10-Q 1 ebay10-qq12015.htm QUARTERLY REPORT eBay 10-Q Q1 2015


 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
 
 
[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

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 000-24821
 
 
 
 
 
eBay Inc.
 
(Exact name of registrant as specified in its charter)
 
 
 

Delaware
77-0430924
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
 
2065 Hamilton Avenue
San Jose, California
95125
(Address of principal executive offices)
(Zip Code)
(408) 376-7400
(Registrant's telephone number, including area code)
 
 
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  [x]    No  [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  [x]    No  [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
[x]
 
Accelerated filer
[ ]
Non-accelerated filer
[ ]
(Do not check if a smaller reporting company)
Smaller reporting company
[ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  [ ]    No  [x]

As of April 20, 2015, there were 1,214,821,692 of the registrant's common stock, $0.001 par value, outstanding, which is the only class of common or voting stock of the registrant issued.

 



PART I: FINANCIAL INFORMATION
Item 1:
Financial Statements
eBay Inc.
CONDENSED CONSOLIDATED BALANCE SHEET
 
March 31,
2015
 
December 31,
2014
 
(In millions, except par value amounts)
 
(Unaudited)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
5,473

 
$
6,328

Short-term investments
4,206

 
3,770

Accounts receivable, net
703

 
797

Loans and interest receivable, net
3,578

 
3,600

Funds receivable and customer accounts
10,891

 
10,545

Other current assets
1,663

 
1,491

Total current assets
26,514

 
26,531

Long-term investments
5,647

 
5,777

Property and equipment, net
2,947

 
2,902

Goodwill
8,965

 
9,094

Intangible assets, net
481

 
564

Other assets
287

 
264

Total assets
$
44,841

 
$
45,132

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt
$
868

 
$
850

Accounts payable
393

 
401

Funds payable and amounts due to customers
10,891

 
10,545

Accrued expenses and other current liabilities
5,145

 
5,393

Deferred revenue
190

 
188

Income taxes payable
124

 
154

Total current liabilities
17,611

 
17,531

Deferred and other tax liabilities, net
768

 
792

Long-term debt
6,795

 
6,777

Other liabilities
129

 
126

Total liabilities
25,303

 
25,226

Commitments and contingencies (Note 9)

 


Stockholders' equity:
 
 
 
Common stock, $0.001 par value; 3,580 shares authorized; 1,210 and 1,224 shares outstanding
2

 
2

Additional paid-in capital
14,084

 
13,887

Treasury stock at cost, 402 and 384 shares
(15,054
)
 
(14,054
)
Retained earnings
19,526

 
18,900

Accumulated other comprehensive income
980

 
1,171

Total stockholders' equity
19,538

 
19,906

Total liabilities and stockholders' equity
$
44,841

 
$
45,132


The accompanying notes are an integral part of these condensed consolidated financial statements.

2


eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
 
Three Months Ended
March 31,
 
2015
 
2014
 
(In millions, except per share amounts)
 
(Unaudited)
Net revenues
$
4,448

 
$
4,262

Cost of net revenues
1,450

 
1,351

Gross profit
2,998

 
2,911

Operating expenses:
 
 
 
Sales and marketing
794

 
805

Product development
485

 
480

General and administrative
665

 
465

Provision for transaction and loan losses
264

 
204

Amortization of acquired intangible assets
58

 
79

Total operating expenses
2,266

 
2,033

Income from operations
732

 
878

Interest and other, net
8

 
(5
)
Income before income taxes
740

 
873

Provision for income taxes
(114
)
 
(3,199
)
Net income (loss)
$
626

 
$
(2,326
)
Net income (loss) per share:
 
 
 
Basic
$
0.51

 
$
(1.82
)
Diluted
$
0.51

 
$
(1.82
)
Weighted average shares:
 
 
 
Basic
1,216

 
1,276

Diluted
1,229

 
1,276


The accompanying notes are an integral part of these condensed consolidated financial statements.


3


eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
 
Three Months Ended
March 31,
 
2015
 
2014
 
(In millions)
 
(Unaudited)
Net income (loss)
$
626

 
$
(2,326
)
Other comprehensive income (loss), net of reclassification adjustments:
 
 
 
Foreign currency translation gain (loss)
(265
)
 
(29
)
Unrealized gains (losses) on investments, net
(22
)
 
(97
)
Tax (expense) benefit on unrealized gains (losses) on investments, net
9

 
42

Unrealized gains (losses) on hedging activities, net
89

 
15

Tax (expense) benefit on unrealized gains (losses) on hedging activities, net
(2
)
 
(3
)
Other comprehensive income (loss), net tax
(191
)
 
(72
)
Comprehensive income (loss)
$
435

 
$
(2,398
)

The accompanying notes are an integral part of these condensed consolidated financial statements.


4


eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
 
Three Months Ended March 31,
 
2015
 
2014
 
(In millions)
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
626

 
$
(2,326
)
Adjustments:
 
 
 
Provision for transaction and loan losses
264

 
204

Depreciation and amortization
381

 
382

Stock-based compensation
185

 
149

Deferred income taxes
(87
)
 
3,108

Changes in assets and liabilities, net of acquisition effects
(218
)
 
(343
)
Net cash provided by operating activities
1,151

 
1,174

Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(322
)
 
(206
)
Changes in principal loans receivable, net
(12
)
 
(2
)
Purchases of investments
(2,423
)
 
(1,261
)
Maturities and sales of investments
2,034

 
2,006

Acquisitions, net of cash acquired

 
(4
)
Other
(1
)
 
(1
)
Net cash provided by (used in) investing activities
(724
)
 
532

Cash flows from financing activities:
 

 
 

Proceeds from issuance of common stock
38

 
55

Repurchases of common stock
(1,000
)
 
(1,811
)
Excess tax benefits from stock-based compensation
28

 
60

Tax withholdings related to net share settlements of restricted stock awards and units
(51
)
 
(104
)
Funds receivable and customer accounts, net
(346
)
 
(388
)
Funds payable and amounts due to customers, net
346

 
388

Other

 
7

Net cash used in financing activities
(985
)
 
(1,793
)
Effect of exchange rate changes on cash and cash equivalents
(297
)
 
8

Net increase (decrease) in cash and cash equivalents
(855
)
 
(79
)
Cash and cash equivalents at beginning of period
6,328

 
4,494

Cash and cash equivalents at end of period
$
5,473

 
$
4,415

Supplemental cash flow disclosures:
 
 
 
Cash paid for interest
$
74

 
$
36

Cash paid for income taxes
$
101

 
$
35

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 — The Company and Summary of Significant Accounting Policies

The Company

We are a global technology company that enables commerce through three reportable segments: Marketplaces, Payments and Enterprise. Our Marketplaces segment includes our eBay.com platform and its localized counterparts and our other online platforms, such as our online classifieds sites and StubHub. Our Payments segment is comprised of our PayPal business. Our Enterprise segment includes our Magento business and provides commerce technologies, omnichannel operations and marketing solutions for merchants of all sizes that operate in general merchandise categories. In January 2015, we announced that we will be exploring strategic options for eBay Enterprise, including a possible sale or partial sale, or IPO.

On September 30, 2014, we announced that our Board of Directors, following a strategic review of our growth strategies and structure, has approved a plan to separate PayPal (consisting of our Payments segment) into an independent publicly traded company. We expect to complete the transaction as a tax-free spin-off in the second half of 2015, subject to market, regulatory, and certain other conditions. We also announced that Dan Schulman has been appointed as President of PayPal and CEO-designee of the standalone PayPal company following separation, and that Devin Wenig, currently president of eBay Marketplaces, will become CEO of eBay following separation. We have also recently announced that, following the separation, we expect that Tom Tierney will become the Chairman of the Board of eBay Inc. and that John Donahoe will become the Chairman of the Board of PayPal Holdings, Inc.

We are required to comply with various regulations worldwide in order to operate our businesses, particularly our Payments business. We also partner with banks and other financial institutions to offer our Payments services globally. Changes in laws or regulations, non-compliance with laws or regulations or loss of key bank or financial institution partners could have a significant adverse impact on our ability to operate our Payments business; therefore, we monitor these areas closely with the goal of mitigating potential adverse impacts.

When we refer to “we,” “our,” “us” or “eBay” in this document, we mean the current Delaware corporation (eBay Inc.) and its California predecessor, as well as all of our consolidated subsidiaries, unless otherwise expressly stated or the context otherwise requires.

Use of estimates

The preparation of condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to provisions for transaction and loan losses, legal contingencies, income taxes, revenue recognition, stock-based compensation, goodwill and the recoverability of intangible assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates.

Principles of consolidation and basis of presentation

The accompanying condensed financial statements are consolidated and include the financial statements of eBay Inc., our wholly and majority-owned subsidiaries and variable interest entities (“VIE”) where we are the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation. Minority interests are recorded as a noncontrolling interest. A qualitative approach is applied to assess the consolidation requirement for VIEs. Investments in entities where we hold at least a 20% ownership interest and have the ability to exercise significant influence, but not control, over the investee are accounted for using the equity method of accounting. For such investments, our share of the investees' results of operations is included in interest and other, net and our investment balance is included in long-term investments. Investments in entities where we hold less than a 20% ownership interest are generally accounted for using the cost method of accounting, and our share of the investees' results of operations is included in our condensed consolidated statement of income to the extent dividends are received.


6


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


These condensed consolidated financial statements and accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2014. We have evaluated all subsequent events through the date these condensed consolidated financial statements were issued. In the opinion of management, these condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for fair presentation of the condensed consolidated financial statements for interim periods.

Recent Accounting Pronouncements

In 2014, the FASB issued new guidance related to reporting discontinued operations. This new standard raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The new standard is effective for the Company and will impact the treatment of our planned spin-off of PayPal expected to occur in the second half of 2015 and any potential disposition transaction related to our Enterprise segment. This new accounting guidance will impact our financial statements by requiring additional disclosures after the spin-off of PayPal.

In 2014, the FASB issued new accounting guidance related to revenue recognition. This new standard will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition guidance provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective for eBay Inc. beginning January 1, 2017 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. We are evaluating the impact of adopting this new accounting guidance on our financial statements.

In 2014, the FASB issued new guidance related to development-stage entities. The new standard removes all incremental financial reporting requirements from GAAP for development-stage entities. The accounting standards update also removes an exception provided to development stage entities in consolidations for determining whether an entity is a variable interest entity. As of the first annual period beginning after December 15, 2014, the presentation and disclosure requirements in Topic 915 will no longer be required. The revised consolidation standards are effective one year later, for fiscal years beginning after December 15, 2015. Early adoption is permitted. The adoption of the presentation and disclosure requirements in Topic 915 did not have a material impact on our financial statements. We are evaluating the impact, if any, of adopting the remaining new accounting guidance on our financial statements.

In 2014, the FASB issued new guidance related to the disclosures around going concern. The new standard provides guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on our financial statements.

In 2014, the FASB issued new guidance related to pushdown accounting. The new guidance provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. The amendments are effective on November 18, 2014. We adopted this guidance, as required, on November 18, 2014. The adoption of this guidance did not have a material impact on our financial statements.

In 2015, the FASB issued new guidance related to consolidations. The new standard amends the guidelines for determining whether certain legal entities should be consolidated and reduces the number of consolidation models. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. We are evaluating the impact, if any, of adopting this new accounting guidance on our financial statements.

In 2015, the FASB issued new guidance related to presentation of debt issue costs. The new standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. We are evaluating the impact, if any, of adopting this new accounting guidance on our financial statements.


7


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


In 2015, the FASB issued new guidance related to accounting for fees paid in a cloud computing arrangement. The new standard provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. We are evaluating the impact, if any, of adopting this new accounting guidance on our financial statements.

Note 2 — Net Income (loss) Per Share

Basic net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding during the period. The dilutive effect of outstanding options and equity incentive awards is reflected in diluted net income (loss) per share by application of the treasury stock method. The calculation of diluted net income (loss) per share excludes all anti-dilutive common shares. The following table sets forth the computation of basic and diluted net income (loss) per share for the periods indicated:
 
Three Months Ended
March 31,
 
2015
 
2014
 
(In millions, except per share amounts)
Numerator:
 
 
 
Net income (loss)
$
626

 
$
(2,326
)
Denominator:
 
 
 
Weighted average shares of common stock - basic
1,216

 
1,276

Dilutive effect of equity incentive awards
13

 

Weighted average shares of common stock - diluted
1,229

 
1,276

Net income (loss) per share:
 
 
 
Basic
$
0.51

 
$
(1.82
)
Diluted
$
0.51

 
$
(1.82
)
Common stock equivalents excluded from income per diluted share because their effect would have been anti-dilutive
4

 
51


Note 3 — Goodwill and Intangible Assets

Goodwill

The following table presents goodwill balances and adjustments to those balances for each of our reportable segments during the three months ended March 31, 2015:
 
December 31,
2014
 
Goodwill
Acquired
 
Adjustments
 
March 31,
2015
 
(In millions)
Reportable segments:
 
 
 
 
 
 
 
Marketplaces
$
4,678

 
$

 
$
(127
)
 
$
4,551

Payments
3,130

 

 
(2
)
 
3,128

Enterprise
1,286

 

 

 
1,286

 
$
9,094

 
$

 
$
(129
)
 
$
8,965


The adjustments to goodwill during the three months ended March 31, 2015 were due primarily to foreign currency translations.


8


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


In January 2015, we announced that we will be exploring strategic options for our eBay Enterprise business, including a possible sale or partial sale, or IPO. If the expected fair value received in a disposition of our eBay Enterprise business is less than its carrying value, a goodwill impairment charge will be realized.

Intangible Assets

The components of identifiable intangible assets are as follows: 
 
March 31, 2015
 
December 31, 2014
 
Gross Carrying Amount  
 
Accumulated Amortization 
 
Net Carrying Amount
 
Weighted Average Useful Life (Years)
 
Gross Carrying Amount
 
Accumulated Amortization 
 
Net Carrying Amount
 
Weighted Average Useful Life (Years)
 
(In millions, except years)
Intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer lists and user base
$
1,626

 
$
(1,394
)
 
$
232

 
5
 
$
1,641

 
$
(1,367
)
 
$
274

 
5
Marketing related
821

 
(721
)
 
100

 
5
 
849

 
(729
)
 
120

 
5
Developed technologies
575

 
(490
)
 
85

 
4
 
579

 
(478
)
 
101

 
4
All other
281

 
(217
)
 
64

 
4
 
279

 
(210
)
 
69

 
4
 
$
3,303

 
$
(2,822
)
 
$
481

 
 
 
$
3,348

 
$
(2,784
)
 
$
564

 
 

Amortization expense for intangible assets was $80 million and $109 million for the three months ended March 31, 2015 and 2014, respectively.

Expected future intangible asset amortization as of March 31, 2015 is as follows (in millions):
Fiscal years:
 
 
Remaining 2015
 
$
228

2016
 
178

2017
 
50

2018
 
20

2019
 
5

Thereafter
 

 
 
$
481


Note 4 — Segments

We have three reportable segments: Marketplaces, Payments and Enterprise. We allocate resources to and assess the performance of each reportable segment using information about its revenue and operating income (loss). We do not evaluate operating segments using discrete asset information. We do not allocate gains and losses from equity investments, interest and other income, or taxes to our reportable segments.

The corporate and other category includes income, expenses and charges such as:

results of operations of various initiatives which support all of our reportable segments;
corporate management costs, such as human resources, finance and legal, not allocated to our segments;
amortization of intangible assets;
separation related expenses;
restructuring charges; and
stock-based compensation expense.


9


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


The following tables summarize the financial performance of our reportable segments and provide a reconciliation to our consolidated operating results for the periods reflected below:
 
Three Months Ended March 31,
 
2015
 
2014
 
(In millions)
Net Revenue
 
 
 
Marketplaces
 
 
 
Net transaction revenues
$
1,672

 
$
1,727

Marketing services and other revenues
397

 
428

 
2,069

 
2,155

Payments
 
 
 
Net transaction revenues
1,940

 
1,700

Marketing services and other revenues
168

 
145

 
2,108

 
1,845

Enterprise
 
 
 
Net transaction revenues
224

 
208

Marketing services and other revenues
64

 
61

 
288

 
269

 
 
 
 
Elimination of inter-segment net revenue (1)
(17
)
 
(7
)
Total consolidated net revenue
$
4,448

 
$
4,262

 
 
 
 
Operating income (loss)
 
 
 
Marketplaces
$
811

 
$
856

Payments
533

 
475

Enterprise
14

 
13

Corporate and other
(626
)
 
(466
)
Total operating income (loss)
$
732

 
$
878


(1) Represents revenue generated between our reportable segments.


10


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Note 5 — Investments

At March 31, 2015 and December 31, 2014, the estimated fair value of our short-term and long-term investments classified as available for sale, were as follows:
 
March 31, 2015
 
Gross
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In millions)
Short-term investments:
 
  
 
  
 
 
 
Restricted cash
$
36

  
$

  
$

 
$
36

Corporate debt securities
3,108

  
2

  
(1
)
 
3,109

Government and agency securities
5

  

  

 
5

Time deposits and other
60

  

  

 
60

Equity instruments
10

 
986

 

 
996

 
$
3,219

  
$
988

  
$
(1
)
 
$
4,206

Long-term investments:
 
  
 
  
 
 
 
Corporate debt securities
5,360

  
31

  
(10
)
 
5,381

Government and agency securities
51

  

  

 
51

 
$
5,411

  
$
31

  
$
(10
)
 
$
5,432

 
 
December 31, 2014
 
Gross
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In millions)
Short-term investments:
 
  
 
  
 
 
 
Restricted cash
$
29

  
$

  
$

 
$
29

Corporate debt securities
2,519

  
1

  
(1
)
 
2,519

Government and agency securities
3

  

  

 
3

Time deposits and other
181

  

  

 
181

Equity instruments
10

 
1,028

 

 
1,038

 
$
2,742

 
$
1,029

 
$
(1
)
 
$
3,770

Long-term investments:
 
  
 
  
 
 
 
Corporate debt securities
5,319

  
18

  
(18
)
 
5,319

Government and agency securities
232

  
1

  

 
233

 
$
5,551

  
$
19

  
$
(18
)
 
$
5,552


We had no material long-term or short-term investments that have been in a continuous unrealized loss position for more than 12 months as of March 31, 2015 and December 31, 2014. Refer to "Note 14 - Accumulated Other Comprehensive Income" for amounts reclassified to earnings from unrealized gains and losses.


11


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


The estimated fair values of our short-term and long-term investments classified as available for sale by date of contractual maturity at March 31, 2015 are as follows:  
 
March 31,
2015
 
(In millions)
One year or less (including restricted cash of $36)
$
3,210

One year through two years
1,776

Two years through three years
2,188

Three years through four years
1,073

Four years through five years
324

Five years through six years
58

Six years through seven years
1

Seven years through eight years

Eight years through nine years
11

Nine years through ten years
1

 
$
8,642

Equity and cost method investments
We have made multiple equity and cost method investments which are reported in long-term investments on our consolidated balance sheet. As of March 31, 2015 and December 31, 2014, our equity and cost method investments totaled $215 million and $225 million, respectively.


12


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Note 6 — Fair Value Measurement of Assets and Liabilities

The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014:
 Description
Balance as of
March 31, 2015
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
(In millions)
Assets:
 
 
 
 
 
Cash and cash equivalents
$
5,473

 
$
3,867

 
$
1,606

Short-term investments:
 
 
 
 
 
Restricted cash
36

 
36

 

Corporate debt securities
3,109

 

 
3,109

Government and agency securities
5

 

 
5

Time deposits
60

 

 
60

Equity instruments
996

 
996

 

Total short-term investments
4,206

 
1,032

 
3,174

Funds receivable and customer accounts
3,745

 

 
3,745

Derivatives
376

 

 
376

Long-term investments:
 
 
 
 
 
Corporate debt securities
5,381

 

 
5,381

Government and agency securities
51

 

 
51

Total long-term investments
5,432

 

 
5,432

Total financial assets
$
19,232

 
$
4,899

 
$
14,333

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Derivatives
$
51

 
$

 
$
51




13


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Description
 
Balance as of
December 31, 2014
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1) 
 
Significant Other
Observable Inputs
(Level 2)
 
 
(In millions)
Assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
6,328

 
$
3,917

 
$
2,411

Short-term investments:
 
 
 
 
 
 
Restricted cash
 
29

 
29

 

Corporate debt securities
 
2,519

 

 
2,519

Government and agency securities
 
3

 

 
3

Time deposits
 
181

 

 
181

Equity instruments
 
1,038

 
1,038

 

Total short-term investments
 
3,770

 
1,067

 
2,703

Funds receivable and customer accounts
 
4,161

 

 
4,161

Derivatives
 
222

 

 
222

Long-term investments:
 
 
 
 
 
 
Corporate debt securities
 
5,319

 

 
5,319

Government and agency securities
 
233

 

 
233

Total long-term investments
 
5,552

 

 
5,552

Total financial assets
 
$
20,033

 
$
4,984

 
$
15,049

 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Derivatives
 
$
29

 
$

 
$
29

 
Our financial assets and liabilities are valued using market prices on both active markets (level 1) and less active markets (level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily available pricing sources for comparable instruments, identical instruments in less active markets, or models using market observable inputs. The majority of our derivative instruments are valued using pricing models that take into account the contract terms as well as multiple inputs where applicable, such as equity prices, interest rate yield curves, option volatility and currency rates. We did not have any transfers of financial instruments between valuation levels during the three months ended March 31, 2015.

Cash and cash equivalents are short-term, highly liquid investments with original or remaining maturities of three months or less when purchased and are comprised primarily of bank deposits, certificates of deposit, commercial paper and money market funds. We had total funds receivable and customer accounts of $10.9 billion as of March 31, 2015, of which $3.7 billion was invested in time deposits and U.S. and foreign government and agency securities. We elect to account for certain customer accounts, including foreign-currency denominated available-for-sale investments, under the fair value option. Election of the fair value option allows us to significantly reduce the accounting asymmetry that would otherwise arise when recognizing foreign exchange gains and losses relating to available-for-sale investments and the corresponding customer liabilities.

In addition, we had cost and equity method investments of approximately $215 million and $225 million included in long-term investments on our condensed consolidated balance sheet at March 31, 2015 and December 31, 2014, respectively.

Our derivative instruments vary in duration depending on contract type. Our foreign exchange derivative contracts are primarily short-term in nature, generally one month to one year in duration. Certain foreign currency contracts designated as cash flow hedges may have a duration of up to 18 months. The duration of our interest rate derivative contracts match the duration of the fixed rate notes due 2019, 2021 and 2024.

As of March 31, 2015 and December 31, 2014, we held no direct investments in auction rate securities, collateralized debt obligations, structured investment vehicles or mortgage-backed securities.


14


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Other financial instruments, including accounts receivable, loans and interest receivable, accounts payable, funds receivable, certain customer accounts, funds payable and amounts due to customers, are carried at cost, which approximates their fair value because of the short-term nature of these instruments.

Note 7 — Derivative Instruments

Summary of Derivative Instruments

Our primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates and interest rates. Our derivatives expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the arrangement. We seek to mitigate such risk by limiting our counterparties to, and by spreading the risk across, major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored on an ongoing basis. To further limit credit risk, we also enter into collateral security arrangements related to certain interest rate derivative instruments whereby collateral is posted between counterparties if the fair value of the derivative instrument exceeds certain thresholds. Additional collateral would be required in the event of a significant credit downgrade by either party.

Foreign Exchange Contracts

We transact business in various foreign currencies and have significant international revenues as well as costs denominated in foreign currencies, which subjects us to foreign currency risk. We use foreign currency exchange contracts, generally with maturities of 18 months or less, to reduce the volatility of cash flows primarily related to forecasted revenues, expenses, assets and liabilities denominated in foreign currencies. The objective of the foreign exchange contracts is to better ensure that the U.S. dollar-equivalent cash flows are not adversely affected by changes in the applicable U.S. dollar/foreign currency exchange rate. For derivative instruments that are designated as cash flow hedges, the effective portion of the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into earnings in the same period the forecasted transaction affects earnings. The ineffective portion of the unrealized gains and losses on these contracts, if any, is recorded immediately in earnings. We evaluate the effectiveness of our foreign exchange contracts on a quarterly basis. We do not use any foreign exchange contracts for trading purposes.

For our derivative instruments designated as cash flow hedges, the amounts recognized in earnings related to the ineffective portion were not material in each of the periods presented, and we did not exclude any component of the changes in fair value of the derivative instruments from the assessment of hedge effectiveness. As of March 31, 2015, we have estimated that approximately $243 million of net derivative gains related to our cash flow hedges included in accumulated other comprehensive income will be reclassified into earnings within the next 12 months.

Interest Rate Contracts

In connection with the July 2014 issuance of our fixed rate notes due 2019, 2021 and 2024, we entered into certain interest rate swap agreements that have the economic effect of modifying the fixed interest obligations associated with $2.4 billion of these notes so that the interest payable on these senior notes effectively became variable based on London InterBank Offered Rate (LIBOR) plus a spread. We have designated these swap agreements as qualifying hedging instruments and are accounting for them as fair value hedges. These transactions are characterized as fair value hedges for financial accounting purposes because they protect us against changes in the fair value of certain of our fixed rate borrowings due to benchmark interest rate movements. Changes in the fair values of these interest rate swap agreements are recognized in other assets or other liabilities with a corresponding increase or decrease in long-term debt. Each quarter we pay interest based on LIBOR plus a spread to the counterparty and on a semi-annual basis receive interest from the counterparty per the fixed rate of these senior notes. The net amount is recognized as interest expense in interest and other, net. The ineffective portion of the unrealized gains and losses on these contracts, if any, is recorded immediately in earnings. We evaluate the effectiveness of our contracts on a quarterly basis. We do not use any interest rate swap agreements for trading purposes.

For our derivative instruments designated as fair value hedges, the amounts recognized in earnings related to the ineffective portion were not material in each of the periods presented, and we did not exclude any component of the changes in fair value of the derivative instruments from the assessment of hedge effectiveness.

15


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)



Fair Value of Derivative Contracts

The fair values of our outstanding derivative instruments as of March 31, 2015 and December 31, 2014 were as follows:
 
Balance Sheet Location
 
March 31,
2015
 
December 31,
2014
 
 
 
(In millions)
Derivative Assets:
 
 
 
 
 
Foreign exchange contracts designated as cash flow hedges
Other Current Assets
 
$
257

 
$
170

Foreign exchange contracts not designated as hedging instruments
Other Current Assets
 
60

 
30

Interest rate contracts designated as fair value hedges
Other Assets
 
59

 
22

Total derivative assets
 
 
$
376

 
$
222

 
 
 
 
 
 
Derivative Liabilities:
 
 
 
 
 
Foreign exchange contracts designated as cash flow hedges
Other Current Liabilities
 
$

 
$
2

Foreign exchange contracts not designated as hedging instruments
Other Current Liabilities
 
51

 
27

Total derivative liabilities
 
 
$
51

 
$
29

 
 
 
 
 
 
Total fair value of derivative instruments
 
 
$
325

 
$
193


Under the master netting agreements with the respective counterparties to our derivative contracts, subject to applicable requirements, we are allowed to net settle transactions of the same type with a single net amount payable by one party to the other. However, we have elected to present the derivative assets and derivative liabilities on a gross basis on our condensed consolidated balance sheet. As of March 31, 2015, the potential effect of rights of set-off associated with the foreign exchange contracts discussed above would be an offset to both assets and liabilities by $47 million, resulting in net derivative assets and derivative liabilities of $270 million and $4 million, respectively. We are not required to pledge, nor are we entitled to receive, collateral related to our foreign exchange derivative transactions. As of March 31, 2015, we had neither pledged nor received collateral related to our interest rate derivative transactions.

Effect of Derivative Contracts on Accumulated Other Comprehensive Income

The following table summarizes the activity of derivative contracts that qualify for hedge accounting as of March 31, 2015 and December 31, 2014, and the impact of these derivative contracts on accumulated other comprehensive income for the three months ended March 31, 2015
 
December 31, 2014
 
Amount of gain (loss)
recognized in other
comprehensive income
(effective portion) 
 
Amount of gain (loss)
reclassified from
accumulated other
comprehensive income
to net revenue and operating expense
(effective portion)
 
March 31, 2015
 
(In millions)
Foreign exchange contracts designated as cash flow hedges
$
168

 
$
159

 
$
70

 
$
257



16


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


The following table summarizes the activity of derivative contracts that qualify for hedge accounting as of March 31, 2014 and December 31, 2013, and the impact of these derivative contracts on accumulated other comprehensive income for the three months ended March 31, 2014:
 
December 31, 2013
 
Amount of gain (loss)
recognized in other
comprehensive income
(effective portion) 
 
Amount of gain (loss)
reclassified from
accumulated other
comprehensive income
to net revenue and operating expense
(effective portion)
 
March 31, 2014
 
(In millions)
Foreign exchange contracts designated as cash flow hedges
$
(106
)
 
$
(6
)
 
$
(21
)
 
$
(91
)


Effect of Derivative Contracts on Condensed Consolidated Statement of Income

The following table provides the location in our financial statements of the recognized gains or losses related to our foreign exchange derivative instruments: 
 
Three Months Ended
March 31,
 
2015
 
2014
 
(In millions)
Foreign exchange contracts designated as cash flow hedges recognized in net revenues
$
50

 
$
(17
)
Foreign exchange contracts designated as cash flow hedges recognized in operating expenses
20

 
(4
)
Foreign exchange contracts not designated as hedging instruments recognized in interest and other, net
27

 
(10
)
Total gain (loss) recognized from foreign exchange derivative contracts in the condensed consolidated statement of income
$
97

 
$
(31
)

The following table provides the location in our financial statements of the recognized gains or losses related to our interest rate derivative instruments: 
 
Three Months Ended
March 31,
 
2015
 
2014
 
(In millions)
Gain (loss) from interest rate contracts designated as fair value hedges recognized in interest and other, net
$
59

 
N/A
Gain (loss) from hedged items attributable to hedged risk recognized in interest and other, net
(59
)
 
N/A
Total gain (loss) recognized from interest rate derivative contracts in the condensed consolidated statement of income
$

 
N/A


17


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Notional Amounts of Derivative Contracts

Derivative transactions are measured in terms of the notional amount, but this amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the derivative instruments. The notional amount is generally not exchanged, but is used only as the basis on which the value of foreign exchange payments under these contracts is determined. The following table provides the notional amounts of our outstanding derivatives:
 
March 31,
 
2015
 
2014
 
(In millions)
Foreign exchange contracts designated as cash flow hedges
$
2,040

 
$
1,802

Foreign exchange contracts not designated as hedging instruments
3,276

 
2,996

Interest rate contracts designated as fair value hedges
2,400

 
N/A

Total
$
7,716

 
$
4,798


Note 8 — Debt
The following table summarizes the carrying value of our outstanding debt:
 
 
Coupon
 
Carrying Value as of
 
Effective
 
Carrying Value as of
 
Effective
 
 
 Rate
 
March 31, 2015
 
 Interest Rate
 
December 31, 2014
 
 Interest Rate
 
 
(In millions, except percentages)
Long-Term Debt
 
 
 
 
 
 
 
 
 
 
Floating Rate Notes:
 
 
 
 
 
 
 
 
 
 
Senior notes due 2017
 
LIBOR plus 0.20%

 
$
450

 
0.562
%
 
450

 
0.560
%
Senior notes due 2019
 
LIBOR plus 0.48%

 
400

 
0.813
%
 
400

 
0.811
%
 
 
 
 
 
 
 
 
 
 
 
Fixed Rate Notes:
 
 
 
 
 
 
 
 
 
 
Senior notes due 2017
 
1.350
%
 
1,000

 
1.456
%
 
1,000

 
1.456
%
Senior notes due 2019
 
2.200
%
 
1,148

 
2.346
%
 
1,148

 
2.346
%
Senior notes due 2020
 
3.250
%
 
498

 
3.389
%
 
498

 
3.389
%
Senior notes due 2021
 
2.875
%
 
749

 
2.993
%
 
749

 
2.993
%
Senior notes due 2022
 
2.600
%
 
999

 
2.678
%
 
999

 
2.678
%
Senior notes due 2024
 
3.450
%
 
749

 
3.531
%
 
749

 
3.531
%
Senior notes due 2042
 
4.000
%
 
743

 
4.114
%
 
743

 
4.114
%
Total senior notes
 
 
 
6,736

 
 
 
6,736

 
 
Hedge accounting fair value adjustments
 
 
 
59

 
 
 
22

 
 
Other indebtedness
 
 
 

 
 
 
19

 
 
Total long-term debt
 
 
 
$
6,795

 
 
 
$
6,777

 
 
 
 
 
 
 
 
 
 
 
 
 
Short-Term Debt
 
 
 
 
 
 
 
 
 
 
Senior notes due 2015
 
0.700
%
 
250

 
0.820
%
 
250

 
0.820
%
Senior notes due 2015
 
1.625
%
 
600

 
1.805
%
 
600

 
1.805
%
Other indebtedness
 
 
 
18

 
 
 

 
 
Total short-term debt
 
 
 
868

 
 
 
850

 
 
Total Debt
 
 
 
$
7,663

 
 
 
$
7,627

 
 

18


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Senior Notes
In July 2014, we issued senior unsecured notes, or senior notes, in an aggregate principal amount of $3.5 billion. These senior notes consist of $450 million aggregate principal amount of floating rate notes due 2017, $400 million aggregate principal amount of floating rate notes due 2019, $1.15 billion aggregate principal amount of 2.2% fixed rate notes due 2019, $750 million aggregate principal amount of 2.875% fixed rate notes due 2021 and $750 million aggregate principal amount of 3.45% fixed rate notes due 2024. The floating rate notes due 2017 bear interest at a floating rate equal to the 3-month LIBOR plus 0.20%. The floating rate notes due 2019 bear interest at a floating rate equal to the 3-month LIBOR plus 0.48%. Interest on the floating rate notes due 2017 is paid quarterly on January 28, April 28, July 28 and October 28 of each year. Interest on the floating rate notes due 2019 is paid quarterly on February 1, May 1, August 1 and November 1 of each year. Interest on the fixed rate notes due 2019, 2021 and 2024 is payable semi-annually on February 1 and August 1. The floating rate notes are not redeemable prior to maturity. We may redeem some or all of the fixed rate notes of each series at any time and from time to time prior to their maturity, generally at a make-whole redemption price.

To help achieve our interest rate risk management objectives, in connection with the July 2014 issuance of senior notes, we entered into interest rate swap agreements that effectively converted $2.4 billion of our fixed rate debt to floating rate debt based on LIBOR. These swaps were designated as fair value hedges against changes in the fair value of certain fixed rate senior notes resulting from changes in interest rates. The gains and losses related to changes in the fair value of interest rate swaps substantially offset changes in the fair value of the hedged portion of the underlying debt that are attributable to changes in market interest rates.

The effective interest rates for our senior notes include the interest payable, the amortization of debt issuance costs and the amortization of any original issue discount on these senior notes. Interest on these senior notes is payable either quarterly or semiannually. Interest expense associated with our senior notes, including amortization of debt issuance costs, during the three months ended March 31, 2015 and 2014 was approximately $45 million and $25 million, respectively. At March 31, 2015, the estimated fair value of these senior notes was approximately $7.6 billion.

The indenture pursuant to which the senior notes were issued includes customary covenants that, among other things and subject to exceptions, limit our ability to incur, assume or guarantee debt secured by liens on specified assets or enter into sale and lease-back transactions with respect to specified properties, and also includes customary events of default.
Other Indebtedness
Our other indebtedness is comprised of overdraft facilities. We have formal overdraft facilities in India bearing interest on drawn balances at a rate of approximately 10% per annum. Drawn balances are expected to be repaid in less than one year.
Commercial Paper
We have an up to $2 billion commercial paper program pursuant to which we may issue commercial paper notes with maturities of up to 397 days from the date of issue in an aggregate principal amount at maturity of up to $2 billion outstanding at any time. As of March 31, 2015, there were no commercial paper notes outstanding.
Credit Agreement
As of March 31, 2015, no borrowings or letters of credit were outstanding under our $3 billion credit agreement. However, as described above, we have an up to $2 billion commercial paper program and therefore maintain $2 billion of available borrowing capacity under our credit agreement in order to repay commercial paper borrowings in the event we are unable to repay those borrowings from other sources when they become due. As a result, at March 31, 2015, $1 billion of borrowing capacity was available for other purposes permitted by the credit agreement. The credit agreement includes customary representations, warranties, affirmative and negative covenants, including a financial covenant, events of default and indemnification provisions in favor of the banks. The negative covenants include restrictions regarding the incurrence of liens, subject to certain exceptions. The financial covenant requires us to meet a quarterly financial test with respect to a minimum consolidated interest coverage ratio.
We were in compliance with all covenants in our outstanding debt instruments for the three-month period ended March 31, 2015.


19


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Note 9 — Commitments and Contingencies

Commitments

 As of March 31, 2015, approximately $21.5 billion of unused credit was available to PayPal Credit accountholders. While this amount represents the total unused credit available, we have not experienced, and do not anticipate, that all of our PayPal Credit accountholders will access their entire available credit at any given point in time. In addition, the individual lines of credit that make up this unused credit are subject to periodic review and termination by the chartered financial institutions that are the issuers of PayPal Credit products based on, among other things, account usage and customer creditworthiness. When a consumer makes a purchase using a PayPal Credit product, the chartered financial institution extends credit to the consumer, funds the extension of credit at the point of sale and advances funds to the merchant. We subsequently purchase the consumer receivables related to the consumer loans and as a result of that purchase, bear the risk of loss in the event of loan defaults. However, we subsequently sell a participation interest in the entire pool of consumer loans to the chartered financial institution that extended the consumer loans. Although the chartered financial institution continues to own each customer account, we own and bear the risk of loss on the related consumer receivables, less the participation interest held by the chartered financial institution, and PayPal is responsible for all servicing functions related to the customer account balances. As of March 31, 2015, the total outstanding principal balance of this pool of consumer loans was $3.6 billion, of which the chartered financial institution owned a participation interest of $169 million, or 4.63% of the total outstanding balance of the consumer loans as of that date.

In addition, in June 2014, we agreed, subject to certain conditions, that PayPal, one of its affiliates or a third party partner will purchase a portfolio of consumer loan receivables relating to the customer accounts arising out of our current credit program agreement with Synchrony (formerly GE Capital Retail Bank) for a price based on the book value of the consumer loan receivables portfolio at the time of the purchase (expected to be October 2016), subject to certain adjustments and exclusions. As of December 31, 2014, Synchrony had a net receivables portfolio under the credit program agreement of approximately $1.5 billion.

Litigation and Other Legal Matters
 
Overview
We are involved in legal and regulatory proceedings on an ongoing basis. Many of these proceedings are in early stages and may seek an indeterminate amount of damages. If we believe that a loss arising from such matters is probable and can be reasonably estimated, we accrue the estimated liability in our financial statements. If only a range of estimated losses can be determined, we accrue an amount within the range that, in our judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, we accrue the low end of the range. For those proceedings in which an unfavorable outcome is reasonably possible but not probable, we have disclosed an estimate of the reasonably possible loss or range of losses or we have concluded that an estimate of the reasonably possible loss or range arising directly from the proceeding (i.e., monetary damages or amounts paid in judgment or settlement) are not material. If we cannot estimate the probable or reasonably possible loss or range of losses arising from a proceeding, we have disclosed that fact. In assessing the materiality of a proceeding, we evaluate, among other factors, the amount of monetary damages claimed, as well as the potential impact of non-monetary remedies sought by plaintiffs (e.g., injunctive relief) that may require us to change our business practices in a manner that could have a material adverse impact on our business. With respect to the matters disclosed in this Note 9, we are unable to estimate the possible loss or range of losses that could potentially result from the application of such non-monetary remedies.

Amounts accrued for legal and regulatory proceedings for which we believe a loss is probable were not material for the three months ended March 31, 2015. Except as otherwise noted for the proceedings described in this Note 9, we have concluded, based on currently available information, that reasonably possible losses arising directly from the proceedings (i.e., monetary damages or amounts paid in judgment or settlement) in excess of our recorded accruals are also not material. However, legal and regulatory proceedings are inherently unpredictable and subject to significant uncertainties. If one or more matters were resolved against us in a reporting period for amounts in excess of management’s expectations, the impact on our operating results or financial condition for that reporting period could be material.

20


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)



Litigation

eBay's Korean subsidiary, IAC (which has merged into Gmarket and is now named eBay Korea), has notified its approximately 20 million users of a January 2008 data breach involving personally identifiable information including name, address, resident registration number and some transaction and refund data (but not including credit card information or real time banking information). Approximately 149,000 users sued IAC over this breach in several lawsuits in Korean courts and trial for a group of representative suits began in August 2009 in the Seoul Central District Court (SCDC). There is some precedent in Korea for a court to grant “consolation money” for data breaches without a specific finding of harm from the breach. In January 2010, the SCDC ruled that IAC had met its obligations with respect to defending the website from intrusion and, accordingly, had no liability for the breach. This January 2010 ruling was appealed by approximately 34,000 plaintiffs to the Seoul High Court. In 2012, the Seoul High Court announced its decision upholding the SCDC's January 2010 decision for three cases, and during 2013, the Seoul High Court upheld the SCDC's January 2010 ruling in another 18 cases. The Seoul High Court's decision was appealed by 33,218 plaintiffs in 11 cases to the Korea Supreme Court. In February 2015, the Korea Supreme Court upheld the lower courts’ decisions in favor of IAC and dismissed the plaintiffs’ appeals in all 11 pending cases.

In January 2013, the Seoul Western District Court ruled in favor of IAC with respect to two other cases filed by 2,291 plaintiffs by following the SCDC's January 2010 ruling, and 2,284 plaintiffs proceeded to appeal this decision of the Seoul Western District Court to the Seoul High Court. On April 4, 2015, these two remaining Seoul High Court cases were withdrawn, and there is no relevant case pending in this matter before any court. While it is not practical, it is possible for IAC users to file new lawsuits until the statute of limitations expires in January 2018.

eBay Inc., eBay Domestic Holdings, Inc., Pierre Omidyar and Joshua Silverman have been sued by craigslist, Inc. in California Superior Court in San Francisco (Case No.:  CGC - 08 - 475276). craigslist filed suit on May 13, 2008 alleging that we engaged in conduct designed to harm craigslist's business while we negotiated to become and while we were a minority shareholder in craigslist. craigslist’s allegations include that we (i) misrepresented, concealed, suppressed and failed to disclose facts in order to induce craigslist to take detrimental action; (ii) interfered with craigslist's business operations; (iii) improperly disseminated and misused confidential and proprietary information from craigslist that we received as a minority investor; (iv) infringed and diluted craigslist's trademark and trade name; and (v) breached duties owed to craigslist. The complaint seeks significant compensatory and punitive damages, rescission and other relief. In addition, in September 2014, craigslist filed an amended complaint alleging trade secret misappropriation and seeking new and additional compensatory and punitive damages. The parties are currently engaged in discovery and a trial date has not yet been set.

Regulatory Proceedings

PayPal routinely reports to the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) on payments it has rejected or blocked pursuant to OFAC sanctions regulations and on any possible violations of those regulations. PayPal has cooperated with OFAC in recent years regarding PayPal’s review process over transaction monitoring and has self-reported a large number of small dollar amount transactions that could possibly be in violation of OFAC sanctions regulations. In March 2015, we reached a settlement with OFAC regarding the possible violations arising from our practices between 2009 and 2013, before our implementation of real-time monitoring processes. The settlement did not have a material impact on our financial statements. In addition, we continue to cooperate with OFAC regarding more recent self-reported transactions that could also possibly be in violation of OFAC sanctions regulations. Such self-reported transactions could result in claims or actions against us including litigation, injunctions, damage awards or require us to change our business practices that could result in a material loss, require significant management time, result in the diversion of significant operational resources or otherwise harm our business.

On August 7, 2013 and January 13, 2014, eBay, PayPal and certain wholly owned subsidiaries of PayPal received Civil Investigative Demands (CIDs) from the Consumer Financial Protection Bureau (CFPB) requesting that we provide testimony, produce documents and provide information relating primarily to the acquisition, management, and operation of our PayPal Credit products, including online credit products and services, advertising, loan origination, customer acquisition, servicing, debt collection, and complaints handling practices. The CIDs could lead to an enforcement action and/or one or more significant consent orders, which may result in substantial costs, including legal fees, fines, penalties and remediation expenses. We are cooperating with the CFPB in connection with the CIDs and are engaging in settlement discussions. The CFPB provided us with a Notice and Opportunity to Respond and Advise and indicated that a lawsuit could be filed against us as early as the second quarter of 2015. Resolution of these inquiries could require us to make monetary payments to certain customers, pay fines and/or change the manner in which we operate the PayPal Credit products, which could adversely affect our business.

21


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)



In May 2014, we publicly announced that criminals were able to penetrate our network and steal certain data, including user names, encrypted user passwords and other non-financial user data, from eBay’s Marketplaces business unit. Upon making this announcement, eBay Marketplaces required all buyers and sellers on the Marketplaces platform to reset their passwords in order to login to their account. In addition to making this public announcement, we proactively approached a number of regulatory and governmental bodies, including those with the most direct supervisory authority over our data privacy and data security programs, to specifically inform them of the incident and our actions to protect our customers in response. Certain of those regulatory agencies have requested us to provide further, more detailed information regarding the incident, and we believe that we have fully cooperated in all of those requests. To date, we have not been informed by any regulatory authority of an intention to bring any enforcement action arising from this incident; however, in the future we may be subject to fines or other regulatory action.  In addition, in July 2014, a putative class action lawsuit was filed against us for alleged violations and harm resulting from the incident. We are vigorously defending the lawsuit.

General Matters

Other third parties have from time to time claimed, and others may claim in the future, that we have infringed their intellectual property rights. We are subject to patent disputes, and expect that we will increasingly be subject to additional patent infringement claims involving various aspects of our Marketplaces, Payments and Enterprise businesses as our products and services continue to expand in scope and complexity. Such claims may be brought directly or indirectly against our companies and/or against our customers (who may be entitled to contractual indemnification under their contracts with us), and we are subject to increased exposure to such claims as a result of our recent acquisitions, particularly in cases where we are entering into new lines of business or acquiring new technologies in connection with such acquisitions. We have in the past been forced to litigate such claims. We may also become more vulnerable to third-party claims as laws such as the Digital Millennium Copyright Act, the Lanham Act and the Communications Decency Act are interpreted by the courts, and as we expand the scope of our businesses (both in terms of the range of products and services that we offer and our geographical operations) and become subject to laws in jurisdictions where the underlying laws with respect to the potential liability of online intermediaries like ourselves are either unclear or less favorable. We believe that additional lawsuits alleging that we have violated patent, copyright or trademark laws will be filed against us. Intellectual property claims, whether meritorious or not, are typically time consuming and costly to defend and resolve, could require expensive changes in our methods of doing business or could require us to enter into costly royalty or licensing agreements on unfavorable terms.

From time to time, we are involved in other disputes or regulatory inquiries that arise in the ordinary course of business, including suits by our users (individually or as class actions) alleging, among other things, improper disclosure of our prices, rules or policies, that our practices, prices, rules, policies or customer/user agreements violate applicable law or that we have acted unfairly and/or not acted in conformity with such prices, rules, policies or agreements. In addition to these types of disputes and regulatory inquiries, our operations are also subject to regulatory and/or legal review and/or challenges that tend to reflect the increasing global regulatory focus to which the payments industry is subject and, when taken as a whole with other regulatory and legislative action, such actions could result in the imposition of costly new compliance burdens on our Payments business and its customers and may lead to increased costs and decreased transaction volume and revenue. Further, the number and significance of these disputes and inquiries are increasing as our company has grown larger, our businesses have expanded in scope (both in terms of the range of products and services that we offer and our geographical operations) and our products and services have increased in complexity. Any claims or regulatory actions against us, whether meritorious or not, could be time consuming, result in costly litigation, damage awards (including statutory damages for certain causes of action in certain jurisdictions), injunctive relief or increased costs of doing business through adverse judgment or settlement, require us to change our business practices in expensive ways, require significant amounts of management time, result in the diversion of significant operational resources or otherwise harm our business.

Indemnification Provisions

In the ordinary course of business, we have included limited indemnification provisions in certain of our agreements with parties with which we have commercial relations, including our standard marketing, promotions and application-programming-interface license agreements. Under these contracts, we generally indemnify, hold harmless and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with claims by a third party with respect to our domain names, trademarks, logos and other branding elements to the extent that such marks are applicable to our performance under the subject agreement. In certain cases, we have agreed to provide indemnification for intellectual property infringement. Our Enterprise business has provided in many of its major ecommerce agreements an indemnity for other types of third-party claims, which are indemnities mainly related to various intellectual property rights, and we have provided similar indemnities in a limited number of agreements for our other businesses, including our Magento business. In our PayPal

22


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


business, we have provided an indemnity to our payment processors in the event of certain third-party claims or card association fines against the processor arising out of conduct by PayPal or PayPal customers. PayPal has also provided a limited indemnity to merchants using its retail point of sale payment services and to manufacturers of its point of sale devices (e.g., the PayPal Here devices and the Beacon device). In addition, Bill Me Later has provided indemnification provisions in its agreements with the chartered financial institutions that issue its credit products. It is not possible to determine the maximum potential loss under these indemnification provisions due to our limited history of prior indemnification claims and the unique facts and circumstances involved in each particular provision. To date, losses recorded in our statement of income in connection with our indemnification provisions have not been significant, either individually or collectively. 

Off-Balance Sheet Arrangements

As of March 31, 2015, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.

We have various cash pooling arrangements with financial institutions for cash management purposes. These arrangements allow for cash withdrawals from these financial institutions based upon our aggregate operating cash balances held within the same financial institutions (“Aggregate Cash Deposits”). These arrangements also allow us to withdraw amounts exceeding the Aggregate Cash Deposits up to an agreed-upon limit. The net balance of the withdrawals and the Aggregate Cash Deposits are used by these financial institutions as a basis for calculating our net interest expense or income under these arrangements. As of March 31, 2015, we had a total of $7.2 billion in cash withdrawals offsetting our $7.2 billion in Aggregate Cash Deposits held within these financial institutions under these cash pooling arrangements.
 
Note 10 — Stock Repurchase Programs

In January 2014, our board of directors authorized a stock repurchase program that provided for the repurchase of up to an additional $5 billion of our common stock, with no expiration from the date of authorization. In January 2015, our board of directors authorized an additional $2 billion stock repurchase program, with no expiration from the date of authorization. The stock repurchase programs are intended to offset the impact of dilution from our equity compensation programs and, subject to market conditions and other factors, to make opportunistic 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.   
 
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.  

The stock repurchase activity under our stock repurchase programs during the three months ended March 31, 2015 is summarized as follows:
 
Shares Repurchased
 
Average Price per Share (1)
 
Value of Shares Repurchased
 
Remaining Amount Authorized
 
(In millions, except per share amounts)
Balance as of January 1, 2015

 

 

 
$
985

Authorization of additional plan in January 2015

 

 

 
2,000

Repurchase of shares of common stock
18

 
$
56.95

 
1,000

 
(1,000
)
Balance as of March 31, 2015

 

 

 
$
1,985

 
(1) Stock repurchase activity excludes broker commissions.

As of March 31, 2015, a total of approximately $2.0 billion remained available for future repurchases of our common stock under our January 2015 stock repurchase program. These repurchased shares of common stock were recorded as treasury stock and were accounted for under the cost method. No repurchased shares of common stock have been retired.


23


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Note 11 — Stock-Based Plans

Stock Option Activity

The following table summarizes stock option activity for the three months ended March 31, 2015:  
 
Options
 
(In millions)
Outstanding as of January 1, 2015
10

Granted and assumed

Exercised
(2
)
Forfeited/expired/canceled

Outstanding as of March 31, 2015
8


The weighted average exercise price of stock options granted during the period was $53.28 per share and the related weighted average grant date fair value was $13.16 per share.

Restricted Stock Unit Activity

The following table summarizes restricted stock unit ("RSU") activity for the three months ended March 31, 2015:  
 
Units 
 
(In millions)
Outstanding as of January 1, 2015
36

Awarded and assumed
1

Vested
(3
)
Forfeited
(1
)
Outstanding as of March 31, 2015
33


The weighted average grant date fair value for RSUs awarded during the period was $54.71 per share.

 Stock-Based Compensation Expense

The impact on our results of operations of recording stock-based compensation expense for the three months ended March 31, 2015 and 2014 was as follows:  
 
Three Months Ended
March 31,
 
2015
 
2014
 
(In millions)
Cost of net revenues
$
21

 
$
17

Sales and marketing
47

 
42

Product development
58

 
51

General and administrative
59

 
39

Total stock-based compensation expense
$
185

 
$
149

Capitalized in product development
$
4

 
$
4



24


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Stock Option Valuation Assumptions

We calculated the fair value of each stock option award on the date of grant using the Black-Scholes option pricing model. The following weighted average assumptions were used for the three months ended March 31, 2015 and 2014:  
 
Three Months Ended
March 31,
 
2015
 
2014
Risk-free interest rate
1.46
%
 
1.06
%
Expected life (in years)
4.4

 
3.9

Dividend yield
%
 
%
Expected volatility
27
%
 
29
%

Our computation of expected volatility is based on a combination of historical and market-based implied volatility from traded options on our common stock. Our computation of expected life is based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.

Note 12 — Income Taxes

The following table reflects changes in unrecognized tax benefits for the three months ended March 31, 2015:
 
 
(In millions)
Gross amounts of unrecognized tax benefits as of January 1, 2015
$
396

Increases related to prior period tax positions
15

Decreases related to prior period tax positions
(7
)
Increases related to current period tax positions
12

Settlements
(2
)
Gross amounts of unrecognized tax benefits as of March 31, 2015
$
414


As of March 31, 2015, our liabilities for unrecognized tax benefits were included in accrued expenses and other current liabilities, deferred and other tax liabilities, net and as a reduction of the amount of deferred tax asset for tax credit carryforwards. The increase in liabilities for unrecognized tax benefits for the first three months of 2015 relates primarily to tax examination risks assessed during the period and transaction costs incurred in conjunction with the spin-off of PayPal.
 
We recognize interest and/or penalties related to uncertain tax positions in income tax expense. The amount of interest and penalties accrued as of March 31, 2015 and December 31, 2014 was approximately $78 million and $71 million, respectively.
 
We are subject to both direct and indirect taxation in the U.S. and various states and foreign jurisdictions. We are under examination by certain tax authorities for the 2003 to 2012 tax years. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these or other examinations. The material jurisdictions where we are subject to potential examination by tax authorities for certain tax years after 2002 include, among others, the U.S. (Federal and California), France, Germany, Italy, Korea, Israel, Switzerland, Singapore, United Kingdom and Canada.
 
Although the timing of the resolution and/or closure of audits is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. However, given the number of years remaining subject to examination and the number of matters being examined, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.


25


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Note 13 — Loans and Interest Receivable, Net

Loans and interest receivable primarily represent purchased consumer receivables arising from loans made by our partner chartered financial institutions to individual consumers to purchase goods and services using our PayPal Credit products. Although a chartered financial institution continues to own each respective customer account, we own the related consumer receivable and PayPal is responsible for all servicing functions related to the customer accounts. Effective August 2013, ownership of most of the existing customer accounts was transitioned from WebBank to a new chartered financial institution, Comenity Capital Bank. As part of the arrangement, we sell Comenity Capital Bank a participation interest in the entire pool of consumer receivables outstanding under the customer accounts. During the three months ended March 31, 2015 and 2014, we purchased approximately $1.4 billion and $1.1 billion, respectively, in consumer receivables. As of March 31, 2015, the total outstanding principal balance of this pool of consumer receivables was $3.6 billion, of which Comenity Capital Bank owned a participation interest of $169 million, or 4.63% of the total outstanding balance of the consumer receivables at that date. In April 2015, we concluded an arrangement with certain investors under which we have agreed to sell a participation interest in a portion of these consumer receivables. Comenity Capital Bank and these investors have no recourse against us related to their respective participation interests for failure of debtors to pay when due. The participation interest held by Comenity Capital Bank and these investors have the same priority to the interests held by us and are subject to the same credit, prepayment, and interest rate risk associated with the consumer receivables. As of March 31, 2015, we classified approximately $700 million of the consumer receivables related to the participation interest we agreed to sell to investors as held for sale. The consumer receivables held for sale are recorded at the lower of cost or fair value on an aggregate portfolio basis. No adjustment to the carrying value was recorded as a result of classifying these consumer receivables as held for sale.

Loans and interest receivable are reported at their outstanding principal balances, net of participation interest sold and pro-rata allowances, including unamortized deferred origination costs and estimated collectible interest and fees. We use a consumer's FICO score, among other measures, in evaluating the credit quality of our consumer receivables. A FICO score is a type of credit score that lenders use to assess an applicant's credit risk and whether to extend credit. Individual FICO scores generally are obtained each quarter the consumer has an outstanding consumer receivable owned by PayPal Credit. The weighted average consumer FICO score related to the pool of consumer receivables and interest receivable balance outstanding as of March 31, 2015 was 684 compared to 687 as of December 31, 2014. As of March 31, 2015 and December 31, 2014, approximately 52.4% and 54.2%, respectively, of the pool of consumer receivables and interest receivable balance was due from consumers with FICO scores greater than 680, which is generally considered "prime" by the consumer credit industry. As of March 31, 2015 and December 31, 2014, approximately 10.7% and 9.2%, respectively, of the pool of consumer receivables and interest receivable balance was due from customers with FICO scores below 599. As of March 31, 2015 and December 31, 2014, approximately 91% and 89%, respectively, of the portfolio of consumer receivables and interest receivable was current.

During 2013, we began working with a chartered financial institution, for the chartered financial institution to offer working capital loans to selected merchant sellers. We subsequently purchase the related merchant receivable from the chartered financial institution and, as a result, bear the risk of loss in the event the loan defaults. Under the program, participating merchants can borrow a certain percentage of their annual payment volume processed by PayPal and are charged a fixed fee for the loan. As of March 31, 2015, the total outstanding balance of this pool of merchant receivables was approximately $125 million.

The following table summarizes the activity in the allowance for loans and interest receivable, net of participating interest sold, for the periods indicated:
 
Three Months Ended March 31,
 
2015
 
2014
 
(In millions)
Balance as of January 1
$
195

 
$
146

Charge-offs
(92
)
 
(70
)
Recoveries
11

 
7

Provision
86

 
66

Balance as of March 31
$
200

 
$
149



26


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Note 14 — Accumulated Other Comprehensive Income

The following table summarizes the changes in accumulated balances of other comprehensive income for the three months ended March 31, 2015:
 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Unrealized
Gains on
Investments
 
Foreign
Currency
Translation
 
Estimated tax (expense) benefit
 
Total
 
(In millions)
Beginning balance
$
168

 
$
1,029

 
$
334

 
$
(360
)
 
$
1,171

Other comprehensive income before reclassifications
159

 
(23
)
 
(265
)
 
7

 
(122
)
Amount of gain (loss) reclassified from accumulated other comprehensive income
70

 
(1
)
 

 

 
69

Net current period other comprehensive income
89

 
(22
)
 
(265
)
 
7

 
(191
)
Ending balance
$
257

 
$
1,007

 
$
69

 
$
(353
)
 
$
980


The following table summarizes the changes in accumulated balances of other comprehensive income for the three months ended March 31, 2014:
 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Unrealized
Gains on
Investments
 
Foreign
Currency
Translation
 
Estimated tax (expense) benefit
 
Total
 
(In millions)
Beginning balance
$
(106
)
 
$
921

 
$
657

 
$
(316
)
 
$
1,156

Other comprehensive income before reclassifications
(6
)
 
(90
)
 
(29
)
 
39

 
(86
)
Amount of gain (loss) reclassified from accumulated other comprehensive income
(21
)
 
7

 

 

 
(14
)
Net current period other comprehensive income
15

 
(97
)
 
(29
)
 
39

 
(72
)
Ending balance
$
(91
)
 
$
824

 
$
628

 
$
(277
)
 
$
1,084



27


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


The following table provides details about reclassifications out of accumulated other comprehensive income for the three months ended March 31, 2015 and 2014:
Details about Accumulated Other Comprehensive
Income Components
 
Affected Line Item in the Statement of Income
 
Amount of Gain (Loss) Reclassified from
Accumulated Other Comprehensive Income
 
 
 
 
Three Months Ended
March 31, 2015
 
Three Months Ended
March 31, 2014
 
 
 
 
(In millions)
Gains (losses) on cash flow hedges - foreign exchange contracts
 
Net Revenues
 
$
50

 
$
(17
)
 
 
Cost of net revenues
 
6

 
(1
)
 
 
Sales and marketing
 
1

 

 
 
Product development
 
11

 
(2
)
 
 
General and administrative
 
2

 
(1
)
 
 
Total, before income taxes
 
70

 
(21
)
 
 
Provision for income taxes
 

 

 
 
Total, net of income taxes
 
70

 
(21
)
 
 
 
 
 
 
 
Unrealized gains on investments
 
Interest and other, net
 
(1
)
 
7

 
 
Total, before income taxes
 
(1
)
 
7

 
 
Provision for income taxes
 

 

 
 
Total, net of income taxes
 
(1
)
 
7

 
 
 
 
 
 
 
Total reclassifications for the period
 
Total, net of income taxes
 
$
69

 
$
(14
)

Note 15 — Restructuring

In January 2015, at a regular meeting of our Board of Directors (the “Board”), the Board approved a plan to implement a strategic reduction of our existing global workforce. As a result, we are reducing our workforce globally. The reduction is expected to be substantially completed in the first half of 2015. The restructuring costs are aggregated in general and administrative expenses in the condensed consolidated statement of income.

The following table summarizes by segment the restructuring costs recognized during the three months ended March 31, 2015 and 2014:
 
Three Months Ended March 31, 2015
 
Three Months Ended March 31, 2014
 
Employee Severance and Benefits
 
Other Associated Costs
 
Total
 
Employee Severance and Benefits
 
Other Associated Costs
 
Total
 
(In millions)
Marketplaces
$
60

 
$

 
$
60

 
$

 
$

 
$

Payments
48

 

 
48

 

 

 

Enterprise
6

 
5

 
11

 

 

 

Total restructuring
$
114

 
$
5

 
$
119

 
$

 
$

 
$



28


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


The following table summarizes the restructuring reserve activity during the three months ended March 31, 2015:
 
Employee Severance and Benefits
 
Other Associated Costs
 
Total
 
(In millions)
Accrued liability as of January 1, 2015
$

 
$

 
$

Charges (benefit)
114

 
5

 
119

Payments
(42
)
 
(3
)
 
(45
)
Accrued liability as of March 31, 2015
$
72

 
$
2

 
$
74


Note 16 — Subsequent Events

In April 2015, we concluded an arrangement with certain investors under which we have agreed to sell a participation interest of approximately $700 million in a portion of our purchased consumer receivables arising from loans made by our partner chartered financial institutions to individual consumers to purchase goods and services using our PayPal Credit products. This transaction, which is subject to customary closing conditions, is expected to close in the second quarter of 2015. The carrying value of such consumer receivables upon the funding of this participation interest may differ from the carrying value as of March 31, 2015 due to normal, ongoing payment and resolution activity.
 
In April 2015, we completed our acquisition of Paydiant, Inc. for approximately $285 million, consisting primarily of cash. The acquisition of Paydiant is intended to expand our capabilities in mobile payments. Using Paydiant’s platform, our merchant partners can create their own branded wallets to accelerate mobile-in-store payments and drive consumer engagement through mobile payments, loyalty, offers and the prioritization of preferred payment types, such as store branded credit cards and gift cards. We are in the process of determining the purchase price allocation for this acquisition.

In April 2015, we completed our acquisition of CyActive Security, Ltd. CyActive is a cybersecurity firm that specializes in technology that predicts how malware will develop. The acquisition of CyActive is intended to further enhance our risk assessment capabilities used to protect merchants and consumers on our Payments Platform. We are in the process of determining the purchase price allocation for this acquisition.


29



Item 2:
Management's Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q 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, the planned separation of our eBay and PayPal businesses into independent publicly traded companies, new or planned features or services, or management strategies). 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 “Part II Item 1A: Risk Factors” of this Quarterly Report on Form 10-Q as well as in our condensed consolidated financial statements, related notes, and the other information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission, or the 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.

You should read the following Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the unaudited condensed consolidated financial statements and the related notes that appear elsewhere in this report.

When we refer to “we,” “our,” “us” or “eBay” in this Quarterly Report on Form 10-Q, we mean the current Delaware corporation (eBay Inc.) and its California predecessor, as well as all of our consolidated subsidiaries, unless otherwise expressly stated or the context otherwise requires.

Overview

We are a global technology company that enables commerce through three reportable segments: Marketplaces, Payments and Enterprise. Our Marketplaces segment includes our eBay.com platform and its localized counterparts and our other online platforms, such as our online classifieds sites and StubHub. Our Payments segment is comprised of our PayPal business. Our Enterprise segment includes our Magento business and provides commerce technologies, omnichannel operations and marketing solutions for merchants of all sizes that operate in general merchandise categories. In January 2015, we announced that we will be exploring strategic options for eBay Enterprise, including a possible sale or partial sale, or IPO.

On September 30, 2014, we announced that our Board of Directors, following a strategic review of our growth strategies and structure, has approved a plan to separate PayPal (consisting of our Payments segment) into an independent publicly traded company. We expect to complete the transaction as a tax-free spin-off in the second half of 2015, subject to market, regulatory, and certain other conditions. We also announced that Dan Schulman has been appointed as President of PayPal and CEO-designee of the standalone PayPal company following separation, and that Devin Wenig, currently president of eBay Marketplaces, will become CEO of eBay company following separation. We have also recently announced that, following the separation, we expect that Tom Tierney will become the Chairman of the Board of eBay Inc. and that John Donahoe will become the Chairman of the Board of PayPal Holdings, Inc. The separation is subject to risks, uncertainties and conditions and there can be no assurance that the separation will be completed on the terms or on the timing currently contemplated, or at all. Please see the information in “Item 1A: Risk Factors” under the heading “Risk Factors Related to the Planned Separation,” which describes some of the risks and uncertainties associated with the proposed separation.

We expect to incur significant costs in connection with our planned separation of our PayPal business. These costs relate primarily to third-party advisory and consulting services, retention payments to certain employees, incremental stock-based compensation and other costs directly related to the separation. Costs related to employees for retention or stock-based compensation are classified on a basis consistent with their regular compensation charges and included within cost of net revenues, sales and marketing, product development or general and administrative in our consolidated statement of income as applicable. Costs other than those paid to employees are included within general and administrative in our consolidated statement of income. During the three months ended March 31, 2015, we incurred approximately $87 million related to separation costs. We expect to continue to incur additional separation costs in 2015 until we complete the separation of our PayPal business. We currently estimate that such additional separation costs will exceed $135 million, although that estimate is subject to a number of assumptions and uncertainties.


30



Net revenues for the three months ended March 31, 2015 increased 4% to $4.4 billion compared to the same period of the prior year, driven primarily by increases in net revenues from our PayPal segment. For the three months ended March 31, 2015, our operating margin decreased to 16% from 21% in the same period of the prior year due to higher general and administrative costs and a greater proportion of our revenue being derived from our Payments segment, which has lower margins than our Marketplaces segment. For the three months ended March 31, 2015, our diluted earnings per share increased to $0.51, a $2.33 increase compared to the same period of the prior year, driven primarily by the accrual in 2014 of deferred taxes on $9.0 billion of undistributed foreign earnings for 2013 and prior years and, to a lesser extent, by growth in net revenues and a lower share count. For both the three months ended March 31, 2015 and 2014, we generated cash flow from operations of $1.2 billion.

Our Marketplaces segment total net revenues decreased $86 million, or 4%, for the three months ended March 31, 2015 compared to the same period of the prior year. Gross Merchandise Volume (GMV) (as defined below) decreased 2% for the three months ended March 31, 2015 compared to the same period of the prior year. The decrease in total net revenues and GMV was driven primarily by a negative impact from foreign currency movements relative to the U.S. dollar. Our Marketplaces segment operating margin decreased by 0.5 percentage points for the three months ended March 31, 2015 compared to the same period of the prior year, due primarily to continued investments in our site operations and business initiatives.

Our Payments segment total net revenues increased $263 million, or 14%, for the three months ended March 31, 2015 compared to the same period of the prior year. The increase in total net revenues was driven primarily by an increase in net total payment volume (Net TPV) (as defined below) of 18%. Our Payments segment operating margin decreased by 0.5 percentage points for the three months ended March 31, 2015 compared to the same period of the prior year due primarily to increased provision for transaction and loan losses partially offset by a favorable transaction expense rate.

Our Enterprise segment total net revenues increased $19 million, or 7%, for the three months ended March 31, 2015 compared to the same period of the prior year. The increase in total net revenues was driven primarily by an increase in Gross Merchandise Sales (as defined below) of 8% for the three months ended March 31, 2015 compared to the same period of the prior year. For the three months ended March 31, 2015, our Enterprise segment operating margin was consistent with the same period of the prior year.

We define GMV as the total value of all successfully closed transactions between users on Marketplaces platforms (excluding eBay's classifieds websites, brands4friends and Shopping.com) during the applicable period regardless of whether the buyer and seller actually consummated the transaction; excludes vehicles and real estate gross merchandise volume. We believe that GMV provides a useful measure of the overall volume of closed transactions that flow through our Marketplaces trading platforms in a given period, notwithstanding the inclusion in GMV of closed transactions that are not ultimately consummated. We define Net TPV as the total dollar volume of payments, net of payment reversals, successfully completed through our payments networks, including PayPal Credit, Venmo and payments processed through Braintree’s full stack payments platform during the period; excludes payments sent or received through PayPal's and Braintree's payment gateway businesses. We define Merchant Services Net TPV as the total dollar volume of payments, net of payment reversals, successfully completed through our payments networks, including PayPal Credit, Venmo and payments processed through Braintree's full stack payments platform, during the period; excludes PayPal's and Braintree's payment gateway businesses and payments for transactions on our Marketplaces platforms. We define On eBay Net TPV as the total dollar volume of payments, net of payment reversals, successfully completed through our payments networks, including PayPal Credit, during the period for transactions on our Marketplaces platforms. We define Gross Merchandise Sales as the retail value of all sales transactions, inclusive of freight charges and net of allowance for returns and discounts, which flow through our Enterprise commerce technologies, whether we record the full amount of such transaction as a product sale or a percentage of such transaction as a service fee; excludes volume transacted through the Magento platform. We define ECV as the total Marketplaces GMV, Payments Merchant Services Net TPV and eBay Enterprise Gross Merchandise Sales not earned on eBay or paid for via PayPal or PayPal Credit during the period; it excludes volume transacted through the Magento platform. 


31



Results of Operations

Summary of Net Revenues

We generate two types of net revenues: net transaction revenues and marketing services and other revenues. Our net transaction revenues are derived principally from listing fees and final value fees (which are fees payable on transactions closed on our Marketplaces platforms), fees paid by merchants for payment processing services and ecommerce service fees. Our marketing services revenues are derived principally from the sale of advertisements, revenue sharing arrangements, classifieds fees, marketing service fees and lead referral fees. Other revenues are derived principally from interest and fees earned on the PayPal Credit portfolio of receivables from loans, interest earned on certain PayPal customer account balances and fees from contractual arrangements with third parties that provide services to our users.
The following table sets forth the breakdown of net revenues by type and geography for the periods presented:
 
Three Months Ended March 31,
 
2015
 
2014
 
(In millions)
Net Revenues by Type:
 
 
 
Net transaction revenues
 
 
 
Marketplaces
$
1,672

 
$
1,727

Payments
1,940

 
1,700

Enterprise
224

 
208

Total net transaction revenues
3,836


3,635

Marketing services and other revenues
 
 
 
Marketplaces
397

 
428

Payments
168

 
145

Enterprise
64

 
61

Total marketing services and other revenues
629


634

Elimination of inter-segment net revenue (1)
(17
)
 
(7
)
Total net revenues
$
4,448


$
4,262

Net Revenues by Geography:
 
 
 
U.S.
$
2,149

 
$
1,998

International
2,299

 
2,264

Total net revenues
$
4,448

 
$
4,262

 
(1)
Represents net revenue generated between our reportable segments.

Revenues are attributed to U.S. and international geographies based primarily upon the country in which the seller, payment recipient, customer, website that displays advertising, or other service provider, as the case may be, is located.

Because we generated a majority of our net revenues internationally in recent periods, including the three months ended March 31, 2015 and 2014, we are subject to the risks of doing business in foreign countries as discussed under "Part II - Item 1A - Risk Factors." In that regard, fluctuations in foreign currency exchange rates impact our results of operations. We have a foreign exchange risk management program that is designed to reduce our exposure to fluctuations in foreign currencies; however, the effectiveness of this program in mitigating the impact of foreign currency fluctuations on our results of operations varies from period to period, and in any given period our operating results are usually affected, sometimes significantly, by changes in currency exchange rates. Fluctuations in exchange rates also directly affect our cross-border revenue. We calculate the year-over-year impact of foreign currency movements on our business using prior period foreign currency rates applied to current year transactional currency amounts.

For the three months ended March 31, 2015, foreign currency movements relative to the U.S. dollar negatively impacted net revenues by $234 million (inclusive of a positive impact of approximately $50 million from hedging activities included in Payments net revenue). On a business segment basis, for the three months ended March 31, 2015, foreign currency movements relative to the U.S. dollar negatively impacted Marketplaces, Payments, and Enterprise net revenues by approximately $152

32



million, $80 million, and $2 million, respectively (net of the positive impact of hedging activities noted above in the case of Payments net revenues).

The following table sets forth, for the periods presented, certain key operating metrics that we believe are significant factors affecting our net revenues:
 
Three Months Ended March 31,
 
Percent
 
2015
 
2014
 
Change
 
(In millions, except percentage changes)
Supplemental Operating Data:
 
 
 
 
 
Marketplaces Segment:  (1)
 
 
 
 
 
GMV  (2)
$
20,195

 
$
20,545

 
(2
)%
Marketplaces Transaction Take Rate (3)
8.28
%
 
8.41
%
 
(0.13
)%
Payments Segment:
 
 
 
 


Merchant Services Net TPV (4)
$
46,732

 
$
37,162

 
26
 %
On eBay Net TPV (5)
$
14,681

 
$
14,844

 
(1
)%
Net TPV  (6)
$
61,413

 
$
52,006

 
18
 %
Payments Take Rate (7)
3.43
%
 
3.55
%
 
(0.12
)%
Enterprise Segment:
 
 
 
 


Gross Merchandise Sales (8)
$
1,014

 
$
936

 
8
 %
Enterprise Transaction Take Rate (9)
22.09
%
 
22.22
%
 
(0.13
)%
 

(1)
eBay's classifieds websites, brands4friends and Shopping.com are not included in these metrics.
(2)
Total value of all successfully closed transactions between users on Marketplaces platforms during the applicable period regardless of whether the buyer and seller actually consummated the transaction; excludes vehicles and real estate gross merchandise volume.
(3)
Total net transaction revenues earned through our Marketplaces segment, divided by Gross Merchandise Volume.
(4)
Total dollar volume of payments, net of payment reversals, successfully completed through our payments networks, including PayPal Credit, Venmo and payments processed through Braintree's full stack payments platform, during the period; excludes PayPal's and Braintree's payment gateway businesses and payments for transactions on our Marketplaces platforms.
(5)
Total dollar volume of payments, net of payment reversals, successfully completed through our payments networks, including PayPal Credit, during the period for transactions on our Marketplaces platforms.
(6)
Total dollar volume of payments, net of payment reversals, successfully completed through our payments networks, including PayPal Credit, Venmo and payments processed through Braintree’s full stack payments platform during the period; excludes payments sent or received through PayPal's and Braintree’s payment gateway businesses.
(7)
Total net revenues earned through our payments networks, including PayPal Credit, Braintree, Venmo, PayPal’s payment gateway business, subscription fees and other net revenues, divided by Net TPV.
(8)
Represents the retail value of all sales transactions, inclusive of freight charges and net of allowance for returns and discounts, which flow through our Enterprise commerce technologies, whether we record the full amount of such transaction as a product sale or a percentage of such transaction as a service fee; excludes volume transacted through the Magento platform.
(9)
Total net transaction revenues earned through our Enterprise segment, divided by Gross Merchandise Sales.

33



Seasonality

The following table sets forth, for the periods presented, our total net revenues and the sequential quarterly movements of these net revenues:
 
Three Months Ended
 
March 31
 
June 30
 
September 30
 
December 31
 
(In millions, except percentage changes)
2013
 

 
 

 
 

 
 

Net revenues
$
3,748

 
$
3,877</