eBay 1998 Annual Report Download - page 23

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Net Revenues
eBay’ s net revenues increased sequentially during each of the past eight quarters. Substantially all of these
increases resulted from growth in the number of items of merchandise listed by sellers for auction on the Company’ s
website and growth in the number of auction transactions successfully concluded. The Company did not increase the
amounts of its basic placement fees or success fees in any of the past eight quarters. Increases in fees for specific
featured placements and in average transaction size did not have a material impact on net revenue growth. The
Company’ s growth rates are not sustainable and it expects growth rates will decline in the future.
Cost of Net Revenues
Cost of net revenues primarily consists of costs for customer support and website operations, including fees for
independent contractors, compensation for customer support and website operations personnel, ISP connectivity
charges, bank processing charges for customer fees paid by credit cards, depreciation of the equipment required for
eBay’ s website operations, amortization of technology acquired in the Jump acquisition in the second quarter of
1998, and costs associated with revenue sharing agreements. The Company’ s cost of net revenues increased
substantially in absolute dollars, and generally increased as a percentage of net revenues, in each of the past eight
quarters. The increases in the 1997 quarters were due primarily to increased personnel expenses and, to a lesser
extent, additional ISP connectivity charges and increased bank processing charges.
Rapid growth in net revenues and the fixed nature of certain components of cost of net revenues caused cost of
net revenues to decline to 10.5% of net revenues in the first quarter of 1998 from 12.7% in the fourth quarter of
1997. In the third quarter of 1998, the Company significantly increased its customer support personnel, website
operations personnel, its use of outside contractors, and accordingly experienced an increase in personnel-related
costs. Also in the third quarter of 1998, the Company began a significant build up of its computer network in order
to handle the increasing volume of transactions on the eBay service resulting in increased depreciation expense as
well as increased ISP connectivity charges. All of these factors, combined with a slowing growth rate of net
revenues beginning in the second quarter of 1998, resulted in increases in cost of net revenues as a percentage of net
revenues from 10.5% in the first quarter of 1998 and 12.4% in the second quarter of 1998, to 16.3% in the third
quarter of 1998. The slight increase in the revenue growth rate in the fourth quarter of 1998 resulted in the decrease
of cost of net revenues to 15.5% in the fourth quarter of 1998. Amortization of technology acquired in the Jump
acquisition also contributed to the absolute dollar increase in the third and fourth quarters of 1998. The Company
anticipates that its costs of net revenues will vary, and may increase, as a percentage of net revenues in future
quarters as it expands its website operations group, website facilities and pays royalties for software licenses to
enhance the eBay website.
Sales and Marketing
eBay’ s sales and marketing expenses primarily consist of compensation for sales and marketing personnel,
advertising, trade show and other promotional costs, expenses for creative design of the eBay website and overhead
costs. Sales and marketing expenses increased substantially in absolute dollars and generally increased as a
percentage of net revenues in each of the past eight quarters, primarily due to increases in compensation associated
with additional personnel and, in the last two quarters of 1997 and each quarter of 1998, increases in advertising and
promotional expenses.
A slower expansion of advertising and promotional expenses and an increase in net revenues from the first
quarter of 1998 to the second quarter of 1998 caused sales and marketing expenses to decrease to 28.0% of net
revenues in the second quarter of 1998. Substantial increases in advertising expenses, including expenses associated
with a marketing agreement with AOL, caused sales and marketing expenses to increase to 42.3% of net revenues in
the third quarter of 1998. These increased expenses, as well as expenses associated with a national print, broadcast
and online advertising campaign, caused sales and marketing expenses to increase to 50.1% of net revenues in the
fourth quarter of 1998. The Company expects to increase its sales and marketing expenses substantially in future
quarters, particularly for advertising and promotion, and, as a result, expects that its sales and marketing expenses
will increase in absolute dollars and will vary as a percentage of net revenues for at least the next several quarters. In
addition, the Company is obligated to make aggregate payments to AOL of $12.0 million over the three-year term of
the marketing agreement it entered into with AOL in August 1998, of which $4.0 million was paid and $1.7 million