Analysis of eBay's 10-K (EBAY)

Stifel Nicolaus analyst Scott Devitt analyzes eBay Inc.'s (EBAY) 10-K filing:

eBay is enhancing its current offerings and pioneering new communities around the world. eBay represents the blue-chip company in the Internet sector, in our view. Below are some of the highlights from the recently published 2005 10-K.

Acquisitions. During 2005, eBay made a number of acquisitions, totaling approximately $4.2 billion. Acquisitions of note include Rent.com in February 2005, three international classifieds Web sites during the second quarter of 2005, Shopping.com in August 2005, Skype in October 2005 and VeriSign's payment gateway business in November 2005.

Enhancing Community Interaction. eBay is continually looking for ways to better enable its community members to interact and transact online. This can seen by the company's addition of the classifieds format, which it has growth through the acquisitions of mobile.de, Marktplaats.nl, Rent.com, other international classifieds businesses as well as its equity investment in craigslist, Inc. Additionally, eBay also added a comparison shopping format with the acquisition of Shopping.com.

PayPal Penetration. The company intends to strengthen PayPal's U.S. penetration by continuing to integrate the service with eBay listings and new formats, focusing on buyer protection programs and seeking to add product features. Internationally, as of year-end, PayPal was available in a local language and currency in 13 international markets, and plans to continue its expansion into new markets, while improving its product and adding new features. As of year-end 2005, PayPal allowed its customers with credit cards to send payments from 54 markets outside of the U.S., and receive payments in 42 of those markets.

Micropayments. To spur growth in domestic and global payments, eBay added PayPal micropayments processing pricing for digital goods and a payment gateway business. The new micropayments processing pricing provides merchants with a way to process payments content such as video games, online greeting cards, news articles, mobile phone content and digital music.

Skype. Skype's premium offering is currently its primary source of revenue. Skype currently offers its software in 23 different languages and has 75 million members in 225 countries. For fee-based offerings, Skype users can use PayPal, which allows for easy online payments and increased growth in users for PayPal as well. eBay expects that in the increasingly competitive VoIP field, the company may need to spend significant resources in technology and marketing. Further, it is expected that Skype will experience seasonally slower growth during holiday periods.

Financial Trends. The expected growth of PayPal, Skype and Shopping.com businesses may cause downward pressure on profit margin because those businesses have lower gross margins than the eBay trading platforms. eBay's growth in net revenues in 2006 are expected to come from increased net transaction revenues across its three primary businesses.

Fraud. PayPal incurs substantial losses from merchant fraud, including claims from customers that merchants have not performed or that their goods or services do not match the merchant's description. Senders funded 53% of PayPal's payment volume using credit cards during both 2004 and 2005.

Recent Lawsuits. Supreme Court oral arguments in the MercExchange patent litigation suit are scheduled for March 29, 2006. In March 2005, eBay, PayPal, and an eBay seller were sued in Supreme Court of the State of New York, in a class action suit alleging that certain disclosures regarding PayPal's Buyer Protection Policy, users' chargeback rights, and the effects of users' choice of funding mechanism are deceptive and/or misleading.

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