10-Q 1 ebay10-qq12014.htm QUARTERLY REPORT eBay 10-Q Q1 2014


 
 
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, 2014

OR

[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______
   
Commission file number 000-24821
 
 
 
 
 
eBay Inc.
 
(Exact name of registrant as specified in its charter)
 
 
 

Delaware
77-0430924
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
 
2065 Hamilton Avenue
San Jose, California
95125
(Address of principal executive offices)
(Zip Code)
(408) 376-7400
(Registrant's telephone number, including area code)
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  [x]    No  [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  [x]    No  [ ]

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

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

As of April 25, 2014, there were 1,267,342,622 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,
2014
 
December 31,
2013
 
(In millions, except par value amounts)
 
(Unaudited)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
4,415

 
$
4,494

Short-term investments
3,429

 
4,531

Accounts receivable, net
810

 
899

Loans and interest receivable, net
2,744

 
2,789

Funds receivable and customer accounts
9,648

 
9,260

Other current assets
1,313

 
1,310

Total current assets
22,359

 
23,283

Long-term investments
5,211

 
4,971

Property and equipment, net
2,686

 
2,760

Goodwill
9,257

 
9,267

Intangible assets, net
805

 
941

Other assets
227

 
266

Total assets
$
40,545

 
$
41,488

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 

 
 

Short-term debt
$
4

 
$
6

Accounts payable
277

 
309

Funds payable and amounts due to customers
9,648

 
9,260

Accrued expenses and other current liabilities
5,523

 
2,799

Deferred revenue
169

 
158

Income taxes payable
120

 
107

Total current liabilities
15,741

 
12,639

Deferred and other tax liabilities, net
828

 
841

Long-term debt
4,124

 
4,117

Other liabilities
243

 
244

Total liabilities
20,936

 
17,841

Commitments and contingencies (Note 8)

 


Stockholders' equity:
 
 
 
Common stock, $0.001 par value; 3,580 shares authorized; 1,267 and 1,294 shares outstanding
2

 
2

Additional paid-in capital
13,202

 
13,031

Treasury stock at cost, 329 and 296 shares
(11,207
)
 
(9,396
)
Retained earnings
16,528

 
18,854

Accumulated other comprehensive income
1,084

 
1,156

Total stockholders' equity
19,609

 
23,647

Total liabilities and stockholders' equity
$
40,545

 
$
41,488


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,
 
2014
 
2013
 
(In millions, except per share amounts)
 
(Unaudited)
Net revenues
$
4,262

 
$
3,748

Cost of net revenues
1,351

 
1,152

Gross profit
2,911

 
2,596

Operating expenses:
 
 
 
Sales and marketing
805

 
697

Product development
480

 
434

General and administrative
465

 
408

Provision for transaction and loan losses
204

 
175

Amortization of acquired intangible assets
79

 
82

Total operating expenses
2,033

 
1,796

Income from operations
878

 
800

Interest and other, net
(5
)
 
9

Income before income taxes
873

 
809

Provision for income taxes
(3,199
)
 
(132
)
Net income (loss)
$
(2,326
)
 
$
677

Net income (loss) per share:
 
 
 
Basic
$
(1.82
)
 
$
0.52

Diluted
$
(1.82
)
 
$
0.51

Weighted average shares:
 
 
 
Basic
1,276

 
1,295

Diluted
1,276

 
1,319


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,
 
2014
 
2013
 
(In millions)
 
(Unaudited)
Net income (loss)
$
(2,326
)
 
$
677

Other comprehensive income (loss), net of reclassification adjustments:
 
 
 
Foreign currency translation
(29
)
 
(301
)
Unrealized gains (losses) on investments, net
(97
)
 
140

Tax (expense) benefit on unrealized gains (losses) on investments, net
42

 
(54
)
Unrealized gains (losses) on hedging activities, net
15

 
86

Tax (expense) benefit on unrealized gains (losses) on hedging activities, net
(3
)
 
(3
)
Other comprehensive income (loss), net tax
(72
)
 
(132
)
Comprehensive income (loss)
$
(2,398
)
 
$
545


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,
 
2014
 
2013
 
(In millions)
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(2,326
)
 
$
677

Adjustments:
 
 
 
Provision for transaction and loan losses
204

 
175

Depreciation and amortization
382

 
329

Stock-based compensation
149

 
111

Deferred income taxes
3,108

 
450

Changes in assets and liabilities, net of acquisition effects
(343
)
 
(805
)
Net cash provided by operating activities
1,174

 
937

Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(206
)
 
(299
)
Changes in principal loans receivable, net
(2
)
 
(29
)
Purchases of investments
(1,261
)
 
(1,426
)
Maturities and sales of investments
2,006

 
1,048

Acquisitions, net of cash acquired
(4
)
 
(8
)
Other
(1
)
 
(5
)
Net cash provided by (used in) investing activities
532

 
(719
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of common stock
55

 
102

Repurchases of common stock
(1,811
)
 
(476
)
Excess tax benefits from stock-based compensation
60

 
116

Tax withholdings related to net share settlements of restricted stock awards and units
(104
)
 
(153
)
Funds receivable and customer accounts, net
(388
)
 
(803
)
Funds payable and amounts due to customers, net
388

 
803

Other
7

 

Net cash used in financing activities
(1,793
)
 
(411
)
Effect of exchange rate changes on cash and cash equivalents
8

 
(94
)
Net increase (decrease) in cash and cash equivalents
(79
)
 
(287
)
Cash and cash equivalents at beginning of period
4,494

 
6,817

Cash and cash equivalents at end of period
$
4,415

 
$
6,530

Supplemental cash flow disclosures:
 

 
 

Cash paid for interest
$
36

 
$
34

Cash paid for income taxes
$
35

 
$
40


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

5



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


Note 1 — The Company and Summary of Significant Accounting Policies

The Company

We are a global technology company that enables commerce through three reportable segments: Marketplaces, Payments and Enterprise. Our Marketplaces segment includes our eBay.com platform and its localized counterparts and our other online platforms, such as our online classifieds sites and StubHub. Our Payments segment is comprised of PayPal and Bill Me Later. Our Enterprise segment includes our Magento business and provides commerce technologies, omnichannel operations and marketing solutions for merchants of all sizes that operate in general merchandise categories.

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

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

Use of estimates

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

Principles of consolidation and basis of presentation

The accompanying condensed financial statements are consolidated and include the financial statements of eBay Inc., our wholly and majority-owned subsidiaries and variable interest entities (“VIE”) if we were 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, 2013. We have evaluated all subsequent events through the date these condensed consolidated financial statements were issued. In the opinion of management, these condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for fair presentation of the condensed consolidated financial statements for the interim period.

6

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


Recent Accounting Pronouncements
In 2013, the Financial Accounting Standards Board ("FASB") issued new accounting guidance clarifying the accounting for the release of a cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. The adoption of this standard did not have a significant impact on our financial position, results of operations, or cash flows.
In 2013, the FASB issued new accounting guidance clarifying the accounting for obligations resulting from joint and several liability arrangements for which the total amount under the arrangement is fixed at the reporting date. The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. The adoption of this standard did not have a significant impact on our financial position, results of operations, or cash flows.
In 2013, the FASB issued a new accounting standard that will require the presentation of certain unrecognized tax benefits as reductions to deferred tax assets rather than as liabilities in the consolidated balance sheets when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The new standard required adoption on a prospective basis in the first quarter of 2014. The adoption of this standard did not have a significant impact on our financial position, results of operations, or cash flows.

Note 2 — Net Income (loss) Per Share

Basic net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding during the period. The dilutive effect of outstanding options and equity incentive awards is reflected in diluted net income (loss) per share by application of the treasury stock method. The calculation of diluted net income (loss) per share excludes all anti-dilutive common shares. The following table sets forth the computation of basic and diluted net income (loss) per share for the periods indicated:
 
 
Three Months Ended March 31,
 
2014
 
2013
 
(In millions, except per share amounts)
Numerator:
 
 
 
Net income (loss)
$
(2,326
)
 
$
677

Denominator:
 
 
 
Weighted average shares of common stock - basic
1,276

 
1,295

Dilutive effect of equity incentive awards

 
24

Weighted average shares of common stock - diluted
1,276

 
1,319

Net income (loss) per share:
 
 
 
Basic
$
(1.82
)
 
$
0.52

Diluted
$
(1.82
)
 
$
0.51

Common stock equivalents excluded from income per diluted share because their effect would have been anti-dilutive
51

 
1




7

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

Note 3 — Goodwill and Intangible Assets

Goodwill

The following table presents goodwill balances and adjustments to those balances for each of our reportable segments and corporate investments during the three months ended March 31, 2014:
 
 
December 31,
2013
 
Goodwill
Acquired
 
Adjustments
 
March 31,
2014
 
(In millions)
Reportable segments:
 
 
 
 
 
 
 
Marketplaces
$
4,861

 
$
1

 
$
(29
)
 
$
4,833

Payments
3,120

 

 
18

 
3,138

Enterprise
1,239

 

 
47

 
1,286

Corporate and other
47

 

 
(47
)
 

 
$
9,267

 
$
1

 
$
(11
)
 
$
9,257


The adjustments to goodwill during the three months ended March 31, 2014 were due primarily to foreign currency translation, a post-closing adjustment related to our acquisition of Braintree which closed December 19, 2013 and a change in our reportable segments. Refer to "Note 4 - Segments" for further discussion on the change in our reportable segments.

Intangible Assets

The components of identifiable intangible assets are as follows: 
 
March 31, 2014
 
December 31, 2013
 
Gross Carrying Amount  
 
Accumulated Amortization 
 
Net Carrying Amount
 
Weighted Average Useful Life (Years)
 
Gross Carrying Amount
 
Accumulated Amortization 
 
Net Carrying Amount
 
Weighted Average Useful Life (Years)
 
(In millions, except years)
Intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer lists and user base
$
1,664

 
$
(1,258
)
 
$
406

 
5
 
$
1,653

 
$
(1,213
)
 
$
440

 
5
Marketing related
870

 
(702
)
 
168

 
5
 
780

 
(677
)
 
103

 
5
Developed technologies
572

 
(424
)
 
148

 
4
 
554

 
(401
)
 
153

 
4
Braintree related(1)
N/A

 
N/A

 
N/A

 
N/A
 
155

 

 
155

 
All other
273

 
(190
)
 
83

 
4
 
273

 
(183
)
 
90

 
4
 
$
3,379

 
$
(2,574
)
 
$
805

 
 
 
$
3,415

 
$
(2,474
)
 
$
941

 
 
 

(1)
During the three months ended March 31, 2014, we allocated the Braintree intangible assets between customer lists, marketing related and developed technologies intangible assets.

Amortization expense for intangible assets was $109 million and $108 million for the three months ended March 31, 2014 and 2013, respectively.


8

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

Expected future intangible asset amortization as of March 31, 2014 is as follows (in millions):
Fiscal years:
 
 
Remaining 2014
 
$
260

2015
 
299

2016
 
174

2017
 
42

2018
 
24

Thereafter
 
6

 
 
$
805





Note 4 — Segments

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

During the first quarter of 2014, we changed our reportable segments based upon changes in our organizational structure which reflect the integration of our Magento platform into our Enterprise segment. Prior to this change, Magento was reported in corporate and other. Also during the quarter, we revised our internal management reporting of certain Marketplaces transactions to align more closely with our related operating metrics. Related to this change, we reclassified our Marketplaces vehicles and real estate revenues from net transaction revenues to marketing services and other revenues. Prior period amounts have been revised to conform to the current period segment reporting structure.

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

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


9

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

The following tables summarize the financial performance of our reportable segments and provides a reconciliation to our consolidated operating results for the periods reflected below:
 
Three Months Ended March 31,
 
2014
 
2013
 
(In millions)
Net Revenue
 
 
 
Marketplaces
 
 
 
Net transaction revenues
$
1,727

 
$
1,554

Marketing services and other revenues
428

 
403

 
2,155

 
1,957

Payments
 
 
 
Net transaction revenues
1,700

 
1,435

Marketing services and other revenues
145

 
113

 
1,845

 
1,548

Enterprise
 
 
 
Net transaction revenues
208

 
186

Marketing services and other revenues
61

 
62

 
269

 
248

 
 
 
 
Elimination of inter-segment net revenue (1)
(7
)
 
(5
)
Total consolidated net revenue
$
4,262

 
$
3,748

 
 
 
 
Operating income (loss)
 
 
 
Marketplaces
$
856

 
$
823

Payments
475

 
374

Enterprise
13

 
(1
)
Corporate and other
(466
)
 
(396
)
Total operating income (loss)
$
878

 
$
800


(1) Represents revenue generated between our reportable segments.



10

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

Note 5 — Fair Value Measurement of Assets and Liabilities

The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2014 and December 31, 2013:

 Description
 
Balance as of
March 31, 2014
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1) 
 
Significant Other
Observable Inputs
(Level 2)
 
 
(In millions)
Assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
4,415

 
$
4,355

 
$
60

Short-term investments:
 
 
 
 
 
 
Restricted cash
 
19

 
19

 

Corporate debt securities
 
2,620

 

 
2,620

Government and agency securities
 
9

 

 
9

Equity instruments
 
781

 
781

 

Total short-term investments
 
3,429

 
800

 
2,629

Funds receivable and customer accounts
 
3,458

 

 
3,458

Derivatives
 
21

 

 
21

Long-term investments:
 
 
 
 
 
 
Corporate debt securities
 
4,611

 

 
4,611

Government and agency securities
 
237

 

 
237

Total long-term investments
 
4,848

 

 
4,848

Total financial assets
 
$
16,171

 
$
5,155

 
$
11,016

 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Derivatives
 
$
119

 
$

 
$
119




11

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

Description
 
Balance as of
December 31, 2013
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1) 
 
Significant Other
Observable Inputs
(Level 2)
 
 
(In millions)
Assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
4,494

 
$
4,159

 
$
335

Short-term investments:
 
 
 
 
 
 
Restricted cash
 
17

 
17

 

Corporate debt securities
 
3,529

 

 
3,529

Government and agency securities
 
43

 

 
43

Time deposits
 
49

 

 
49

Equity instruments
 
893

 
893

 

Total short-term investments
 
4,531

 
910

 
3,621

Funds receivable and customer accounts
 
3,563

 

 
3,563

Derivatives
 
44

 

 
44

Long-term investments:
 
 
 
 
 
 
Corporate debt securities
 
4,445

 

 
4,445

Government and agency securities
 
251

 

 
251

Total long-term investments
 
4,696

 

 
4,696

Total financial assets
 
$
17,328

 
$
5,069

 
$
12,259

 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Derivatives
 
$
151

 
$

 
$
151

 
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. Our derivative instruments are primarily short-term in nature, generally one month to one year in duration. Certain foreign currency contracts designated as cash flow hedges may have a duration of up to 18 months. We did not have any transfers of financial instruments between valuation levels during the first three months of 2014.

Cash and cash equivalents are short-term, highly liquid investments with original or remaining maturities of three months or less when purchased and are comprised primarily of bank deposits, money market funds and commercial paper. We had total funds receivable and customer accounts of $9.6 billion as of March 31, 2014, of which $3.5 billion was invested in short-term investments.

In addition, we had cost and equity method investments of approximately $357 million and $269 million included in long-term investments on our condensed consolidated balance sheet at March 31, 2014 and our consolidated balance sheet at December 31, 2013, respectively. Additionally, as of both March 31, 2014 and December 31, 2013, we also held $6 million of time deposits classified as held to maturity, which are recorded at amortized cost.

As of March 31, 2014 and December 31, 2013, we held no direct investments in auction rate securities, collateralized debt obligations, structured investment vehicles or mortgage-backed securities.

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


12

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


Note 6 — Derivative Instruments

The notional amounts associated with our foreign currency contracts at March 31, 2014 and 2013 were $4.8 billion and $5.7 billion, respectively, of which $1.8 billion and $2.0 billion were designated as cash flow hedges during those respective periods. Derivative transactions are measured in terms of the notional amount, but this amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the derivative instruments. The notional amount is generally not exchanged, but is used only as the basis on which the value of foreign exchange payments under these contracts is determined.
For our derivative instruments designated as cash flow hedges, the amounts recognized in earnings related to the ineffective portion were not material in each of the periods presented, and we did not exclude any component of the changes in fair value of the derivative instruments from the assessment of hedge effectiveness. As of March 31, 2014, we estimate that approximately $86 million of net derivative losses related to our cash flow hedges included in accumulated other comprehensive income will be reclassified into earnings within the next 12 months.

Fair Value of Derivative Contracts

The fair value of our outstanding derivative instruments as of March 31, 2014 and December 31, 2013 was as follows:
 
 
Derivative Assets Reported in Other Current Assets 
 
Derivative Liabilities Reported in Other Current Liabilities
 
March 31,
2014
 
December 31,
2013
 
March 31,
2014
 
December 31,
2013
 
(In millions)
Foreign exchange contracts designated as cash flow hedges
$
6

 
$
15

 
$
97

 
$
121

Foreign exchange contracts not designated as hedging instruments
15

 
29

 
22

 
30

Total fair value of derivative instruments
$
21

 
$
44

 
$
119

 
$
151


Under the master netting agreements with the respective counterparties to our foreign exchange contracts, subject to applicable requirements, we are allowed to net settle transactions of the same currency 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 in our consolidated balance sheet.  As of March 31, 2014, the potential effect of rights of set-off associated with the foreign exchange contracts, discussed above, would be an offset to both assets and liabilities by $21 million, resulting in a net derivative liability of $98 million. We are not required to pledge, nor are we entitled to receive, cash collateral related to these derivative transactions.

Effect of Derivative Contracts on Accumulated Other Comprehensive Income

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


13

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

The following table summarizes the activity of derivative contracts that qualify for hedge accounting as of March 31, 2013 and December 31, 2012, and the impact of these derivative contracts on accumulated other comprehensive income for the three months ended March 31, 2013:

 
December 31, 2012
 
Amount of gain (loss)
recognized in other
comprehensive income
(effective portion) 
 
Amount of gain (loss)
reclassified from
accumulated other
comprehensive income
to net revenue and operating expense
(effective portion)
 
March 31, 2013
 
(In millions)
Foreign exchange contracts designated as cash flow hedges
$
(55
)
 
$
82

 
$
(4
)
 
$
31



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 derivative instruments: 
 
Three Months Ended March 31,
 
2014
 
2013
 
(In millions)
Foreign exchange contracts designated as cash flow hedges recognized in net revenues
$
(17
)
 
$

Foreign exchange contracts designated as cash flow hedges recognized in operating expenses
(4
)
 
(4
)
Foreign exchange contracts not designated as hedging instruments recognized in interest and other, net
(10
)
 
4

Total gain (loss) recognized from derivative contracts in the condensed consolidated statement of income
$
(31
)
 
$



14



Note 7 — Debt
The following table summarizes the carrying value of our outstanding debt:
 
Coupon
 
Carrying Value as of
Effective
 
Carrying Value as of
Effective
 
 Rate
 
March 31, 2014
 Interest Rate
 
December 31, 2013
 Interest Rate
 
(In millions, except percentages)
Long-Term Debt
 
 
 
 
 
 
 
Senior notes due 2015
1.625
%
 
$
599

1.805
%
 
$
599

1.805
%
Senior notes due 2015
0.700
%
 
250

0.820
%
 
250

0.820
%
Senior notes due 2017
1.350
%
 
1,000

1.456
%
 
1,000

1.456
%
Senior notes due 2020
3.250
%
 
498

3.389
%
 
498

3.389
%
Senior notes due 2022
2.600
%
 
999

2.678
%
 
999

2.678
%
Senior notes due 2042
4.000
%
 
743

4.114
%
 
743

4.114
%
Total senior notes
 
 
4,089

 
 
4,089

 
Other indebtedness
 
 
35

 
 
28

 
Total long-term debt
 
 
$
4,124

 
 
$
4,117

 
 
 
 
 
 
 
 
 
Short-Term Debt
 
 
 
 
 
 
 
Other indebtedness
 
 
4

 
 
6

 
Total short-term debt
 
 
4

 
 
6

 
Total Debt
 
 
$
4,128

 
 
$
4,123

 
Senior Notes
The effective interest rates for our fixed-rate 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 semiannually. Interest expense associated with these senior notes, including amortization of debt issuance costs, during the three months ended March 31, 2014 and 2013 was approximately $25 million and $26 million, respectively. At March 31, 2014, the estimated fair value of these senior notes included in long-term debt was approximately $4.0 billion.

The indenture pursuant to which the senior notes were issued includes customary covenants that, among other things and subject to exceptions, limit our ability to incur, assume or guarantee debt secured by liens on specified assets or enter into sale and lease-back transactions with respect to specified properties, and also includes customary events of default.
Other Indebtedness
Our other indebtedness is comprised of overdraft facilities, notes payable, and capital lease obligations. We have formal overdraft facilities in India bearing interest on drawn balances at a rate of approximately 10% per annum. Drawn balances are expected to be repaid in more than one year. Notes payable is comprised primarily of a note that bears interest at 6.3% per annum and has a maturity date of July 2034. Our capital leases have maturity dates ranging from May 2014 to September 2014 and bear interest at rates ranging from 3% to 7% per annum. The present value of future minimum capital lease payments as of March 31, 2014 was $2 million with imputed interest of less than $1 million.
Commercial Paper
We have a $2 billion commercial paper program pursuant to which we may issue commercial paper notes with maturities of up to 397 days from the date of issue. As of March 31, 2014, there were no commercial paper notes outstanding.
Credit Agreement
As of March 31, 2014, no borrowings or letters of credit were outstanding under our $3 billion credit agreement. However, as described above, we have a $2 billion commercial paper program and maintain $2 billion of available borrowing capacity under our credit agreement in order to repay commercial paper borrowings in the event we are unable to repay those borrowings from other sources when they become due.  As a result, at March 31, 2014, $1 billion of borrowing capacity was available for other purposes permitted by the credit agreement.  The credit agreement includes customary representations, warranties, affirmative and negative covenants, including a financial covenant, events of default and indemnification provisions

15



in favor of the banks. The negative covenants include restrictions regarding the incurrence of liens, subject to exceptions. The financial covenant requires us to meet a quarterly financial test with respect to a minimum consolidated interest coverage ratio.
We were in compliance with all covenants in our outstanding debt instruments for the three-month period ended March 31, 2014.

Note 8 — Commitments and Contingencies

Commitments

 As of March 31, 2014, approximately $16.3 billion of unused credit was available to Bill Me Later accountholders. While this amount represents the total unused credit available, we have not experienced, and do not anticipate, that all of our Bill Me Later accountholders will access their entire available credit at any given point in time. In addition, the individual lines of credit that make up this unused credit are subject to periodic review and termination by the chartered financial institutions that are the issuers of Bill Me Later credit products based on, among other things, account usage and customer creditworthiness. When a consumer makes a purchase using a Bill Me Later credit product, the chartered financial institution extends credit to the consumer, funds the extension of credit at the point of sale and advances funds to the merchant. We subsequently purchase the consumer receivables related to the consumer loans and as a result of that purchase, bear the risk of loss in the event of loan defaults. However, we subsequently sell a participation interest in the entire pool of consumer loans to the chartered financial institution that extended the consumer loans. Although the chartered financial institution continues to own each customer account, we own and bear the risk of loss on the related consumer receivables, less the participation interest held by the chartered financial institution, and Bill Me Later is responsible for all servicing functions related to the customer account balances. As of March 31, 2014, the total outstanding balance of this pool of consumer receivables was $2.9 billion, of which the chartered financial institution owned a participation interest of $89 million, or 3.1% of the total outstanding balance of the consumer receivables as of that date.

Litigation and Other Legal Matters
 
Overview
We are involved in legal proceedings on an ongoing basis. 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. Amounts accrued for legal proceedings for which we believe a loss is probable were not material for the three months ended March 31, 2014. Except as otherwise noted, we have concluded that reasonably possible losses arising directly from the proceedings (i.e., monetary damages or amounts paid in judgment or settlement) in excess of our accruals are also not material. 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 of losses 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 legal proceeding, we have disclosed that fact.
 In assessing the materiality of a legal 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 8, we are unable to estimate the possible loss or range of losses that could potentially result from the application of such non-monetary remedies.
Specific Matters

In August 2006, Louis Vuitton Malletier and Christian Dior Couture filed two lawsuits in the Paris Court of Commerce against eBay Inc. and eBay International AG. Among other things, the complaint alleged that we violated French tort law by negligently broadcasting listings posted by third parties offering counterfeit items bearing plaintiffs' trademarks and by purchasing certain advertising keywords. Around September 2006, Parfums Christian Dior, Kenzo Parfums, Parfums Givenchy, and Guerlain Société also filed a lawsuit in the Paris Court of Commerce against eBay Inc. and eBay International AG. The complaint alleged that we had interfered with the selective distribution network the plaintiffs established in France and the European Union by allowing third parties to post listings offering genuine perfumes and cosmetics for sale on our websites. In June 2008, the Paris Court of Commerce ruled that eBay and eBay International AG were liable for failing to prevent the sale of

16

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

counterfeit items on its websites that traded on plaintiffs' brand names and for interfering with the plaintiffs' selective distribution network. The court awarded plaintiffs approximately EUR 38.6 million in damages and issued an injunction (enforceable by daily fines of up to EUR 100,000) prohibiting all sales of perfumes and cosmetics bearing the Dior, Guerlain, Givenchy and Kenzo brands over all worldwide eBay websites to the extent that they are accessible from France. We appealed this decision, and in September 2010, the Paris Court of Appeal reduced the damages award to EUR 5.7 million and modified the injunction. We further appealed this decision to the French Supreme Court, and in May 2012, the French Supreme Court ruled that the appeal court should not have assumed jurisdiction upon activity that took place on the eBay.com website and that the injunction was too broad insofar as it did not exclude private sales. The court also noted that the appeal court had not sufficiently dealt with assertions that the plaintiffs' distribution contracts were not valid. Those matters were remanded to the Paris Court of Appeal. In 2009, plaintiffs filed an action regarding our compliance with the original injunction, and in November 2009, the court awarded the plaintiffs EUR 1.7 million (the equivalent of EUR 2,500 per day) and indicated that as a large Internet company we should do a better job of enforcing the injunction. Parfums Christian Dior has filed another motion relating to our compliance with the injunction. We have taken measures to comply with the injunction and have appealed these rulings, noting, among other things, the modification of the initial injunction. In light of the French Supreme Court ruling mentioned above, we asked the court to stay proceedings with respect to enforcement of the injunction pending the retrial of the matters on appeal, and this request has been granted. However, these and similar suits may force us to modify our business practices, which could lower our revenue, increase our costs or make our websites less convenient to our customers. Any such results could materially harm our business. Other brand owners have also filed suit against us or have threatened to do so in numerous different jurisdictions, seeking to hold us liable for, among other things, alleged counterfeit items listed on our websites by third parties, “tester” and other not for resale consumer products listed on our websites by third parties, alleged misuse of trademarks in listings, alleged violations of selective distribution channel laws, alleged violations of parallel import laws, alleged non-compliance with consumer protection laws and in connection with paid search advertisements. We have prevailed in some of these suits, lost in others, and many are in various stages of appeal. We continue to believe that we have meritorious defenses to these suits and intend to defend ourselves vigorously.

eBay's Korean subsidiary, IAC (which has merged into Gmarket and is now named eBay Korea), has notified its approximately 20 million users of a January 2008 data breach involving personally identifiable information including name, address, resident registration number and some transaction and refund data (but not including credit card information or real time banking information). Approximately 149,000 users sued IAC over this breach in several lawsuits in Korean courts and more may do so in the future (including after final determination of liability). Trial for a group of representative suits began in August 2009 in the Seoul Central District Court, and trial for additional suits began later in the Seoul Central District Court. There is some precedent in Korea for a court to grant “consolation money” for data breaches without a specific finding of harm from the breach. Such precedents have involved payments of up to approximately $200 per user. In January 2010, the Seoul Central District Court ruled that IAC had met its obligations with respect to defending the website from intrusion and, accordingly, had no liability for the breach. This January 2010 ruling was appealed by approximately 34,000 plaintiffs to the Seoul High Court. In September 2012, the Seoul High Court announced its decision upholding the Seoul Central District Court's January 2010 decision for three cases involving 55 plaintiffs (who did not appeal to the Korea Supreme Court). During 2013, the Seoul High Court upheld the Seoul Central District Court's January 2010 ruling in another 18 cases involving 33,795 plaintiffs. The Seoul High Court's decision in 10 of these 18 cases has been appealed by 33,215 plaintiffs to the Korea Supreme Court, and there was no appeal in the eight other cases. Currently, the Korea Supreme Court is reviewing a total of 11 cases with 33,218 plaintiffs, including one case appealed from the Daegu High Court. In January 2013, the Seoul Western District Court ruled in favor of IAC with respect to two cases filed by 2,291 plaintiffs by following the Seoul Central District Court's January 2010 ruling, and 2,284 plaintiffs proceeded to appeal the January 2013 decision of the Seoul Western District Court to the Seoul High Court. We expect decisions in these cases in late 2014.

General Matters

Other third parties have from time to time claimed, and others may claim in the future, that we have infringed their intellectual property rights. We are subject to patent disputes, and expect that we will increasingly be subject to additional patent infringement claims involving various aspects of our Marketplaces, Payments and Enterprise businesses as our services continue to expand in scope and complexity. Such claims may be brought directly against our companies and/or against our customers (who may be entitled to contractual indemnification under their contracts with us), and we are subject to increased exposure to such claims as a result of our recent acquisitions, particularly in cases where we are entering into new lines of business in connection with such acquisitions. We have in the past been forced to litigate such claims. We may also become more vulnerable to third-party claims as laws such as the Digital Millennium Copyright Act, the Lanham Act and the Communications Decency Act are interpreted by the courts, and as we expand the scope of our businesses (both in terms of the range of products and services that we offer and our geographical operations) and become subject to laws in jurisdictions where the underlying laws with respect to the potential liability of online intermediaries like ourselves are either unclear or less

17

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

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 prices, rules, policies or customer/user agreements violate applicable law or that we have not acted in conformity with such prices, rules, policies or agreements. The number and significance of these disputes and inquiries are increasing as our company has grown larger, our businesses have expanded in scope (both in terms of the range of products and services that we offer and our geographical operations) and our products and services have increased in complexity. Any claims or regulatory actions against us, whether meritorious or not, could be time consuming, result in costly litigation, damage awards (including statutory damages for certain causes of action in certain jurisdictions), injunctive relief or increased costs of doing business through adverse judgment or settlement, require us to change our business practices in expensive ways, require significant amounts of management time, result in the diversion of significant operational resources or otherwise harm our business.
 
Indemnification Provisions

In the ordinary course of business, we have included limited indemnification provisions in certain of our agreements with parties with which we have commercial relations, including our standard marketing, promotions and application-programming-interface license agreements. Under these contracts, we generally indemnify, hold harmless and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with claims by a third party with respect to our domain names, trademarks, logos and other branding elements to the extent that such marks are applicable to our performance under the subject agreement. In certain cases, we have agreed to provide indemnification for intellectual property infringement. Our Enterprise business has provided in many of its major ecommerce agreements an indemnity for other types of third-party claims, which are indemnities mainly related to various intellectual property rights, and we have provided similar indemnities in a limited number of agreements for our other businesses. In our PayPal business, we have provided an indemnity to our payment processors in the event of certain third-party claims or card association fines against the processor arising out of conduct by PayPal or PayPal customers. PayPal has also provided a limited indemnity to merchants using its retail point of sale payment services and to manufacturers of its point of sale devices (e.g., the PayPal Here devices and the Beacon device). In addition, Bill Me Later has provided indemnification provisions in its agreements with the chartered financial institutions that issue its credit products. It is not possible to determine the maximum potential loss under these indemnification provisions due to our limited history of prior indemnification claims and the unique facts and circumstances involved in each particular provision. To date, losses recorded in our statement of income in connection with our indemnification provisions have not been significant, either individually or collectively. 

Off-Balance Sheet Arrangements

As of March 31, 2014, 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.

In Europe, we have various cash pooling arrangements with financial institutions for cash management purposes. These arrangements allow for cash withdrawals from these financial institutions based upon our aggregate operating cash balances held in Europe within the same financial institutions (“Aggregate Cash Deposits”). These arrangements also allow us to withdraw amounts exceeding the Aggregate Cash Deposits up to an agreed-upon limit. The net balance of the withdrawals and the Aggregate Cash Deposits are used by these financial institutions as a basis for calculating our net interest expense or income under these arrangements. As of March 31, 2014, we had a total of $5.8 billion in cash withdrawals offsetting our $5.8 billion in Aggregate Cash Deposits held within these financial institutions under these cash pooling arrangements.
 

18




Note 9 — Stock Repurchase Programs

In June 2012, our Board of Directors authorized a stock repurchase program that provided for the repurchase of up to $2 billion of our common stock, with no expiration from the date of authorization. In January 2014, our Board of Directors authorized an additional stock repurchase program that provides for the repurchase of up to an additional $5 billion of our common stock, with no expiration from the date of authorization. The stock repurchase programs are intended to offset the impact of dilution from our equity compensation programs and, subject to market conditions and other factors, are also used to make opportunistic repurchases of our common stock to reduce our outstanding share count.  Any share repurchases under our stock repurchase programs may be made through open market transactions, block trades, privately negotiated transactions (including accelerated share repurchase transactions) or other means at times and in such amounts as management deems appropriate and will be funded from our working capital or other financing alternatives.   
 
Our stock repurchase programs may be limited or terminated at any time without prior notice. The timing and actual number of shares repurchased will depend on a variety of factors, including corporate and regulatory requirements, price and other market conditions and management's determination as to the appropriate use of our cash.  

The stock repurchase activity under our stock repurchase programs during the three months ended March 31, 2014 is summarized as follows:

 
Shares Repurchased
 
Average Price per Share
 
Value of Shares Repurchased
 
Remaining Amount Authorized
 
(In millions, except per share amounts)
Balance as of January 1, 2014
25

 
$
54.30

 
$
1,360

 
$
640

Authorization of additional plan in January 2014
 
 
 
 
 
 
5,000

Repurchase of shares of common stock
33

 
54.64

 
1,811

 
(1,811
)
Balance as of March 31, 2014
58

 
$
54.49

 
$
3,171

 
$
3,829


As of March 31, 2014, we had repurchased the full amount of common stock authorized under our June 2012 stock repurchase program and a total of approximately $3.8 billion remained available for further repurchases of our common stock under our January 2014 stock repurchase program. These repurchased shares of common stock were recorded as treasury stock and were accounted for under the cost method. No repurchased shares of common stock have been retired.

Note 10 — Stock-Based Plans

Stock Option Activity

The following table summarizes stock option activity for the three months ended March 31, 2014:  
 
Options
 
(In millions)
Outstanding as of January 1, 2014
14

Granted and assumed

Exercised
(2
)
Forfeited/expired/canceled

Outstanding as of March 31, 2014
12


The weighted average exercise price of stock options granted during the period was $56.74 per share and the related weighted average grant date fair value was $13.64 per share.


19

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

Restricted Stock Unit Activity

The following table summarizes restricted stock unit ("RSU") activity for the three months ended March 31, 2014:  
 
Units 
 
(In millions)
Outstanding as of January 1, 2014
34

Awarded and assumed
3

Vested
(5
)
Forfeited
(1
)
Outstanding as of March 31, 2014
31


The weighted average grant date fair value for RSUs awarded during the period was $55.47 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, 2014 and 2013 was as follows:
 
 
Three Months Ended March 31,
 
2014
 
2013
 
(In millions)
Cost of net revenues
$
17

 
$
13

Sales and marketing
42

 
33

Product development
51

 
32

General and administrative
39

 
33

Total stock-based compensation expense
$
149

 
$
111

Capitalized in product development
$
4

 
$
3


Stock Option Valuation Assumptions

We calculated the fair value of each stock option award on the date of grant using the Black-Scholes option pricing model. The following weighted average assumptions were used for the three months ended March 31, 2014 and 2013:
 
 
Three Months Ended March 31,
 
2014
 
2013
Risk-free interest rate
1.06
%
 
0.49
%
Expected life (in years)
3.9

 
3.8

Dividend yield
%
 
%
Expected volatility
29
%
 
34
%

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



20

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

Note 11 — Income Taxes

The following table reflects changes in unrecognized tax benefits for the three months ended March 31, 2014:
 
 
(In millions)
Gross amounts of unrecognized tax benefits as of January 1, 2014
$
334

Increases related to prior period tax positions

Decreases related to prior period tax positions

Increases related to current period tax positions
4

Settlements
(3
)
Gross amounts of unrecognized tax benefits as of March 31, 2014
$
335


As of March 31, 2014, our liabilities for unrecognized tax benefits were included in accrued expenses and other current liabilities, deferred and other tax liabilities, net and as a reduction of the amount of deferred tax asset for tax credit carryforwards.
 
We recognize interest and/or penalties related to uncertain tax positions in income tax expense. The amount of interest and penalties accrued as of March 31, 2014 and December 31, 2013 was approximately $80 million and $77 million, respectively.
 
We are subject to both direct and indirect taxation in the U.S. and various states and foreign jurisdictions. We are under examination by certain tax authorities for the 2003 to 2012 tax years. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these or other examinations. The material jurisdictions where we are subject to potential examination by tax authorities for certain tax years after 2002 include, among others, the U.S. (Federal and California), France, Germany, Italy, Korea, Israel, Switzerland, Singapore, the 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.
 
As of December 31, 2013, we had approximately $14.0 billion of indefinitely reinvested foreign earnings for which we had not provided U.S. income or applicable foreign withholding taxes. During the first quarter of 2014, we altered our capital allocation strategy. As a result, we changed our intent with regard to the indefinite reinvestment of undistributed foreign earnings of certain of our foreign subsidiaries for 2013 and prior years. Accordingly, a portion of these earnings are no longer considered indefinitely reinvested in our international operations. In connection with this change in our capital allocation strategy during the first quarter of 2014, we provided for U.S. income and applicable foreign withholding taxes on $9.0 billion of undistributed foreign earnings of those subsidiaries for 2013 and prior years, and recorded a deferred tax liability of approximately $3.0 billion, which is included in accrued expenses and other current liabilities on on condensed consolidated balance sheet at March 31, 2014. The remaining approximately $5.0 billion of undistributed foreign earnings have been reinvested in our foreign operations, as we have determined that these earnings are necessary to support our planned ongoing investments in our foreign operations, and as a result, these earnings remain indefinitely reinvested in those operations. In making this determination, we consider projected cash needs for, among other things, investment in our existing businesses, potential acquisitions and capital transactions, including repurchases of our common stock and debt repayments. Additionally, we estimate the amount of cash available or needed in the jurisdictions where these investments are expected, as well as our ability to generate cash in those jurisdictions and our access to capital markets. This analysis enables us to conclude whether or not we will indefinitely reinvest foreign earnings in our international operations. The remaining approximately $5.0 billion of undistributed foreign earnings for 2013 and prior years that is indefinitely reinvested in our foreign operations relates to a large number of our non-U.S. subsidiaries located in numerous jurisdictions for which it is impracticable to determine the impact of U.S. income or applicable foreign taxes that would be payable if such earnings were repatriated to the U.S.

In addition to the accrual of deferred taxes related to undistributed foreign earnings of certain of our non-U.S. subsidiaries for 2013 and prior years discussed above, we recorded in the first quarter of 2014 U.S. income and applicable foreign taxes of $53 million based on our estimated 2014 earnings of our non-U.S. subsidiaries not considered indefinitely reinvested in our foreign operations.

21




Note 12 — Loans and Interest Receivable, Net
Loans and interest receivable primarily represent purchased consumer receivables arising from loans made by our partner chartered financial institutions to individual consumers in the U.S. to purchase goods and services through our Bill Me Later merchant network. Although a chartered financial institution continues to own each respective customer account, we own the related consumer receivable and Bill Me Later is responsible for all servicing functions related to the customer accounts. Effective August 2013, ownership of most of the existing customer accounts was transitioned to a new chartered financial institution. As part of the arrangement with the new chartered financial institution, we sell the chartered financial institution a participation interest in the entire pool of consumer receivables outstanding under the customer accounts. During the three months ended March 31, 2014 and 2013, we purchased approximately $1.1 billion and $849 million, respectively, in consumer receivables. As of March 31, 2014, the total outstanding balance of this pool of consumer receivables was $2.9 billion, of which the chartered financial institution owned a participation interest of $89 million, or 3.1% of the total outstanding balance of the consumer receivables at that date.  The chartered financial institution has no recourse against us related to its participation interest for failure of debtors to pay when due. The participation interest held by the chartered financial institution has the same priority to the interests held by us and is subject to the same credit, prepayment, and interest rate risk associated with this pool of consumer receivables.
Loans and interest receivable are reported at their outstanding principal balances, net of participation interest sold and pro-rata allowances, including unamortized deferred origination costs and estimated collectible interest and fees. We use a consumer's FICO score, among other measures, in evaluating the credit quality of our consumer receivables. A FICO score is a type of credit score that lenders use to assess an applicant's credit risk and whether to extend credit. Individual FICO scores generally are obtained each quarter the consumer has an outstanding consumer receivable owned by Bill Me Later. The weighted average consumer FICO score related to the pool of consumer receivables and interest receivable balance outstanding as of March 31, 2014 was 685, compared to 688 as of December 31, 2013. As of March 31, 2014 and December 31, 2013, approximately 53.3% and 54.7%, respectively, of the pool of consumer receivables and interest receivable balance was due from consumers with FICO scores greater than 680, which is generally considered "prime" by the consumer credit industry. As of March 31, 2014 and December 31, 2013, approximately 10.5% and 9.1%, respectively, of the pool of consumer receivables and interest receivable balance was due from customers with FICO scores below 599. As of March 31, 2014 and December 31, 2013, approximately 91% and 90%, respectively, of the portfolio of consumer receivables and interest receivable was current.

During 2013, we began a pilot program, working with a chartered financial institution, for the chartered financial institutions to offer working capital loans to selected merchant sellers in the U.S.  We subsequently purchase the related merchant receivable from the chartered financial institution.  This program is still in the pilot phase.  Under the program, participating merchants can borrow a certain percentage of their annual payment volume processed by PayPal and are charged a fixed fee for the loan.  As of March 31, 2014, the total outstanding balance of this pool of merchant receivables was approximately $39 million.
The following table summarizes the activity in the allowance for loans and interest receivable, net of participating interest sold, for the periods indicated:
 
Three Months Ended March 31,
 
2014
 
2013
 
(In millions)
Balance as of January 1
$
146

 
$
101

Charge-offs
(70
)
 
(51
)
Recoveries
7

 
3

Provision
66

 
56

Balance as of March 31
$
149

 
$
109




22



Note 13 — Accumulated Other Comprehensive Income
The following table summarizes the changes in accumulated balances of other comprehensive income for the three months ended March 31, 2014:
 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Unrealized
Gains on
Investments
 
Foreign
Currency
Translation
 
Estimated tax (expense) benefit
 
Total
 
(In millions)
Beginning balance
$
(106
)
 
$
921

 
$
657

 
$
(316
)
 
$
1,156

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

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

 

 

 
(14
)
Net current period other comprehensive income
15

 
(97
)
 
(29
)
 
39

 
(72
)
Ending balance
$
(91
)
 
$
824

 
$
628

 
$
(277
)
 
$
1,084

The following table summarizes the changes in accumulated balances of other comprehensive income for the three months ended March 31, 2013:
 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Unrealized
Gains on
Investments
 
Foreign
Currency
Translation
 
Estimated tax (expense) benefit
 
Total
 
(In millions)
Beginning balance
$
(55
)
 
$
687

 
$
449

 
$
(225
)
 
$
856

Other comprehensive income before reclassifications
82

 
141

 
(301
)
 
(57
)
 
(135
)
Amount of gain (loss) reclassified from accumulated other comprehensive income
(4
)
 
1

 

 

 
(3
)
Net current period other comprehensive income
86

 
140

 
(301
)
 
(57
)
 
(132
)
Ending balance
$
31

 
$
827

 
$
148

 
$
(282
)
 
$
724



23



The following table provides details about reclassifications out of accumulated other comprehensive income for the three months ended March 31, 2014 and 2013:
Details about Accumulated Other Comprehensive
Income Components
 
Amount of Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Income
 
Affected Line Item in the Statement of Income
 
 
Three Months Ended
March 31, 2014
 
Three Months Ended March 31, 2013
 
 
 
 
(In millions)
 
 
Gains (losses) on cash flow hedges - foreign exchange contracts
 
$
(17
)
 
$

 
Net Revenues
 
 
(1
)
 

 
Cost of net revenues
 
 

 
(1
)
 
Sales and marketing
 
 
(2
)
 
(2
)
 
Product development
 
 
(1
)
 
(1
)
 
General and administrative
 
 
(21
)
 
(4
)
 
Total, before income taxes
 
 

 

 
Provision for income taxes
 
 
(21
)
 
(4
)
 
Total, net of income taxes
 
 
 
 
 
 
 
Unrealized gains on investments
 
7

 
1

 
Interest and other, net
 
 
7

 
1

 
Total, before income taxes
 
 

 

 
Provision for income taxes
 
 
7

 
1

 
Total, net of income taxes
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
(14
)
 
$
(3
)
 
Total, net of income taxes


24





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 condensed consolidated financial statements, related notes, and the other information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission, or the SEC. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

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

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


Overview

We are a global technology company that enables commerce through three reportable segments: Marketplaces, Payments and Enterprise. Our Marketplaces segment includes our eBay.com platform and its localized counterparts and our other online platforms, such as our online classifieds sites and StubHub. Our Payments segment is comprised of PayPal and Bill Me Later. Our Enterprise segment includes our Magento business and provides commerce technologies, omnichannel operations and marketing solutions for merchants of all sizes that operate in general merchandise categories.
  
Net revenues for the three months ended March 31, 2014 increased 14% to $4.3 billion compared to the same period of the prior year, driven primarily by increases in net revenues from each of our segments. For the three months ended March 31, 2014, our operating margin remained flat at 21%, consistent with the same period of the prior year. For the three months ended March 31, 2014, our diluted earnings per share decreased to $(1.82), a $2.33 decrease compared to the same period of the prior year, driven primarily by the accrual of deferred taxes on $9.0 billion of undistributed foreign earnings for 2013 and prior years, partially offset by growth in net revenues. For the three months ended March 31, 2014, we generated cash flow from operations of $1.2 billion, compared to $937 million for the same period of the prior year.

Our Marketplaces segment total net revenues increased $198 million, or 10%, for the three months ended March 31, 2014 compared to the same period of the prior year. The increase in total net revenues was driven primarily by an increase in gross merchandise volume (GMV) (as defined below) of 12% for the three months ended March 31, 2014 compared to the same period of the prior year, which was due primarily to continued growth internationally and in the U.S. and a favorable impact from foreign currency movements relative to the U.S. dollar. Our Marketplaces segment operating margin decreased by 2.4 percentage points for the three months ended March 31, 2014 compared to the same period of the prior year, due primarily to continued investments in our marketing programs, site operations and business initiatives.
Our Payments segment total net revenues increased $297 million, or 19%, for the three months ended March 31, 2014 compared to the same period of the prior year. The increase in total net revenues was driven primarily by an increase in net total payment volume (TPV) (as defined below) of 27% for the three months ended March 31, 2014 compared to the same period of the prior year and growth in Bill Me Later. Our Payments segment operating margin increased by 1.6 percentage points for the three months ended March 31, 2014 compared to the same period of the prior year due primarily to an increase in volume and operating efficiencies that was partially offset by a lower take rate.

25



Our Enterprise segment total net revenues increased $21 million, or 8%, for the three months ended March 31, 2014 compared to the same period of the prior year. The increase in total net revenues was driven primarily by an increase in Gross Merchandise Sales (as defined below) of 16% for the three months ended March 31, 2014 compared to the same period of the prior year. Our Enterprise segment operating margin increased 5.2 percentage points for the three months ended March 31, 2014 compared to the same period of the prior year, due primarily to an increase in operating efficiencies that was partially offset by a lower take rate.
We define GMV as the total value of all successfully closed transactions between users on Marketplaces platforms (excluding eBay's classifieds websites, brands4friends and Shopping.com) during the period regardless of whether the buyer and seller actually consummated the transaction; excludes vehicles and real estate gross merchandise volume. We define Net TPV as the total dollar volume of payments, net of payment reversals, successfully completed through our payments networks, including Bill Me Later, Venmo and payments processed through Braintree’s full stack payments platform during the period; excludes payments sent or received through PayPal's and Braintree's payment gateway businesses. We define Merchant Services Net TPV as the total dollar volume of payments, net of payment reversals, successfully completed through our payments networks, including Bill Me Later, Venmo and payments processed through Braintree's full stack payments platform during the period; excludes PayPal's and Braintree's payment gateway businesses and payments for transactions on our Marketplaces platforms. We define On eBay Net TPV as the total dollar volume of payments, net of payment reversals, successfully completed through our payments networks, including Bill Me Later, during the period for transactions on our Marketplaces platforms. We define Gross Merchandise Sales as the retail value of all sales transactions, inclusive of freight charges and net of allowance for returns and discounts, which flow through our Enterprise commerce technologies, whether we record the full amount of such transaction as a product sale or a percentage of such transaction as a service fee; excludes volume transacted through the Magento platform. We define ECV as the total Marketplaces GMV, Payments Merchant Services Net TPV and eBay Enterprise Gross Merchandise Sales not earned on eBay or paid for via PayPal or Bill Me Later during the period; excludes volume transacted through the Magento platform. 


Results of Operations

Summary of Net Revenues

We generate two types of net revenues: net transaction revenues and marketing services and other revenues. Our net transaction revenues are derived principally from listing fees and final value fees (which are fees payable on transactions closed on our Marketplaces platforms), fees paid by merchants for payment processing services and ecommerce service fees. Our marketing services revenues are derived principally from the sale of advertisements, revenue sharing arrangements, classifieds fees, marketing service fees and lead referral fees. Other revenues are derived principally from interest and fees earned on the Bill Me Later portfolio of receivables from loans, interest earned on certain PayPal customer account balances and fees from contractual arrangements with third parties that provide services to our users.

26



The following table sets forth the breakdown of net revenues by type and geography for the periods presented:(1) 
 
Three Months Ended March 31,
 
2014
 
2013
 
(In millions)
Net Revenues by Type:
 
 
 
Net transaction revenues
 
 
 
Marketplaces
$
1,727

 
$
1,554

Payments
1,700

 
1,435

Enterprise
208

 
186

Total net transaction revenues
3,635

 
3,175

Marketing services and other revenues
 
 
 
Marketplaces
428

 
403

Payments
145

 
113

Enterprise
61

 
62

Total marketing services and other revenues
634

 
578

Elimination of inter-segment net revenue (2)
(7
)
 
(5
)
Total net revenues
$
4,262

 
$
3,748

Net Revenues by Geography:
 
 
 
U.S.
$
1,998

 
$
1,789

International
2,264

 
1,959

Total net revenues
$
4,262

 
$
3,748

 
(1)
During the first quarter of 2014, we changed our reportable segments based upon changes in our organizational structure which reflect the integration of our Magento platform into our Enterprise segment. Prior to this change, Magento was reported in corporate and other. Also during the quarter, we revised our internal management reporting of certain Marketplaces transactions to align more closely with our related operating metrics. Related to this change, we reclassified our Marketplaces vehicles and real estate revenues from net transaction revenues to marketing services and other revenues. Prior period amounts have been revised to conform to the current period segment reporting structure.
(2)
Represents net revenue generated between our reportable segments.

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

Because we generated a majority of our net revenues internationally in recent periods, including the three months ended March 31, 2014 and 2013, we are subject to the risks of doing business in foreign countries as discussed under "Part II - Item 1A - Risk Factors." In that regard, fluctuations in foreign currency exchange rates impact our results of operations. We have a foreign exchange risk management program that is designed to reduce our exposure to fluctuations in foreign currencies; however, the effectiveness of this program in mitigating the impact of foreign currency fluctuations on our results of operations varies from period to period, and in any given period, our operating results are usually affected, sometimes significantly, by changes in currency exchange rates. Fluctuations in exchange rates also directly affect our cross-border revenue. We calculate the year-over-year impact of foreign currency movements on our business using prior period foreign currency rates applied to current year transactional currency amounts.

For the three months ended March 31, 2014, foreign currency movements relative to the U.S. dollar positively impacted net revenues by $24 million (inclusive of a negative impact of approximately $17 million from hedging activities included in Payments net revenue) compared to the same period of the prior year. On a business segment basis, for the three months ended March 31, 2014, foreign currency movements relative to the U.S. dollar positively impacted Marketplaces and Enterprise net revenues by approximately $29 million and less than $1 million, respectively, and negatively impacted Payments net revenues by approximately $5 million, in each case compared to the same period of the prior year (net of the negative impact of hedging activities noted above in the case of Payments net revenues).




27



The following table sets forth, for the periods presented, certain key operating metrics that we believe are significant factors affecting our net revenues:
 
Three Months Ended March 31,
 
Percent
 
2014
 
2013
 
Change
 
(In millions, except percentage changes)
Supplemental Operating Data:
 
 
 
 
 
Marketplaces Segment:  (1)
 
 
 
 
 
GMV  (2)
$
20,545

 
$
18,307

 
12
%
Payments Segment:
 
 
 
 
 
Merchant Services Net TPV (3)
$
37,162

 
$
28,087

 
32
%
On eBay Net TPV (4)
$
14,844

 
$
12,953

 
15
%
Net TPV  (5)
$
52,006

 
$
41,040

 
27
%
Enterprise Segment:
 
 
 
 
 
Gross Merchandise Sales (6)
$
936

 
$
807

 
16
%
 

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

Seasonality

The following table sets forth, for the periods presented, our total net revenues and the sequential quarterly movements of these net revenues:
 
Three Months Ended
 
March 31
 
June 30
 
September 30
 
December 31
 
(In millions, except percentage changes)
2012
 
 
 
 
 
 
 
Net revenues
$
3,277

 
$
3,398

 
$
3,404

 
$
3,992

Percent change from prior quarter
(3
)%
 
4
%
 
0
%
 
17
%
2013
 
 
 
 
 
 
 
Net revenues
$
3,748

 
$
3,877

 
$
3,892

 
$
4,530

Percent change from prior quarter
(6
)%
 
3
%
 
0
%
 
16
%
2014
 
 
 
 
 
 
 
Net revenues
$
4,262

 
 
 
 
 
 
Percent change from prior quarter
(6
)%
 
 
 
 
 
 

We expect transaction activity patterns on our websites to mirror general consumer buying patterns. Our Enterprise segment is highly seasonal. The fourth calendar quarter typically accounts for a disproportionate amount of Enterprise's total

28



annual revenues because consumers increase their purchases and businesses increase their advertising to consumers in the fourth quarter holiday season. We expect that these trends will continue.

Marketplaces Net Transaction Revenues

Marketplaces net transaction revenues increased $173 million, or 11%, while GMV increased 12% during the three months ended March 31, 2014 compared to the same period in the prior year. The increase in net transaction revenues and GMV was due primarily to continued growth in our businesses internationally as well as a favorable impact from foreign currency movements relative to the U.S. dollar. In addition, slower U.S. growth and a weaker StubHub performance impacted revenue growth.
 
Marketplaces net transaction revenues earned internationally totaled $995 million and $862 million during the three months ended March 31, 2014 and 2013, respectively, representing 58% and 55% of total Marketplaces net transaction revenues during those respective periods. The increase in international net transaction revenues as a percentage of total net transaction revenues during the three months ended March 31, 2014 was due primarily to stronger growth in international GMV relative to U.S. GMV, in addition to a favorable impact from foreign currency movements relative to the U.S. dollar.

Payments Net Transaction Revenues

Payments net transaction revenues increased $265 million, or 19%, during the three months ended March 31, 2014 compared to the same period of the prior year, due primarily to net TPV growth of 27%, partially offset by a lower take rate and the net impact of foreign currency activity and hedging. The increase in net TPV was due primarily to growth in consumer and merchant use of PayPal both on and off eBay and the impact of Braintree. The lower take rate was due primarily to a shift to larger merchants who pay lower rates. Our Merchant Services Net TPV increased 32% during the three months ended March 31, 2014 compared to the same period of the prior year, and represented 71% of PayPal's net TPV in the three months ended March 31, 2014 compared to 68% in the same period of the prior year. On eBay Net TPV increased 15% during the three months ended March 31, 2014 compared to the same period of the prior year, and represented 29% of PayPal's net TPV in the three months ended March 31, 2014 compared to 32% in the same period of the prior year.

Payments net transaction revenues earned internationally totaled $950 million and $791 million during the three months ended March 31, 2014 and March 31, 2013, respectively, representing 56% and 55% of total Payments net transaction revenues during those respective periods. The increase in international net transaction revenues during the three months ended March 31, 2014 as a percentage of total Payments net transaction revenues compared to the same period of the prior year was due primarily to higher growth in Merchant Services Net TPV outside the U.S. as we expanded merchant coverage and consumer share of checkout.

Enterprise Net Transaction Revenues

Enterprise net transaction revenues increased $22 million, or 12%, during the three months ended March 31, 2014 compared to the same period of the prior year, due primarily to a 16% increase in Gross Merchandise Sales for the period, partially offset by a lower take rate.

Marketing Services and Other Revenues

Marketing services and other revenues increased $56 million, or 10%, during the three months ended March 31, 2014 compared to the same period of the prior year, and represented 15% of total net revenues for both periods. The increase in marketing services and other revenues during the three months ended March 31, 2014 was due in part to growth in our Bill Me Later portfolio of receivables from loans and increased revenue from our advertising businesses.


29



Summary of Cost of Net Revenues

The following table summarizes changes in cost of net revenues for the periods presented(1):
 
Three Months Ended March 31,
 
Change from
2013 to 2014
 
2014
 
2013
 
in Dollars
 
in %
 
(In millions, except percentages)
Cost of net revenues:
 
Marketplaces
$
404

 
$
356

 
$
48

 
13
%
As a percentage of total Marketplaces net revenues
18.7
%
 
18.2
%
 
 
 
 
Payments
744

 
617

 
127

 
21
%
As a percentage of total Payments net revenues
40.3
%
 
39.9
%
 
 

 
 
Enterprise
200

 
178

 
22

 
12
%
As a percentage of total Enterprise net revenues
74.3
%
 
71.8
%
 
 
 
 
Corporate and other 
3

 
1

 
2

 
200
%
Total cost of net revenues
$
1,351

 
$
1,152

 
$
199

 
17
%
As a percentage of net revenues
31.7
%
 
30.7
%
 
 

 
 

 

(1)
During the first quarter of 2014, we changed our reportable segments based upon changes in our organizational structure which reflect the integration of our Magento platform into our Enterprise segment. Prior to this change, Magento was reported in corporate and other. Prior period amounts have been revised to conform to the current period segment reporting structure.

Cost of net revenues consists primarily of costs associated with payment processing, interest expense on borrowings incurred to finance Bill Me Later's portfolio of loan receivables, customer support, site operations and fulfillment. Significant components of these costs include bank transaction fees, credit card interchange and assessment fees, interest expense on indebtedness incurred to finance the purchase of consumer loan receivables related to Bill Me Later accounts, employee compensation, contractor costs, facilities costs, depreciation of equipment and amortization expense.

Marketplaces

Marketplaces cost of net revenues increased $48 million, or 13%, during the three months ended March 31, 2014, compared to the same period of the prior year. The increase was due primarily to an increase in volume and continued investment in our site operations and data centers. This resulted in the cost of net revenues as a percentage of Marketplaces net revenues increasing by 0.5 percentage points during the three months ended March 31, 2014 compared to the same period in the prior year.

Payments

Payments cost of net revenues increased $127 million, or 21%, during the three months ended March 31, 2014, compared to the same period of the prior year. The increase was due primarily to the impact of growth in transaction processing costs associated with the growth in net TPV and growth in our customer support initiatives. This resulted in the cost of net revenues as a percentage of Payments net revenues increasing by 0.4 percentage points during the three months ended March 31, 2014 compared to the same period in the prior year.

Enterprise

Enterprise cost of net revenues increased $22 million, or 12%, during the three months ended March 31, 2014, compared to the same period of the prior year. This increase was due primarily to the increase in Merchandise Sales as well as amortization expense driven by the initial rollout of the new suite of Enterprise commerce technologies. This resulted in the cost of net revenues as a percentage of Enterprise net revenues increasing by 2.5 percentage points during the three months ended March 31, 2014 compared to the same period in the prior year.


30



Summary of Operating Expenses, Non-Operating Items and Provision for Income Taxes

The following table summarizes changes in operating expenses, non-operating items and provision for income taxes for the periods presented: 
 
Three Months Ended March 31,
 
Change from
2013 to 2014
 
2014
 
2013
 
in Dollars
 
in %
 
(In millions, except percentage changes)
Sales and marketing
$
805

 
$
697

 
$
108

 
15
 %
Product development
480

 
434

 
46

 
11
 %
General and administrative
465

 
408

 
57

 
14
 %
Provision for transaction and loan losses
204

 
175

 
29

 
17
 %
Amortization of acquired intangible assets
79

 
82

 
(3
)
 
(4
)%
Interest and other, net
(5
)
 
9

 
(14
)
 
(156
)%
Provision for income taxes
(3,199
)
 
(132
)
 
(3,067
)
 
2,323
 %
 
The following table summarizes operating expenses, non-operating items and provision for income taxes as a percentage of net revenues for the periods presented: 
 
Three Months Ended March 31,
 
2014
 
2013
Sales and marketing
19
 %
 
19
%
Product development
11
 %
 
12
%
General and administrative
11
 %
 
11
%
Provision for transaction and loan losses
5
 %
 
5
%
Amortization of acquired intangible assets
2
 %
 
2
%
Interest and other, net
 %
 
%
Provision for income taxes
75
 %
 
4
%

Sales and Marketing
 
Sales and marketing expenses consist primarily of advertising costs and marketing programs (both online and offline), employee compensation, contractor costs, facilities costs and depreciation on equipment. Online marketing expenses represent traffic acquisition costs in various channels such as paid search, affiliates marketing and display advertising. Offline advertising includes brand campaigns, buyer/seller communications and general public relations expenses.

Sales and marketing expenses increased $108 million, or 15%, during the three months ended March 31, 2014 compared to the same period of the prior year. The increase in sales and marketing expense was due primarily to an increase in marketing program costs, both online and offline programs and higher employee-related expenses (including consultant costs, facility costs and equipment-related costs). Sales and marketing expense as a percentage of net revenues was 19% for both the three months ended March 31, 2014 and 2013. We anticipate sales and marketing spend to increase during the year.

Product Development
 
Product development expenses consist primarily of employee compensation, contractor costs, facilities costs and depreciation on equipment. Product development expenses are net of required capitalization of major site and other product development efforts, including the development of our next generation platform architecture, migration of certain platforms, seller tools and Payments services projects. Our top technology priorities include mobile, user experience, search, platform and products that allow us to continue pursuing our omnichannel strategy. Capitalized internal use and website development costs were $57 million in the three months ended March 31, 2014 compared to $49 million in the three months ended March 31, 2013, and are reflected primarily as a cost of net revenues when amortized in future periods.

Product development expenses increased $46 million, or 11%, during the three months ended March 31, 2014 compared to the same period of the prior year. The increase was due primarily to higher employee-related costs (including consultant costs, facility costs and equipment-related costs) driven by increased investment in platform, mobile and offline. Product

31



development expenses as a net percentage of revenues were 11% and 12% for the three months ended March 31, 2014 and 2013, respectively,

General and Administrative
 
General and administrative expenses consist primarily of employee compensation, contractor costs, facilities costs, depreciation of equipment, employer payroll taxes on stock-based compensation, legal expenses, restructuring, insurance premiums and professional fees. Our legal expenses, including those related to various ongoing legal proceedings, may fluctuate substantially from period to period.

General and administrative expenses increased $57 million, or 14%, during the three months ended March 31, 2014 compared to the same period of the prior year. The increase was due primarily to higher employee-related costs (including consultant costs, facility costs and equipment-related costs) and professional services. The increase in other professional services was due primarily to proxy related costs. General and administrative expenses as a percentage of net revenues were 11% for both the three months ended March 31, 2014 and 2013.

Provision for Transaction and Loan Losses

Provision for transaction and loan losses consists primarily of transaction loss expense associated with our customer protection programs, fraud, chargebacks, and merchant credit losses; loan loss reserves associated with our consumer loan receivables; and bad debt expense associated with our accounts receivable balance. We expect our provision for transaction and loan loss expense to fluctuate depending on many factors, including macroeconomic conditions, our customer protection programs and the impact of regulatory changes.
Provision for transaction and loan losses increased $29 million, or 17%, during the three months ended March 31, 2014, compared to the same period of the prior year. Provision for transaction and loan losses as a percentage of net revenues was 5% for both the three months ended March 31, 2014 and 2013.
Marketplaces provision for transaction losses increased by $9 million, or 16%, during the three months ended March 31, 2014, compared to the same period of the prior year. This increase in transaction losses was due primarily to an increase in the number of cases being opened under our eBay customer protection programs as a result of the simplified process for users to file claims which we introduced in 2013, as well as higher transaction volume.
Payments provision for transaction and loan losses increased by $20 million, or 17%, during the three months ended March 31, 2014 compared to the same period of the prior year. This increase was due primarily to higher PayPal transaction losses driven by higher transaction volume, resulting in part from the introduction of new products, initiatives to enhance customers' experience and growth in active registered accounts. The increase was also due to growth in our Bill Me Later portfolio of receivables from consumer loans. Modifications to our Bill Me Later acceptable risk parameters did not have a material impact on our provision for loan losses.

Amortization of Acquired Intangible Assets
From time to time we have purchased, and we expect to continue to purchase, assets and businesses. These purchase transactions generally result in the creation of acquired intangible assets with finite lives and lead to a corresponding increase in our amortization expense in periods subsequent to acquisition. We amortize intangible assets over the period of estimated benefit, using the straight-line method and estimated useful lives ranging from one to eight years. Amortization of acquired intangible assets is also impacted by our sales of assets and businesses and timing of acquired intangible assets becoming fully amortized. See "Note 3 - Goodwill and Intangible Assets" to our condensed consolidated financial statements included in this report.

Amortization of acquired intangible assets decreased by $3 million, or 4%, during the three months ended March 31, 2014, compared to the same period of the prior year.


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Interest and Other, Net
 
Interest and other, net consists primarily of interest earned on cash, cash equivalents and investments, as well as foreign exchange transaction gains and losses, our portion of operating results from investments accounted for under the equity method of accounting, investment gain/loss on acquisitions and interest expense, consisting of interest charges on any amounts borrowed and commitment fees on unborrowed amounts under our credit agreement and interest expense on our outstanding commercial paper, if any, and debt securities. Interest and other, net excludes interest expense on borrowings incurred to finance Bill Me Later's portfolio of loan receivables, which is included in cost of net revenues.

Interest and other, net decreased $14 million during the three months ended March 31, 2014 compared to the same period of the prior year. The decrease in interest and other, net was due primarily to an approximately $17 million unfavorable impact from foreign currency activity, partially offset by an increase in interest income of approximately $6 million as a result of an increase in our investment balances.

Provision for Income Taxes

As of December 31, 2013, we had approximately $14.0 billion of indefinitely reinvested foreign earnings for which we had not provided U.S. income or applicable foreign withholding taxes. During the first quarter of 2014, we altered our capital allocation strategy, which included changing our intent with regard to the indefinite reinvestment of foreign earnings from certain of our foreign subsidiaries for 2013 and prior years. Accordingly, a portion of these foreign earnings are no longer considered indefinitely reinvested in our international operations. In connection with this change in our capital allocation strategy during the first quarter of 2014, we provided for U.S. income and applicable foreign withholding taxes on $9.0 billion of undistributed foreign earnings of certain of our foreign subsidiaries for 2013 and prior years, and recorded a deferred tax liability of approximately $3.0 billion. The remaining approximately $5.0 billion of undistributed foreign earnings remains indefinitely reinvested in our international operations.

This change reflects our objectives of increasing our available U.S. cash, preserving our credit rating and, providing greater liquidity to meet our other cash needs in the U.S., which may include, among other things and subject to market conditions and other uncertainties, merger and acquisition activity and funding opportunistic share repurchases on an accelerated basis, potentially in the near term.

In addition to the accrual of deferred taxes related to undistributed foreign earnings of certain of our non-U.S. subsidiaries for 2013 and prior years discussed above, in the first quarter of 2014 we recorded U.S. income and applicable foreign withholding taxes of $53 million on $156 million of undistributed foreign earnings of our non-U.S. subsidiaries based on our estimated 2014 earnings of our non-U.S. subsidiaries that are not considered indefinitely reinvested in our foreign operations. The amount represents U.S. income and applicable foreign withholding taxes on 2014 foreign earnings not considered indefinitely reinvested, reflecting a larger percentage of foreign earnings subject to U.S. tax compared to 2013.  During the first quarter of 2013, we recorded $36 million of U.S. income and applicable foreign taxes on $111 million of undistributed foreign earnings of our non-U.S. subsidiaries that were not considered indefinitely reinvested in our foreign operations.

Our effective tax rate was 366.4% for the three months ended March 31, 2014 compared to 16.3% for the same period in the prior year. The increase in our effective tax rate for the three months ended March 31, 2014 compared to the same period of the prior year was due primarily to the accrual of U.S. income and applicable foreign taxes on $9.0 billion of undistributed foreign earnings for 2013 and prior years.  Without this accrual, the effective tax rate for the three months ended March 31, 2014 would have been 18.3%.  The additional 2.0% increase in our effective tax rate over the same period in the prior year was due primarily to increases in the current year’s foreign earnings being subject to U.S. tax as discussed above, which we estimate will increase our effective tax rate for 2014 by additional 1.0% to 1.5% compared to 2013, and the expiration of the federal R&D credit. 

From time to time, we engage in certain intercompany transactions and legal entity restructurings. We consider many factors when evaluating these transactions, including the alignment of our corporate structure with our organizational objectives and the operational and tax efficiency of our corporate structure, as well as the long-term cash flows and cash needs of our different businesses. These transactions may impact our overall tax rate and/or result in additional cash tax payments. The impact in any period may be significant. These transactions may be complex and the impact of such transactions on future periods may be difficult to estimate.

We are regularly under examination by tax authorities both domestically and internationally. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these examinations, although we can provide

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no assurances that this will be the case given the inherent uncertainties in these examinations. Due to the ongoing tax examinations, we believe it is impractical to determine the amount and timing of these adjustments.


Liquidity and Capital Resources

Cash Flows 
 
Three Months Ended March 31,
 
2014
 
2013
 
(In millions)
Net cash provided by (used in):
 
 
 
Operating activities
$
1,174

 
$
937

Investing activities
532

 
(719
)
Financing activities
(1,793
)
 
(411
)
Effect of exchange rates on cash and cash equivalents
8

 
(94
)
Net increase/(decrease) in cash and cash equivalents
$
(79
)
 
$
(287
)
 
Operating Activities

We generated cash from operating activities of $1.2 billion and $0.9 billion in the three months ended March 31, 2014 and 2013, respectively. The increase in cash provided by operating activities during the three months ended March 31, 2014 compared to the same period of the prior year was due primarily to an increase in depreciation and amortization and provision for transaction and loan loss.

Investing Activities

The net cash provided by investing activities of $532 million in the three months ended March 31, 2014 was due primarily to proceeds of $2.0 billion from the maturities and sale of investments, partially offset by cash paid for the purchases of investments of $1.3 billion and purchases of property and equipment of $206 million.
The net cash used in investing activities of $719 million in the three months ended March 31, 2013 was due primarily to net cash paid for the purchases of investments of $1.4 billion and purchases of property and equipment of $299 million, partially offset by proceeds of $1.0 billion from the maturities and sale of investments.
Financing Activities

The net cash used in financing activities of $1.8 billion in the three months ended March 31, 2014 was due primarily to cash outflows of $1.8 billion to repurchase common stock and cash paid for tax withholdings in the amount of $104 million related to net share settlements of restricted stock units and awards. These cash outflows were partially offset by the cash inflows of $55 million from the issuance of common stock in connection with the exercise of stock options and the effect of $60 million of excess tax benefits from stock-based compensation.

The net cash used in financing activities of $411 million in the three months ended March 31, 2013 was due primarily to cash outflows of $476 million to repurchase common stock and cash paid for tax withholdings in the amount of $153 million related to net share settlements of restricted stock units and awards. These cash outflows were partially offset by the effect of $116 million of excess tax benefits from stock-based compensation and the cash inflows of $102 million from the issuance of common stock in connection with the exercise of stock options.

The negative effect of exchange rate movements on cash and cash equivalents during the three months ended March 31, 2013 was due to the strengthening of the U.S. dollar against other currencies, primarily the Euro.


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Stock Repurchases

In June 2012, our Board of Directors authorized a stock repurchase program that provided for the repurchase of up to $2 billion of our common stock, with no expiration from the date of authorization. In January 2014, our Board of Directors authorized an additional stock repurchase program that provides for the repurchase of up to an additional $5 billion of our common stock, with no expiration from the date of authorization. The stock repurchase programs are intended to offset the impact of dilution from our equity compensation programs and, subject to market conditions and other factors, are also used to make opportunistic repurchases of our common stock to reduce outstanding share count.  Any share repurchases under our stock repurchase programs may be made through open market transactions, block trades, privately negotiated transactions (including accelerated share repurchase transactions) or other means at times and in such amounts as management deems appropriate and will be funded from our working capital or other financing alternatives.   

Our stock repurchase programs may be limited or terminated at any time without prior notice. The timing and actual number of shares repurchased will depend on a variety of factors including corporate and regulatory requirements, price and other market conditions and management's determination as to the appropriate use of our cash.  

During the three months ended March 31, 2014, we repurchased approximately $1.8 billion of our common stock under our stock repurchase programs, which exceeds our total 2013 repurchases of approximately $1.3 billion. We expect, subject to market conditions and other uncertainties, to continue making opportunistic repurchases of our stock on an accelerated basis, potentially on a near term basis. As of March 31, 2014, we had repurchased the full amount of common stock authorized under the June 2012 stock repurchase program and a total of approximately $3.8 billion remained available for further repurchases of our common stock under our January 2014 stock repurchase program.

Shelf Registration Statement and Long-Term Debt

At March 31, 2014, we had an effective shelf registration statement on file with the Securities and Exchange Commission that allows us to issue various types of debt securities, such as fixed or floating rate notes, U.S. dollar or foreign currency denominated notes, redeemable notes, global notes, and dual currency or other indexed notes. Each issuance under the shelf registration statement will require the filing of a prospectus supplement identifying the amount and terms of the securities to be issued. The registration statement does not limit the amount of debt securities that may be issued thereunder. Our ability to issue debt securities is subject to market conditions and other factors impacting our borrowing capacity, including our credit ratings and compliance with the covenants in our credit agreement.

We issued $3 billion of senior notes in an underwritten public offering in July 2012. These senior notes remain outstanding and consist of $250 million aggregate principal amount of 0.70% notes due 2015, $1 billion aggregate principal amount of 1.35% notes due 2017, $1 billion aggregate principal amount of 2.60% notes due 2022 and $750 million aggregate principal amount of 4.00% notes due 2042. In addition, we have $1.1 billion of senior notes outstanding that were issued under a prior registration statement in an underwritten offering in 2010, consisting of $600 million aggregate principal amount of 1.625% notes due 2015 and $500 million aggregate principal amount of 3.250% notes due 2020.

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.

Commercial Paper

We have a $2 billion commercial paper program pursuant to which we may issue commercial paper notes with maturities of up to 397 days from the date of issue in an aggregate principal amount at maturity of up to $2 billion outstanding at any time. As of March 31, 2014, there were no commercial paper notes outstanding. We may elect, subject to market conditions, to issue commercial paper notes from time to time in the future.

Credit Agreement

As of March 31, 2014, no borrowings or letters of credit were outstanding under our $3 billion credit agreement. As described above, we have a $2 billion commercial paper program and maintain $2 billion of available borrowing capacity under our credit agreement in order to repay commercial paper borrowings in the event we are unable to repay those borrowings from other sources when they become due.  As a result, at March 31, 2014, $1.0 billion of borrowing capacity was available for other purposes permitted by the credit agreement. The credit agreement contains customary representations, warranties, affirmative and negative covenants, including a financial covenant, events of default and indemnification provisions in favor of the banks.

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The negative covenants include restrictions regarding the incurrence of liens, subject to certain exceptions. The financial covenant requires us to meet a quarterly financial test with respect to a minimum consolidated interest coverage ratio.

Other Indebtedness

 In addition to the debt described above, as of March 31, 2014, we have $24 million of borrowings outstanding under our overdraft facilities, notes payable of $12 million and capital lease obligations of $3 million.

We are in compliance with all covenants in our outstanding debt instruments for the period ended March 31, 2014.

Commitments

As of March 31, 2014, approximately $16.3 billion of unused credit was available to Bill Me Later accountholders. While this amount represents the total unused credit available, we have not experienced, and do not anticipate, that all of our Bill Me Later accountholders will access their entire available credit at any given point in time. In addition, the individual lines of credit that make up this unused credit are subject to periodic review and termination by the chartered financial institutions that are the issuers of Bill Me Later credit products based on, among other things, account usage and customer creditworthiness. When a consumer makes a purchase using a Bill Me Later credit product, the chartered financial institution extends credit to the consumer, funds the extension of credit at the point of sale and advances funds to the merchant. We subsequently purchase the consumer receivables related to the consumer loans and as a result of that purchase, bear the risk of loss in the event of loan defaults. However, we subsequently sell a participation interest in the entire pool of consumer loans to the chartered financial institution that extended the consumer loans. Although the chartered financial institution continues to own each customer account, we own and bear the risk of loss on the related consumer receivables, less the participation interest held by the chartered financial institution, and Bill Me Later is responsible for all servicing functions related to the customer account balances. As of March 31, 2014, the total outstanding balance on this pool of consumer loan receivables was $2.9 billion, of which the chartered financial institution owned a participation interest of $89 million, or 3.1%.

Liquidity and Capital Resource Requirements

As of March 31, 2014 and December 31, 2013, we had assets classified as cash and cash equivalents, as well as short-term and long-term non-equity investments, in an aggregate amount of $11.9 billion and $12.8 billion, respectively. As of March 31, 2014, this amount included assets of these types held outside the U.S. in certain of our foreign operations totaling approximately $9.7 billion. If these assets were distributed to the U.S., we may be subject to additional U.S. tax in certain circumstances. As described under “--Provision for Income Taxes” above, during the first quarter of 2014, we accrued deferred taxes of approximately $3.0 billion on $9.0 billion of undistributed foreign earnings of certain of our foreign subsidiaries for 2013 and prior years that we no longer intend to indefinitely reinvest in our international operations, which is consistent with our capital allocation strategy. As of March 31, 2014, we had not repatriated any of this $9.0 billion of undistributed foreign earnings to the U.S. and, as a result, we have not yet paid U.S. tax on any portion of those earnings. However, to the extent that we repatriate these earnings to the U.S., we will be required to pay U.S. income and applicable foreign withholding taxes on those amounts during the period when such repatriation occurs. To the extent we repatriate this $9.0 billion of undistributed foreign earnings, it would increase our U.S. cash by approximately $6.0 billion, net of related tax.

We actively monitor all counterparties that hold these assets, focusing primarily on the safety of principal and secondarily on improving yield on these assets. We diversify our cash and cash equivalents and investments among various counterparties in order to reduce our exposure should any one of these counterparties fail or encounter difficulties. To date, we have not experienced any material loss or lack of access to our invested cash, cash equivalents or short-term investments; however, we can provide no assurances that access to our invested cash, cash equivalents or short-term investments will not be impacted by adverse conditions in the financial markets. At any point in time we have funds in our operating accounts and customer accounts that are deposited with third party financial institutions.

To the extent that our Bill Me Later or other credit products become more widely available through improved and more comprehensive product integrations with eBay, PayPal and other channels, and as we further promote Bill Me Later or other credit products, customer adoption and usage of such products may expand. Any resulting growth in the portfolio of Bill Me Later or other loan receivables would increase our liquidity needs and any failure to meet those liquidity needs could adversely affect the Bill Me Later business. We currently fund the expansion of the Bill Me Later portfolio of loan receivables with domestic and international cash resources and borrowings.

We believe that our existing cash, cash equivalents and short-term and long-term investments, together with cash expected to be generated from operations, borrowings available under our credit agreement and commercial paper program, and

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our access to capital markets, will be sufficient to fund our operating activities, anticipated capital expenditures and requirements, Bill Me Later portfolio of loan receivables and stock repurchases for the foreseeable future.

Off-Balance Sheet Arrangements

As of March 31, 2014, 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.

In Europe, we have various cash pooling arrangements with financial institutions for cash management purposes. These arrangements allow for cash withdrawals from these financial institutions based upon our aggregate operating cash balances held in Europe within the same financial institutions (“Aggregate Cash Deposits”). These arrangements also allow us to withdraw amounts exceeding the Aggregate Cash Deposits up to an agreed-upon limit. The net balance of the withdrawals and the Aggregate Cash Deposits are used by these financial institutions as a basis for calculating our net interest expense or income under these arrangements. As of March 31, 2014, we had a total of $5.8 billion in cash withdrawals offsetting our $5.8 billion in Aggregate Cash Deposits held within these financial institutions under these cash pooling arrangements.
 
Indemnification Provisions

In the ordinary course of business, we have included limited indemnification provisions in certain of our agreements with parties with which we have commercial relations, including our standard marketing, promotions and application-programming-interface license agreements. Under these contracts, we generally indemnify, hold harmless and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with claims by a third party with respect to our domain names, trademarks, logos and other branding elements to the extent that such marks are applicable to our performance under the subject agreement. In certain cases we have agreed to provide indemnification for intellectual property infringement. Our Enterprise business has provided in many of its major ecommerce agreements an indemnity for other types of third-party claims, which are indemnities mainly related to various intellectual property rights, and we have provided similar indemnities in a limited number of agreements for our other businesses. In our PayPal business, we have provided an indemnity to our payment processors in the event of certain third-party claims or card association fines against the processor arising out of conduct by PayPal or PayPal customers. PayPal has also provided a limited indemnity to merchants using its retail point of sale payment services and to manufacturers of its point of sale devices (e.g., the PayPal Here devices and the Beacon device). In addition, Bill Me Later has provided indemnification provisions in its agreements with the chartered financial institutions that issue its credit products. It is not possible to determine the maximum potential loss under these indemnification provisions due to our limited history of prior indemnification claims and the unique facts and circumstances involved in each particular provision. To date, losses recorded in our consolidated statement of income in connection with our indemnification provisions have not been significant, either individually or collectively.

Item 3:
Quantitative and Qualitative Disclosures About Market Risk

The information in this section should be read in connection with the information on financial market risk related to changes in interest rates and non-U.S. currency exchange rates in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended December 31, 2013. Our market risk profile has not changed significantly during the first three months of 2014.

Interest Rate Risk

As of March 31, 2014, approximately 34% of our total cash and investment portfolio was held in bank deposits and money market funds. As such, changes in interest rates will impact interest income. Fixed rate securities may have their fair market value adversely affected due to a rise in interest rates, and we may suffer losses in principal if we are forced to sell securities that have declined in market value due to changes in interest rates. As of March 31, 2014, 100% of the outstanding senior notes issued under our shelf registration statement bore interest at fixed rates. Therefore, changes in interest rates will not impact interest expense on those senior notes. However, changes in interest rates will impact interest expense on any borrowings under our revolving credit facility, which bear interest at floating rates, and the interest rate on any commercial paper borrowings we make and any floating-rate debt securities we may issue in the future and, accordingly, will impact interest expense or cost of net revenues (or both).

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

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Investment Risk

The primary objective of our investment activities is to preserve principal while at the same time improving yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents and short-term and long-term investments in a variety of asset types, including bank deposits, money market funds, government bonds and corporate debt securities.

As of March 31, 2014, our cost and equity method investments totaled $357 million, which represented approximately 3% of our total cash and investment portfolio and were primarily related to equity method investments in privately held companies. We review our investments for impairment when events and circumstances indicate a decline in fair value of such assets below carrying value is other-than-temporary. Our analysis includes a review of recent operating results and trends, recent sales/acquisitions of the securities in which we have invested and other publicly available data.

Equity Price Risk

We are exposed to equity price risk on our marketable equity instruments due to market volatility. As of March 31, 2014, the total fair value of our marketable equity instruments (primarily related to our equity holdings in MercadoLibre) was $781 million, which represented approximately 6% of our total cash and investment portfolio.

Foreign Currency Risk

We have significant operations internationally 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. We transact business in various foreign currencies and have significant international revenues as well as costs. In addition, we charge our international subsidiaries for their use of intellectual property and technology and for certain corporate services provided by eBay and by PayPal.

We have a foreign exchange exposure management program designed to identify material foreign currency exposures, manage these exposures and reduce the potential effects of currency fluctuations on our reported consolidated cash flows and results of operations through the purchase of foreign currency exchange contracts. These foreign currency exchange contracts are accounted for as derivative instruments; for additional details related to our derivative instruments, please see “Note 6 – Derivative Instruments” to the condensed consolidated financial statements included in this report.

European Debt Exposures
 
We actively monitor our exposure to the European markets, including the impact of sovereign debt issues associated with Cyprus, Greece, Ireland, Italy, Portugal and Spain.  As of March 31, 2014, we did not have any direct investments in the sovereign debt of these countries or in debt securities issued by corporations or financial institutions organized in these countries.  We maintain a small number of operating bank accounts with Spanish, Italian and Portuguese banks that have balances that we do not consider material.

Item 4:
Controls and Procedures

(a) Evaluation of disclosure controls and procedures. Based on the evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934) required by Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, our Chief Executive Officer and our Chief Financial Officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.

(b) Changes in internal controls. There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II: OTHER INFORMATION

Item 1:
Legal Proceedings

The information set forth under “Note 8 — Commitments and Contingencies — Litigation and Other Legal Matters” to the condensed consolidated financial statements included in Part I, Item 1 of this report is incorporated herein by reference.

Item 1A:
Risk Factors
Risk Factors That May Affect Results of Operations and Financial Condition
Our operating and financial results are subject to various risks and uncertainties that could adversely affect our business, financial condition, results of operations and cash flows, as well as the trading price of our common stock and debt securities.

Our operating and financial results have varied on a quarterly basis during our operating history. Our operating and financial results may fluctuate significantly as a result of a variety of factors, many of which are outside our control. Factors that may affect our operating and financial results include risks described elsewhere in this section and the following: 

general economic conditions, including the possibility of a prolonged period of limited economic growth or possible economic decline in Europe;; the possibility of greater austerity in the U.S. due to, among other factors, the impact of uncertainty regarding the fiscal policy of the U.S. government; management of debt and other significant events in the financial markets of China and the rest of Asia; disruptions to the credit and financial markets in Europe, the U.S., and elsewhere due to the political situation in Ukraine or other causes; contractions or limited growth in consumer spending or consumer credit; and adverse economic conditions that may be specific to the Internet, online commerce, or ecommerce, and payments industries;
our ability to manage the rapid shift from ecommerce and online payments to mobile and multi-channel commerce and payments;
our ability to improve the quality of the user experience on our websites and through mobile devices (including our customer support in the event of a problem) to keep pace with the improved quality of the user experience generally offered by competitive platforms;