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2018-06-30 xbrli:pure ebay:segment iso4217:USD ebay:tranche xbrli:shares iso4217:USD xbrli:shares


 
 
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 June 30, 2018

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 001-37713
 
ebaynotma03.jpg
 
 
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)
 
 
2025 Hamilton Avenue
San Jose, California
95125
(Address of principal executive offices)
(Zip Code)
(408) 376-7008
(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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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
[ ]
 
 
 
Emerging growth company
[ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  [ ]
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 July 16, 2018, there were 989,549,611 shares 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
 
June 30,
2018
 
December 31,
2017
 
(In millions, except par value)
 
(Unaudited)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,619

 
$
2,120

Short-term investments
2,388

 
3,743

Accounts receivable, net
745

 
696

Other current assets
1,432

 
1,185

Total current assets
6,184

 
7,744

Long-term investments
5,418

 
6,331

Property and equipment, net
1,576

 
1,597

Goodwill
5,199

 
4,773

Intangible assets, net
123

 
69

Deferred tax assets
5,052

 
5,199

Other assets
436

 
273

Total assets
$
23,988

 
$
25,986

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt
$
3

 
$
781

Accounts payable
253

 
330

Accrued expenses and other current liabilities
2,117

 
2,134

Deferred revenue
151

 
137

Income taxes payable
84

 
177

Total current liabilities
2,608

 
3,559

Deferred tax liabilities
3,290

 
3,424

Long-term debt
9,201

 
9,234

Other liabilities
1,743

 
1,720

Total liabilities
16,842

 
17,937

Commitments and contingencies (Note 10)

 


Stockholders’ equity:
 
 
 
Common stock, $0.001 par value; 3,580 shares authorized; 989 and 1,029 shares outstanding
2

 
2

Additional paid-in capital
15,478

 
15,293

Treasury stock at cost, 682 and 632 shares
(23,892
)
 
(21,892
)
Retained earnings
14,977

 
13,929

Accumulated other comprehensive income
581

 
717

Total stockholders’ equity
7,146

 
8,049

Total liabilities and stockholders’ equity
$
23,988

 
$
25,986


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

2


eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
 
(In millions, except per share amounts)
 
(Unaudited)
Net revenues
$
2,640

 
$
2,419

 
$
5,220

 
$
4,722

Cost of net revenues
597

 
560

 
1,156

 
1,074

Gross profit
2,043

 
1,859

 
4,064

 
3,648

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
838

 
727

 
1,594

 
1,375

Product development
352

 
313

 
686

 
591

General and administrative
368

 
267

 
638

 
512

Provision for transaction losses
66

 
63

 
138

 
125

Amortization of acquired intangible assets
13

 
9

 
23

 
18

Total operating expenses
1,637

 
1,379

 
3,079

 
2,621

Income from operations
406

 
480

 
985

 
1,027

Interest and other, net
301

 
(18
)
 
269

 
(7
)
Income before income taxes
707

 
462

 
1,254

 
1,020

Income tax benefit (provision)
(69
)
 
(433
)
 
(209
)
 
44

Income from continuing operations
$
638

 
$
29

 
$
1,045

 
$
1,064

Income from discontinued operations, net of income taxes
4

 

 
4

 

Net income
$
642

 
$
29

 
$
1,049

 
$
1,064

 
 
 
 
 
 
 
 
Income per share - basic:
 
 
 
 
 
 
 
Continuing operations
$
0.64

 
$
0.03

 
$
1.04

 
$
0.99

Discontinued operations

 

 

 

Net income per share - basic
$
0.64

 
$
0.03

 
$
1.04

 
$
0.99

 
 
 
 
 
 
 
 
Income per share - diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.64

 
$
0.03

 
$
1.03

 
$
0.97

Discontinued operations

 

 

 

Net income per share - diluted
$
0.64

 
$
0.03

 
$
1.03

 
$
0.97

 
 
 
 
 
 
 
 
Weighted-average shares:
 
 
 
 
 
 
 
Basic
992

 
1,076

 
1,001

 
1,080

Diluted
1,004

 
1,091

 
1,016

 
1,097


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
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
 
(In millions)
 
(Unaudited)
Net income
$
642

 
$
29

 
$
1,049

 
$
1,064

Other comprehensive income, net of reclassification adjustments:
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
(325
)
 
345

 
(193
)
 
676

Unrealized gains (losses) on investments, net
(2
)
 
(29
)
 
(38
)
 
(49
)
Tax benefit (expense) on unrealized gains (losses) on investments, net

 
6

 
10

 
18

Unrealized gains (losses) on hedging activities, net
137

 
(64
)
 
108

 
(98
)
Tax benefit (expense) on unrealized gains (losses) on hedging activities, net
(29
)
 
14

 
(23
)
 
14

Other comprehensive income, net of tax
(219
)
 
272

 
(136
)
 
561

Comprehensive income
$
423

 
$
301

 
$
913

 
$
1,625


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


4


eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
 
Six Months Ended
June 30,
 
2018
 
2017
 
(In millions)
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income
$
1,049

 
$
1,064

Income from discontinued operations, net of income taxes
(4
)
 

Adjustments:

 
 
Provision for transaction losses
138

 
125

Depreciation and amortization
349

 
331

Stock-based compensation
271

 
238

(Gain) Loss on investments, net
(260
)
 
(28
)
Deferred income taxes
(17
)
 
(122
)
Change in fair value of warrant
(106
)
 

Changes in assets and liabilities, and other, net of acquisition effects
(553
)
 
(327
)
Net cash provided by operating activities
867

 
1,281

Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(342
)
 
(317
)
Purchases of investments
(10,365
)
 
(7,603
)
Maturities and sales of investments
12,555

 
5,815

Acquisitions, net of cash acquired
(302
)
 
(20
)
Other
1

 
1

Net cash provided by (used in) investing activities
1,547

 
(2,124
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of common stock
67

 
62

Repurchases of common stock
(2,000
)
 
(917
)
Tax withholdings related to net share settlements of restricted stock units and awards
(153
)
 
(130
)
Proceeds from issuance of long-term debt, net

 
2,484

Repayment of debt
(750
)
 

Other
(31
)
 
15

Net cash provided by (used in) financing activities
(2,867
)
 
1,514

Effect of exchange rate changes on cash, cash equivalents and restricted cash
(51
)
 
151

Net increase (decrease) in cash, cash equivalents and restricted cash
(504
)
 
822

Cash, cash equivalents and restricted cash at beginning of period
2,140

 
1,835

Cash, cash equivalents and restricted cash at end of period
$
1,636

 
$
2,657

 
 
 
 
Supplemental cash flow disclosures:
 
 
 
Cash paid for:
 
 
 
Interest
$
162

 
$
131

Income taxes
$
454

 
$
163

Noncash investing activities:
 
 
 
Relinquishment of equity method investment
$
266

 
$


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

eBay Inc. is a global commerce leader, which includes our Marketplace, StubHub and Classifieds platforms. Our Marketplace platforms include our online marketplace located at www.ebay.com, its localized counterparts and the eBay mobile apps. Our StubHub platforms include our online ticket platform located at www.stubhub.com, its localized counterparts and the StubHub mobile apps. Our Classifieds platforms include a collection of brands such as Mobile.de, Kijiji, Gumtree, Marktplaats, eBay Kleinanzeigen and others.

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.

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 condensed 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 losses, legal contingencies, income taxes, revenue recognition, stock-based compensation, investments, 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 as equity investments to be measured at fair value or, under an election, at cost if it does not have readily determinable fair value, in which case the carrying value would be adjusted upon the occurrence of an observable price change or impairment.

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, 2017. 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 statement of the condensed consolidated financial position, results of operations and cash flows for these interim periods. Certain prior period amounts have been reclassified on our condensed consolidated financial statements to conform with current year presentation.

Significant Accounting Policies

Notwithstanding the changes to our Investments, Derivatives Instruments and Revenue Recognition policies, there were no significant changes to our significant accounting policies disclosed in Note 1, The Company and Summary of Significant Accounting Policies of our Annual Report on Form 10-K for the year ended December 31, 2017.

6


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


Investments

Short-term investments, which may include marketable equity securities, time deposits, certificates of deposit, government bonds and corporate debt securities with original maturities of greater than three months but less than one year when purchased, are classified as available-for-sale and are reported at fair value using the specific identification method. Unrealized gains and losses related to equity securities are recognized in interest & other, net, with all other unrealized gains and losses reported as a component of other comprehensive income (loss), net of related estimated income tax provisions or benefits.

Long-term investments may include marketable government bonds and corporate debt securities, time deposits, certificates of deposit and equity investments. Debt securities are classified as available-for-sale and are reported at fair value using the specific identification method. Unrealized gains and losses on our available-for-sale debt securities are excluded from earnings and reported as a component of other comprehensive income (loss), net of related estimated income tax provisions or benefits.

Our equity investments are primarily investments in privately-held companies. Our condensed consolidated results of operations include, as a component of interest and other, net, our share of the net income or loss of the equity investments accounted for under the equity method of accounting. Our share of investees’ results of operations is not significant for any period presented. Equity investments without readily determinable fair values are accounted for at cost, less impairment and adjusted for subsequent observable price changes obtained from orderly transactions for identical or similar investments issued by the same investee. Such changes in the basis of the equity investment are recognized in interest & other, net.

We assess whether an other-than-temporary impairment loss on our investments has occurred due to declines in fair value or other market conditions. With respect to our debt securities, this assessment takes into account the severity and duration of the decline in value, our intent to sell the security, whether it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, and whether we expect to recover the entire amortized cost basis of the security (that is, whether a credit loss exists).

Derivative Instruments

We use derivative financial instruments, primarily forwards, options and swaps, to hedge certain foreign currency and interest rate exposures. We may also use other derivative instruments not designated as hedges, such as forwards to hedge foreign currency balance sheet exposures. We do not use derivative financial instruments for trading purposes. 

In addition, we entered into a warrant agreement with a service provider that, subject to meeting certain conditions, entitles us to acquire a fixed number of shares up to 5% of the service provider’s fully diluted issued and outstanding share capital at a specific date. The warrant is accounted for as a derivative instrument under ASC Topic 815, Derivatives and Hedging.

See “Note 7 - Derivative Instruments” for a full description of our derivative instrument activities and related accounting policies.

Revenue Recognition
We generate net transaction revenues primarily from final value fees and fees to promote or feature listings from sellers in our Marketplace and final value fees from sellers and buyers on our StubHub platforms. We recognize revenue for the fees when the single performance obligation is satisfied at a point in time when transactions are successfully closed or payments are authorized to sellers on our Marketplace and StubHub platforms, respectively. We made the policy election to consider the delivery of tickets on our StubHub platform to be fulfillment activities and, consequently does not impact the timing of revenue recognition.
Our marketing services and other revenues are derived principally from the sale of advertisements, classifieds fees, and revenue sharing arrangements. Advertising revenue is derived principally from the sale of online advertisements which are based on “impressions” (i.e., the number of times that an advertisement appears in pages viewed by users of our platforms) or “clicks” (which are generated each time users on our platforms click through our advertisements to an advertiser’s designated website) delivered to advertisers. We use the output method and apply

7


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

the practical expedient to recognize advertising revenue in the amount to which we have a right to invoice. For contracts with target advertising commitments with rebates, estimated payout is accounted for as a variable consideration to the extent it is probable that a significant reversal of revenue will not occur.
We generate net revenues related to fees for listing items on our Classifieds platforms, which are recognized over the estimated period of the classifieds listing and fees to feature the listing that are recognized over the feature period or a point in time depending on the nature of the feature purchased. Discounts offered through purchase of packages of multiple services are allocated based on the stand-alone selling price (“SSP”) of each respective feature. Revenues related to revenue sharing arrangements are recognized based on whether we are the principal in the arrangement and are responsible for fulfilling the promise to provide the specified services or whether we are an agent arranging for those services to be provided by our partners. If the former, we recognize revenue in the gross amount of consideration received from the customer whereas if the latter, we recognize revenue net of the consideration due to our partners. Revenue related to revenue sharing arrangements are primarily recognized at a point in time when services are provided to customers.
We provide incentives to our users in various forms including discounts on fees, discounts on items sold on the platforms, coupons and rewards. Incentives which are consideration payable to the customer that are not in exchange for a distinct good or service are generally recognized as a reduction of revenue at the later of when revenue is recognized or when we pay or promise to pay the incentive. Further, we provide credits in certain circumstances in which we refund certain fees to our customers. Credits are accounted for as variable consideration at contract inception when estimating the amount of revenue to be recognized when the performance obligation is satisfied to the extent that it is probable that a significant reversal of revenue will not occur and updated as additional information becomes available.
Our contracts with customers may include promises to transfer multiple services including discounts on future services. Determining whether services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Further, judgment is required to determine the SSP for each distinct performance obligation. In instances where SSP is not directly observable, we generally estimate selling prices based on when they are sold to customers of a similar nature and geography. These estimates are generally based on pricing strategies, market factors, strategic objectives and observable inputs.
Contract Balances  

Timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable represents amounts invoiced and revenue recognized prior to invoicing when we have satisfied our performance obligation and have the unconditional right to payment. The allowance for doubtful accounts and authorized credits is estimated based upon our assessment of various factors including historical experience, the age of the accounts receivable balances, current economic conditions and other factors that may affect our customers’ ability to pay. The allowance for doubtful accounts and authorized credits was $100 million and $102 million as of June 30, 2018 and December 31, 2017, respectively.
Deferred revenue consists of fees received related to unsatisfied performance obligations at the end of the period. Due to the generally short-term duration of contracts, the majority of the performance obligations are satisfied in the following reporting period. The amount of revenue recognized for the six month period ended June 30, 2018 that was included in the deferred revenue balance at the beginning of the period was $90 million.

Recently Adopted Accounting Pronouncements

In 2014, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance related to revenue recognition. This new standard replaces all current GAAP guidance on this topic and eliminates 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. In 2016, the FASB issued several amendments to the standard, including principal versus agent considerations when another party is involved in providing goods or services to a customer and the application of identifying performance obligations. We adopted the standard effective January 1, 2018 using the full retrospective transition method and recast each prior reporting period presented. The cumulative adjustment to retained earnings as of January 1, 2016 was immaterial.

8


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


Under the new standard, we identified one performance obligation related to the core service offered to sellers on our Marketplace platform and believe additional services, mainly to promote or feature listings at the option of sellers, are not distinct within the context of the contract. Accordingly, certain fees paid by sellers for these services will be recognized when the single performance obligation is satisfied or when the contract expires resulting, in some cases, in a change in the timing of recognition. In addition, we made the policy election to consider delivery of tickets in our StubHub business to be fulfillment activities and, consequently, the performance obligation is considered to be satisfied upon payment to sellers. The impact of this policy election will allow an acceleration of revenue recognition for certain users. The total impact resulting from the change in timing of recognition for both the Marketplace and StubHub platforms was an immaterial net increase in transaction revenue for the three and six months ended June 30, 2017, and an increase in deferred revenue of $20 million as of December 31, 2017.

Further, certain incentives such as coupons and rewards provided to certain users from which we do not earn revenue within the context of the identified contract of $90 million and $176 million for the three and six months ended June 30, 2017, respectively, are recognized as sales and marketing expenses, which historically were recorded as a reduction of revenue.

Adoption of this guidance impacted our previously reported results as follows (in millions, except per share data):
 
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2017
 
As Reported
 
As Adjusted
 
As Reported
 
As Adjusted
Net revenues
$
2,328

 
$
2,419

 
$
4,545

 
$
4,722

Cost of net revenues
$
561

 
$
560

 
$
1,076

 
$
1,074

Sales and marketing
$
637

 
$
727

 
$
1,199

 
$
1,375

Net income (loss)
$
27

 
$
29

 
$
1,062

 
$
1,064

 
 
 
 
 
 
 
 
Net income (loss) per share - basic
$
0.03

 
$
0.03

 
$
0.98

 
$
0.99

 
 
 
 
 
 
 
 
Net income (loss) per share - diluted
$
0.02

 
$
0.03

 
$
0.97

 
$
0.97



In 2016, the FASB issued new guidance related to accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. Further in 2018, the FASB issued certain clarifications related to the application of the new guidance. We anticipate that the adoption of the new standard will increase the volatility of our other income (expense), net, as a result of the remeasurement of equity investments. The Company adopted this guidance in the first quarter of 2018 with no material impact on our condensed consolidated financial statements at adoption.

Recent Accounting Pronouncements Not Yet Adopted

In 2016, the FASB issued new guidance related to accounting for leases. The new guidance requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. Further in 2018, the FASB provided an optional transition practical expedient to not evaluate under the new guidance existing or expired land easements that were not previously accounted for as leases under the current guidance. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We are evaluating the impact of adopting this new accounting guidance on our condensed consolidated financial statements.

In 2016, the FASB issued new guidance that requires credit losses on financial assets measured at amortized cost basis to be presented at the net amount expected to be collected, not based on incurred losses. Further, credit losses on available-for-sale debt securities should be recorded through an allowance for credit losses limited to the amount by which fair value is below amortized cost. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption for fiscal years, and interim periods within

9


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

those fiscal years, beginning after December 15, 2018 is permitted. We are evaluating the impact of adopting this new accounting guidance on our condensed consolidated financial statements.

In 2017, the FASB issued new guidance to simplify the subsequent measurement of goodwill by removing the requirement to perform a hypothetical purchase price allocation to compute the implied fair value of goodwill to measure impairment. Instead, any goodwill impairment will equal the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Further, the guidance eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. This standard is effective for annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2019, with early adoption permitted for impairment tests performed after January 1, 2017. We do not expect the adoption of this standard to have a material impact on our condensed consolidated financial statements.

In 2017, the FASB issued new guidance that will shorten the amortization period for certain callable debt securities held at a premium to the earliest call date to more closely align with expectations incorporated in market pricing. The new guidance will not impact debt securities held at a discount. Adoption of this standard will be made on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. This standard is effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within those annual reporting periods, with early adoption permitted. While we continue to assess the potential impact of this standard, we do not expect the adoption of this standard to have a material impact on our condensed consolidated financial statements.

In 2018, the FASB issued new guidance that allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act, eliminating the stranded tax effects resulting from the Tax Cuts and Jobs Act. However, the new guidance only applies to the tax effects resulting from the Tax Cuts and Jobs Act and does not change the underlying guidance to recognize the effect of a change in tax laws or rates in income from continuing operations. The amendments are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. We are evaluating the impact of adopting this new accounting guidance on our condensed consolidated financial statements.

In 2018, the FASB issued new guidance to simplify the accounting for nonemployee share-based payment transactions by expanding the scope of ASC Topic 718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. Under the new standard, most of the guidance on stock compensation payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. This standard is effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within those annual reporting periods, with early adoption permitted. While we continue to assess the potential impact of this standard, we do not expect the adoption of this standard to have a material impact on our condensed consolidated financial statements.


10


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

Note 2 — Net Income 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 three and six months ended June 30, 2018 and 2017 (in millions, except per share amounts):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Income from continuing operations
$
638

 
$
29

 
$
1,045

 
$
1,064

Income from discontinued operations, net of income taxes
4

 

 
4

 

Net income
$
642

 
$
29

 
$
1,049

 
$
1,064

Denominator:
 
 
 
 
 
 
 
Weighted average shares of common stock - basic
992

 
1,076

 
1,001

 
1,080

Dilutive effect of equity incentive awards
12

 
15

 
15

 
17

Weighted average shares of common stock - diluted
1,004

 
1,091

 
1,016

 
1,097

 
 
 
 
 
 
 
 
Income per share - basic:
 
 
 
 
 
 
 
Continuing operations
$
0.64

 
$
0.03

 
$
1.04

 
$
0.99

Discontinued operations

 

 

 

Net income per share - basic
$
0.64

 
$
0.03

 
$
1.04

 
$
0.99

Income per share - diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.64

 
$
0.03

 
$
1.03

 
$
0.97

Discontinued operations

 

 

 

Net income per share - diluted
$
0.64

 
$
0.03

 
$
1.03

 
$
0.97

Common stock equivalents excluded from income per diluted share because their effect would have been anti-dilutive
15

 
1

 
13

 
16




11


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

Note 3 – Business Combinations

Business Combinations

In May 2018, we completed the acquisition of 100% of Giosis Pte. Ltd.’s (“Giosis”) Japan business, including the Qoo10.jp platform, in exchange for $306 million in cash and the relinquishment of our existing equity method investment in Giosis. We believe the acquisition will allow us to offer Japanese consumers more inventory and grow our international presence. Refer to “Note 6 - Investments” for further details on the relinquishment of our equity method investment in Giosis’ non-Japanese business.

The aggregate purchase consideration was allocated as follows (in millions):
 
Giosis
Purchased intangible assets
$
91

Goodwill
532

Net liabilities
(50
)
Total
$
573



These allocations were prepared on a preliminary basis and changes to these allocations may occur as additional information becomes available. The goodwill recognized is primarily attributable to expected synergies and the assembled workforce of Giosis. We generally do not expect goodwill to be deductible for income tax purposes.

Our condensed consolidated financial statements include the operating results of Giosis from the date of acquisition. Separate operating results and pro forma results of operations for this acquisition have not been presented as the effect of the acquisition is not material to our financial results.

Note 4 — Goodwill and Intangible Assets

Goodwill

The following table presents goodwill activities during the six months ended June 30, 2018 (in millions):
 
December 31,
2017
 
Goodwill
Acquired
 
Adjustments
 
June 30,
2018
Goodwill
$
4,773

 
$
532

 
$
(106
)
 
$
5,199



The adjustments to goodwill during the six months ended June 30, 2018 were primarily due to foreign currency translation.

Intangible Assets

The components of identifiable intangible assets as of June 30, 2018 and December 31, 2017 are as follows (in millions, except years): 
 
June 30, 2018
 
December 31, 2017
 
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)
Intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer lists and user base
$
523

 
$
(431
)
 
$
92

 
5
 
$
458

 
$
(430
)
 
$
28

 
5
Marketing related
590

 
(577
)
 
13

 
5
 
607

 
(587
)
 
20

 
5
Developed technologies
279

 
(266
)
 
13

 
3
 
273

 
(258
)
 
15

 
3
All other
158

 
(153
)
 
5

 
4
 
156

 
(150
)
 
6

 
4
Total
$
1,550

 
$
(1,427
)
 
$
123

 
 
 
$
1,494

 
$
(1,425
)
 
$
69

 
 



12


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

Amortization expense for intangible assets was $18 million and $16 million for the three months ended June 30, 2018 and 2017, respectively. Amortization expense for intangible assets was $34 million and $32 million for the six months ended June 30, 2018 and 2017, respectively.

Expected future intangible asset amortization as of June 30, 2018 is as follows (in millions):
Fiscal year:
 
 
Remaining 2018
 
$
31

2019
 
49

2020
 
34

2021
 
9

Thereafter
 

Total
 
$
123



Note 5 — Segments

We have one operating and reportable segment. Our chief operating decision maker reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. The following table sets forth the breakdown of net revenues by type for the three and six months ended June 30, 2018 and 2017 (in millions):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Net transaction revenues:
 
 
 
 
 
 
 
Marketplace
$
1,837

 
$
1,679

 
$
3,629

 
$
3,288

StubHub
240

 
229

 
471

 
435

Total net transaction revenues
2,077

 
1,908

 
4,100

 
3,723

Marketing services and other revenues:
 
 
 
 
 
 
 
Marketplace
298

 
283

 
608

 
566

Classifieds
259

 
219

 
505

 
418

StubHub, Corporate and other
6

 
9

 
7

 
15

Total marketing services and other revenues
563

 
511

 
1,120

 
999

Total net revenues
$
2,640

 
$
2,419

 
$
5,220

 
$
4,722



The following table summarizes the allocation of net revenues based on geography for the three and six months ended June 30, 2018 and 2017 (in millions):  
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Net revenues by geography:
 
 
 
 
 
 
 
U.S.
$
1,055

 
$
1,005

 
$
2,129

 
$
1,995

United Kingdom
369

 
329

 
725

 
640

Germany
407

 
353

 
799

 
684

South Korea
304

 
269

 
587

 
514

Rest of world
505

 
463

 
980

 
889

Total net revenues
$
2,640

 
$
2,419

 
$
5,220

 
$
4,722



Net revenues, inclusive of the effects of foreign exchange during each period, are attributed to U.S. and international geographies primarily based upon the country in which the seller, platform that displays advertising, other service provider or customer, as the case may be, is located.


13


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

Note 6 — Investments

The following tables summarize the unrealized gains and losses and estimated fair value of our investments classified as available-for-sale as of June 30, 2018 and December 31, 2017 (in millions):
 
June 30, 2018
 
Gross
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
Short-term investments:
 
  
 
  
 
 
 
Restricted cash
$
17

  
$

  
$

 
$
17

Corporate debt securities
2,376

  
1

  
(6
)
 
2,371

 
$
2,393

  
$
1

  
$
(6
)
 
$
2,388

Long-term investments:
 
  
 
  
 
 
 
Corporate debt securities
4,598

  
5

  
(53
)
 
4,550

 
$
4,598

  
$
5

  
$
(53
)
 
$
4,550

 
 
December 31, 2017
 
Gross
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
Short-term investments:
 
  
 
  
 
 
 
Restricted cash
$
20

  
$

  
$

 
$
20

Corporate debt securities
3,726

  
1

  
(4
)
 
3,723

 
$
3,746

 
$
1

 
$
(4
)
 
$
3,743

Long-term investments:
 
  
 
  
 
 
 
Corporate debt securities
5,458

  
12

  
(24
)
 
5,446

 
$
5,458

  
$
12

  
$
(24
)
 
$
5,446



Investment securities in a continuous loss position for greater than 12 months had an estimated fair value of $430 million and $9 million of unrealized losses as of June 30, 2018 and an estimated fair value of $360 million and an immaterial amount of unrealized losses as of December 31, 2017. Refer to “Note 14 - Accumulated Other Comprehensive Income” for amounts reclassified to earnings from unrealized gains and losses.

The estimated fair values of our short-term and long-term investments classified as available-for-sale by date of contractual maturity as of June 30, 2018 are as follows (in millions):  
 
June 30, 2018
One year or less (including restricted cash of $17)
$
2,388

One year through two years
2,127

Two years through three years
1,478

Three years through four years
640

Four years through five years
305

 
$
6,938



14


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

Equity investments

Our equity investments are reported in long-term investments on our condensed consolidated balance sheet. The following table provides a summary of our equity investments as of June 30, 2018 and December 31, 2017 (in millions):
 
June 30, 2018
 
December 31, 2017
Equity investments without readily determinable fair values
$
859

 
$
872

Equity investments under the equity method of accounting
9

 
13

Total equity investments
$
868

 
$
885



During the second quarter of 2018, we relinquished our existing equity method investment in Giosis as part of the exchange for the acquisition of Giosis’ Japan business. The gain upon relinquishment of $266 million was recorded in interest and other, net on our condensed consolidated statement of income. Refer to “Note 3 - Business Combinations” for further details on the acquisition. Changes in our equity investments without determinable fair values typically include foreign currency translation.

In May 2018, we announced our intent to sell our ownership interest in Flipkart. We expect to close the transaction in the second half of 2018, subject to regulatory approval.

Note 7 — 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. These hedging contracts reduce, but do not entirely eliminate, the impact of adverse foreign exchange rate and interest rate movements. We do not use any of our derivative instruments for trading purposes.

We use foreign currency exchange contracts to reduce the volatility of cash flows related to forecasted revenues, expenses, assets and liabilities, including intercompany balances denominated in foreign currencies. These contracts are generally one month to one year in duration but with maturities up to 18 months. The objective of the foreign exchange contracts is to better ensure that ultimately the U.S. dollar-equivalent cash flows are not adversely affected by changes in the applicable U.S. dollar/foreign currency exchange rate. We evaluate the effectiveness of our foreign exchange contracts designated as cash flow or net investment hedges on a quarterly basis.

We use interest rate swaps to manage interest rate risk on our fixed rate notes issued in July 2014 and maturing in 2019, 2021 and 2024. These interest rate swaps had 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. The duration of these interest rate contracts matches the duration of the fixed rate notes due 2019, 2021 and 2024.

Cash Flow Hedges

For derivative instruments that are designated as cash flow hedges, the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (“AOCI”) and subsequently reclassified into earnings in the same period the forecasted transaction affects earnings. Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Unrealized gains and losses in AOCI associated with such derivative instruments are immediately reclassified into earnings. As of June 30, 2018, we have estimated that approximately $44 million of net derivative gain related to our cash flow hedges included in accumulated other comprehensive income will be reclassified into earnings within the next 12 months.

Net Investment Hedges

For derivative instruments that are designated as net investment hedges, the derivative’s gain or loss is initially reported in the translation adjustments component of AOCI and is reclassified to net earnings in the period in which the hedged subsidiary is either sold or substantially liquidated.


15


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

Fair Value Hedges

We have designated the interest rate swaps used to manage interest rate risk on our fixed rate notes issued in July 2014 and maturing in 2019, 2021 and 2024 as qualifying hedging instruments and are accounting for them as fair value hedges. These transactions are designated 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.

Non-Designated Hedges

Our derivatives not designated as hedging instruments consist of foreign currency forward contracts that we primarily use to hedge monetary assets or liabilities, including intercompany balances denominated in non-functional currencies. The gains and losses on our derivatives not designated as hedging instruments are recorded in interest and other, net, which are offset by the foreign currency gains and losses on the related assets and liabilities that are also recorded in interest and other, net.

Warrant

We entered into a warrant agreement with a service provider that, subject to meeting certain conditions, entitles us to acquire a fixed number of shares up to 5% of the service providers fully diluted issued and outstanding share capital at a specific date. The warrant has a term of seven years and will vest in a series of four tranches, at a specified price per share upon meeting significant milestones on a calendar year basis. If and when the relevant milestone is reached, the warrant becomes exercisable with respect to the corresponding tranche of warrant shares up until the warrant expiration date of January 31, 2025. The maximum number of tranches that can vest in one calendar year is two.
 
The warrant is accounted for as a derivative under ASC Topic 815, Derivatives and Hedging. We report the warrant at fair value within other assets in our condensed consolidated balance sheets and changes in the fair value of the warrant are recognized in interest and other, net in our condensed consolidated statement of income. The day-one value attributable to the warrant, which was recorded as a deferred credit, is reported within other liabilities in our condensed consolidated balance sheets and will be amortized over the life of the warrant.

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


Fair Value of Derivative Contracts

The fair values of our outstanding derivative instruments as of June 30, 2018 and December 31, 2017 were as follows (in millions):
 
Balance Sheet Location
 
June 30,
2018
 
December 31,
2017
Derivative Assets:
 
 
 
 
 
Foreign exchange contracts designated as cash flow hedges
Other Current Assets
 
$
87

 
$
16

Foreign exchange contracts designated as net investment hedges
Other Current Assets
 
11

 

Foreign exchange contracts not designated as hedging instruments
Other Current Assets
 
52

 
10

Warrant
Other Assets
 
150

 

Interest rate contracts designated as fair value hedges
Other Assets
 

 
2

Total derivative assets
 
 
$
300

 
$
28

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

 
$
18

Foreign exchange contracts not designated as hedging instruments
Other Current Liabilities
 
45

 
11

Interest rate contracts designated as fair value hedges
Other Liabilities
 
37

 

Total derivative liabilities
 
 
$
82

 
$
29

 
 
 
 
 
 
Total fair value of derivative instruments
 
 
$
218

 
$
(1
)


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 June 30, 2018, the potential effect of rights of set-off associated with the foreign exchange contracts would be an offset to both assets and liabilities by $45 million, resulting in net derivative assets of $105 million and net derivative liabilities of zero.

Effect of Derivative Contracts on Accumulated Other Comprehensive Income

The following tables present the activity of derivative contracts that qualify for hedge accounting as of June 30, 2018 and December 31, 2017, and the impact of these derivative contracts on AOCI for the six months ended June 30, 2018 and 2017 (in millions): 
 
December 31, 2017
 
Amount of Gain (Loss)
Recognized in Other
Comprehensive 
Income
 
Amount of Gain (Loss)
Reclassified From
AOCI to Earnings
 
June 30, 2018
Foreign exchange contracts designated as cash flow hedges
$
(57
)
 
$
59

 
$
(49
)
 
$
51


 
December 31, 2016
 
Amount of Gain (Loss)
Recognized in Other
Comprehensive 
Income
 
Amount of Gain (Loss)
Reclassified From
AOCI to Earnings
 
June 30, 2017
Foreign exchange contracts designated as cash flow hedges
$
54

 
$
(63
)
 
$
35

 
$
(44
)



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

Effect of Derivative Contracts on Condensed Consolidated Statement of Income

The following table provides a summary of the total gain (loss) recognized in the condensed consolidated statement of income from our foreign exchange derivative contracts by location (in millions):