eBay 2003 Annual Report Download - page 28

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PayPal payment volume totaled $12.2 billion in 2003, and transaction net revenues as a percentage of
total payment volume was 3.5%. The growth in Payments transaction net revenues was also positively
aÅected by PayPal's continued penetration of eBay transactions in the United States and the United
Kingdom, growth in our cross border international payment transactions and growth in the oÅ-eBay
business. Net transaction revenues from the Payments segment earned internationally totaled $93.9 million
during 2003, representing 21.9% of total Payments segment net transaction revenues. We expect the
Payments segment transaction net revenues to increase in absolute dollars and as a percentage of total
transaction net revenues during 2004.
Advertising and Other Net Revenues
Advertising and other net revenues decreased in both absolute dollars and as a percentage of total net
revenues. Advertising and other net revenues totaled $52.9 million in 2003, $105.1 million in 2002 and
$146.2 million in 2001. These amounts as a percentage of total net revenues represented 2% in 2003, 9% in
2002 and 20% in 2001. The decrease in net revenues from advertising and other services was primarily the
result of a general deterioration in the online advertising market in 2002, our decision in 2002 to no longer
use America Online as our sales agent in the online advertising market, and our divestiture of both of our
oÉine businesses in 2002. We continue to view our business as primarily transaction driven and we expect
advertising and other net revenues to continue to decrease as a percentage of total net revenues and
possibly in absolute dollars during 2004.
Cost of Net Revenues
Percent Percent
2001 Change 2002 Change 2003
(in thousands, except percent changes)
Cost of net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $134,816 59% $213,876 95% $416,058
As a percentage of net revenues ÏÏÏÏÏÏ 18% 18% 19%
Cost of net revenues consists primarily of costs associated with customer support, site operations and
payment processing. SigniÑcant cost components include bank charges, credit card interchange, other
payment processing costs, employee compensation and facilities costs for our customer support and site
operations, Internet connectivity charges, depreciation of equipment, amortization of required capitalization
of major site and product development costs, and certain corporate overhead allocations.
Cost of net revenues increased in absolute dollars and slightly as a percentage of net revenues during
2003 as compared to 2002. The increase in absolute dollars was due to a full year of payment processing
costs resulting from our acquisition of PayPal on October 3, 2002, an increase in the volume of
transactions on the eBay websites, and continued development and expansion of our customer support and
site operations infrastructure. The increase in cost of net revenues as a percentage of net revenues was
primarily due to the impact of PayPal's higher structural costs relating to payment processing oÅset, in
part, by eBay's site operations costs growing at a slower rate than net revenues. Payment processing costs
increased to $215.7 million in 2003 from $120.8 million in 2002, reÖecting the full year of PayPal activity
in 2003, the substantial increase in PayPal's total payment volume and increased payment processing costs
related to the collection of our eBay fees. Aggregate customer support and site operations costs increased
$80.0 million during 2003, compared to the prior year, and resulted primarily from an increase in
headcount and related employee costs of approximately $26.5 million. In addition, aggregate depreciation
of site equipment and amortization of capitalized software development costs increased $21.5 million as
compared to 2002. Costs of net revenues are expected to increase in absolute dollars and to remain
generally comparable as a percentage of net revenues during 2004.
Cost of net revenues increased in absolute dollars but remained generally constant as a percentage of
net revenues in 2002. The increase in absolute dollars was due to payment processing costs primarily
resulting from our acquisition of PayPal on October 3, 2002, an increase in the volume of transactions on
the eBay websites, and continued development and expansion of our customer support and site operations
26