sellers, eBay continuously invests in resources and programs to grow and enhance the seller tools ecosystem. Seller initiated offers allows sellers to send custom deals directly to buyers, and we launched several new features in this offering and drove $1.25 billion in GMV in 2020. Additionally, a new collaboration with UPS launched in the U.S., helps provide sellers with more options to support their shipping needs and access to discounted rates, saving them time and money. We supported seller profitability during the holiday season by working with the carriers on our platform to eliminate peak season shipping surcharges on eBay. For sellers, eBay also launched new features like “Image Clean-Up,” using computer vision to enable sellers to create cleaner images in their listing and optimize for Google Shopping and “Time Away,” which allows sellers to update their listings and protect their on-time delivery record while they are on vacation and provides buyers with more accurate shipping estimates. Seller Hub capabilities continue to grow with the launch of several new features such as expanded “Multi-User Account Access” authentication capabilities, real-time competitive pricing, and traffic data and enhancement of our competitive pricing analytics to include the search of item specifics in addition to Terapeak.
During the COVID-19 pandemic, we put specific seller protections in place to support our sellers’ businesses during carrier delays, not penalizing sellers for delayed shipping or canceled orders to protect their seller performance standards. To accommodate for United States Postal Service (USPS) delays, we protected sellers to ensure they were covered for any shipping defects and delays beyond their control by automatically extending estimated delivery dates as necessary to give buyers more reasonable expectations of when their items will arrive. We also waited to evaluate any “item not received” cases until after the extended, estimated delivery date.
To help sellers keep positive momentum in their business during the pandemic, we increased the number of monthly, zero insertion fee listings that we provide to most sellers. We also allowed all eBay Store subscribers to list additional, fixed price listings for free in order to test new inventory that buyers may be searching for in the COVID-19 environment, and we offered monthly, zero insertion fee listings in select categories for sellers enrolled in managed payments.
In 2020, eBay launched new features like Dark Mode to ease the shopping experience and create more accessibility for our customers; “Great Price Signal” to highlight competitively priced items from trusted sellers; and “Secure Local PickUp” to help connect local buyers and sellers, allowing them to receive items quicker and more secure through the use of a QR code. More than 1,000,000 QR codes have been scanned since Secure Local Pickup’s launch in July. eBay’s Developer Program launched new APIs for managed payments, Offers to Buyers, eBay for Charity, and more, for developers to help their businesses thrive with eBay.
Our Impact and Responsibility
eBay’s purpose is to empower people and create economic opportunity for all through our technology for our global community of users. Every day, people build businesses on our platforms. With low cost of entry for sellers, we offer a highly accessible way for all types of users to interact in a global marketplace that’s inclusive and connects people of all backgrounds. Accordingly, we prioritize our corporate responsibility efforts to impact the areas of economic empowerment and sustainable commerce. Key economic programs include eBay for Charity, the eBay Foundation, and our small business enablement efforts, such as our Up & Running program.
eBay for Charity empowers buyers and sellers to support charities around the world. In 2020, eBay for Charity matched donations made to Feeding America, Direct Relief, and Opportunity Fund, and offered U.S. shoppers the opportunity to buy Gifts That Give Back to support COVID-19 relief efforts. In 2020, nearly $123 million was raised by buyers and sellers to support charities via eBay for Charity.
The eBay Foundation helps to build economically vibrant and thriving communities. In 2020, the eBay Foundation granted over $16 million to support small businesses, untapped communities, and COVID-19 relief efforts, and offered an additional $2,500 per employee in matching gifts for a total of up to $5,000 per employee. To date, the eBay Foundation has awarded more than $65 million to more than 1,800 nonprofits.
We are champions of inclusive commerce and in 2020, born out of the pandemic and an extension of our Retail Revival program, we launched the Up & Running initiative to help more small businesses start and grow online. Through the program, new eBay sellers received fee discounts and resources to run their business on eBay. The Up & Running program saw global adaptations in over 25 markets around the world, and expanded efforts with the Up & Running Grants program, which will reward a number of eBay U.S. small business sellers a grant package worth $10,000.
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eBay continued its work to reach its goal of 100% renewable energy by 2025. We joined the U.S. EPA’s Green Power Program. Additionally, we strive to integrate best practices in our offices and data center operations and to continually reduce our environmental footprint. This year, eBay was also recognized for its commitment to sustainability and responsible business on the DJSI World and North American Indices, and ranked on the CDP A list.
Financial Information
We measure our footprint in our addressable market according to GMV. GMV consists of the total value of all successfully closed transactions between users on our platforms during the applicable period, regardless of whether the buyer and seller actually completed the transaction. In 2020, we generated $100 billion in GMV, of which approximately 62 percent was generated outside the U.S. We believe that GMV provides a useful measure of the overall volume of closed transactions that flow through our platforms in a given period, notwithstanding the inclusion in GMV of closed transactions that are not ultimately consummated.
At the end of 2020, eBay had 185 million active buyers and over 19 million sellers. In 2020, we had approximately 1.6 billion live listings globally. The term “active buyer” means, as of any date, all buyer accounts that successfully closed a transaction on Marketplace platforms within the previous 12-month period. Buyers may register more than once and, as a result, may have more than one account. “Sellers” include consumer-to-consumer (“C2C”) and business-to-consumer (“B2C”) businesses and individual sellers on the platform.
We generate revenue primarily from the transactions we successfully enable and through marketing services, and our growth initiatives of payments and advertising. The majority of our revenue comes from a take rate on the GMV of transactions closed on our platforms. We define “take rate” as net transaction revenues divided by GMV.
Our platforms are designed to enable our buyers and sellers to leverage our economies of scale and capital investments, such as in sales and marketing, mobile, customer acquisition, technology innovation and customer service.
Notable Business Transactions in 2020
We regularly review and manage our investments to ensure that they support eBay’s strategic direction and complement our disciplined approach to value creation, profitability and capital allocation. In the first quarter of 2020, eBay completed the sale of StubHub to viagogo for $4.05 billion in cash, subject to certain adjustments. In the third quarter of 2020, we entered into a definitive agreement to transfer eBay Classifieds Group to Adevinta; see “Agreement to Transfer eBay Classifieds Group” above for more details.
Competition
We encounter vigorous competition in our business from numerous sources. Our users can list, sell, buy, and pay for similar items through a variety of competing online, mobile and offline channels. These include, but are not limited to, retailers, distributors, liquidators, import and export companies, auctioneers, catalog and mail-order companies, classifieds, directories, search engines, commerce participants (consumer-to-consumer, business-to-consumer and business-to-business), 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, mobile and offline channels for those new offerings. We compete on the basis of price, product selection and services, and global scale.
For more information regarding competitive factors impacting our business, see the information in “Item 1A: Risk Factors” under the captions “Substantial and increasingly intense competition worldwide in ecommerce may harm our business” and “We are subject to regulatory activity and antitrust litigation under competition laws that could adversely impact our business.”
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Government Regulation
Government regulation impacts key aspects of our business. In particular, we are subject to laws and regulations that affect the ecommerce industry in many countries where we operate. With nine additional states adopting Internet sales tax laws in 2020, some buyers across the U.S. encounter sales tax for the first time on eBay. To date, more than 40 states have implemented Internet sales tax and digital service tax legislation. Additionally, a digital service tax (DST) was implemented in Italy, India and Turkey in 2020, and we are complying with the legislation. In the U.K. the government also approved the law to introduce a 2% DST. Tax collection responsibility and the additional costs associated with complex sales and use tax collection, remittance and audit requirements could create additional burdens for buyers and sellers on our websites and mobile platforms.
For more information regarding regulatory risks, see the information in “Item 1A: Risk Factors” under the caption “Our business is subject to extensive government regulation and oversight” and “Our business and its users are subject to Internet sales tax and sales reporting and record-keeping obligations.”
Seasonality
We expect transaction activity patterns on our platforms to mirror general consumer buying patterns. Please see the additional information in “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Seasonality.”
Technology
The eBay Marketplace uses a combination of proprietary technologies and services as well as technologies and services provided by others. We have developed intuitive user interfaces, buyer, seller and developer tools and transaction processing, database and network applications that help enable our users to reliably and securely complete transactions on our sites. Our technology infrastructure simplifies the storage and processing of large 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.
In support of our commitment to innovation and a better customer experience, we have been on a multi-year evolution to modernize our marketplace. Through technologies like artificial intelligence, we are anticipating the needs of buyers, sellers and developers, empowering entrepreneurs looking to grow their business, and making the platform more accessible to everyone. We aim to create highly personalized and inspiring shopping experiences powered by advanced technologies.
For information regarding technology-related risks, see the information in “Item 1A: Risk Factors” under the captions “Systems failures or cyberattacks and resulting interruptions in the availability of or degradation in the performance of our websites, applications, products or services could harm our business” and “Regulation in the areas of privacy and protection of user data could harm our business.”
Intellectual Property
We regard the protection of our intellectual property, including our trademarks (particularly those covering the eBay name), patents, copyrights, domain names, trade dress and trade secrets as critical to our success. We aggressively protect our intellectual property rights by relying on federal, state and common law rights in the U.S. and internationally, as well as a variety of administrative procedures. We also rely on contractual restrictions to protect our proprietary rights in products and services. We routinely enter into confidentiality and invention assignment agreements with our employees and contractors and nondisclosure agreements with parties with whom we conduct business to limit access to and disclosure of our proprietary information.
We pursue the registration of our domain names, trademarks and service marks in the U.S. and internationally. Additionally, we have filed U.S. and international patent applications covering certain aspects of our proprietary technology. Effective trademark, copyright, patent, domain name, trade dress and trade secret protection is typically expensive to maintain and may require litigation. We must protect our intellectual property rights and other proprietary rights in an increasing number of jurisdictions, a process that is expensive and time consuming and may not be successful.
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We have registered our core brands as trademarks and domain names in the U.S. and a large number of other jurisdictions and have in place an active program to continue to secure trademarks and domain names that correspond to our brands in markets of interest. If we are unable to register or protect our trademarks or domain names, we could be adversely affected in any jurisdiction in which our trademarks or domain names are not registered or protected. 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.
From time to time, third parties have claimed - and others will likely claim in the future - that we have infringed their intellectual property rights. We are typically involved in a number of such legal proceedings at any time. Please see the information in “Item 3: Legal Proceedings” and in “Item 1A: Risk Factors” under the captions “The listing or sale by our users of items that allegedly infringe the intellectual property rights of rights owners, including pirated or counterfeit items, may harm our business,” and “We may be unable to adequately protect or enforce our intellectual property rights and face ongoing risk from patent litigation and allegations by third parties that we are infringing their intellectual property rights.”
Human Capital Management
As of December 31, 2020, we employed approximately 12,700 people globally. Approximately 6,000 of our employees were located in the U.S. eBay has robust people-focused programs to support and retain our employees globally and to attract our future employees. Our recruitment, development, compensation and benefits and wellness programs are designed to reflect our cultural values and our goal to make eBay competitive in the market for talent and a place that is welcoming and inclusive. eBay’s management is focused on delivering programs that develop and support our people and connect them with our customers, our community, and each other.
Culture
In 2020, after engaging with our workforce, customers, and investors, CEO Jamie Iannone introduced “Our DNA”, a framework to link all employees to our purpose, our role in people’s lives, our strategic vision, and our beliefs.
Our Purpose: We empower people and create economic opportunity for all
Our Role in People’s Lives: A marketplace that brings people together to spark unexpected joy
Our Strategic Vision: Become the best global marketplace for buyers and sellers through a tech-led re-imagination of eBay
Our Beliefs: These beliefs reflect our culture at its best and our shared desire to be part of a company with a wonderful, productive, fun way of working where we deliver the best we can for ourselves as employees and for our customers.
•Empower our community
•Innovate boldly
•Deliver with impact
•Be for everyone
•Act with integrity
Pandemic Response
Adapting to working during the COVID-19 pandemic has been a major focus of our people programs. When companies were required to close their workplaces, eBay quickly moved to facilitate our people working from home. eBay provided equipment, systems, and resources for home connection, including for our customer experience team members who all shifted to working from home. In 2020, eBay made two payments to all employees to allow them to cover individual needs and well-being. We also increased work flexibility to balance personal and professional responsibilities and provided back-up in-home child and adult care in the U.S., U.K., Canada, Germany and Ireland. eBay has continually engaged with our people to support physical and mental health for them and their families through online wellness resources, webinars, telehealth access and expansion of company-paid mental health support as well as additional training for managers. In recognition of the extraordinary circumstances affecting the team, we also provided an additional paid day off globally for all employees and contractors.
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Diversity, Equity and Inclusion
eBay’s Diversity, Equity and Inclusion program is focused on three strategic areas – workforce, workplace and marketplace. Equity is at the forefront of all we do to hire, grow, and keep top talent, enhance corporate performance, and foster a welcoming and inclusive place to work, learn and grow. Starting with a comprehensive diversity recruiting strategy, we review and enhance processes, including deepening data insights, updating learning and development practices and a new governance model to ensure that a diverse set of candidates are connected to eBay and can see themselves as being successful here. Our Communities of Inclusion welcome and connect eBay employees all over the world to help us build and nurture employees, allies and external communities. They host events and forums to connect employees to groups organized around age, disability status, ethnicity, gender, religion, military status, parental status and sexual orientation and gender identity and expression. We are currently preparing our fifth Global Diversity & Inclusion report for publication later this year that shares stories and workforce data.
Acting with Integrity
We reaffirmed and expanded our commitment to ethics and acting with integrity in 2020. We took big and small actions to ensure that we are open, honest, ethical and authentic with a company-wide webinar meeting and a series of leadership trainings with an outside ethics expert, quarterly “tone from the top” engagements between leaders with their employees, and daily ethics contests during Ethics and Compliance Week.
Parental Leave
In addition to competitive pay and benefits, eBay offers additional parental time off beyond what’s required by law in the U.S. and in most countries where we operate. This benefit is offered for parents welcoming a new child into the family whether by giving birth, adopting or welcoming a child through surrogacy. This is an important demonstration of our commitment to working parents and their families.
Employee Voice & Values
In addition to multiple channels for sharing feedback, we also regularly survey our employees on trust and engagement, their experience with diversity, equity and inclusion as well as ethics and integrity. Our employees highly value eBay’s approach to Impact and Responsibility and Diversity, Equity & Inclusion discussed earlier in the report. These commitments are core to our business and they positively impact recruitment, engagement and retention.
Available Information
Our Internet address is www.ebay.com. Our investor relations website is located at investors.ebayinc.com. We make available free of charge on our investor relations website under the heading “Financial Information - 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 such materials are electronically filed with (or furnished to) the SEC at www.sec.gov.
We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases, and blogs on our investor relations website. Company sustainability information for investors is available on our investor relations website under the heading “ESG Investors.” Corporate governance information, including our governance guidelines for our Board of Directors (“Board”), Board committee charters and code of conduct, is also available on our investor relations website under the heading “Corporate Governance.”
The contents of our websites and webcasts and information that can be accessed through our websites and webcasts are not incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with (or furnish to) the SEC, and any references to our websites and webcasts are intended to be inactive textual references only.
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Item 1A: RISK FACTORS
Risk Factors Summary:
The summary of risks below provides an overview of the principal risks we are exposed to in the normal course of our business activities:
•Our operating and financial results are subject to various risks and uncertainties that could adversely affect our business, financial condition, results of operations and cash flows, as well as the trading price of our common stock and debt securities.
•Substantial and increasingly intense competition worldwide in ecommerce may harm our business.
•The global COVID-19 pandemic could harm our business and results of operations.
•Fluctuations in foreign currency exchange rates could negatively impact our financial results.
•Our international operations and engagement in cross-border trade are subject to risks, which could harm our business.
•Our business may be adversely affected by geopolitical events, natural disasters, seasonal factors and similar factors.
•Our success depends to a large degree on our ability to successfully address the rapidly evolving market for transactions on mobile devices.
•If we cannot keep pace with rapid technological developments or continue to innovate and create new initiatives to provide new programs, products and services, the use of our products and our revenues could decline.
•Changes to our programs to protect buyers and sellers could increase our costs and loss rate.
•Development of our payments system requires ongoing investment, is subject to evolving laws, regulations, rules, and standards, and involves risk, including risks related to our dependence on third-party providers.
•We may be unable to adequately protect or enforce our intellectual property rights and face ongoing risks from patent litigation and allegations by third parties that we are infringing their intellectual property rights.
•Failure to deal effectively with fraudulent activities on our platforms would increase our loss rate and harm our business, and could severely diminish merchant and consumer confidence in and use of our services.
•Our business is subject to online security risks, including security breaches and cyberattacks.
•Systems failures and resulting interruptions in the availability of or degradation in the performance of our websites, applications, products or services could harm our business.
•We may not be able to attract, retain, and develop the highly skilled employees and senior management that we need to support our business.
•Problems with or price increases by third parties who provide services to us or to our sellers could harm our business.
•Our business is subject to extensive government regulation and oversight.
•Regulation in the areas of privacy and protection of user data could harm our business.
•We are regularly subject to general litigation, regulatory disputes, and government inquiries.
•We are subject to regulatory activity and antitrust litigation under competition laws that could adversely impact our business
•The listing or sale by our users of items that allegedly infringe the intellectual property rights of rights owners, including pirated or counterfeit items, may harm our business.
•We are subject to risks associated with information disseminated through our services.
•Fluctuations in interest rates could adversely impact our financial results.
•We have substantial indebtedness, and we may incur substantial additional indebtedness in the future, and we may not generate sufficient cash flow from our business to service our indebtedness.
•Our business may be subject to sales and other taxes and we may have exposure to greater than anticipated tax liabilities.
•Our business and its users are subject to Internet sales tax and sales reporting and record-keeping obligations.
•The closing of the proposed transfer of our Classifieds business may not be completed in accordance with expected plans or on the currently contemplated terms or timeline, or at all, and may not generate the anticipated returns to eBay.
•Acquisitions, dispositions, joint ventures, strategic partnerships and strategic investments could result in operating difficulties and could harm our business.
•We could incur significant liability if the Distribution of PayPal is determined to be a taxable transaction.
•We may be exposed to claims and liabilities as a result of the Distribution of PayPal.
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Risk Factors:
You should carefully review the following discussion of the risks that may affect our business, results of operations and financial condition, as well as our consolidated financial statements and notes thereto and the other information appearing in this report, for important information regarding risks that affect us. Current global economic events and conditions may amplify many of these risks. These risks are not the only risks that may affect us. Additional risks that we are not aware of or do not believe are material at the time of this filing may also become important factors that adversely affect our business.
Business, Economic, Market and Operating Risks
Our operating and financial results are subject to various risks and uncertainties that could adversely affect our business, financial condition, results of operations and cash flows, as well as the trading price of our common stock and debt securities.
Our operating and financial results have varied on a quarterly basis during our operating history and may continue to fluctuate significantly as a result of a variety of factors, including as a result of the risks set forth in this “Risk Factors” section. In view of the rapidly evolving nature of our business, 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. It is difficult for us to forecast the level or source of our revenues or earnings (loss) accurately, particularly given that substantially all of our net revenues each quarter come from transactions involving sales during that quarter. Due to the inherent difficulty in forecasting revenues, it is also difficult to forecast expenses as a percentage of net revenues. Quarterly and annual expenses as a percentage of net revenues reflected in our consolidated financial statements may be significantly different from historical or projected percentages.
Substantial and increasingly intense competition worldwide in ecommerce may harm our business.
The businesses and markets in which we operate are intensely competitive. We currently and potentially compete with a wide variety of online and offline companies providing goods and services to consumers and merchants, a number of which have significant resources, large user communities and well-established brands. The Internet and mobile networks provide new, rapidly evolving and intensely competitive channels for the sale of all types of goods and services. We compete in two-sided markets, and must attract both buyers and sellers to use our platforms. Consumers who purchase or sell goods and services through us have more and more alternatives, and merchants have more channels to reach consumers. We expect competition to continue to intensify. The barriers to entry into these channels can be low, and businesses easily can launch online sites or mobile platforms and applications at nominal cost by using commercially available software or partnering with any of a number of successful ecommerce companies. As we respond to changes in the competitive environment, we may, from time to time, make pricing, service or marketing decisions or acquisitions that may be controversial with and lead to dissatisfaction among sellers, which could reduce activity on our platform and harm our profitability.
We face increased competitive pressure online and offline. In particular, the competitive norm for, and the expected level of service from, ecommerce and mobile commerce has significantly increased due to, among other factors, improved user experience, greater ease of buying goods, lower (or no) shipping costs, faster shipping times and more favorable return policies. In addition, certain platform businesses, such as Alibaba, Amazon, Apple, Facebook and Google, many of whom are larger than us or have greater capitalization, have a dominant and secure position in other industries or certain significant markets, and offer other goods and services to consumers and merchants that we do not offer. If we are unable to change our products, offerings and services in ways that reflect the changing demands of ecommerce and mobile commerce marketplaces, particularly the higher growth of sales of fixed-price items and higher expected service levels (some of which depend on services provided by sellers on our platforms), or compete effectively with and adapt to changes in larger platform businesses, our business will suffer.
Competitors with other revenue sources may also be able to devote more resources to marketing and promotional campaigns, adopt more aggressive pricing policies and devote more resources to website, mobile platforms and applications and systems development than we can. Other competitors may offer or continue to offer faster and/or free shipping, delivery on Sunday, same-day delivery, favorable return policies or other transaction-related services which improve the user experience on their sites and which could be impractical or inefficient for our sellers to match. Competitors may be able to innovate faster and more efficiently, and new technologies may increase the competitive pressures by enabling competitors to offer more efficient or lower-cost services.
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Some of our competitors control other products and services that are important to our success, including credit card interchange, Internet search, and mobile operating systems. Such competitors could manipulate pricing, availability, terms or operation of service related to their products and services in a manner that impacts our competitive offerings. For example, Google, which operates a shopping platform service, has from time to time made changes to its search algorithms that reduced the amount of search traffic directed to us from searches on Google. If we are unable to use or adapt to operational changes in such services, we may face higher costs for such services, face integration or technological barriers or lose customers, which could cause our business to suffer.
Consumers who might use our sites to buy goods have a wide variety of alternatives, including traditional department, warehouse, boutique, discount and general merchandise stores (as well as the online and mobile operations of these traditional retailers), online retailers and their related mobile offerings, online and offline aggregation and classified services, social media platforms and other shopping channels, such as offline and online home shopping networks. In the United States, these include, but are not limited to, Amazon, Facebook, Google, Walmart, Target, Macy’s, Etsy, StockX, Shopify, Wayfair, TheRealReal, Overstock.com and Rakuten, among others. In addition, consumers have a large number of online and offline channels focused on one or more of the categories of products offered on our site.
Consumers also can turn to many companies that offer a variety of services that provide other channels for buyers to find and buy items from sellers of all sizes, including social media, online aggregation and classifieds platforms, such as websites operated by Adevinta or Naspers Limited and others such as craigslist, Oodle.com and Facebook. Consumers also can turn to shopping-comparison sites, such as Google Shopping. In certain markets, our fixed-price listing and traditional auction-style listing formats increasingly are being challenged by other formats, such as classifieds.
We use product search engines and paid search advertising to help users find our sites, but these services also have the potential to divert users to other online shopping destinations. Consumers may choose to search for products and services with a horizontal search engine or shopping comparison website, and such sites may also send users to other shopping destinations. In addition, sellers are increasingly utilizing multiple sales channels, including the acquisition of new customers by paying for search-related advertisements on horizontal search engine sites, such as Google, Naver and Baidu.
Consumers and merchants who might use our sites to sell goods also have many alternatives, including general ecommerce sites, such as Amazon, Alibaba, Zalando and Coupang, and more specialized sites, such as Etsy. Our international sites also compete for sellers with general and specialized ecommerce sites. Sellers may also choose to sell their goods through other channels, such as classifieds platforms. Consumers and merchants also can create and sell through their own sites, and may choose to purchase online advertising instead of using our services. In some countries, there are online sites that have larger customer bases and greater brand recognition, as well as competitors that may have a better understanding of local culture and commerce. We may increasingly compete with local competitors in developing countries that have unique advantages, such as a greater ability to operate under local regulatory authorities.
In addition, certain manufacturers may limit or cease distribution of their products through online channels, such as our sites. Manufacturers may attempt to use contractual obligations or existing or future government regulation to prohibit or limit ecommerce in certain categories of goods or services. Manufacturers may also attempt to enforce minimum resale price maintenance or minimum advertised price arrangements to prevent distributors from selling on our platforms or on the Internet generally, or drive distributors to sell at prices that would make us less attractive relative to other alternatives. The adoption by those or other policies could adversely affect our results of operations and result in loss of market share and diminished value of our brands.
The principal competitive factors for us include the following:
•ability to attract, retain and engage buyers and sellers;
•volume of transactions and price and selection of goods;
•trust in the seller and the transaction;
•customer service;
•brand recognition;
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•community cohesion, interaction and size;
•website, mobile platform and application ease-of-use and accessibility;
•system reliability and security;
•reliability of delivery and payment, including customer preference for fast delivery and free shipping and returns;
•level of service fees; and
•quality of search tools.
We may be unable to compete successfully against current and future competitors. 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.
The global COVID-19 pandemic could harm our business and results of operations.
The global spread of COVID-19 and related measures to contain its spread (such as government mandated business closures and shelter in-place guidelines) have created significant volatility, uncertainty and economic disruption. The extent to which the COVID-19 pandemic impacts our business, results of operations, financial condition and liquidity in the future will depend on numerous evolving factors that we cannot predict, including the duration and scope of the pandemic; any resurgence of the pandemic; the availability and distribution of effective treatments and vaccines; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; the impact of the pandemic on national and global economic activity, unemployment levels and financial markets, including the possibility of a national or global recession; the potential for shipping difficulties, including slowed deliveries from sellers to their customers; and the ability of consumers to pay for products. The COVID-19 pandemic has generally resulted in a decrease in consumer spending, which could have an adverse impact on our sellers through reduced consumer demand for their products and availability of inventory, which could in turn negatively impact the demand for use of our platforms. Additionally, the COVID-19 pandemic has caused us to require employees to work remotely for an extended period of time, which could negatively impact our business and harm productivity and collaboration. If there is a prolonged impact of COVID-19, it could adversely affect our business, results of operations, financial condition and liquidity, perhaps materially. The future impact of COVID-19 and these containment measures cannot be predicted with certainty and may increase our borrowing costs and other costs of capital and otherwise adversely affect our business, results of operations, financial condition and liquidity, and we cannot assure that we will have access to external financing at times and on terms we consider acceptable, or at all, or that we will not experience other liquidity issues going forward.
The COVID-19 pandemic and the related measures to contain its spread have not adversely affected our consolidated results of operations to date. Additionally, to date, our Marketplace platforms experienced improved traffic and buyer acquisition due to the ongoing impact of mobility restrictions taken globally to contain the spread of COVID-19 and changes in consumer behaviors that have resulted in more online shopping. The impacts seen may continue to create volatility in our results and a wider range of outcomes as consumer behaviors and mobility restrictions continue to evolve.
We are exposed to fluctuations in foreign currency exchange rates, which could negatively impact our financial results.
Because we generate the majority of our revenues outside the United States but report our financial results in U.S. dollars, our financial results are impacted by fluctuations in foreign currency exchange rates, or foreign exchange rates. The results of operations of many of our internationally focused platforms 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 for financial reporting purposes.
While from time to time we enter into transactions to hedge portions of our foreign currency translation exposure, it is impossible to predict or eliminate the effects of this exposure. Fluctuations in foreign exchange rates could significantly impact our financial results, which may have a significant impact on the trading price of our common stock and debt securities.
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Our international operations and engagement in cross-border trade are subject to risks, which could harm our business.
Our international businesses, especially in the United Kingdom, Germany, Australia and South Korea, and cross-border business from greater China, have generated a majority of our net revenues in recent years. In addition to uncertainty about our ability to generate revenues from our foreign operations and expand into international markets, there are risks inherent in doing business internationally, including:
•uncertainties and instability in economic and market conditions resulting from Brexit;
•expenses associated with localizing our products and services and customer data, including offering customers the ability to transact business in the local currency and adapting our products and services to local preferences (e.g., payment methods) with which we may have limited or no experience;
•trade barriers and changes in trade regulations;
•difficulties in developing, staffing, and simultaneously managing a large number of varying foreign operations as a result of distance, language, and cultural differences;
•stringent local labor laws and regulations;
•credit risk and higher levels of payment fraud;
•profit repatriation restrictions, foreign currency exchange restrictions or extreme fluctuations in foreign currency exchange rates for a particular currency;
•global or regional economic conditions that impact companies and customers with which we do business;
•political or social unrest, economic instability, repression, or human rights issues;
•geopolitical events, including natural disasters, public health issues (such as the coronavirus), acts of war, and terrorism;
•import or export regulations;
•compliance with U.S. laws such as the Foreign Corrupt Practices Act, and foreign laws prohibiting corrupt payments to government officials, as well as U.S. and foreign laws designed to combat money laundering and the financing of terrorist activities;
•antitrust and competition regulations;
•potentially adverse tax developments and consequences;
•economic uncertainties relating to sovereign and other debt;
•different, uncertain, or more stringent user protection, data protection, privacy, and other laws;
•risks related to other government regulation or required compliance with local laws;
•national or regional differences in macroeconomic growth rates;
•payment intermediation regulations;
•local licensing and reporting obligations; and
•increased difficulties in collecting accounts receivable.
Violations of the complex foreign and U.S. laws and regulations that apply to our international operations may result in fines, criminal actions, or sanctions against us, our officers, or our employees; prohibitions on the conduct of our business; and damage to our reputation. Although we have implemented policies and procedures designed to promote compliance with these laws, there can be no assurance that our employees, contractors, or agents will not violate our policies. These risks inherent in our international operations and expansion increase our costs of doing business internationally and could harm our business.
Cross-border trade is an important source of both revenue and profits for us. Cross-border trade also represents our primary (or in some cases, only) presence in certain important markets, such as Brazil/Latin America, China, and various other countries. The interpretation and/or application of laws, such as those related to intellectual property rights of authentic products, selective distribution networks, and sellers in other countries listing items on the Internet, could impose restrictions on, or increase the costs of, purchasing, selling, shipping, or returning goods across national borders. The shipping of goods across national borders is often more expensive and complicated than domestic shipping. Any factors that increase the costs of cross-border trade or restrict, delay, or make cross-border trade more difficult or impractical would lower our revenues and profits and could harm our business.
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Our business may be adversely affected by geopolitical events, natural disasters, seasonal factors and other factors that cause our users to spend less time on our websites or mobile platforms and applications, including increased usage of other websites.
Our users may spend less time on our websites and our applications for mobile devices as a result of a variety of diversions, including: geopolitical events, such as war, the threat of war, or terrorist activity; natural disasters or the effects of climate change (such as drought, flooding, wildfires, increased storm severity, and sea level rise); power shortages or outages, major public health issues, including pandemics (such as COVID-19); social networking or other entertainment websites or mobile applications; significant local, national or global events capturing the attention of a large part of the population; and seasonal fluctuations due to a variety of factors. If any of these, or any other factors, divert our users from using our websites or mobile applications, our business could be materially adversely affected.
Our success depends to a large degree on our ability to successfully address the rapidly evolving market for transactions on mobile devices.
Mobile devices are increasingly used for ecommerce transactions. A significant and growing portion of our users access our platforms through mobile devices. We may lose users if we are not able to continue to meet our users’ mobile and multi-screen experience expectations. The variety of technical and other configurations across different mobile devices and platforms increases the challenges associated with this environment. In addition, a number of other companies with significant resources and a number of innovative startups have introduced products and services focusing on mobile markets.
Our ability to successfully address the challenges posed by the rapidly evolving market for mobile transactions is crucial to our continued success, and any failure to continuously increase the volume of mobile transactions effected through our platforms could harm our business.
If we cannot keep pace with rapid technological developments or continue to innovate and create new initiatives to provide new programs, products and services, the use of our products and our revenues could decline.
Rapid, significant technological changes continue to confront the industries in which we operate and we cannot predict the effect of technological changes on our business. We also continuously strive to create new initiatives and innovations that offer growth opportunities, such as our new payments and advertising offerings. In addition to our own initiatives and innovations, we rely in part on third parties, including some of our competitors, for the development of and access to new technologies. We expect that new services and technologies applicable to the industries in which we operate will continue to emerge. These new services and technologies may be superior to, or render obsolete, the technologies we currently use in our products and services. Incorporating new technologies into our products and services may require substantial expenditures and take considerable time, and ultimately may not be successful. In addition, our ability to adopt new services and develop new technologies may be inhibited by industry-wide standards, new laws and regulations, resistance to change from our users, clients or merchants, or third parties’ intellectual property rights. Our success will depend on our ability to develop new technologies and adapt to technological changes and evolving industry standards.
Changes to our programs to protect buyers and sellers could increase our costs and loss rate.
Our eBay Money Back Guarantee program represents the means by which we compensate users who believe that they have been defrauded, have not received the item that they purchased or have received an item different from what was described. 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 sorts of claims is slowly beginning to be clarified in some jurisdictions and may be higher in some non-U.S. jurisdictions than it is in the United States. Litigation involving liability for any such third-party actions could be costly and time consuming for us, divert management attention, result in increased costs of doing business, lead to adverse judgments or settlements 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.
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Development of our payments system requires ongoing investment, is subject to evolving laws, regulations, rules, and standards, and involves risk, including risks related to our dependence on third-party providers.
We have invested and plan to continue to invest internal resources into our payments tools in order to maintain existing availability, expand into additional markets and offer new payment methods and tools to our buyers and sellers. If we fail to invest adequate resources into payments on our platform, or if our investment efforts are unsuccessful, unreliable or result in system failure, our payments services may not function properly or keep pace with competitive offerings, which could negatively impact their usage and our Marketplace. Future errors, failures or outages could cause our buyers and sellers to lose confidence in our payments system and could cause them to cease using our marketplace.
Our ability to expand our payments services into additional countries is dependent upon the third-party providers we use to support this service. If we transition to new third-party payment service providers for any reason, we may be required to invest significant financial and personnel resources to support such transition or could be unable to find a suitable replacement service provider. As we expand the availability of our payments services to additional markets or offer new payment methods to our sellers and buyers in the future, we may become subject to additional regulations and compliance requirements, and exposed to heightened fraud risk, which could lead to an increase in our operating expenses.
We rely on third-party service providers to perform services related to compliance, credit card processing, payment disbursements, currency exchange, identity verification, sanctions screening, and fraud analysis and detection. As a result, we are subject to a number of risks related to our dependence on third-party service providers. If any or some of these service providers fail to perform adequately or if any such service provider were to terminate or modify its relationship with us unexpectedly, our sellers’ ability to use our platform to receive orders or payments could be adversely affected, which would increase costs, drive sellers away from our marketplaces, result in potential legal liability, and harm our business. In addition, we and our third-party service providers may experience service outages from time to time that could adversely impact payments made on our platform. Additionally, any unexpected termination or modification of those third-party services could lead to a lapse in the effectiveness of certain fraud prevention and detection tools.
Our third-party service providers may increase the fees they charge us in the future, which would increase our operating expenses. This could, in turn, require us to increase the fees we charge to sellers and cause some sellers to reduce listings on our marketplaces or to leave our platform altogether by closing their accounts.
Payments are governed by complex and continuously evolving laws and regulations that are subject to change and vary across different jurisdictions in the United States and globally. As a result, we are required to spend significant time and effort to determine whether various licensing and registration laws relating to payments apply to us and to comply with applicable laws and licensing and registration regulations. In addition, there can be no assurance that we will be able to obtain or retain any necessary licenses or registrations. Any failure or claim of failure on the part of the Company or its third-party service providers to comply with applicable laws and regulations relating to payments could require us to expend significant resources, result in liabilities, limit or preclude our ability to enter certain markets and harm our reputation. In addition, changes in payment regulations, including changes to the credit or debit card interchange rates in the United States or other markets, could adversely affect payments on our platform and make our payments systems less profitable.
Further, we are indirectly subject to payment card association operating rules and certification requirements pursuant to agreements with our third-party payment processors. These rules and requirements, including the Payment Card Industry Data Security Standard and rules governing electronic funds transfers, are subject to change or reinterpretation, making it difficult for us to comply. Any failure to comply with these rules and certification requirements could impact our ability to meet our contractual obligations to our third-party payment processors and could result in potential fines. In addition, changes in these rules and requirements, including any change in our designation by major payment card providers, could require a change in our business operations and could result in limitations on or loss of our ability to accept payment cards, any of which could negatively impact our business. Such changes could also increase our costs of compliance, which could lead to increased fees for us or our sellers and adversely affect payments on our platform or usage of our payments services and Marketplace.
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Our payments system is susceptible to illegal uses, including money laundering, terrorist financing, fraud and payments to sanctioned parties. If our compliance program and internal controls to limit such illegal activity are ineffective, government authorities could bring legal action against us or otherwise suspend our ability to offer payment services in one or more markets.
We may be unable to adequately protect or enforce our intellectual property rights and face ongoing risks from patent litigation and allegations by third parties that we are infringing their intellectual property rights.
We believe the protection of our intellectual property, including our trademarks, patents, copyrights, domain names, trade dress, and trade secrets, is critical to our success. We seek to protect our intellectual property rights by relying on applicable laws and regulations in the United States and internationally, as well as a variety of administrative procedures. We also rely on contractual restrictions to protect our proprietary rights when offering or procuring products and services, including confidentiality and invention assignment agreements entered into with our employees and contractors and confidentiality agreements with parties with whom we conduct business.
However, effective intellectual property protection may not be available in every country in which our products and services are made available, and contractual arrangements and other steps we have taken to protect our intellectual property may not prevent third parties from infringing or misappropriating our intellectual property or deter independent development of equivalent or superior intellectual property rights by others. Trademark, copyright, patent, domain name, trade dress and trade secret protection is very expensive to maintain and may require litigation. We must protect our intellectual property rights and other proprietary rights in an increasing number of jurisdictions, a process that is expensive and time consuming and may not be successful in every jurisdiction. Also, we may not be able to discover or determine the extent of any unauthorized use of our proprietary rights. 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. Any failure to adequately protect or enforce our intellectual property rights, or significant costs incurred in doing so, could materially harm our business.
Additionally, we have repeatedly been sued for allegedly infringing other parties’ patents. We are a defendant in a number of patent suits and have been notified of several other potential patent disputes.
As the number of patent owners and products in the software industry increases and the functionality of these products further overlap, and as we acquire technology through acquisitions or licenses, litigation may be necessary to determine the validity and scope of the intellectual property rights of others and we may become increasingly subject to patent suits and other infringement claims, including copyright, and trademark infringement claims. Such claims may be brought directly against us and/or against our customers whom we may indemnify either because we are contractually obligated to do so or we choose to do so as a business matter. Patent claims, whether meritorious or not, are time-consuming and costly to defend and resolve, and could require us to make expensive changes in our methods of doing business, enter into costly royalty or licensing agreements, make substantial payments to satisfy adverse judgments or settle claims or proceedings, or cease conducting certain operations, which would harm our business.
Failure to deal effectively with fraudulent activities on our platforms would increase our loss rate and harm our business, and could severely diminish merchant and consumer confidence in and use of our services.
We face risks with respect to fraudulent activities on our platforms and periodically receive complaints from buyers and sellers who may not have received the goods that they had contracted to purchase or payment for the goods that a buyer had contracted to purchase. In some European and Asian jurisdictions, buyers may also have the right to withdraw from a sale made by a professional seller within a specified time period. While we can, in some cases, suspend the accounts of users who fail to fulfill their payment or delivery obligations to other users, we do not have the ability to require users to make payment or deliver goods, or otherwise make users whole other than through our buyer protection program, which in the United States we refer to as the eBay Money Back Guarantee, or as we roll out our new payments capabilities, by compensating our sellers for fraudulent payments. Although we have implemented measures to detect and reduce the occurrence of fraudulent activities, combat bad buyer experiences and increase buyer satisfaction, including evaluating sellers on the basis of their transaction history and restricting or suspending their activity, there can be no assurance that these measures will be effective in combating fraudulent transactions or improving overall satisfaction among sellers, buyers, and other participants. Additional measures to address fraud could negatively affect the attractiveness of our services to buyers or sellers, resulting in
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a reduction in the ability to attract new users or retain current users, damage to our reputation, or a diminution in the value of our brand names.
Our business is subject to online security risks, including security breaches and cyberattacks.
Our businesses involve the storage and transmission of users’ personal financial information. In addition, a significant number of our users authorize us to bill their payment card accounts directly for all transaction and other fees charged by us or, in certain cases, third-party service providers utilized in our payment services. An increasing number of websites, including those owned by several other large Internet and offline companies, have disclosed breaches of their security, some of which have involved sophisticated and highly targeted attacks on portions of their websites or infrastructure. Our information technology and infrastructure may be vulnerable to cyberattacks or security incidents and third parties may be able to access our users’ proprietary information and payment card data that are stored on or accessible through our systems. Any security breach at a company providing services to us or our users could have similar effects.
We may also need to expend significant additional resources to protect against security breaches or to redress problems caused by breaches. Additionally, our insurance policies carry low coverage limits, which may not be adequate to reimburse us for losses caused by security breaches and we may not be able to fully collect, if at all, under these insurance policies.
Systems failures and resulting interruptions in the availability of or degradation in the performance of our websites, applications, products or services could harm our business.
Our systems may experience service interruptions or degradation due to hardware and software defects or malfunctions, computer denial-of-service and other cyberattacks, human error, earthquakes, hurricanes, floods, fires, natural disasters, power losses, disruptions in telecommunications services, fraud, military or political conflicts, terrorist attacks, computer viruses, or other events. Our systems are also subject to break-ins, sabotage and intentional acts of vandalism. Some of our systems are not fully redundant and our disaster recovery planning is not sufficient for all eventualities.
We have experienced and will likely continue to experience system failures, denial-of-service attacks and other events or conditions from time to time that interrupt the availability or reduce the speed or functionality of our websites and mobile applications, including our payments services. These events have resulted and likely will result in loss of revenue. A prolonged interruption in the availability or reduction in the speed or other functionality of our websites and mobile applications or payments services could materially harm our business. 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. Moreover, to the extent that any system failure or similar event results in damages to our customers or their businesses, these customers could seek significant compensation from us for their losses and those claims, even if unsuccessful, would likely be time-consuming and costly for us to address. We also rely on facilities, components and services supplied by third parties and our business may be materially adversely affected to the extent these components or services do not meet our expectations or these third parties cease to provide the services or facilities. In particular, a decision by any of our third party hosting providers to close a facility that we use could cause system interruptions and delays, result in loss of critical data and cause 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 systems failures and similar events.
Our success largely depends on key employees. Because competition for our key employees is intense, we may not be able to attract, retain, and develop the highly skilled employees we need to support our business. The loss of senior management or other key employees could harm our business.
Our future performance depends substantially on the continued services of our senior management and other key employees, including highly skilled engineers and product developers, and our ability to attract, retain, and motivate them. Competition for highly skilled individuals is intense, especially in the Silicon Valley where our corporate headquarters are located, and we may be unable to successfully attract, integrate or retain sufficiently qualified employees. In making employment decisions, particularly in the Internet and high-technology industries, employees often consider the value of their total compensation, including share-based awards such as restricted stock units, that they could receive in connection with their employment. In addition, our employee hiring and retention also depend on our ability to build and maintain a diverse, welcoming and inclusive workplace. If our
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share-based or other compensation programs cease to be viewed as competitive, including due to fluctuations in our stock price, or our workplace is not viewed as welcoming and inclusive, our ability to attract, retain, and motivate employees would be weakened, which could harm our business. We do not have long-term employment agreements with any of our key employees and do not maintain any “key person” life insurance policies. The loss of the services of any of our senior management or other key employees, or our inability to attract highly qualified senior management and other key employees, could harm our business.
Problems with or price increases by third parties who provide services to us or to our sellers could harm our business.
A number of third parties provide services to us or to our sellers. 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 sellers list items and shipping providers that deliver goods sold on our platform, managed payments intermediation, among others. Financial or regulatory issues, labor issues (e.g., strikes, lockouts, or work stoppages), or other problems that prevent these companies from providing services to us or our sellers could harm our business.
Price increases by, or service terminations, disruptions or interruptions at, companies that provide services to us and our sellers and clients could also reduce the number of listings on our platforms or make it more difficult for our sellers to complete transactions, thereby harming our business. While we continue to work with global carriers to offer our sellers a variety of shipping options and to enhance their shipping experience, postal rate increases may reduce the competitiveness of certain sellers’ offerings, and postal service changes could require certain sellers to utilize alternatives which could be more expensive or inconvenient, which could in turn decrease the number of transactions on our sites, thereby harming our business.
We have outsourced certain functions to third-party providers, including some customer support, managed payments and product development functions, which are critical to our operations. If our service providers do not perform satisfactorily, our operations could be disrupted, which could result in user dissatisfaction and could harm our business.
There can be no assurance that third parties who provide services directly to us or our sellers will continue to do so on acceptable terms, or at all. If any third parties were to stop providing services to us or our sellers on acceptable terms, including as a result of bankruptcy, we may be unable to procure alternatives from other third parties in a timely and efficient manner and on acceptable terms, or at all.
Regulatory and Legal Risks
Our business is subject to extensive government regulation and oversight.
We are subject to laws and regulations affecting our domestic and international operations in a number of areas, including consumer protection, data privacy requirements, intellectual property ownership and infringement, prohibited items and stolen goods, tax, antitrust and anti-competition, export requirements, anti-corruption, labor, advertising, digital content, real estate, billing, ecommerce, promotions, quality of services, telecommunications, mobile communications and media, environmental, and health and safety regulations, as well as laws and regulations intended to combat money laundering and the financing of terrorist activities. In addition, we are, or may become, subject to further regulation in some of the above-mentioned areas or new areas as a result of the continued development and expansion of our payments capabilities.
Compliance with these laws, regulations, and similar requirements may be onerous and expensive, and variances and inconsistencies from jurisdiction to jurisdiction may further increase the cost of compliance and doing business. Any such costs, which may rise in the future as a result of changes in these laws and regulations or in their interpretation, could individually or in the aggregate make our products and services less attractive to our customers, delay the introduction of new products or services in one or more regions, or cause us to change or limit our business practices. We have implemented policies and procedures designed to ensure compliance with applicable laws and regulations, but there can be no assurance that our employees, contractors, or agents will not violate such laws and regulations or our policies and procedures.
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Regulation in the areas of privacy and protection of user data could harm our business.
We are subject to laws relating to the collection, use, retention, security, and transfer of personally identifiable information about our users around the world. Much of the personal information that we collect, especially financial information, is regulated by multiple laws. User data protection laws may be interpreted and applied inconsistently from country to country. In many cases, these laws apply not only to third-party transactions, but also to transfers of information between or among ourselves, our subsidiaries, and other parties with which we have commercial relations. These laws continue to develop in ways we cannot predict and that may harm our business.
Regulatory scrutiny of privacy, user data protection, use of data and data collection is increasing on a global basis. We are subject to a number of privacy and similar laws and regulations in the countries in which we operate and these laws and regulations will likely continue to evolve over time, both through regulatory and legislative action and judicial decisions. In addition, compliance with these laws may restrict our ability to provide services to our customers that they may find to be valuable. For example, the General Data Protection Regulation (“GDPR”) became effective in May 2018. The GDPR, which applies to all of our activities conducted from an establishment in the European Union or related to products and services offered in the European Union, imposes a range of new compliance obligations regarding the handling of personal data. The GDPR imposes significant new obligations and compliance with these obligations depends in part on how particular regulators interpret and apply them. If we fail to comply with the GDPR, or if regulators assert we have failed to comply with the GDPR, it may lead to regulatory enforcement actions, which can result in monetary penalties of up to 4% of worldwide revenue, private lawsuits, or reputational damage. In the U.S., California has adopted the California Consumer Privacy Act of 2018 (“CCPA”), which became effective January 1, 2020 and which provides a new private right of action for data breaches and requires companies that process information on California residents to make new disclosures to consumers about their data collection, use and sharing practices and allow consumers to opt out of certain data sharing with third parties. In addition to the CCPA, several other U.S. states have adopted or are considering adopting laws and regulations imposing obligations regarding the handling of personal data. Compliance with the GDPR, the CCPA, and other current and future applicable international and U.S. privacy, cybersecurity and related laws can be costly and time-consuming. Complying with these varying national and international requirements could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business and violations of privacy-related laws can result in significant penalties.
A determination that there have been violations of laws relating to our practices under communications-based laws could also expose us to significant damage awards, fines and other penalties that could, individually or in the aggregate, materially harm our business. In particular, because of the enormous number of texts, emails and other communications we send to our users, communications laws that provide a specified monetary damage award or fine for each violation (such as those described below) could result in particularly large awards or fines.
For example, the Federal Communications Commission amended certain of its regulations under the Telephone Consumer Protection Act, or TCPA, in 2012 and 2013 in a manner that could increase our exposure to liability for certain types of telephonic communication with customers, including but not limited to text messages to mobile phones. Under the TCPA, plaintiffs may seek actual monetary loss or statutory damages of $500 per violation, whichever is greater, and courts may treble the damage award for willful or knowing violations. We are regularly subject to class-action lawsuits, as well as individual lawsuits, containing allegations that our businesses violated the TCPA. These lawsuits, and other private lawsuits not currently alleged as class actions, seek damages (including statutory damages) and injunctive relief, among other remedies. Given the enormous number of communications we send to our users, a determination that there have been violations of the TCPA or other communications-based statutes could expose us to significant damage awards that could, individually or in the aggregate, materially harm our business.
We post on our websites our privacy policies and practices concerning the collection, use and disclosure of user data. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any regulatory requirements or orders or other federal, state or international privacy or consumer protection-related laws and regulations, including the GDPR and the CCPA, could result in proceedings or actions against us by governmental entities or others (e.g., class action privacy litigation), subject us to significant penalties and negative publicity, require us to change our business practices, increase our costs and adversely affect our business. Data collection, privacy and security have become the subject of increasing public concern. If Internet and mobile users were to reduce their use of our websites, mobile platforms, products, and services as a result of these concerns, our
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business could be harmed. We also have experienced security breaches and likely will in the future, which themselves may result in a violation of these laws.
Other laws and regulations could harm our business.
It is not always clear how laws and regulations governing matters relevant to our business, such as property ownership, copyrights, trademarks, and other intellectual property issues, parallel imports and distribution controls, taxation, libel and defamation, and obscenity apply to our businesses. Many of these laws were adopted prior to the advent of the Internet, mobile, and related technologies and, as a result, do not contemplate or address the unique issues of the Internet and related technologies. Many of these laws, including some of those that do reference the Internet are subject to interpretation by the courts on an ongoing basis and the resulting uncertainty in the scope and application of these laws and regulations increases the risk that we will be subject to private claims and governmental actions alleging violations of those laws and regulations.
As our activities, the products and services we offer, our investment in other companies, and our geographical scope continue to expand, regulatory agencies or courts may claim or hold that we or our users are subject to additional requirements (including licensure) or prohibited from conducting our business in their jurisdiction, either generally or with respect to certain actions. For example, we have or will have investments in other companies (such as Adevinta and Adyen) that raise the potential for us to be deemed an investment company as defined by the Investment Company Act of 1940 (the “Investment Company Act”). While we intend to conduct our operations such that we will not be deemed an investment company, such a determination would require us to initiate burdensome compliance requirements and comply with restrictions imposed by the Investment Company Act that would limit our activities, including limitations on our capital structure and our ability to transact with affiliates, which would have an adverse effect on our financial condition. Further, financial and political events have increased the level of regulatory scrutiny on large companies, and regulatory agencies may view matters or interpret laws and regulations differently than they have in the past and in a manner adverse to our businesses.
Numerous U.S. states and foreign jurisdictions, including the State of California, have regulations regarding “auctions” and the handling of property by “secondhand dealers” or “pawnbrokers.” Several states and some foreign jurisdictions have attempted to impose such regulations upon us or our users, and others may attempt to do so in the future. Attempted enforcement of these laws against some of our users appears to be increasing and we could be required to change the way we or our users do business in ways that increase costs or reduce revenues, such as forcing us to prohibit listings of certain items or restrict certain listing formats in some locations. We could also be subject to fines or other penalties, and any of these outcomes could harm our business.
As we expand and localize our international activities, we are increasingly becoming obligated to comply with the laws of the countries or markets in which we operate. In addition, because our services are accessible worldwide and we facilitate sales of goods and provide services to users worldwide, one or more jurisdictions may claim that we or our users are required to comply with their laws based on the location of our servers or one or more of our users, or the location of the product or service being sold or provided in an ecommerce transaction. Laws regulating Internet, mobile and ecommerce technologies outside of the United States are generally less favorable to us than those in the United States. Compliance may be more costly or may require us to change our business practices or restrict our service offerings, and the imposition of any regulations on us or our users may harm our business. In addition, we may be subject to multiple overlapping legal or regulatory regimes that impose conflicting requirements on us (e.g., in cross-border trade). Our alleged failure to comply with foreign laws could subject us to penalties ranging from criminal prosecution to significant fines to bans on our services, in addition to the significant costs we may incur in defending against such actions.
We are regularly subject to general litigation, regulatory disputes, and government inquiries.
We are regularly subject to claims, lawsuits (including class actions and individual lawsuits), government investigations, and other proceedings involving competition and antitrust, intellectual property, privacy, consumer protection, accessibility claims, securities, tax, labor and employment, commercial disputes, content generated by our users, services and other matters. The number and significance of these disputes and inquiries have increased as our Company has grown larger, our businesses have expanded in scope and geographic reach, and our products and services have increased in complexity. As the global regulatory and legal landscape evolves, we may also become subject to product liability claims when products sold by third parties using our platforms result in personal injury, or illness, or death or injury to property.
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The outcome and impact of such claims, lawsuits, government investigations, and other proceedings cannot be predicted with certainty. Regardless of the outcome, such investigations and proceedings can have an adverse impact on us because of legal costs, diversion of management resources, and other factors. Determining reserves for our pending litigation and other proceedings is a complex, fact-intensive process that is subject to judgment calls. It is possible that a resolution of one or more such proceedings could require us to make substantial payments to satisfy judgments, fines or penalties or to settle claims or proceedings, any of which could harm our business. These proceedings could also result in reputational harm, criminal sanctions, consent decrees, or orders preventing us from offering certain products, or services, or requiring a change in our business practices in costly ways, or requiring development of non-infringing or otherwise altered products or technologies. Any of these consequences could harm our business.
We are subject to regulatory activity and antitrust litigation under competition laws that could adversely impact our business.
We are subject to scrutiny by various government agencies under U.S. and foreign laws and regulations, including antitrust and competition laws. Some jurisdictions also provide private rights of action for competitors or consumers to assert claims of anti-competitive conduct. 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 United States, individual states, the European Union or other countries, or otherwise constitute unfair competition. An increasing number of governments are regulating competition law activities, including increased scrutiny in large markets such as China. Our business partnerships or agreements or arrangements with customers or other companies could give rise to regulatory action or antitrust litigation. Some regulators, particularly those outside of the United States, may perceive our business to be used so broadly that otherwise uncontroversial business practices could be deemed anticompetitive. Certain competition authorities have conducted market studies of our industries. Such claims and investigations, even if without foundation, may be very expensive to defend, involve negative publicity and substantial diversion of management time and effort and could result in significant judgments against us or require us to change our business practices.
The listing or sale by our users of items that allegedly infringe the intellectual property rights of rights owners, including pirated or counterfeit items, may harm our business.
The listing or sale by our users of unlawful, counterfeit or stolen goods or unlawful services, or sale of goods or services in an unlawful manner, has resulted and may continue to result in allegations of civil or criminal liability for unlawful activities against us (including the employees and directors of our various entities) involving activities carried out by users through our services. In a number of circumstances, third parties, including government regulators and law enforcement officials, have alleged that our services aid and abet violations of certain laws, including laws regarding the sale of counterfeit items, laws restricting or prohibiting the transferability (and by extension, the resale) of digital goods (e.g., books, music and software), the fencing of stolen goods, selective distribution channel laws, customs laws, distance selling laws, and the sale of items outside of the United States that are regulated by U.S. export controls.
In addition, allegations of infringement of intellectual property rights, including but not limited to counterfeit items, have resulted in threatened and actual litigation from time to time by rights owners. These and similar suits may also force us to modify our business practices in a manner that increases costs, lowers revenue, makes our websites and mobile platforms less convenient to customers, and requires us to spend substantial resources to take additional protective measures or discontinue certain service offerings in order to combat these practices. In addition, we have received significant media attention relating to the listing or sale of illegal or counterfeit goods, which could damage our reputation, diminish the value of our brand names, and make users reluctant to use our products and services.
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We are subject to risks associated with information disseminated through our services.
Online services companies may be subject to claims relating to information disseminated through their services, including claims alleging defamation, libel, breach of contract, invasion of privacy, negligence, copyright or trademark infringement, among other things. The laws relating to the liability of online services companies for information disseminated through their services are subject to frequent challenges both in the United States and foreign jurisdictions. Any liabilities incurred as a result of these matters could require us to incur additional costs and harm our reputation and our business.
Our potential liability to third parties for the user-provided content on our sites, particularly in jurisdictions outside the United States where laws governing Internet transactions are unsettled, may increase. 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, including expending substantial resources or discontinuing certain service offerings, which could harm our business.
Interest Rate and Indebtedness Risks
Fluctuations in interest rates, and changes in regulatory guidance related to such interest rates, could adversely impact our financial results.
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 investment securities may be adversely impacted due to a rise in interest rates. In addition, relatively low interest rates limit our investment income.
We have substantial indebtedness, and we may incur substantial additional indebtedness in the future, and we may not generate sufficient cash flow from our business to service our indebtedness. Failure to comply with the terms of our indebtedness could result in the acceleration of our indebtedness, which could have an adverse effect on our cash flow and liquidity.
We have a substantial amount of outstanding indebtedness and we may incur substantial additional indebtedness in the future, including under our commercial paper program and revolving credit facility or through public or private offerings of debt securities. Our outstanding indebtedness and any additional indebtedness we incur may have significant consequences, including, without limitation, any of the following:
•requiring us to use a significant portion of our cash flow from operations and other available cash to service our indebtedness, thereby reducing the amount of cash available for other purposes, including capital expenditures, dividends, share repurchases, and acquisitions;
•our indebtedness and leverage may increase our vulnerability to downturns in our business, to competitive pressures, and to adverse changes in general economic and industry conditions;
•adverse changes in the ratings assigned to our debt securities by credit rating agencies will likely increase our borrowing costs;
•our ability to obtain additional financing for working capital, capital expenditures, acquisitions, share repurchases, dividends or other general corporate and other purposes may be limited; and
•our flexibility in planning for, or reacting to, changes in our business and our industry may be limited.
Tax Risks
Our business may be subject to sales and other taxes.
The application of indirect taxes such as sales and use tax, value-added tax (“VAT”), goods and services tax (“GST”) (including the “digital services tax”), business tax and gross receipt tax to ecommerce businesses is a complex and evolving issue. Many of the fundamental statutes and regulations that impose these taxes were established before the adoption and growth of the Internet and ecommerce. In many cases, it is not clear how existing statutes apply to ecommerce services. In addition, many state and foreign governments are looking for ways to increase revenues, which has resulted in legislative action, including new taxes on services and gross revenues and through other indirect taxes. There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain.
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From time to time, some taxing authorities in the United States have notified us that they believe we owe them certain taxes imposed on our services. These notifications have not resulted in any significant tax liabilities to date, but there is a risk that some jurisdiction may be successful in the future, which would harm our business.
Similar issues exist outside of the United States, where the application of VAT or other indirect taxes on ecommerce providers is complex and evolving. While we attempt to comply in those jurisdictions where it is clear that a tax is due, some of our subsidiaries have, from time to time, received claims relating to the applicability of indirect taxes to our fees. Additionally, we pay input VAT on applicable taxable purchases within the various countries in which we operate. In most cases, we are entitled to reclaim this input VAT from the various countries. 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 we are not entitled to reclaim VAT could harm our business.
We may have exposure to greater than anticipated tax liabilities.
The determination of our worldwide provision for income taxes and other tax liabilities requires estimation and significant judgment, and there can be from time to time transactions and calculations where the ultimate tax determination is uncertain. Like many other multinational corporations, we are subject to tax in multiple U.S. and foreign jurisdictions and have structured our operations to reduce our effective tax rate. Our determination of our tax liability is always subject to audit and review by applicable domestic and foreign tax authorities, and we are currently undergoing a number of investigations, audits and reviews by taxing authorities throughout the world, including with respect to our business structure. Any adverse outcome of any such audit or review could harm our business, and the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made. While we have established reserves based on assumptions and estimates that we believe are reasonable to cover such eventualities, these reserves may prove to be insufficient.
In addition, our future income taxes could be adversely affected by a shift in our jurisdictional earning mix, by changes in the valuation of our deferred tax assets and liabilities, as a result of gains on our foreign exchange risk management program, or changes in tax laws, regulations, or accounting principles, as well as certain discrete items.
Our business and its users are subject to Internet sales tax and sales reporting and record-keeping obligations.
The application of sales tax and other indirect taxes on cross border sales by remote sellers is continuing to change and evolve. On June 21, 2018, the U.S. Supreme Court decided South Dakota v. Wayfair, Inc. et al., a case challenging the current law under which online retailers are not required to collect sales and use tax unless they have a physical presence in the buyer’s state. This decision allows states to adopt new or enforce existing laws requiring sellers to collect and remit sales and use tax, even in states in which the seller has no presence. The adoption or enforcement of any such legislation could result in a sales and use tax collection responsibility for certain of our sellers. This collection responsibility and the additional costs associated with complex sales and use tax collection, remittance and audit requirements could create additional burdens for buyers and sellers on our websites and mobile platforms and could harm our business. Moreover, the application of such taxes on our commerce platforms could cause a marketplace to be less attractive to current and prospective buyers, which could adversely impact our business, financial performance, and growth. The majority of U.S. states have enacted laws or have pending legislation that require marketplace facilitators to collect and remit sales tax for some or all sellers using these marketplaces.
Similar laws imposing tax collection responsibility on foreign sellers are being considered in other countries as well. We are now jointly liable for U.K. VAT and German VAT for certain sellers who fail to fulfill their VAT obligations unless we suspend their eBay activity until the seller resolves the matter with the corresponding VAT authority. Other jurisdictions are considering similar legislation.
Multiple jurisdictions have enacted laws which require marketplaces to report user activity or collect and remit taxes on certain items sold on the marketplace. The U.K. and European Union have also adopted a VAT reform package which starting in 2021 requires marketplaces such as eBay to collect and remit VAT on most imports from outside the European Union.
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One or more states, the U.S. federal government or foreign countries may seek to impose reporting or record-keeping obligations on companies that engage in or facilitate ecommerce. Such an obligation could be imposed by legislation intended to improve tax compliance or if one of our companies was ever deemed to be the legal agent of the users of our services by a jurisdiction in which it operates. Certain of our companies are required to report to the Internal Revenue Service (the “IRS”) and most states on customers subject to U.S. income tax if they reach certain payment thresholds. As a result, we are required to request tax identification numbers from certain payees, track payments by tax identification number and, under certain conditions, withhold a portion of payments and forward such withholding to the IRS. These obligations can increase operational costs and change our user experience. Any failure by us to meet these requirements could result in substantial monetary penalties and other sanctions and could harm our business. Imposition of an information reporting requirement could decrease seller or buyer activity on our sites and would harm our business.
Transactional Risks
The closing of the proposed transfer of our Classifieds business is subject to various risks and uncertainties, may not be completed in accordance with expected plans or on the currently contemplated terms or timeline, or at all, and may not generate the anticipated returns to eBay, and the pending transfer may be disruptive to our Classifieds business.
We believe the transaction will close by the end of the first quarter of 2021. However, the completion of the transaction is subject to receipt of certain regulatory approvals and other customary closing conditions. We cannot assure you that the conditions to the closing of the transaction will be satisfied and, if those conditions are neither satisfied nor, where permissible, waived on a timely basis or at all, we may be unable to complete the transfer of the Classifieds business, or such completion may be delayed or completed on terms that are less favorable, perhaps materially, to us than the terms currently contemplated.
If the proposed transfer of the Classifieds business is delayed or not completed for any reason, including due to our or Adevinta’s inability to satisfy the closing conditions set forth in the transaction agreement or industry or economic conditions outside of our control, including those related to the ongoing COVID-19 pandemic, investor confidence could decline and we could face negative publicity and possible litigation. In addition, in the event of a failed transaction, we will have expended significant management resources in an effort to complete the transaction and, although in some circumstances Adevinta may be obligated to pay us a termination fee of $92 million, we will have incurred significant transaction costs. Accordingly, if the proposed transaction of the Classifieds business is not completed on the timeline or terms currently contemplated, or at all, our business, results of operations, financial condition, cash flows and stock price may be adversely affected.
Upon closing of the transaction to transfer the Classifieds business, we will receive approximately 540 million Adevinta shares and, depending on how we ultimately determine to account for our ownership interest in Adevinta, fluctuations in Adevinta’s share price, financial results and fluctuations in exchange rates could result in material changes in our consolidated balance sheet and our consolidated statement of income. In addition, our ability to sell our Adevinta shares in the future will be subject to market conditions and other factors which could impact the value we are able to realize from any such sales.
Acquisitions, dispositions, joint ventures, strategic partnerships and strategic investments could result in operating difficulties and could harm our business or impact our financial results.
We have acquired a significant number of businesses of varying size and scope, technologies, services, and products. We have also disposed of significant businesses and recently announced a portfolio review of our Korea business. We expect to continue to evaluate and consider a wide array of potential strategic transactions as part of our overall business strategy, including business combinations, acquisitions, and dispositions of businesses, technologies, services, products, and other assets, as well as strategic investments and joint ventures.
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These transactions may involve significant challenges and risks, including:
•the potential loss of key customers, merchants, vendors and other key business partners of the companies we acquire, or dispose of, following and continuing after announcement of our transaction plans;
•declining employee morale and retention issues affecting employees of companies that we acquire or dispose of, which may result from changes in compensation, or changes in management, reporting relationships, future prospects or the direction of the acquired or disposed business;
•difficulty making new and strategic hires of new employees;
•diversion of management time and a shift of focus from operating the businesses to the transaction, and in the case of an acquisition, integration and administration;
•the need to provide transition services to a disposed of company, which may result in the diversion of resources and focus;
•the need to integrate the operations, systems (including accounting, management, information, human resource and other administrative systems), technologies, products and personnel of each acquired company, which is an inherently risky and potentially lengthy and costly process;
•the inefficiencies and lack of control that may result if such integration is delayed or not implemented, and unforeseen difficulties and expenditures that may arise as a result;
•the need to implement or improve controls, procedures and policies appropriate for a larger public company at companies that prior to acquisition may have lacked such controls, procedures and policies or whose controls, procedures and policies did not meet applicable legal and other standards;
•risks associated with our expansion into new international markets;
•derivative lawsuits resulting from the acquisition or disposition;
•liability for activities of the acquired or disposed of company before the transaction, including intellectual property and other litigation claims or disputes, violations of laws, rules and regulations, commercial disputes, tax liabilities and other known and unknown liabilities and, in the case of dispositions, liabilities to the acquirors of those businesses under contractual provisions such as representations, warranties and indemnities;
•the potential loss of key employees following the transaction;
•the acquisition of new customer and employee personal information by us or a third party acquiring assets or businesses from us, which in and of itself may require regulatory approval and or additional controls, policies and procedures and subject us to additional exposure; and
•our dependence on the acquired business’ accounting, financial reporting, operating metrics and similar systems, controls and processes and the risk that errors or irregularities in those systems, controls and processes will lead to errors in our consolidated financial statements or make it more difficult to manage the acquired business.
We have made certain investments, including through joint ventures, in which we have a minority equity interest and/or lack management and operational control. The controlling joint venture partner in a joint venture may have business interests, strategies, or goals that are inconsistent with ours, and business decisions or other actions or omissions of the controlling joint venture partner or the joint venture company may result in harm to our reputation or adversely affect the value of our investment in the joint venture. Any circumstances, which may be out of our control, that adversely affect the value of our investments, or cost resulting from regulatory action or lawsuits in connection with our investments, could harm our business or negatively impact our financial results.
We entered into a warrant agreement in conjunction with a commercial agreement with Adyen that entitles us to acquire a fixed number of shares of Adyen’s common stock subject to certain milestones being met. This warrant is accounted for as a derivative instrument under ASC Topic 815, Derivatives and Hedging. Changes in Adyen’s common stock price and equity volatility has had, and may continue to have in the future, a significant impact on the value of this warrant. We report this warrant on a quarterly basis at fair value in our consolidated balance sheets, and changes in the fair value of this warrant are recognized in our consolidated statement of income. Fluctuations in Adyen’s common stock or other changes in assumptions could result in material changes in the fair value that we report in our consolidated balance sheets and our consolidated statement of income, which could have a material impact on our financial results.
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We could incur significant liability if the Distribution is determined to be a taxable transaction.
We have received an opinion from outside tax counsel to the effect that our distribution of 100% of the outstanding common stock of PayPal to our stockholders on July 17, 2015 (the “Distribution”) qualifies as a transaction that is described in Sections 355 and 368(a)(1)(D) of the Internal Revenue Code. The opinion relies on certain facts, assumptions, representations and undertakings from PayPal and us regarding the past and future conduct of the companies’ respective businesses and other matters. If any of these facts, assumptions, representations or undertakings are incorrect or not satisfied, our stockholders and we may not be able to rely on the opinion of tax counsel and could be subject to significant tax liabilities. Notwithstanding the opinion of tax counsel we have received, the IRS could determine on audit that the Distribution is taxable if it determines that any of these facts, assumptions, representations or undertakings are not correct or have been violated or if it disagrees with the conclusions in the opinion. If the Distribution is determined to be taxable for U.S. federal income tax purposes, our stockholders that are subject to U.S. federal income tax and we could incur significant U.S. federal income tax liabilities.
We may be exposed to claims and liabilities as a result of the Distribution.
We entered into a separation and distribution agreement and various other agreements with PayPal to govern the Distribution and the relationship of the two companies. These agreements provide for specific indemnity and liability obligations and could lead to disputes between us and PayPal. The indemnity rights we have against PayPal under the agreements may not be sufficient to protect us. In addition, our indemnity obligations to PayPal may be significant and these risks could negatively affect our results of operations and financial condition.
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ITEM 1B: UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2: PROPERTIES
We own and lease various properties in the U.S. and 24 other countries around the world. We use the properties for executive and administrative offices, data centers, product development offices, fulfillment centers and customer service offices. Our headquarters are located in San Jose, California and occupies approximately 0.5 million square feet. Our owned data centers are solely located in Utah. As of December 31, 2020, our owned and leased properties provided us with aggregate square footage for our continuing operations as follows (in millions):
| United States | Other Countries | Total | |||||||||||||||
| Owned facilities | 1.3 | — | 1.3 | ||||||||||||||
| Leased facilities | 0.7 | 3.4 | 4.1 | ||||||||||||||
| Total facilities | 2.0 | 3.4 | 5.4 | ||||||||||||||
From time to time we consider various alternatives related to our long-term facilities needs. While we believe that our existing facilities are adequate to meet our immediate needs, it may become necessary to develop and improve land that we own or lease or acquire additional or alternative space to accommodate any future growth.
ITEM 3: LEGAL PROCEEDINGS
This information is set forth under “Note 13 – Commitments and Contingencies – Litigation and Other Legal Matters” to the consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K is incorporated herein by reference.
ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock
Our common stock has been traded on The Nasdaq Global Select Market under the symbol “EBAY” since September 24, 1998. As of February 1, 2021, there were approximately 3,411 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
The company paid a total of $447 million and $473 million in cash dividends during the years ended December 31, 2020 and December 31, 2019, respectively. In February 2021, we declared a quarterly cash dividend of $0.18 per share of common stock to be paid on March 19, 2021 to stockholders of record as of March 1, 2021. The timing, declaration, amount and payment of any future cash dividends are at the discretion of the Board of Directors and will depend on many factors, including our available cash, working capital, financial condition, results of operations, capital requirements, covenants in our credit agreement, applicable law and other business considerations that our Board of Directors considers relevant.
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, 2015 (the last trading day for the year ended December 31, 2015) in (i) our common stock, (ii) the Nasdaq Composite Index, (iii) the S&P 500 Index and (iv) the S&P 500 Information Technology Index.
Our stock price performance shown in the graph below is not indicative of future stock price performance. The 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 past or future filing with the SEC, except to the extent that such filing specifically states that such graph and related information are incorporated by reference into such filing.
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Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Stock repurchase activity during the three months ended December 31, 2020 was as follows:
| Period Ended | Total Number of Shares Purchased | Average Price Paid per Share (2) | Total Number of Shares Purchased as Part of Publicly Announced Programs | Maximum Dollar Value that May Yet be Purchased Under the Programs (1) | ||||||||||||||||||||||
| October 31, 2020 | 250,675 | $ | 47.63 | 250,675 | $ | 2,440,568,444 | ||||||||||||||||||||
| November 30, 2020 | 4,216,131 | $ | 48.67 | 4,216,131 | $ | 2,235,384,642 | ||||||||||||||||||||
| December 31, 2020 | 4,014,404 | $ | 50.41 | 4,014,404 | $ | 2,033,023,506 | ||||||||||||||||||||
| 8,481,210 | 8,481,210 | |||||||||||||||||||||||||
(1)In January 2019 our Board authorized a $4.0 billion stock repurchase program and in January 2020 our Board authorized an additional $5 billion stock repurchase program. These stock repurchase programs have no expiration from the date of authorization.
Our stock repurchase programs are intended to programmatically offset the impact of dilution from our equity compensation programs and, subject to market conditions and other factors, to make opportunistic and programmatic repurchases of our common stock to reduce our outstanding share count. Any share repurchases under our stock repurchase programs may be made through open market transactions, block trades, privately negotiated transactions (including accelerated share repurchase transactions) or other means at times and in such amounts as management deems appropriate and will be funded from our working capital or other financing alternatives.
During the three months ended December 31, 2020, we repurchased approximately $419 million of our common stock under our stock repurchase program. As of December 31, 2020, a total of approximately $2.0 billion remained available for future repurchases of our common stock under our stock repurchase program. During February 2021, our Board authorized an additional $4.0 billion stock repurchase program, with no expiration from the date of authorization.
We expect, subject to market conditions and other uncertainties, to continue making opportunistic and programmatic repurchases of our common stock. However, our stock repurchase programs may be limited or terminated at any time without prior notice. 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 and management’s determination as to the appropriate use of our cash.
(2)Excludes broker commissions.
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ITEM 6: SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and notes thereto and “Management’s 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 data for the years ended December 31, 2020, 2019 and 2018 are derived from our audited consolidated financial statements. The consolidated statement of income data for the years ended December 31, 2017 and 2016 have been adjusted for discontinued operations. The consolidated balance sheet data as of December 31, 2020 and 2019 are derived from our audited consolidated financial statements. The consolidated balance sheet data as of December 31, 2018, 2017 and 2016 have been adjusted for discontinued operations. The consolidated balance sheet data as of December 31, 2017 and 2016 has been adjusted for the adoption of the ASC 606, Revenue from Contracts with Customers (ASC 606).
| Year Ended December 31, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 (5) | 2017 (4)(6) | 2016 (4)(7) | |||||||||||||||||||||||||
| (In millions, except per share amounts) | |||||||||||||||||||||||||||||
Consolidated Statement of Income Data: (1) | |||||||||||||||||||||||||||||
| Net revenues | $ | 10,271 | $ | 8,636 | $ | 8,650 | $ | 8,009 | $ | 7,568 | |||||||||||||||||||
| Gross profit | 7,798 | 6,500 | 6,627 | 6,156 | 5,883 | ||||||||||||||||||||||||
| Income from operations | 2,711 | 1,861 | 1,752 | 1,852 | 1,960 | ||||||||||||||||||||||||
| Income from continuing operations before income taxes | 3,420 | 1,749 | 2,249 | 1,864 | 3,290 | ||||||||||||||||||||||||
| Income (loss) from continuing operations | 2,542 | 1,516 | 2,128 | (1,997) | 7,056 | ||||||||||||||||||||||||
| Income (loss) per share from continuing operations: | |||||||||||||||||||||||||||||
| Basic | $ | 3.58 | $ | 1.79 | $ | 2.17 | $ | (1.88) | $ | 6.23 | |||||||||||||||||||
| Diluted | $ | 3.54 | $ | 1.77 | $ | 2.15 | $ | (1.88) | $ | 6.17 | |||||||||||||||||||
| Weighted average shares: | |||||||||||||||||||||||||||||
| Basic | 710 | 849 | 980 | 1,064 | 1,133 | ||||||||||||||||||||||||
| Diluted | 718 | 856 | 991 | 1,064 | 1,144 | ||||||||||||||||||||||||
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| As of December 31, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 (5) | 2017 (4) (6) | 2016 (4) (7) | |||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||
Consolidated Balance Sheet Data: (1) | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 1,428 | $ | 901 | $ | 2,067 | $ | 1,964 | $ | 1,775 | |||||||||||||||||||
| Short-term investments | 2,398 | 1,850 | 2,713 | 3,743 | 5,333 | ||||||||||||||||||||||||
| Long-term investments | 833 | 1,275 | 3,747 | 6,299 | 3,945 | ||||||||||||||||||||||||
| Working capital - continuing operations | 2,452 | 726 | 2,683 | 4,226 | 5,152 | ||||||||||||||||||||||||
| Working capital - held for sale | 9 | 32 | 52 | 43 | 31 | ||||||||||||||||||||||||
| Working capital - discontinued operations | — | (118) | (63) | (84) | (173) | ||||||||||||||||||||||||
Working capital total (2)(3) | 2,461 | 640 | 2,672 | 4,185 | 5,010 | ||||||||||||||||||||||||
| Total assets - continuing operations | 18,122 | 16,654 | 21,086 | 24,072 | 22,941 | ||||||||||||||||||||||||
| Total assets - held for sale | 1,188 | 1,073 | 1,204 | 1,372 | 519 | ||||||||||||||||||||||||
| Total assets - discontinued operations | — | 447 | 529 | 542 | 391 | ||||||||||||||||||||||||
| Total assets | 19,310 | 18,174 | 22,819 | 25,986 | 23,851 | ||||||||||||||||||||||||
| Short-term debt | 18 | 1,020 | 1,546 | 781 | 1,451 | ||||||||||||||||||||||||
| Long-term debt | 7,745 | 6,738 | 7,685 | 9,234 | 7,509 | ||||||||||||||||||||||||
| Total stockholders’ equity | 3,561 | 2,870 | 6,281 | 8,049 | 10,526 | ||||||||||||||||||||||||
| Dividends declared per share: | $ | 0.64 | $ | 0.56 | $ | — | $ | — | $ | — | |||||||||||||||||||
(1)Includes the impact of acquisitions and dispositions. For a summary of recent significant acquisitions and dispositions, please see “Note 3 - Business Combinations” and “Note 4 - Discontinued Operations” to the consolidated financial statements included in this report.
(2)Working capital is calculated as the difference between total current assets and total current liabilities.
(3)Reflects the impact of the adoption of the new lease accounting standard in 2019 which was adopted prospectively.
(4)Reflects the impact of the adoption of the new revenue recognition accounting standard in 2018.
(5)The consolidated balance sheet data as of December 31, 2018 includes the impact of a $463 million reduction to the provisional current and deferred tax liabilities recorded in the fourth quarter of 2017 and a $120 million reduction in 2018 to the deferred tax asset recognized in 2017 as a result of a tax rate change. The consolidated statement of income data for the year ended December 31, 2018 includes a $463 million income tax benefit and $120 million tax expense associated with such current and deferred tax liabilities and assets, respectively.
(6)The consolidated balance sheet data as of December 31, 2017 includes the impact of a $695 million deferred tax asset recognized in 2017 as a result of our voluntary domiciling our Classifieds intangible assets into a new jurisdiction. The consolidated statement of income data for the year ended December 31, 2017 includes tax expense of $376 million caused by the foreign exchange remeasurement of our deferred tax assets and a $3.1 billion provisional tax expense associated with the enactment of the Tax Cuts and Jobs Act.
(7)The consolidated balance sheet data for the year ended December 31, 2016 includes the impact of a $4.6 billion deferred tax asset recognized in 2016 as a result of our election to terminate an existing tax ruling and finalize a new agreement with the foreign tax authority. The consolidated statement of income data for the year ended December 31, 2016 includes a $4.6 billion income tax benefit associated with such deferred tax asset.
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ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that involve expectations, plans or intentions (such as those relating to future business, future results of operations or financial condition, including with respect to the ongoing effects of COVID-19, new or planned features or services, or management strategies including our strategic review). You can identify these forward-looking statements by words such as “may,” “will,” “would,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and other similar expressions. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those discussed in “Item 1A: Risk Factors” of this Annual Report on Form 10-K, as well as in our consolidated financial statements, related notes, and the other information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. You should read the following Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the consolidated financial statements and the related notes included in this report.
OVERVIEW
Business
eBay Inc., is a global commerce leader, which includes our Marketplace platforms, that connects millions of buyers and sellers around the world, empowering people and creating opportunity for all. Founded in 1995 in San Jose, California, eBay is one of the world’s largest and most vibrant marketplaces for discovering great value and unique selection. Our technologies and services are designed to provide buyers choice and a breadth of relevant inventory from around the globe and to enable sellers worldwide to organize and offer their inventory for sale, virtually anytime and anywhere. In 2020, eBay enabled $100 billion of Gross Merchandise Volume.
On February 13, 2020, we closed the previously announced sale of our StubHub business to an affiliate of viagogo. Beginning in the first quarter of 2020, StubHub’s financial results for periods prior to the sale have been reflected in our consolidated statement of income as discontinued operations. Additionally, the related assets and liabilities associated with the discontinued operations in the prior periods are classified as discontinued operations in our consolidated balance sheet. See “Note 4 – Discontinued Operations” in our consolidated financial statements included elsewhere in this report for additional information.
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which continues to spread throughout the world. While the disruption is currently expected to be temporary, there is uncertainty around its duration. As a result of COVID-19 mobility restrictions globally, there have been changes in consumer behavior that have resulted in more online shopping. We expect these changes in behavior to continue to evolve as the pandemic progresses. Our Marketplace platforms experienced improved traffic and buyer acquisition due to the ongoing impact of measures taken globally to contain the spread of COVID-19. The Marketplace platforms also experienced improved acquisition of small business sellers. While the impact of COVID-19 has had a positive impact on our reported results, it’s uncertain whether this consumer behavior will continue. The impacts seen to date may continue to create volatility in our results and a wider range of outcomes as consumer behaviors and mobility restrictions continue to evolve. See “Results of Operations” below for impacts of COVID-19 on our results for the twelve months ended December 31, 2020. For additional information, see “– Liquidity and Capital Resource Requirements” below and “Item 1A: Risk Factors” under the caption “The global COVID-19 pandemic could harm our business and results of operations” in Part II of this report.
On July 20, 2020, we entered into a definitive agreement to transfer our Classifieds business to Adevinta ASA (“Adevinta”) for $2.5 billion in cash, subject to certain adjustments, and approximately 540 million shares in Adevinta. These shares would represent, approximately 44% of Adevinta’s total outstanding shares and approximately 33% of Adevinta’s outstanding voting shares, based on the number of Adevinta’s outstanding shares as of June 30, 2020. Together, the total consideration payable under the definitive agreement is valued at
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approximately $9.2 billion, based on the closing trading price of Adevinta shares on the Oslo Stock Exchange on July 17, 2020. We believe the transaction will close by the end of the first quarter of 2021. Completion of the transaction is subject to certain conditions, including receipt of certain regulatory approvals and other risks and uncertainties. We have classified the results of our Classifieds business as discontinued operations in our consolidated statement of income for the periods presented. Additionally, the related assets and liabilities associated with the discontinued operations are classified as held for sale in our consolidated balance sheet. See “Note 4 – Discontinued Operations” in our consolidated financial statements included elsewhere in this report for additional information.
Presentation
In addition to the corresponding measures under generally accepted accounting principles (“GAAP”), management uses non-GAAP measures in reviewing our financial results. The foreign exchange neutral (“FX-Neutral”), or constant currency, net revenue amounts discussed below are non-GAAP financial measures and are not in accordance with, or an alternative to, measures prepared in accordance with GAAP. Accordingly, the FX-Neutral information appearing in the following discussion of our results of operations should be read in conjunction with the information provided below in “Non-GAAP Measures of Financial Performance,” which includes reconciliations of FX-Neutral financial measures to the most directly comparable GAAP measures. We calculate the year-over-year impact of foreign currency movements using prior period foreign currency rates applied to current year transactional currency amounts.
Our commerce platforms operate globally, resulting in certain revenues that are denominated in foreign currencies, primarily the British pound, euro, Korean won and Australian dollar, subjecting us to foreign currency risk which may impact our financial results. Because of this and the fact that we generate a majority of our net revenues internationally, including during the years ended December 31, 2020, 2019 and 2018, we are subject to the risks related to doing business in foreign countries as discussed under “Item 1A: Risk Factors.”
The effect of foreign currency exchange rate movements during 2020 was primarily attributable to the strengthening of the U.S. dollar against the Korean won, partially offset by the weakening of the U.S. dollar against the euro.
Fiscal Year Highlights
Net revenues increased 19% to $10.3 billion in 2020 compared to 2019, primarily driven by improved traffic and buyer acquisition, which we attribute primarily to global restrictions implemented to contain the spread of COVID-19 which resulted in more online shopping during 2020. FX-Neutral net revenue (as defined above) increased 20% in 2020 compared to 2019. Operating margin increased to 26.4% in 2020 compared to 21.6% in 2019.
We generated cash flow from continuing operating activities of $3.1 billion in 2020 compared to $2.6 billion in 2019, ending the year with cash, cash equivalents and non-equity investments for continuing operations of $4.1 billion.
During 2020, we issued senior unsecured notes of $1.8 billion, which consisted of $800 million of 1.900% fixed rate notes due 2025 and $950 million of 2.700% fixed rate notes due 2030. In addition, we repaid approximately $1.8 billion of debt comprising of $500 million of 2.150% senior fixed rate notes due 2020, $500 million of 3.250% senior fixed rate notes due 2020 and $750 million related to 2.875% senior fixed rate notes due 2021. We also repurchased $5.1 billion of shares and paid $447 million in dividends during 2020.
Diluted earnings per share from continuing operations was $3.54 in 2020 compared to diluted earnings per share of $1.77 in 2019. In February 2021, we declared a quarterly cash dividend of $0.18 per share of common stock to be paid on March 19, 2021 to stockholders of record as of March 1, 2021.
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RESULTS OF OPERATIONS
Net Revenues
Seasonality
We expect transaction activity patterns on our platforms to mirror general consumer buying patterns and expect that these trends will continue. As we introduce new products and platforms, such as managed payments, we expect net revenues to fluctuate. In addition, macroeconomic conditions, such as the ongoing COVID-19 pandemic, may also contribute to fluctuations in revenues and margins. The following table sets forth, for the periods presented, our total net revenues and the sequential quarterly movements of these net revenues (in millions, except percentages):
| Quarter Ended | |||||||||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | ||||||||||||||||||||
| 2018 | |||||||||||||||||||||||
| Net revenues | $ | 2,104 | $ | 2,137 | $ | 2,107 | $ | 2,302 | |||||||||||||||
| Percent change from prior quarter | (2) | % | 2 | % | (1) | % | 9 | % | |||||||||||||||
| 2019 | |||||||||||||||||||||||
| Net revenues | $ | 2,161 | $ | 2,156 | $ | 2,083 | $ | 2,236 | |||||||||||||||
| Percent change from prior quarter | (6) | % | — | % | (3) | % | 7 | % | |||||||||||||||
| 2020 | |||||||||||||||||||||||
| Net revenues | $ | 2,129 | $ | 2,668 | $ | 2,606 | $ | 2,868 | |||||||||||||||
| Percent change from prior quarter | (5) | % | 25 | % | (2) | % | 10 | % | |||||||||||||||
Net Revenues by Geography
Revenues are attributed to U.S. and international geographies primarily based upon the country in which the seller, platform that displays advertising, other service provider or customer, as the case may be, is located. The following table presents net revenues by geography for the periods presented (in millions, except percentages):
| Year Ended December 31, | |||||||||||||||||||||||||||||
| 2020 | % Change | 2019 | % Change | 2018 | |||||||||||||||||||||||||
| U.S. | $ | 4,151 | 26 | % | 3,303 | (2) | % | $ | 3,382 | ||||||||||||||||||||
| Percentage of net revenues | 40 | % | 38 | % | 39 | % | |||||||||||||||||||||||
| International | 6,120 | 15 | % | 5,333 | 1 | % | 5,268 | ||||||||||||||||||||||
| Percentage of net revenues | 60 | % | 62 | % | 61 | % | |||||||||||||||||||||||
| Total net revenues | $ | 10,271 | 19 | % | $ | 8,636 | — | % | $ | 8,650 | |||||||||||||||||||
Net revenues included $15 million and $81 million of hedging gains and $8 million of hedging losses during the years ended December 31, 2020, 2019 and 2018, respectively. Foreign currency movements relative to the U.S. dollar had a favorable impact of $1 million, an unfavorable impact of $153 million and a favorable impact of $139 million on net revenues for the years December 31, 2020, 2019 and 2018, respectively. The effect of foreign currency exchange rate movements in 2020 compared to 2019 was primarily attributable to the strengthening of the U.S. dollar against the Korean won, partially offset by the weakening of the U.S. dollar against the euro. The effect of foreign currency exchange rate movements in 2019 compared to 2018 was primarily attributable to the strengthening of the U.S. dollar against the euro, British pound and Korean won.
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Net Revenues by Type
We generate two types of net revenues:
Net transaction revenues primarily include final value fees, feature fees, including fees to promote listings, and listing fees from sellers on our platforms. Our net transaction revenues also include store subscription and other fees often from large enterprise sellers. Our net transaction revenues are reduced by incentives, including discounts, coupons and rewards, provided to our customers.
Marketing services and other ("MS&O") revenues consist of revenues principally from the sale of advertisements, revenue sharing arrangements and first-party inventory programs.
The following table presents net revenues by type (in millions, except percentages):
| Year Ended December 31, | |||||||||||||||||||||||||||||
| 2020 | % Change | 2019 | % Change | 2018 | |||||||||||||||||||||||||
| Net transaction revenues | $ | 9,300 | 23 | % | $ | 7,578 | 2 | % | $ | 7,416 | |||||||||||||||||||
| Marketing services and other revenues | 971 | (8) | % | 1,058 | (14) | % | 1,234 | ||||||||||||||||||||||
| Total net revenues | $ | 10,271 | 19 | % | $ | 8,636 | — | % | $ | 8,650 | |||||||||||||||||||
Net Transaction Revenues
Key Operating Metrics
Gross Merchandise Volume (“GMV”) and take rate are significant factors that we believe affect our net transaction revenues.
GMV consists of the total value of all successfully closed transactions between users on our platforms during the applicable period, regardless of whether the buyer and seller actually consummated the transaction. Despite GMV’s divergence from revenue, we still believe that GMV provides a useful measure of the overall volume of closed transactions that flow through our platforms in a given period, notwithstanding the inclusion in GMV of closed transactions that are not ultimately consummated.
Take rate is defined as net transaction revenues divided by GMV.
The following table presents GMV and take rate for the periods presented (in millions, except percentages):
Year Ended December 31, | |||||||||||||||||||||||||||||
| 2020 | % Change | 2019 | % Change | 2018 | |||||||||||||||||||||||||
| GMV | $ | 100,001 | 17 | % | $ | 85,510 | (5) | % | $ | 89,829 | |||||||||||||||||||
| Transaction take rate | 9.30 | % | 0.44 | % | 8.86 | % | 0.61 | % | 8.25 | % | |||||||||||||||||||
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Net Transaction Revenues
| Year Ended December 31, | % Change | Year Ended December 31, | % Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | As Reported | FX-Neutral | 2019 | 2018 | As Reported | FX-Neutral | ||||||||||||||||||||||||||||||||||||||||
Net transaction revenues (1) | 9,300 | 7,578 | 23 | % | 24 | % | 7,578 | 7,416 | 2 | % | 4 | % | |||||||||||||||||||||||||||||||||||
| Supplemental data: | |||||||||||||||||||||||||||||||||||||||||||||||
| GMV | 100,001 | 85,510 | 17 | % | 17 | % | 85,510 | 89,829 | (5) | % | (2) | % | |||||||||||||||||||||||||||||||||||
| Take rate | 9.30 | % | 8.86 | % | 0.44 | % | 8.86 | % | 8.25 | % | 0.61 | % | |||||||||||||||||||||||||||||||||||
(1)Marketplace net transaction revenues were net of $15 million, $81 million and $8 million hedging activity during the years ended December 31, 2020, 2019 and 2018 respectively.
Net transaction revenues increased in 2020 compared to 2019 primarily due to an increase in GMV due to improved traffic and buyer acquisition due to global restrictions implemented to contain the spread of COVID-19 which resulted in consumers engaging in more online shopping during 2020 and higher take rate due to the expansion of managed payments and promoted listings. Transaction take rate was higher in 2020 compared to 2019, due to the expansion of managed payments and due to promoted listings, which along with final value fees are calculated as a percentage of an item’s sale price and category mix.
Net transaction revenues increased in 2019 compared to 2018 primarily due to growth in promoted listing fees and a higher take rate. Transaction take rate was higher in 2019 compared to 2018, primarily due to growth in promoted listing fees, which along with final value fees are calculated as a percentage of an item’s sale price, and category mix. The increase in net transaction revenues in 2019 compared to 2018 was due to take rate considerations discussed above, despite declining GMV. We expect that the divergence between net transaction revenues and GMV will continue. Despite GMV’s divergence from net transaction revenues during the year, we still believe the metric provides a useful measure of overall volume of closed transactions that flow through the platform in a given period.
Marketing Services and Other Revenues
The following table presents MS&O revenues (in millions, except percentages):
| Year Ended December 31, | % Change | Year Ended December 31, | % Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | As Reported | FX-Neutral | 2019 | 2018 | As Reported | FX-Neutral | ||||||||||||||||||||||||||||||||||||||||
| MS&O revenues | $ | 971 | $ | 1,058 | (8) | % | (8) | % | $ | 1,058 | $ | 1,234 | (14) | % | (12) | % | |||||||||||||||||||||||||||||||
| Percentage of net revenues | 9 | % | 12 | % | 12 | % | 14 | % | |||||||||||||||||||||||||||||||||||||||
The decrease in MS&O revenues during 2020 compared to 2019 was primarily due to lower advertising revenues that were driven by our ongoing shift to promoted listing fees, which are recognized in net transaction revenues and the sale of brands4friends in the third quarter of 2019, partially offset by an increase attributable to our first-party inventory program in Korea.
The decrease in MS&O revenues during 2019 compared to 2018 was primarily due to a decrease in advertising revenues that was driven by our ongoing shift to promoted listing fees, which are recognized in net transaction revenues and lower revenues resulting from the sale of brands4friends. These decreases were partially offset by increases in first-party inventory program in Korea in 2019 compared to 2018.
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Cost of Net Revenues
Cost of net revenues primarily consists of costs associated with customer support, site operations, costs of goods sold and payment processing. Significant components of these costs include employee compensation, contractor costs, facilities costs, depreciation of equipment and amortization expense, first party inventory costs, bank transaction fees, credit card interchange and assessment fees and digital services tax. The following table presents cost of net revenues (in millions, except percentages):
| Year Ended December 31, | |||||||||||||||||||||||||||||
| 2020 | % Change | 2019 | % Change | 2018 | |||||||||||||||||||||||||
| Cost of net revenues | $ | 2,473 | 16 | % | $ | 2,136 | 6 | % | $ | 2,023 | |||||||||||||||||||
| As a percentage of net revenues | 24.1 | % | 24.7 | % | 23.4 | % | |||||||||||||||||||||||
The increase in cost of net revenues in 2020 compared to 2019 was primarily due to an increase in payment processing costs as we continue to transition customers to our payments platform and an increase in cost of goods sold related to our first-party inventory program in Korea. The increase in cost of net revenues was partially offset by lower cost of goods sold due to the sale of brands4friends in the third quarter of 2019.
The increase in cost of net revenues in 2019 compared to 2018 was primarily due to an increase in site operation and payment processing costs as we increased our investments in our business, and an increase in costs of goods sold driven by our first-party inventory program in Korea.
Cost of net revenues, net of immaterial hedging activities, was favorably impacted by $7 million attributable to foreign currency movements relative to the U.S. dollar in 2020 compared to 2019. Cost of net revenues, net of immaterial hedging activities, was favorably impacted by $49 million attributable to foreign currency movements relative to the U.S. dollar in 2018.
Operating Expenses
The following table presents operating expenses (in millions, except percentages):
| Year Ended December 31, | |||||||||||||||||||||||||||||
| 2020 | % Change | 2019 | % Change | 2018 | |||||||||||||||||||||||||
| Sales and marketing | $ | 2,639 | 11 | % | $ | 2,368 | (8) | % | $ | 2,576 | |||||||||||||||||||
| Percentage of net revenues | 26 | % | 27 | % | 30 | % | |||||||||||||||||||||||
| Product development | 1,087 | 11 | % | 976 | (7) | % | 1,051 | ||||||||||||||||||||||
| Percentage of net revenues | 11 | % | 11 | % | 12 | % | |||||||||||||||||||||||
| General and administrative | 1,003 | — | % | 1,005 | 3 | % | 979 | ||||||||||||||||||||||
| Percentage of net revenues | 10 | % | |||||||||||||||||||||||||||