EBAY INC.
(NDQ: EBAY)
Analyst Report
Anjana Radhakrishnan
Student Managed Fund
MBA 2004
Date: 25 November 2003
Sector: Services
Industry: Retail Specialty
Business Summary
eBay Inc. operates a marketplace in which anyone, anywhere, can buy
or sell practically anything. The Company provides a web-based
marketplace which brings together buyers and sellers in an auction
format to browse, buy and sell various items. Through its PayPal
service, eBay enables any business or consumer with e-mail to send and
receive online payments securely, conveniently and cost-effectively.
eBay is the world’s largest person-to-person trading community on the
internet. Its platform is a fully automated, topically arranged, intuitive
and easy-to-use online service that is available 24 hours a day, seven
days a week (subject to a weekly scheduled two-hour maintenance
period), enabling sellers to list items for sale in either auction or fixedprice formats, buyers to bid for and/or purchase items of interest and all
eBay users to browse through listed items from any place in the world
at any time.
Share Performance
Price ($): 55.38
52 Week High: 61.60
Currency: USD
Volume (millions): 3.208
52 Week Low: 33.05
Financial Summary
For the nine months ended September 30, 2003, eBay Inc.’s revenues
increased 90% to 1.52 billion USD. At the same time, net income
increased by 87% to 304.7 million. The increases in net income and
revenues reflect the increasing online transaction activities and Paypal
acquisition.
eBay Inc.
(NASAQ)
2145 Hamilton Avenue
San Jose
CA - 95125
USA
http://www.ebay.com
NDQ: ebay
P/E
78.8
Employees
4000
Shares
570.832
million
Market Cap
$ 31.5
billion
Value line
Beta
1.75
Timeliness
1
Safety
3
Technical
2
Financial
B++
Strength
Industry
3 of 98
Ranking
Analyst Rating
Zack’s
Hold
Moneycentral
Hold
Credit Suisse Outperform
First Boston
Prudential
Overweight
Pacific Crest
Strong Buy
Deutsche
Buy
Bank
RECOMMENDATION:
BUY
# of shares: 260
Share Price: $ 55.38
Stop Loss: $ 44.30
Company Overview
eBay Inc. (referred to as ‘eBay’ henceforth) is the world’s largest person to person trading
community on the internet. eBay pioneered online trading by developing a web-based
marketplace where buyers and sellers are brought together in an auction format to buy and sell
items such as antiques, coins, collectibles, computers, memorabilia, stamps and toys. Through
their Paypal service, eBay Inc. Facilitates any business or consumer with email to send or receive
online payments securely, conveniently and cost effectively across 38 countries. In this trading
place, the role of eBay is to create, maintain and expand the technological functionality, safety,
ease of use and reliability of trading platform while supporting the growth and success of the
community users. eBay Inc was formed as a sole proprietorship in 1995 and the company
completed its initial public offering in September 1998.
The success of a company like eBay is a function of the success of its users. This success is
reflected in the growth of users from 2 million on December 31, 1998 to 62 million on December
31, 2002. eBay attracts buyers and sellers to use their platform by offering:
BUYERS




Selection
Convenience
Entertainment
Value



SELLERS
Access to broad
markets
Low distribution
costs
Ability increase
sales
With the acquisition of Paypal services in 2002, the company intended to increase the velocity of
trade on eBay be eliminating all the obstacles presented by traditional payment methods. The
company is shifting its focus to geographic expansion by increasing its geographic reach to 27
countries by 2002.
Net Revenues by geography
International –
26%
26%
USA
74%
The categories of products offered in the eBay market place range from antiques to computers to
cars and motor vehicles. Category growth, both in number and size are critical for creating a
faster, easier and safer online service. In 2002, the company made significant successful
investments to grow existing categories and expand the number of categories in the eBay market
place. The fruits of this investment are seen in the 10% growth in the depth of categories and
increase in the number of categories from 10 in 1995 to 22,000 in 2002.
eBay’s value proposition is to make inefficient markets efficient by

Providing a platform wherein individuals can communicate and exchange information
and complete transactions at low cost

Providing a wide variety and selection of goods.

Efficient information exchange
The removal of the existing inefficiencies in the traditional market is particularly beneficial to
large markets with broad buyers and sellers with broad product range. The company’s main
competitors are Yahoo (YHOO), Priceline.com (PCLN), Symantec Corp. (SYMC) and Amazon
(AMZN).
SIGNIFICANT TRENDS (GROWTH DRIVERS FOR EBAY)

Currently, the company commands an estimated 88% market share. The company’s
dominance of the lucrative, high margin, high growth, no-inventory business has resulted
in a valuation for eBay that topped $18 billion. Building on its dominance, the company
is now aggressively trying to capture the international markets. eBay will soon have 18

country specific websites. These international businesses are expected to reach on par
with the business scale in USA driving the company’s growth tremendously. With a
worldwide opportunity of $ 1 trillion, analysts believe that eBay has the potential to
become a $100 billion company. (www.fool.com).The increasing appeal and popularity
of online shopping has and will strengthen the eBay market place.

eBay is increasingly focusing on its online business by acquiring paypal (sold payment
operation “Billpoint” after the acquisition) and selling its fine art auction arm
“Butterfield”

eBay is rapidly adding business sellers to its portfolio (e.g. Sun Microsystems, Disney,
Ritz camera and US Postal Service)

eBay is adopting many “convenience initiatives” to make the website more customer
friendly (e.g. “Buy it now” option to buy goods immediately, “fixed price trading” via
half.com and “shipping calculator”). Continued expansion in the fixed trade market have
aided revenue growth.

On July 1, 2003 , eBay announced a 2-for 1 stock split effective on August 28, 2003. The
management justified this step as a measure of decreasing the volatility of the stock and
making the eBay shares more affordable to investors. This announcement was made
when the company reported a 91% jump in the second quarter revenue. Prior to this, the
stocks of eBay had split twice, once in 1999 (3-for-1 split) and then in 2000 (2-or-1 split).

eBay acquired the company Eachnet in July 2003 to expand its market in China.

eBay has also agreed to pay $10 million to settle the charges levied on Paypal (before its
merger with eBay) of aiding illegal gambling. Paypal ceased its role in online gambling
after being acquired by eBay.

On November 16, 2003 eBay submitted a tender to acquire the publicly held shares of
Internet Auction Co. Ltd, a Korean online trading company.

Q 3 report
o 41% growth in US revenues
o 105% growth in international revenues
o 56% increase in registered users
o 69% increase in GAAP net income
RECENT NEWS

Accenture helps companies sell inventories on eBay (DJ Newswire)
Technology consultant Accenture hopes to profit from the explosive growth of online
shopping by helping big manufacturers like Sony and Hewlett-Packard offload excess
inventory on Internet auction site eBay

Fulcrum Global Starts EBay At Buy (DJ Newswire)

EBay Bid May Be Blocked (WSJ)
Minority shareholders of Internet Auction Co. threatened to block eBay Inc.'s tender offer to
buy all of the South Korean company's shares outstanding. Offshore investors and local
shareholders said they would try to thwart eBay's move to delist Internet Auction unless the
U.S. auctioneer raised its tender-offer price, according to Kim Joo Young, a lawyer
representing minority shareholders. Last week, eBay said it would buy all of Internet
Auction's remaining 6.39 million publicly traded shares that it didn't already own for 70,000
won ($58.53) a share between Nov. 21 and Dec. 10. The San Jose, California, company
bought a controlling 50.01% stake in Internet Auction in February 2001.

AT&T Files Patent Infringement Suit Against PayPal, Inc., And EBay, Inc.
AT&T Corp. (T) filed a patent-infringement lawsuit against PayPal Inc. and its parent, eBay
Inc. (EBAY), seeking compensation for alleged infringement of payment processing
technology.Based on what it knows about the suit, the company believes the suit is
"completely meritless" and plans to defend itself vigorously, the spokesman said.

Computer Virus Attempts PayPal 'Phishing' Scam
An e-mail virus designed to facilitate a PayPal "phisher" identity-theft scam is circulating among
computer users globally.Though the virus, which first surfaced late Thursday, hasn't become a
large outbreak as of yet, computer-security companies warned that it poses a considerable danger
to consumers who may fall victim to a phony request for credit-card information from PayPal,
eBay Inc.'s online payment unit.
Growth Trends
Revenues and Net Income
1400
1200
1000
Revenue Growt h (5yr)
Revenue
120.00%
Net Income
100.00%
800
80.00%
600
60.00%
400
40.00%
200
20.00%
0
0.00%
1998
1999
2000
2001
2002
EBAY
Indust ry
S&P500
AMZN
REVENUE GROWTH (5 Yr)
REVENUE & NET INCOME
eBay’s revenues and net income has been increasing steadily for the past 5 years. The sources of
revenues for eBay are fees associated with business transaction (listing, feature and value fees
from sellers along with fees from payment processing), third party advertising (sale of online
banners and sponsorship advertisement), end to end services (from contractual agreement with
third parties) and offline services (seller commissions, buyer premiums, bidder registration fee
etc). The upward trend in revenues could be attributed to increased transaction activity arising
from increase in registered users, listed categories and gross merchandise sales. The acquisition
of iBazar S.A. and a majority interest in Internet Auction Co., Ltd. In 2001, contributed to a 3%
increase in revenues that year. 6% of net revenues in 2002 could be attributed to the acquisitions
of PayPal Inc., Neocom Technology and 50% interest in an Australian subsidiary. Another major
reason for the significant revenue growth is the fee increases in USA and various international
locations.
One would notice that net income as a percentage of net revenues is low in absolute value,
though it is on an upward trend. The relatively lower net income could be attributed to the costs
associated with development and expansion most importantly to high acquisition costs. At the
same time the effort made by the organization to lower costs is reflected in the decline in
technology costs and the resultant increase in gross margin for third party advertising and end to
end services.
YHOO
A significant portion of the international revenues, net income and operating expenses of eBay
Inc. are denominated in Euros. In 2002, the weakening of US dollar against Euro increased the
net revenues figure by $ 11 million and the operating expenses amount increased by $ 5 million.
Net Profit Margin
Net Prof it Margin
25
20
15
10
5
0
-5
EBAY
Indust ry
S&P500
AMZN
-10
-15
-20
NET PROFIT MARGIN
NET PROFIT MARGIN
(Industry and Competitors)
The 2002 net profit margin for eBay Inc. is much higher than that of the industry average and its
competitors. The net profit margin for year 2002 for eBay Inc. was 20.3% while that of the
industry was -16%. Over the past five years, the net profit margin of this company has been on
an upward trend except in the year 1999. In 1999, eBay Inc had acquired many companies such
as “Butterfield and Butterfield” (the merger related costs incurred by B & B were included in the
consolidated statement of income of eBay), “kruse International”, “Billpoint”, “Alando”. The
company incurred $ 4.4 million in merger related transaction costs alone.
YHOO
EARNING PER SHARE
EPS
The EPS for the company is on an upward trend
0.5
0.4
0.3
0.2
0.1
0
since 1998. The 5-year average growth rate of
EPS for eBay Inc. has been 160.61%, while that
of the industry was -11.21%.
1998
1999
2000
2001
2002
Free Cash Flow
Free Cash Flow
Free cah flow is the measure of cash that is
400
available from eBay’s business operations
300
after the payment of interest and tax, for
200
distribution of dividends or for reinvestment
100
in business. The proceeds of disposals and
0
1998
1999
2000
2001
2002
-100
acquisitions are excluded from this
calculation. The steady increase in FCF can
be attributed to proprtionally higher increase in revenues when comapared to increase in
expenses and capital expensitures. Analysts believe that, in many ways eBay cost model is like
that of a software model. i.e. most of its costs are fixed in nature. The technology, infrastructure,
the essential support staff, brand marketing and promotion costs do not rise proportionally to the
number of transactions ib the eBay’s network. The free cash flow for year 2005 id estimated to
be around $ 600 million (www.netscape.fool.com)
Dividend per share
The company has never paid cash dividends on its stock, and anticipates that it will continue to
retain any future earnings to finance the growth of its business.
Financial Health
Debt/Equity ratio
Debt / Equit y
0.3
0.25
The debt-equity ratio shows how much a firm
0.2
has borrowed long term as a percentage of its
0.15
stock equity. eBay Inc.’s debt to equity ratio is
0.1
much lower than that of its competitors and
0.05
industry average. The data for industry, S & P
0
EBAY
Indust ry
S&P500
AMZN
YHOO
500 was not available.
Interest Coverage
Interest coverage
300
250
200
150
100
50
0
-50
eBay’s interest coverage ratio is much higher
than that of its competitors and the industry
average reflecting the low debt burden on the
company. Another reason for this strong ratio
could be the good cash flow the company has
been able to generate in the past year.
EBAY
Industry S&P500
AMZN
YHOO
Management Performance
Return on Equity (ROE)
.
ROE
ROE
8
25
7
20
6
15
10
5
5
4
Return on Assets (ROA)
3
2
0
1
EBAY
Industry S&P500
AMZN
YHOO
0
1998
1999
2000
2001
2002
ROE = Income/shareholder equity
eBay’s ROE at 20.4% is much higher than that of the industry average (8.7%) and its competitors. ROE has
been increasing in the past 3 years. The dip in ROE in 1999 could be attributed to the losses incurred due to
service disruptions. The company invested in “High System Availability” to avoid such problems in the
future.
Return on Assets
ROA
ROA
25
7
20
6
15
5
4
10
3
5
2
0
1
EBAY
Indust ry
S&P500
AMZN
YHOO
0
1998
1999
2000
2001
2002
ROA = Net Income / Total Assets
eBay’s ROA is much higher than that of its competitor like Amazon and the industry average
indicating that the company has used its assets much more efficiently. This is often a good sign
of management.
Return on Invested Capital (ROIC)
ROIC
ROIC = NOPLAT / Invested Capital. The
60
50
40
30
20
10
0
ROIC for the year 2002 is 16.78%, while
industry average ROIC is 6.1%.
(www.globalfactiva.com) This shows that
eBay has made very good use of its debt and
1998
1999
2000
2001
2002
equity capital.
Economic Value Added
In
the
year
ending
(http://global.factiva.com).
2002,
The
the
invested
weighted
capital
average
for
cost
eBay
of
was
capital
$3,570,271,000
(WACC)
www.bloomberg.com is 8.74%.
Economic Value Added = (ROIC – WACC) x Invested Capital
= (16.78 -8.74) x $3,570,271,000 = $287,049,788.4
Market Multiples
P/E Ratio
P/E ratio
EBAY
AMZN
YHOO
Industry
S & P 500
91.6
N/A
126.4
96.0
31.7
from
The P/E ratio for eBay is lower than that of the industry and its competitors even though the
market forces and economic trends are in its favor. This suggests that stock of eBay might be
undervalued and its attainable price target is high. This view is also reflected in the “Moderate
Buy”, “Hold” and “Overweight” recommendations of various analysts.
PEG
PEG = P/E ratio /Annual EPS growth
The PEG ratio is 1.89 for eBay. This is much lower than its competitors. This could be an indicator
that the investors expect the EPS growth to be much higher than the street consensus number.
Stock Valuation
Capital Structure
99.60% of eBay’s capital is from shareholders and the remaining 0.40% is funded through short
term and long term debt. eBay has no preferred stock. This means that the company is not as
risky since they do not owe any money.
Equity Capital Structure
Debt Capital Structure
Market Capitalization = $34.5 B
Short-term debt = 3.59 M
Preferred equity = 0
Long-term debt = $133.95 M
Common Weight = 99.60%
Short Debt Weight = 0.01%
Preferred Weight = 0%
Long Debt Weight = 0.39%
Cost of Capital
The Weighted Average Cost of Capital for eBay is calculated under the following assumptions
(based on Bloomberg):
Rf = risk-free rate = 5 year treasury bond rate = 4.24%
Rm - Rf = historical long term equity risk premium = 4.53%
Long-term growth rate = 40.46%
Country Premium = 5.11%
Note rate = 1.90%
Bond rate = 4.24%
Debt adjustment factor = 1.38
Tax rate = 32.09%
Debt
Common Equity
Preferred Equity
Weight (%)
0.40
99.60
0
Cost (%)
3.92
8.76
0
Wtd. Avg.
0.0001568
0.08725
0
WACC
8.74%
Intrinsic Value Calculation
An intrinsic value/share is a hypothetical value of the company based on the sum of its future
earnings. This value can be compared to a stock’s current price to determine if it is overvalued or
undervalued. The Intrinsic Value for FDC is calculated under the following assumptions:
R = initial earnings = $ 391,800,000.00
n = length of the first stage = 10yrs
E1 = first stage earnings growth rate = 43.61% (www.quicken.com)
E2 = second stage earnings growth rate = 6.0% (www.quicken.com)
D1 = first stage discount rate = 17% (www.quicken.com)
D2 = second stage discount rate = 12%

www.quicken.com
Discounted Value
$14.3B
Continuing Value
$53.7 B
Long-term Debt
$134 M
# shares outstanding
646 M
Intrinsic Stock Price
$105.10
Current Stock Price
$ 56.81
120
100
80
60
40
20
0
Intrinsic Value
stock Price
The above calculations show that stock of eBay is greatly undervalued. One must note that for a
company like eBay with a market potential of one trillion dollars and on an expansion mode, the
growth may be above the predicted norms.
Insider Trading
From www.wsj.com:
# shares outstanding
646 M
% owned by insiders
23.50%
# sold in the past 6 months
751,571= 0.495% of insider
shares
# purchased by insider
shareholders in the past 6
0
months
As seen from the above table, around 0.495 % of insider shares were traded (sold) over the last
six month period.
The Company Board
An "Independent Director" means one who satisfies The Nasdaq Stock Market Issuer
requirements (or other listing standards which may be applicable) for independent directors, as
they may be amended from time to time
Name
Occupation
Independent
Pierre Omidyar
Founder and Chairman of the Board
No
Director
Yes
Maynard Webb
Chief Operating Officer
No
Rajiv Dutta
Chief Financial Officer
No
Director
Yes
Director
Yes
Director
Yes
Director
Yes
Director
Yes
Director
Yes
Thomas J. Tierney
Fred D. Anderson
Philippe Bourguignon
Scott D. Cook
Robert C. Kagle
Dawn G. Lepore
Howard D. Schultz
Meg Whitman
Jeffrey D. Jordan
President & CEO
No
Senior Vice President, U.S. Business
No
William C. Cobb
Senior Vice President, International
No
Mike Jacobson
Senior Vice President, Legal Affairs, General Counsel
No
and Secretary
Matthew Bannick
Senior Vice President, Global Online Payments
No
Seven out of the 15 directors on the board are independent.
Valuation Models
CAPM model

Risk-free rate (Rf) = 4.25% (based on 10-year T-bond rate on 11/17/2003)

Market Return (Rm) = 7.25% (Expected return on S & P 500 for the five year horizon)

Beta = 1.75 (www.valueline.com)
Formula CAPM:
CAPM = Rf + (Rm - Rf ) = 0.0425 +1.75 (0.075 – 0.0425) = 0.099375 = 9.9375%
The expected return on eBay based on its risk and the prevalent market and risk free rate is
9.9375%.
AVERAGE ANNUAL GROWTH RATE

ROE (5 year average)  18.7%

Retention ratio  100%
Annual growth rate = retention ratio x return on equity:
100% x 18.7% = 18.7%
eBay has been the better performing companies in its industry with phenomenal growth figures.
The average annual growth rates for its competitors like Amazon have been negative figures.
Growth Rate in Earnings
Earning per share (1998)  $ 0.01
Earning per share (2002)  $ 0.43
PV = 0.01; FV = 0.43; N =5; PMT = 0
Therefore g = 112.17%
Since the earnings growth rate have been a phenomenal 112%, I have assumed a growth rate of
18.7% (calculated by multiplying ROE with the retention ratio) for this analysis.
No Growth Model
Vo = Current EPS / K
= 0.43 /0.0994 = $ 4.325
The current market price is $ 32.05, therefore ($ 55.38 - $ 4.325) = $ 51.055 is the value of the
growth. This means that 92% of the value of the company comes form growth and hence it is a
“buy”.
P/E Model
Average P/E for past five years (1998 – 2002)
= (0 +0 + 0 +0 + 69.5) / 5 = $ 13.9
The expected EPS in 2003 = $ 0.70
Based on this data, the expected price in the year 2004 = Avg. P/E x Exp. EPS
= $ 13.9 x $ 0.70 = $ 9.73
Based on this model the value of growth opportunities in terms of stock price appreciation is
limited.
Valuepro.net Stock Valuation
Intrinsic Value
$ 66.08
Growth Rate
35%
This proprietary valuation model is based on observed historical data and growth rate estimates.
According to that analysis the value of the stock is $66.08, which indicates that the stock is
undervalued. The growth rate assumed in this model is 35 %.
Risk Analysis
Risk Factors
Risks to Operating Results

our ability to retain an active user base, to attract new users who list items for sale, who
purchase items through our service or who use our payment services and to maintain
customer satisfaction;

our ability to keep our websites operational at a reasonable cost

the amount and timing of operating costs and capital expenditures relating to the
maintenance and expansion of our businesses, operations and infrastructure

foreign, federal, state or local government regulation, including investigations prompted
by items listed, sold or paid for by our users

our ability to comply with the requirements of entities whose services are required for our
operations, such

as the credit card associations

our ability to comply with the requirements of entities whose services are required for our
operations, such as the credit card associations

the success of our geographical and product expansion

the introduction of new sites, services and products by us or our competitors

volume, size, timing and completion rate of transactions on our websites

consumer confidence in the safety and security of transactions on our websites

our ability to upgrade and develop our systems, infrastructure and customer service
capabilities to accommodate growth at a reasonable cost

our ability to develop product enhancements at reasonable cost

our ability to integrate successfully and cost effectively manage our acquisitions,
including the acquisition of PayPal

our ability to manage fraud loss and credit card charge back rates and the payment
funding mix at PayPal

the cost and demand for advertising on our websites

technical difficulties or service interruptions involving our websites or services provided
to our users by third parties (such as photo hosting

our ability to attract new personnel in a timely and effective manner

our ability to retain key employees in our online businesses, including PayPal

our ability to expand our product offerings involving fixed-price trading successfully

the costs and results of litigation

the results of regulatory decisions

the success of brand building and marketing campaigns

the continued financial strength of our commercial partners and technology suppliers

the level of use of the Internet and online services

increasing consumer acceptance of the Internet and other online services for commerce
and, in particular, for the trading of products such as those listed on our websites

general economic conditions and those economic conditions specific to the Internet and
e-commerce industries

geopolitical events such as war, threat of war or terrorist actions

Our limited operating history and the increased variety of services offered on our
websites makes it difficult for us to forecast the level or source of our revenues or
earnings accurately. We believe that 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. We do not have backlog, and substantially all of our net revenues
each quarter come from transactions involving sales or payments during that quarter. Due
to the inherent difficulty in forecasting revenues it is also difficult to forecast income
statement expenses as a percentage of net revenues. Quarterly and annual income
statement expenses as a percentage of net revenues may be significantly different from
historical or projected rates. Our operating results in one or more future quarters may fall
below the expectations of securities analysts and investors. In that event, the trading price
of our common stock would almost certainly decline.

We are investing heavily in marketing and promotion, customer support, further
development of our websites, technology and operating infrastructure development. The
costs of these investments are expected to remain significant into the future. In addition,
many of our acquisitions require continuing investments in these areas and we have
significant ongoing contractual commitments in some of these areas. As a result, we may
be unable to adjust our spending rapidly enough to compensate for any unexpected
revenue shortfall, which may harm our profitability. The existence of several larger and
more established companies that are enabling online sales as well as other companies,
some of whom do not charge for transactions on their sites and others who are facilitating
trading through varied pricing formats (e.g., fixed-price, reverse auction, group buying)
may limit our ability to raise user fees in response to declines in profitability. In addition,
we are spending in advance of anticipated growth, which may also harm our profitability.
In view of the rapidly evolving nature of our business and our limited operating history,
we believe that period-to-period comparisons of our operating results are not necessarily
meaningful. You should not rely upon our historical results as indications of our future
performance.

While eBay has acquired smaller companies in the past, the acquisition of PayPal
represents by far the largest acquisition by eBay to date. We expect that the process of
integrating PayPal’s business into

Anything that diverts our users from their customary level of usage of our websites could
adversely affect our business. We would therefore be adversely affected by geopolitical
events such as war, the threat of war or terrorist activity. Similarly, our results of
operations historically have been seasonal in nature because many of our users reduce
their activities on our websites during the holidays, such as during the Thanksgiving (in
the U.S.) and Christmas periods, and with the onset of good weather during the summer
months. We have historically experienced our strongest quarters of online growth in our
first and fourth fiscal quarters. PayPal has shown similar seasonality, except that its
strongest quarter of online growth has historically been the fourth fiscal quarter.

Our international expansion has been rapid and we have only limited experience in many
of the countries in which we now do business. Our international business, especially in
Germany, the U.K., Canada and Korea, has also become critical to our revenues and
profits. Expansion into international markets requires management attention and
resources. We have limited experience in localizing our service to conform to local
cultures, standards and policies. In many countries, we compete with local companies
who understand the local market better than we do. We may not be successful in
expanding into particular international markets or in generating revenues from foreign
operations. For example, in 2002 we withdrew from the Japanese market. Even if we are
successful, the costs of operating new sites are expected to exceed our net revenues for at
least 12 months in most countries.

International net revenues result from transactions by our foreign operations and are
typically denominated in the local currency of each country. These operations also incur
most of their expenses inthe local currency. Accordingly, our foreign operations use the
local currency as their functional currency. Our international operations are subject to
risks typical of international operations, including, but not limited to differing economic
conditions, changes in political climate, differing tax structures, other regulations and
restrictions and foreign exchange rate volatility. Accordingly, our future results could be
materially adversely impacted by changes in these or other factors.