eBay Inc.
EBAY INC (Form: 10-Q, Received: 04/20/2017 17:07:02)


 
 
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, 2017

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
 
EBAYNOTMA01.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) 376-7400
(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, 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 April 17, 2017 , there were 1,082,338,026 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
 
March 31,
2017
 
December 31,
2016
 
(In millions, except par value)
 
(Unaudited)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,979

 
$
1,816

Short-term investments
4,775

 
5,333

Accounts receivable, net
592

 
592

Other current assets
1,147

 
1,134

Total current assets
8,493

 
8,875

Long-term investments
4,540

 
3,969

Property and equipment, net
1,496

 
1,516

Goodwill
4,648

 
4,501

Intangible assets, net
86

 
102

Deferred tax asset
5,263

 
4,608

Other assets
282

 
276

Total assets
$
24,808

 
$
23,847

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt
$
2,210

 
$
1,451

Accounts payable
296

 
283

Accrued expenses and other current liabilities
1,693

 
1,893

Deferred revenue
112

 
110

Income taxes payable
122

 
110

Total current liabilities
4,433

 
3,847

Deferred and other tax liabilities, net
1,958

 
1,888

Long-term debt
6,756

 
7,509

Other liabilities
66

 
64

Total liabilities
13,213

 
13,308

Commitments and contingencies (Note 9)

 


Stockholders’ equity:
 
 
 
Common stock, $0.001 par value; 3,580 shares authorized; 1,078 and 1,087 shares outstanding
2

 
2

Additional paid-in capital
14,989

 
14,907

Treasury stock at cost, 567 and 557 shares
(19,555
)
 
(19,205
)
Retained earnings
15,994

 
14,959

Accumulated other comprehensive income/(loss)
165

 
(124
)
Total stockholders’ equity
11,595

 
10,539

Total liabilities and stockholders’ equity
$
24,808

 
$
23,847


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,
 
2017
 
2016
 
(In millions, except per share amounts)
 
(Unaudited)
Net revenues
$
2,217

 
$
2,137

Cost of net revenues
515

 
477

Gross profit
1,702

 
1,660

Operating expenses:
 
 
 
Sales and marketing
562

 
538

Product development
278

 
239

General and administrative
245

 
209

Provision for transaction losses
62

 
52

Amortization of acquired intangible assets
9

 
8

Total operating expenses
1,156

 
1,046

Income from operations
546

 
614

Interest and other, net
12

 
(23
)
Income before income taxes
558

 
591

Income tax benefit (provision)
477

 
(109
)
Net income
$
1,035

 
$
482

 
 
 
 
Net income (loss) per share:
 
 
 
Basic
$
0.96

 
$
0.42

Diluted
$
0.94

 
$
0.41

 
 
 
 
Weighted-average shares:
 
 
 
Basic
1,083

 
1,159

Diluted
1,102

 
1,170


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,
 
2017
 
2016
 
(In millions)
 
(Unaudited)
Net income
$
1,035

 
$
482

Other comprehensive income (loss), net of reclassification adjustments:
 
 
 
Foreign currency translation gain (loss)
331

 
154

Unrealized gains (losses) on investments, net
(20
)
 
23

Tax benefit (expense) on unrealized gains (losses) on investments, net
12

 
(21
)
Unrealized gains (losses) on hedging activities, net
(34
)
 
3

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

 

Other comprehensive income (loss), net of tax
289

 
159

Comprehensive income
$
1,324

 
$
641


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,
 
2017
 
2016
 
(In millions)
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income
$
1,035

 
$
482

Adjustments:

 
 
Provision for transaction losses
62

 
52

Depreciation and amortization
163

 
167

Stock-based compensation
101

 
88

Deferred income taxes
(565
)
 
(28
)
Changes in assets and liabilities, and other, net of acquisition effects
(214
)
 
(120
)
Net cash provided by operating activities
582

 
641

Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(135
)
 
(158
)
Purchases of investments
(2,750
)
 
(2,935
)
Maturities and sales of investments
2,770

 
2,030

Other

 
(12
)
Net cash used in investing activities
(115
)
 
(1,075
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of common stock
11

 
7

Repurchases of common stock
(410
)
 
(1,001
)
Excess tax benefits from stock-based compensation

 
1

Tax withholdings related to net share settlements of restricted stock units and awards
(29
)
 
(8
)
Proceeds from issuance of long-term debt, net

 
2,216

Other
10

 
7

Net cash provided by (used in) financing activities
(418
)
 
1,222

Effect of exchange rate changes on cash and cash equivalents
114

 
66

Net increase in cash and cash equivalents
163

 
854

Cash and cash equivalents at beginning of period
1,816

 
1,832

Cash and cash equivalents at end of period
$
1,979

 
$
2,686

Supplemental cash flow disclosures:
 
 
 
Cash paid for interest
$
109

 
$
73

Cash paid for income taxes
$
45

 
$
31


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, 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.

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, 2016 . 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.

Recently Adopted Accounting Pronouncements

In 2016, the FASB issued new guidance to revise certain aspects of stock-based compensation guidance which includes income tax consequences, classification of awards as equity or liabilities, and classification on the statement of cash flows. We adopted the new standard in the first quarter of 2017. Adoption of this standard did not have a material impact on our consolidated financial statements.

6


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



Recent Accounting Pronouncements Not Yet Adopted

In 2014, the Financial Accounting Standards Board (“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. 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. While we continue to assess all potential impacts of the standard, we currently believe there will be an impact related to timing and measurement of certain fees paid by sellers based on identification of performance obligations and whether certain services would be considered a material right. In addition, we are currently assessing whether the principal versus agent considerations would change how we present revenue, specifically in our advertising and shipping arrangements. Further, we believe incentives such as coupons and rewards provided to our users could potentially be recognized as an expense, which we generally record as a reduction of revenue under current guidance. The standard is required to be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. We have not yet selected the transition method. The Company will adopt the new revenue standards in its first quarter of 2018.

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. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We are evaluating the impact of adopting this new accounting guidance on our consolidated financial statements.

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

In 2016, the FASB issued new guidance that clarifies the classification of certain cash receipts and cash payments in the statement of cash flows, including debt prepayment or extinguishment costs, settlement of contingent consideration arising from a business combination, insurance settlement proceeds, and distributions from certain equity method investees. Additionally, the FASB issued new guidance to include restricted cash with cash and cash equivalents when reconciling the beginning-of-the-period and end-of-the-period total amounts shown on the statement of cash flows. The new standards are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. 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 consolidated financial statements.


7


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


In 2016, the FASB issued new guidance that requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. This removes the exception to postpone recognition until the asset has been sold to an outside party. This standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods, with early adoption permitted. It is required to be applied on a modified retrospective basis through a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. We are evaluating the impact of adopting this new accounting guidance on our consolidated financial statements.

In 2017, the FASB issued new guidance that narrows the application of when an integrated set of assets and activities is considered a business and provides a framework to assist entities in evaluating whether both an input and a substantive process are present to be considered a business. It is expected that the new guidance will reduce the number of transactions that would need to be further evaluated and accounted for as a business. This standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods, with early adoption permitted. We are evaluating the impact of adopting this new accounting guidance on our 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. 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 consolidated financial statements.

In 2017, the FASB issued new guidance to clarify the scope and application of the sale or transfer of nonfinancial assets to noncustomers, including partial sales and also defines what constitutes an “in substance nonfinancial asset” which can include financial assets. The new guidance eliminates several accounting differences between transactions involving assets and transactions involving businesses. Further, the guidance aligns the accounting for derecognition of a nonfinancial asset with that of a business. This standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. We are evaluating the impact of adopting this new accounting guidance on our 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. We are evaluating the impact of adopting this new accounting guidance on our consolidated financial statements.


8


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


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 three months ended March 31, 2017 and 2016 (in millions, except per share amounts):
 
Three Months Ended
March 31,
 
2017
 
2016
Numerator:
 
 
 
Net income
$
1,035

 
$
482

Denominator:
 
 
 
Weighted average shares of common stock - basic
1,083

 
1,159

Dilutive effect of equity incentive awards
19

 
11

Weighted average shares of common stock - diluted
1,102

 
1,170

Net income (loss) per share:
 
 
 
Basic
$
0.96

 
$
0.42

Diluted
$
0.94

 
$
0.41

Common stock equivalents excluded from income per diluted share because their effect would have been anti-dilutive
1

 
6


Note 3 — Goodwill and Intangible Assets

Goodwill

The following table presents goodwill activities during the three months ended March 31, 2017 (in millions):
 
December 31,
2016
 
Goodwill
Acquired
 
Adjustments
 
March 31,
2017
Goodwill
$
4,501

 
$

 
$
147

 
$
4,648


The adjustments to goodwill during the three months ended March 31, 2017 were primarily due to foreign currency translation.


9


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


Intangible Assets

The components of identifiable intangible assets as of March 31, 2017 and December 31, 2016 are as follows (in millions, except years): 
 
March 31, 2017
 
December 31, 2016
 
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
$
438

 
$
(401
)
 
$
37

 
5
 
$
434

 
$
(393
)
 
$
41

 
5
Marketing related
559

 
(548
)
 
11

 
5
 
568

 
(555
)
 
13

 
5
Developed technologies
262

 
(235
)
 
27

 
3
 
263

 
(229
)
 
34

 
3
All other
154

 
(143
)
 
11

 
4
 
154

 
(140
)
 
14

 
4
Total
$
1,413

 
$
(1,327
)
 
$
86

 
 
 
$
1,419

 
$
(1,317
)
 
$
102

 
 

Amortization expense for intangible assets was $16 million and $12 million for the three months ended March 31, 2017 and 2016 , respectively.

Expected future intangible asset amortization as of March 31, 2017 is as follows (in millions):
Fiscal year:
 
 
Remaining 2017
 
$
44

2018
 
27

2019
 
10

2020
 
5

Thereafter
 

Total
 
$
86


Note 4 — 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 months ended March 31, 2017 and 2016 (in millions):
 
Three Months Ended
March 31,
 
2017
 
2016
Net revenues by type:
 
 
 
Net transaction revenues:
 
 
 
Marketplace
$
1,525

 
$
1,500

StubHub
204

 
177

Total net transaction revenues
1,729

 
1,677

Marketing services and other revenues:
 
 
 
Marketplace
283

 
274

Classifieds
199

 
186

StubHub, Corporate and other
6

 

Total marketing services and other revenues
488

 
460

Total net revenues
$
2,217

 
$
2,137



10


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


Note 5 — Investments

The following tables summarize the unrealized gains and losses and estimated fair value of our investments classified as available-for-sale as of March 31, 2017 and December 31, 2016 (in millions):
 
March 31, 2017
 
Gross
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
Short-term investments:
 
  
 
  
 
 
 
Restricted cash
$
20

  
$

  
$

 
$
20

Corporate debt securities (1)
4,670

  
19

  
(2
)
 
4,687

Government and agency securities
64

  
4

  

 
68

 
$
4,754

  
$
23

  
$
(2
)
 
$
4,775

Long-term investments:
 
  
 
  
 
 
 
Corporate debt securities (1)
4,411

  
18

  
(8
)
 
4,421

 
$
4,411

  
$
18

  
$
(8
)
 
$
4,421

 
 
(1)
As of March 31, 2017 , investment securities with a fair value of $711 million and a net unrealized foreign exchange gain of $20 million were held by a foreign subsidiary in which the U.S. dollar is not the functional currency.

 
December 31, 2016
 
Gross
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
Short-term investments:
 
  
 
  
 
 
 
Restricted cash
$
19

  
$

  
$

 
$
19

Corporate debt securities
5,203

  
44

  
(1
)
 
5,246

Government and agency securities
63

  
5

  

 
68

 
$
5,285

 
$
49

 
$
(1
)
 
$
5,333

Long-term investments:
 
  
 
  
 
 
 
Corporate debt securities
3,848

  
15

  
(12
)
 
3,851

 
$
3,848

  
$
15

  
$
(12
)
 
$
3,851


Investment securities in a continuous loss position for greater than 12 months had an estimated fair value of $27 million and an immaterial amount of unrealized losses as of March 31, 2017 and an estimated fair value of $123 million and an immaterial amount of unrealized losses as of December 31, 2016 . Refer to “Note 13 - 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 March 31, 2017 are as follows (in millions):  
 
March 31, 2017
One year or less (including restricted cash of $20)
$
4,775

One year through two years
1,931

Two years through three years
1,743

Three years through four years
296

Four years through five years
451

 
$
9,196


11


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


Equity and cost method investments

We have made multiple equity and cost method investments, which are reported in long-term investments on our condensed consolidated balance sheet. As of March 31, 2017 and December 31, 2016 , our equity and cost method investments totaled $119 million and $118 million , respectively.

Note 6 — Fair Value Measurement of Assets and Liabilities

The following tables presents financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016 (in millions):
 
March 31, 2017
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
Assets:
 
 
 
 
 
Cash and cash equivalents
$
1,979

 
$
1,979

 
$

Short-term investments:
 
 
 
 
 
Restricted cash
20

 
20

 

Corporate debt securities
4,687

 

 
4,687

Government and agency securities
68

 

 
68

Total short-term investments
4,775

 
20

 
4,755

Derivatives
107

 

 
107

Long-term investments:
 
 
 
 
 
Corporate debt securities
4,421

 

 
4,421

Total long-term investments
4,421

 

 
4,421

Total financial assets
$
11,282

 
$
1,999

 
$
9,283

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Derivatives
$
33

 
$

 
$
33


 
December 31, 2016
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
Assets:
 
 
 
 
 
Cash and cash equivalents
$
1,816

 
$
1,816

 
$

Short-term investments:
 
 
 
 
 
Restricted cash
19

 
19

 

Corporate debt securities
5,246

 

 
5,246

Government and agency securities
68

 

 
68

Total short-term investments
5,333

 
19

 
5,314

Derivatives
154

 

 
154

Long-term investments:
 
 
 
 
 
Corporate debt securities
3,851

 

 
3,851

Total long-term investments
3,851

 

 
3,851

Total financial assets
$
11,154

 
$
1,835

 
$
9,319

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Derivatives
$
48

 
$

 
$
48

 

12


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


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, 2017 .

Other financial instruments, including accounts receivable and accounts payable, 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, primarily short-term in nature, generally one month to one year in duration but with maturities up to 18 months , 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 ultimately 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 (”AOCI”) 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. 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 March 31, 2017 , we have estimated that approximately $21 million of net derivative gains related to our cash flow hedges included in AOCI will be reclassified into earnings within the next 12 months.

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.


13


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


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.

Fair Value of Derivative Contracts

The fair values of our outstanding derivative instruments as of March 31, 2017 and December 31, 2016 were as follows (in millions):
 
Balance Sheet Location
 
March 31,
2017
 
December 31,
2016
Derivative Assets:
 
 
 
 
 
Foreign exchange contracts designated as cash flow hedges
Other Current Assets
 
$
48

 
$
67

Foreign exchange contracts not designated as hedging instruments
Other Current Assets
 
43

 
64

Interest rate contracts designated as fair value hedges
Other Assets
 
16

 
23

Total derivative assets
 
 
$
107

 
$
154

 
 
 
 
 
 
Derivative Liabilities:
 
 
 
 
 
Foreign exchange contracts designated as cash flow hedges
Other Current Liabilities
 
$
4

 
$
3

Foreign exchange contracts not designated as hedging instruments
Other Current Liabilities
 
29

 
45

Total derivative liabilities
 
 
$
33

 
$
48

 
 
 
 
 
 
Total fair value of derivative instruments
 
 
$
74

 
$
106


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, 2017 , the potential effect of rights of set-off associated with the foreign exchange contracts would be an offset to both assets and liabilities by $31 million , resulting in net derivative assets and net derivative liabilities of $59 million and $1 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, 2017 , we had neither pledged nor received collateral related to our interest rate derivative transactions.


14


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


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 March 31, 2017 and December 31, 2016 , and the impact of these derivative contracts on AOCI for the three months ended March 31, 2017 and 2016 (in millions): 
 
December 31, 2016
 
Amount of Gain (Loss)
Recognized in Other
Comprehensive 
Income
(Effective Portion)  
 
Amount of Gain (Loss)
Reclassified From
AOCI to Earnings
(Effective Portion)
 
March 31, 2017
Foreign exchange contracts designated as cash flow hedges
$
54

 
$
(14
)
 
$
20

 
$
20


 
December 31, 2015
 
Amount of Gain (Loss)
Recognized in Other
Comprehensive 
Income
(Effective Portion)  
 
Amount of Gain (Loss)
Reclassified From
AOCI to Earnings
(Effective Portion)
 
March 31, 2016
Foreign exchange contracts designated as cash flow hedges
$
36

 
$
19

 
$
16

 
$
39


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 (in millions): 
 
Three Months Ended
March 31,
 
2017

2016
Foreign exchange contracts designated as cash flow hedges recognized in cost of net revenues and operating expenses
$
7

 
$
4

Foreign exchange contracts designated as cash flow hedges recognized in interest and other, net
13

 
12

Foreign exchange contracts not designated as hedging instruments recognized in interest and other, net
(4
)
 
(2
)
Total gain (loss) recognized from foreign exchange derivative contracts in the condensed consolidated statement of income
$
16

 
$
14


The following table provides the location in our financial statements of the recognized gains or losses related to our interest rate derivative instruments (in millions): 
 
Three Months Ended
March 31,
 
2017
 
2016
Gain (loss) from interest rate contracts designated as fair value hedges recognized in interest and other, net
$
(7
)
 
$
63

Gain (loss) from hedged items attributable to hedged risk recognized in interest and other, net
7

 
(63
)
Total gain (loss) recognized from interest rate derivative contracts in the condensed consolidated statement of income
$

 
$



15


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 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 are determined. The following table provides the notional amounts of our outstanding derivatives as of March 31, 2017 and December 31, 2016 (in millions):
 
March 31,
2017
 
December 31,
2016
Foreign exchange contracts designated as cash flow hedges
$
1,502

 
$
1,200

Foreign exchange contracts designated as net investment hedges
96

 

Foreign exchange contracts not designated as hedging instruments
3,111

 
2,993

Interest rate contracts designated as fair value hedges
2,400

 
2,400

Total
$
7,109

 
$
6,593


Note 8 — Debt

The following table summarizes the carrying value of our outstanding debt (in millions, except percentages):
 
 
Coupon
 
As of
 
Effective
 
As of
 
Effective
 
 
 Rate
 
March 31, 2017
 
 Interest Rate
 
December 31, 2016
 
 Interest Rate
Long-Term Debt
 
 
 
 
 
 
 
 
 
 
Floating Rate Notes:
 
 
 
 
 
 
 
 
 
 
Senior notes due 2017
 
LIBOR plus 0.20%

 
$
450

 
1.372
%
 
$
450

 
1.223
%
Senior notes due 2019
 
LIBOR plus 0.48%

 
400

 
1.600
%
 
400

 
1.460
%
 
 
 
 
 
 
 
 
 
 
 
Fixed Rate Notes:
 
 
 
 
 
 
 
 
 
 
Senior notes due 2017
 
1.350
%
 
1,000

 
1.456
%
 
1,000

 
1.456
%
Senior notes due 2018
 
2.500
%
 
750

 
2.775
%
 
750

 
2.775
%
Senior notes due 2019
 
2.200
%
 
1,150

 
2.346
%
 
1,150

 
2.346
%
Senior notes due 2020
 
3.250
%
 
500

 
3.389
%
 
500

 
3.389
%
Senior notes due 2021
 
2.875
%
 
750

 
2.993
%
 
750

 
2.993
%
Senior notes due 2022
 
3.800
%
 
750

 
3.989
%
 
750

 
3.989
%
Senior notes due 2022
 
2.600
%
 
1,000

 
2.678
%
 
1,000

 
2.678
%
Senior notes due 2024
 
3.450
%
 
750

 
3.531
%
 
750

 
3.531
%
Senior notes due 2042
 
4.000
%
 
750

 
4.114
%
 
750

 
4.114
%
Senior notes due 2056
 
6.000
%
 
750

 
6.547
%
 
750

 
6.547
%
Total senior notes
 
 
 
9,000

 
 
 
9,000

 
 
Hedge accounting fair value adjustments
 
 
 
16

 
 
 
23

 
 
Unamortized discount and debt issuance costs
 
 
 
(60
)
 
 
 
(64
)
 
 
Less: Current portion of long-term debt
 
 
 
(2,200
)
 
 
 
(1,450
)
 
 
Total long-term debt
 
 
 
6,756

 
 
 
7,509

 
 
 
 
 
 
 
 
 
 
 
 
 
Short-Term Debt
 
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
 
 
 
2,200

 
 
 
1,450

 
 
Unamortized discount and debt issuance costs
 
 
 
(2
)
 
 
 
(1
)
 
 
Other indebtedness
 
 
 
12

 
 
 
2

 
 
Total short-term debt
 
 
 
2,210

 
 
 
1,451

 
 
Total Debt
 
 
 
$
8,966

 
 
 
$
8,960

 
 

16


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



Senior Notes

The floating rate notes are not redeemable prior to maturity. On and after March 1, 2021, we may redeem some or all of the 6.000% fixed rate notes due 2056 at any time and from time to time prior to their maturity at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest. We may redeem some or all of the other 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, plus accrued and unpaid interest. If a change of control triggering event occurs with respect to the 2.500% fixed rate notes due 2018, the 3.800% fixed rate notes due 2022 or the 6.000% fixed rate notes due 2056, we must, subject to certain exceptions, offer to repurchase all of the notes of the applicable series at a price equal to 101% of the principal amount, plus accrued and unpaid interest.

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.

To help achieve our interest rate risk management objectives, in connection with the previous issuance of certain senior notes, we entered into interest rate swap agreements that effectively converted $2.4 billion of our fixed rate notes to floating rate debt based on LIBOR plus a spread. 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 these senior notes, including amortization of debt issuance costs was approximately $68 million and $50 million during the three months ended March 31, 2017 and 2016 , respectively.

As of March 31, 2017 and December 31, 2016, the estimated fair value of these senior notes was approximately $9.0 billion and $8.9 billion , respectively.

Other Indebtedness

Our other indebtedness is comprised of overdraft facilities. We have formal overdraft facilities in India bearing interest on drawn balances at approximately a 9.1% rate per annum.

Commercial Paper

We have a commercial paper program pursuant to which we may issue commercial paper notes in an aggregate principal amount at maturity of up to $1.5 billion outstanding at any time with maturities of up to 397 days from the date of issue. As of March 31, 2017 , there were no commercial paper notes outstanding.

Credit Agreement

As of March 31, 2017 , no borrowings were outstanding under our $2 billion credit agreement. However, as described above, we have an up to $1.5 billion commercial paper program and therefore maintain $1.5 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, $500 million of borrowing capacity was available as of March 31, 2017 for other purposes permitted by the credit agreement. The credit agreement includes customary representations, warranties, affirmative and negative covenants, including financial covenants, events of default and indemnification provisions in favor of the banks. The negative covenants include restrictions regarding the incurrence of liens and subsidiary indebtedness, in each case, subject to certain exceptions. The financial covenants require us to meet a quarterly financial test with respect to a minimum consolidated interest coverage ratio and a maximum consolidated leverage ratio. The events of default include the occurrence of a change of control (as defined in the credit agreement) with respect to us.

17


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



We were in compliance with all covenants in our outstanding debt instruments during the three months ended March 31, 2017 .

Note 9 — Commitments and Contingencies

Off-Balance Sheet Arrangements

As of March 31, 2017 , 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 a cash pooling arrangement with a financial institution for cash management purposes. This arrangement allows for cash withdrawals from the financial institution based upon our aggregate operating cash balances held within the same financial institution (“Aggregate Cash Deposits”). This arrangement also allows 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 the financial institution as a basis for calculating our net interest expense or income under the arrangement. As of March 31, 2017 , we had a total of $1.1 billion in cash withdrawals offsetting our $1.1 billion in Aggregate Cash Deposits held within the financial institution under the cash pooling arrangement.

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, 2017 . 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.

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 business 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 acquisitions and divestitures and in cases where we are entering new lines of business. We have in the past been forced to litigate such claims. We may also become more

18


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


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 business (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 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. Further, the number and significance of these disputes and inquiries are increasing as the political and regulatory landscape changes; and as we have 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

We entered into a separation and distribution agreement and various other agreements with PayPal to govern the separation and relationship of the two companies going forward. These agreements provide for specific indemnity and liability obligations and could lead to disputes between us and PayPal, which may be significant. In addition, the indemnity rights we have against PayPal under the agreements may not be sufficient to protect us and our indemnity obligations to PayPal may be significant.

In addition, we have entered into indemnification agreements with each of our directors, executive officers and certain other officers. These agreements require us to indemnify such individuals, to the fullest extent permitted by Delaware law, for certain liabilities to which they may become subject as a result of their affiliation with us.

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. 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 consolidated statement of income in connection with our indemnification provisions have not been significant, either individually or collectively. 

Note 10 — Stockholders’ Equity

Stock Repurchase Program

Our stock repurchase program is intended to programmatically 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 program 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 program may be limited or terminated at any time without prior notice. The timing and actual number of shares repurchased will depend on a

19


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


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.  

In July 2016, our Board authorized a  $2.5 billion stock repurchase program. The stock repurchase program has no expiration from the date of authorization. The stock repurchase activity under our stock repurchase program during the three months ended March 31, 2017 is summarized as follows (in millions, except per share amounts):
 
Shares Repurchased (1)
 
Average Price per Share (2)
 
Value of Shares Repurchased
 
Remaining Amount Authorized
Balance as of January 1, 2017
 
 
 
 
 
 
$
1,336

Repurchase of shares of common stock
10

 
$
33.65

 
350

 
(350
)
Balance as of March 31, 2017
 
 
 
 
 
 
$
986

 
(1)
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.
(2)
Excludes broker commissions.

Note 11 — Employee Benefit Plans

Restricted Stock Unit Activity

The following table presents restricted stock unit (“RSU”) activity (including performance-based RSUs that have been earned) under our equity incentive plans as of and for the three months ended March 31, 2017 (in millions except per share amounts):  
 
Units  
Outstanding as of January 1, 2017
44

Awarded and assumed
1

Vested
(2
)
Forfeited
(2
)
Outstanding as of March 31, 2017
41


The weighted average grant date fair value for RSUs awarded during the three months ended March 31, 2017 was $31.78 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, 2017 and 2016 was as follows (in millions):
 
Three Months Ended
March 31,
 
2017
 
2016
Cost of net revenues
$
11

 
$
7

Sales and marketing
21

 
21

Product development
36

 
31

General and administrative
33

 
29

Total stock-based compensation expense
$
101

 
$
88

Capitalized in product development
$
3

 
$
3



20


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


Note 12 — Income Taxes

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 2013 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 tax years after 2002 include, among others, the U.S. (Federal and California), Germany, Korea, Israel, Switzerland, 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.

During the fourth quarter of 2016, we began the process of realigning our legal structure, subsequent to the distribution of PayPal Holdings, Inc., to better reflect how we manage and operate our platforms. We consider many factors in effecting this realignment, including foreign exchange exposures, long-term cash flows and cash needs of our platforms, capital allocation considerations and the associated tax effects. As a result of the initial stages of this realignment and the associated tax agreements, in 2016 we achieved a substantial step-up in the tax basis of the intangible assets in our foreign eBay platforms. In the first quarter of 2017, we achieved a step-up in the tax basis of the intangible assets in our foreign Classifieds platforms and recognized a tax benefit of $695 million .

As a result of the realignment, we no longer benefit from tax rulings previously concluded in several different jurisdictions. Without the benefit of the rulings, the noncash tax impacts of the realignment in our foreign eBay and Classifieds platforms have increased our income tax rate in certain foreign jurisdictions, most significantly Switzerland. While we experienced a higher tax rate, the realignment allows us to achieve certain cash tax benefits due to the step-up in tax basis achieved in certain foreign jurisdictions. These cash tax benefits will remain consistent, subject to the performance of our foreign platforms. The realignment is expected to extend into 2018 and primarily impact our international entities.

On July 27, 2015, in Altera Corp. v. Commissioner, the U.S. Tax Court issued an opinion invalidating the regulations relating to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was issued by the Tax Court in December 2015. The IRS is appealing the decision and filed its arguments opposing the Tax Court decision in June 2016. Due to the uncertainty surrounding the status of the current regulations, questions related to the scope of potential benefits or obligations, and the risk of the Tax Court’s decision being overturned upon appeal, we have not recorded any benefit or expense as of March 31, 2017 . We will continue to monitor ongoing developments and potential impacts to our consolidated financial statements.

Note 13 — Accumulated Other Comprehensive Income

The following tables summarize the changes in AOCI for the three months ended March 31, 2017 and 2016 (in millions):

 
Unrealized Gains (Losses) on Derivative Instruments
 
Unrealized
Gains on
Investments
 
Foreign
Currency
Translation
 
Estimated Tax (Expense) Benefit
 
Total
Balance as of December 31, 2016
$
54

 
$
51

 
$
(230
)
 
$
1

 
$
(124
)
Other comprehensive income (loss) before reclassifications
(14
)
 
(8
)
 
331

 
12

 
321

Less: Amount of gain (loss) reclassified from AOCI
20

 
12

 

 

 
32

Net current period other comprehensive income
(34
)
 
(20
)
 
331

 
12

 
289

Balance as of March 31, 2017
$
20

 
$
31

 
$
101

 
$
13

 
$
165



21


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


 
Unrealized Gains (Losses) on Derivative Instruments
 
Unrealized
Gains on
Investments
 
Foreign
Currency
Translation
 
Estimated Tax (Expense) Benefit
 
Total
Balance as of December 31, 2015
$
36

 
$
845

 
$
(45
)
 
$
(310
)
 
$
526

Other comprehensive income (loss) before reclassifications
19

 
18

 
154

 
(21
)
 
170

Less: Amount of gain (loss) reclassified from AOCI
16

 
(5
)
 

 

 
11

Net current period other comprehensive income
3

 
23

 
154

 
(21
)
 
159

Balance as of March 31, 2016
$
39

 
$
868

 
$
109

 
$
(331
)
 
$
685


The following table provides details about reclassifications out of AOCI for the three months ended March 31, 2017 and 2016 (in millions):
Details about AOCI Components
 
Affected Line Item in the Statement of Income
 
Amount of Gain (Loss) Reclassified From AOCI
 
 
 
 
Three Months Ended
March 31,
 
 
 
 
2017
 
2016
Gains (losses) on cash flow hedges - foreign exchange contracts
 
Cost of net revenues
 
$
2

 
$
2

 
 
Sales and marketing
 
1

 

 
 
Product development
 
3

 
2

 
 
General and administrative
 
1

 

 
 
Interest and other, net
 
13

 
12

 
 
Total, from continuing operations before income taxes
 
20

 
16

 
 
Provision for income taxes
 

 

 
 
Total, net of income taxes
 
20

 
16

 
 
 
 
 
 
 
Unrealized gains (losses) on investments
 
Interest and other, net
 
12

 
(5
)
 
 
Total, before income taxes
 
12

 
(5
)
 
 
Provision for income taxes
 

 

 
 
Total, net of income taxes
 
12

 
(5
)
 
 
 
 
 
 
 
Total reclassifications for the period
 
Total, net of income taxes
 
$
32

 
$
11


Note 14 — Subsequent Event

Subsequent to March 31, 2017, we received an ownership interest in Flipkart in exchange for our eBay.in business and a $500 million cash investment. We signed the definitive agreement to sell our marketplaces business in India on April 10, 2017 and we expect to close this transaction, subject to customary closing conditions, in the second half of 2017. We are unable to estimate the financial statement impact of the sale at this time.


22



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, 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 unaudited 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 (“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 included in this report.

OVERVIEW
 
Business

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.

Seasonality

We expect transaction activity patterns on our platforms to mirror general consumer buying patterns and expect that these trends will continue. The following table sets forth, for the periods presented, our total net revenues and the sequential quarterly movements of these net revenues (in millions, except percentages):

 
Quarter Ended
 
March 31
 
June 30
 
September 30
 
December 31
2015
 
 
 
 
 
 
 
Net revenues
$
2,061

 
$
2,110

 
$
2,099

 
$
2,322

Percent change from prior quarter
(11
)%
 
2
%
 
(1
)%
 
11
%
2016
 
 
 
 
 
 
 
Net revenues
$
2,137

 
$
2,230

 
$
2,217

 
$
2,395

Percent change from prior quarter
(8
)%
 
4
%
 
(1
)%
 
8
%
2017
 
 
 
 
 
 
 
Net revenues
$
2,217

 
 
 
 
 
 
Percent change from prior quarter
(7
)%
 
 
 
 
 



23



Impact of Foreign Currency Exchange Rates

Our commerce platforms operate globally, resulting in certain revenues that are denominated in foreign currencies, primarily the Euro, British pound, Korean won and Australian dollar, subjecting us to foreign currency risk, which may adversely impact our financial results. Because of this and the fact that we generated a majority of our net revenues internationally, including the three months ended March 31, 2017 and 2016 , we are subject to the risks related to doing business in foreign countries as discussed under “Part II - Item 1A - Risk Factors.”

In addition to the corresponding measures under generally accepted accounting principles (“GAAP”), management uses non-GAAP measures in reviewing our financial results. The foreign exchange, or constant currency (“FX-Neutral”), net revenue amounts discussed below are non-GAAP financial measures and are not in accordance with, or an alternative to, measures prepared in accordance with GAAP. Accordingly, the FX-Neutral information appearing in the following discussion of our results of operations should be read in conjunction with the information provided below in “Non-GAAP Measure of Financial Performance,” which includes reconciliations of FX-Neutral financial measures to the most directly comparable GAAP measures. We calculate the year-over-year impact of foreign currency movements using prior period foreign currency rates applied to current year transactional currency amounts.

The effect of foreign currency exchange rate movements during the three months ended March 31, 2017 compared to the same period in 2016 was due to the strengthening of the U.S. dollar against other currencies, primarily the Euro and British pound.

Quarter Highlights

Net revenues increased 4% to  $2.2 billion  during the three months ended  March 31, 2017  compared to the same period in 2016 . FX-Neutral net revenue (as defined below) increased 7% during the three months ended March 31, 2017 compared to the same period in 2016 .

In the first quarter of 2017, related to the continued realignment of our legal structure, we achieved a step-up in the tax basis of the intangible assets in our foreign Classifieds platforms and recognized a tax benefit of $695 million.

Operating margin decreased to 25% for the three months ended  March 31, 2017 compared to 29% for the same period in 2016 . Diluted earnings per share from continuing operations increased to $0.94 during the three months ended  March 31, 2017 compared to $0.41 in the same period in 2016 . In addition, we generated cash flow from continuing operating activities of $582 million for the three months ended  March 31, 2017 compared to  $641 million  in the same period in 2016 .

RESULTS OF OPERATIONS

Net Revenues

We generate two types of net revenues: net transaction revenues and marketing services and other (“MS&O”) revenues. Net transaction revenues are derived principally from final value fees (which are fees payable on transactions closed on our Marketplace and StubHub platforms), listing fees and other service fees. MS&O revenues consist of Marketplace, StubHub and Classifieds revenue principally from the sale of advertisements, vehicles classifieds listing on Marketplace platforms, revenue sharing arrangements, classifieds fees, marketing service fees and lead referral fees. Revenues 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. To drive traffic to our platforms, we provide incentives to our users in the form of coupons and buyer and seller rewards. These incentives are generally treated as reductions in revenue.


24



The following table presents net revenues by type and geography (in millions, except percentages):

 
Three Months Ended
March 31,
 
 
 
2017
 
2016
 
% Change
Net Revenues by Type:
 
 
 
 
 
Net transaction revenues:
 
 
 
 
 
Marketplace
$
1,525

 
$
1,500

 
2
%
StubHub
204

 
177

 
15
%
Total net transaction revenues
1,729

 
1,677

 
3
%
Marketing services and other revenues:
 
 
 
 
 
Marketplace
283

 
274

 
4
%
Classifieds
199

 
186

 
7
%
StubHub, Corporate and other
6

 

 
**

Total marketing services and other revenues
488

 
460

 
6
%
Total net revenues
$
2,217


$
2,137

 
4
%
 
 
 
 
 
 
Net Revenues by Geography:
 
 
 
 
 
U.S.
$
962

 
$
909

 
6
%
International
1,255

 
1,228

 
2
%
Total net revenues
$
2,217

 
$
2,137

 
4
%
 
**    Not meaningful

The following table presents certain key operating metrics that we believe are significant factors affecting our net transaction revenues (in millions, except percentages):
 
Three Months Ended
March 31,
 
 
 
2017
 
2016
 
% Change
Supplemental Operating Data:
 
 
 
 
 
GMV (1) :
 
 
 
 
 
Marketplace
$
20,033

 
$
19,581

 
2
 %
StubHub
916

 
869

 
6
 %
Total GMV
$
20,949

 
$
20,450

 
2
 %
 
 
 
 
 
 
Transaction take rate:
 
 
 
 
 
Marketplace (2)
7.61
%
 
7.66
%
 
(0.05
)%
StubHub (3)
22.30
%
 
20.37
%
 
1.93
 %
Total transaction take rate (4)
8.25
%
 
8.20
%
 
0.05
 %
 
(1)
We define Gross Merchandise Volume (“GMV”) as the total value of all successfully closed transactions between users on our Marketplace and StubHub platforms during the applicable period regardless of whether the buyer and seller actually consummated the transaction. We believe that GMV provides a useful measure of the overall volume of closed transactions that flow through our platforms in a given period, notwithstanding the inclusion in GMV of closed transactions that are not ultimately consummated.
(2)
We define Marketplace transaction take rate as Marketplace net transaction revenues divided by Marketplace GMV.
(3)
We define StubHub transaction take rate as StubHub net transaction revenues divided by StubHub GMV.
(4)
We define total transaction take rate as total net transaction revenues divided by GMV.

25




Net Transaction Revenues

The following table presents total net transaction revenues and supplemental operating data (in millions, except percentages):
 
Three Months Ended
March 31,
 
% Change
 
2017
 
2016
 
As Reported
 
FX-Neutral
Total net transaction revenues
$
1,729

 
$
1,677

 
3
%
 
6
%
Percentage of net revenues
78
%
 
78
%
 
 
 
 
 
 
 
 
 
 
 
 
Total GMV
$
20,949

 
$
20,450

 
2
%
 
5
%
Total transaction take rate
8.25
%
 
8.20
%
 
0.05
%
 
 

The increase in net transaction revenues during the three months ended March 31, 2017 compared to the same period in 2016 was primarily driven by an increase in StubHub and Marketplace GMV, partially offset by an unfavorable impact from foreign currency movements relative to the U.S. dollar. The total transaction take rate was higher during the three months ended March 31, 2017 compared to the same period in 2016 due to the increase in StubHub transaction take rate.

Net transaction revenues earned internationally totaled $917 million and $922 million during the three months ended March 31, 2017 and 2016 , respectively, representing 53% and 55% of total net transaction revenues in the respective periods.

Marketplace Net Transaction Revenues

The following table presents Marketplace net transaction revenues and supplemental operating data (in millions, except percentages):
 
Three Months Ended
March 31,
 
% Change
 
2017
 
2016
 
As Reported
 
FX-Neutral
Marketplace net transaction revenues
$
1,525

 
$
1,500

 
2
 %
 
5
%
 
 
 
 
 
 
 
 
Marketplace GMV
$
20,033

 
$
19,581

 
2
 %
 
5
%
Marketplace take rate
7.61
%
 
7.66
%
 
(0.05
)%
 
 

The increase in Marketplace net transaction revenues during the three months ended March 31, 2017 compared to the same period in 2016  was commensurate with Marketplace GMV growth. Marketplace transaction take rate was lower during the three months ended March 31, 2017 compared to the same period in 2016  primarily due to lapping prior year price changes and an increase of buyer incentives in Korea.

StubHub Net Transaction Revenues

The following table presents StubHub net transaction revenues and supplemental operating data (in millions, except percentages):
 
Three Months Ended
March 31,
 
% Change
 
2017
 
2016
 
As Reported
 
FX-Neutral
StubHub net transaction revenues
$
204

 
$
177

 
15
%
 
16
%
 
 
 
 
 
 
 
 
StubHub GMV
$
916

 
$
869

 
6
%
 
6
%
StubHub take rate
22.30
%
 
20.37
%
 
1.93
%
 
 

The increase in StubHub net transaction revenues during the three months ended March 31, 2017 compared to the same period in 2016 was primarily attributable to an increase in StubHub GMV, a higher StubHub transaction take rate and the acquisition of Ticketbis. The increase in StubHub GMV was primarily driven by Theater and

26



international GMV growth. The increase in StubHub transaction take rate was primarily due to a decrease in our buyer incentives, which are accounted for as a reduction of revenue, and pricing strategies. The increase in StubHub net transaction revenue was greater than the increase in StubHub GMV due to the higher StubHub transaction take rate.

Marketing Services and Other Revenues

The following table presents MS&O revenues (in millions, except percentages):
 
Three Months Ended
March 31,
 
% Change
 
2017
 
2016
 
As Reported
 
FX-Neutral
MS&O revenues:
 
 
 
 
 
 
 
Marketplace
$
283

 
$
274

 
4
%
 
6
%
Classifieds
199

 
186

 
7
%
 
10
%
StubHub, Corporate and other
6

 

 
**

 
**

Total MS&O revenues
$
488

 
$
460

 
6
%
 
9
%
Percentage of net revenues
22
%
 
22
%
 
 
 
 

The increase in total MS&O revenues during the three months ended March 31, 2017 compared to the same period in 2016 was primarily driven by increases in Classifieds and Marketplace MS&O revenues, partially offset by an unfavorable impact from foreign currency movements relative to the U.S. dollar.

Marketplace MS&O Revenues

The increase in Marketplace MS&O revenues during the three months ended March 31, 2017 compared to the same period in 2016 was primarily driven by co-branded credit card revenue, and an increase in revenues attributable to our first-party inventory program in Korea and our Brands4friends online shopping community.

Classifieds MS&O Revenues

The increase in Classifieds MS&O revenues during the three months ended March 31, 2017 compared to the same period in 2016 was primarily driven by increased revenue from our Classifieds platforms in Germany.

Cost of Net Revenues

Cost of net revenues primarily consists of costs associated with customer support, site operations, and payment processing. Significant components of these costs include employee compensation, contractor costs, facilities costs, depreciation of equipment and amortization expense, bank transaction fees, and credit card interchange and assessment fees. The following table presents cost of net revenues (in millions, except percentages):
 
Three Months Ended
March 31,
 
 
 
2017
 
2016
 
% Change
Cost of net revenues
$
515

 
$
477

 
8
%
As a percentage of net revenues
23.2
%
 
22.3
%
 
 


The increase in cost of net revenues during the three months ended March 31, 2017 , compared to the same period in 2016 was primarily due to an increase in costs of goods sold driven by our first-party inventory program in Korea and our Brands4friends online shopping community, increased costs from acquired business and GMV growth.

Cost of net revenues, net of  $2 million  from hedging activities, was favorably impacted by $1 million due to foreign currency movements relative to the U.S. dollar in the three months ended March 31, 2017 compared to the same period in 2016 .


27



Operating Expenses

The following table presents operating expenses (in millions, except percentages): 
 
Three Months Ended
March 31,
 
 
 
2017
 
2016
 
% Change
Sales and marketing
$
562

 
538

 
4
%
Percentage of net revenues
25
%
 
25
%
 
 
Product development
278

 
239

 
16
%
Percentage of net revenues
13
%
 
11
%
 
 
General and administrative
245

 
209

 
18
%
Percentage of net revenues
11
%
 
10
%