eBay 2012 Q3_10Q


 
 
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 September 30, 2012

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)
 
 
2145 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 October 15, 2012, there were 1,293,985,406 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
 
September 30,
2012
 
December 31,
2011
 
(In millions, except par value amounts)
 
(Unaudited)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
7,331

 
$
4,691

Short-term investments
1,804

 
1,238

Accounts receivable, net
694

 
682

Loans and interest receivable, net
1,792

 
1,501

Funds receivable and customer accounts
4,807

 
3,968

Other current assets
982

 
581

Total current assets
17,410

 
12,661

Long-term investments
2,500

 
2,453

Property and equipment, net
2,393

 
1,986

Goodwill
8,492

 
8,365

Intangible assets, net
1,234

 
1,406

Other assets
473

 
449

Total assets
$
32,502

 
$
27,320

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 

 
 

Short-term debt
$
12

 
$
565

Accounts payable
271

 
282

Funds payable and amounts due to customers
4,807

 
3,968

Accrued expenses and other current liabilities
1,776

 
1,511

Deferred revenue
132

 
110

Income taxes payable
63

 
298

Total current liabilities
7,061

 
6,734

Deferred and other tax liabilities, net
945

 
1,073

Long-term debt
4,506

 
1,525

Other liabilities
77

 
58

Total liabilities
12,589

 
9,390

Commitments and contingencies (Note 9)

 


Stockholders' equity:
 
 
 
Common stock, $0.001 par value; 3,580 shares authorized; 1,294 and 1,286 shares outstanding
2

 
2

Additional paid-in capital
11,811

 
11,145

Treasury stock at cost, 266 and 249 shares
(7,797
)
 
(7,155
)
Retained earnings
15,248

 
13,389

Accumulated other comprehensive income
649

 
549

Total stockholders' equity
19,913

 
17,930

Total liabilities and stockholders' equity
$
32,502

 
$
27,320


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

2



eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In millions, except per share amounts)
 
(Unaudited)
Net revenues
$
3,404

 
$
2,966

 
$
10,079

 
$
8,272

Cost of net revenues
1,022

 
920

 
2,992

 
2,426

Gross profit
2,382

 
2,046

 
7,087

 
5,846

Operating expenses:
 
 
 
 
 

 
 

Sales and marketing
726

 
623

 
2,120

 
1,763

Product development
389

 
319

 
1,157

 
891

General and administrative
369

 
336

 
1,131

 
1,018

Provision for transaction and loan losses
148

 
146

 
413

 
372

Amortization of acquired intangible assets
83

 
85

 
251

 
182

Total operating expenses
1,715

 
1,509

 
5,072

 
4,226

Income from operations
667

 
537

 
2,015

 
1,620

Interest and other, net
5

 
79

 
74

 
111

Gain (loss) on divested businesses

 

 
118

 
(256
)
Income before income taxes
672

 
616

 
2,207

 
1,475

Provision for income taxes
(75
)
 
(125
)
 
(348
)
 
(225
)
Net income
$
597

 
$
491

 
$
1,859

 
$
1,250

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.46

 
$
0.38

 
$
1.44

 
$
0.97

Diluted
$
0.45

 
$
0.37

 
$
1.42

 
$
0.95

Weighted average shares:
 
 
 
 
 
 
 
Basic
1,292

 
1,290

 
1,291

 
1,291

Diluted
1,314

 
1,309

 
1,311

 
1,311


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


3



eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In millions)
 
(Unaudited)
Net income
$
597

 
$
491

 
$
1,859

 
$
1,250

Other comprehensive income (loss), before tax and net of reclassification adjustments:
 
 
 
 
 

 
 

Foreign currency translation
191

 
(513
)
 
80

 
5

Unrealized gains (losses) on investments, net
89

 
(253
)
 
126

 
(150
)
Unrealized (losses) gains on hedging activities, net
(73
)
 
65

 
(90
)
 
23

Other comprehensive income (loss), before tax
207

 
(701
)
 
116

 
(122
)
Tax (provision) benefit related to items of other comprehensive income
(22
)
 
83

 
(16
)
 
44

Other comprehensive income (loss), net tax
185

 
(618
)
 
100

 
(78
)
Comprehensive income (loss)
$
782

 
$
(127
)
 
$
1,959

 
$
1,172


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


4



eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
 
Nine Months Ended September 30,
 
2012
 
2011
 
(In millions)
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income
$
1,859

 
$
1,250

Adjustments:
 
 
 
Provision for transaction and loan losses
413

 
372

Depreciation and amortization
882

 
667

Stock-based compensation
360

 
346

(Gain) loss on divested businesses
(118
)
 
256

Gain on acquisition of a business

 
(73
)
Changes in assets and liabilities, net of acquisition effects
(943
)
 
(527
)
Net cash provided by operating activities
2,453

 
2,291

Cash flows from investing activities:
 

 
 

Purchases of property and equipment, net
(961
)
 
(672
)
Changes in principal loans receivable, net
(335
)
 
(254
)
Purchases of investments
(1,470
)
 
(1,884
)
Maturities and sales of investments
938

 
1,298

Acquisitions, net of cash acquired
(143
)
 
(3,155
)
Proceeds from divested business, net of cash disposed
144

 

Other
(77
)
 
(102
)
Net cash used in investing activities
(1,904
)
 
(4,769
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of common stock
359

 
188

Repurchases of common stock
(642
)
 
(814
)
Excess tax benefits from stock-based compensation
95

 
65

Tax withholdings related to net share settlements of restricted stock awards and units
(152
)
 
(130
)
Net (repayments) and borrowings under commercial paper program
(550
)
 
700

Proceeds from the issuance of debt, net of issuance costs
2,976

 

Repayment of acquired debt

 
(199
)
Funds receivable and customer accounts
(839
)
 
(696
)
Funds payable and amounts due to customers
839

 
696

Other
(4
)
 

Net cash provided by (used in) financing activities
2,082

 
(190
)
Effect of exchange rate changes on cash and cash equivalents
9

 
90

Net increase (decrease) in cash and cash equivalents
2,640

 
(2,578
)
Cash and cash equivalents at beginning of period
4,691

 
5,577

Cash and cash equivalents at end of period
$
7,331

 
$
2,999

Supplemental cash flow disclosures:
 

 
 

Cash paid for interest
$
15

 
$
14

Cash paid for income taxes
$
757

 
$
282

Non-cash investing and financing activities:
 
 
 
Common stock options assumed pursuant to acquisition
$

 
$
25

Note receivable from divested business
$

 
$
287


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

5



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

Note 1 — The Company and Summary of Significant Accounting Policies

The Company

eBay Inc. (“eBay”) was incorporated in California in May 1996, and reincorporated in Delaware in April 1998. eBay is a global commerce platform and payments leader. We enable commerce through eBay, the world's largest online marketplace, which allows users to buy and sell in nearly every country on earth; through PayPal, which enables individuals and businesses to securely, easily and quickly send and receive online payments; and through GSI, which facilitates ecommerce, multichannel retailing and interactive marketing for global enterprises. X.commerce harnesses the developer community of Magento, an ecommerce platform, by providing technology solutions and eBay Inc. capabilities to merchants of all sizes, supporting eBay Inc.'s mission of enabling commerce. We also reach millions of people through specialized marketplaces such as StubHub, the world's largest ticket marketplace, and eBay classifieds sites, which together have a presence in more than 1,000 cities around the world.
 
We have three reportable business segments: Marketplaces, Payments and GSI. Our Marketplaces segment includes our eBay.com platform and its localized counterparts and our other online trading platforms, such as our online classifieds sites and StubHub. Our Payments segment is comprised of PayPal, Bill Me Later and Zong. Our GSI segment consists of GSI Commerce, Inc. ("GSI"), and was added upon the completion of our acquisition of GSI on June 17, 2011. The results of our GSI segment have been included in our consolidated results of operations from the acquisition date.
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 regulations or how regulations are interpreted or enforced by governmental authorities and courts, non-compliance with regulations or loss of key bank or financial institution partners could have a significant adverse impact on our ability to operate our 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.

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 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. Ownership interests of minority interests are recorded as a noncontrolling interest. All significant intercompany balances and transactions have been eliminated in consolidation. 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 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, 2011. We have evaluated all subsequent events through the date the financial statements were issued.

6

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


Recent Accounting Pronouncements

In 2012, the FASB issued a new accounting standard that simplifies the impairment test for indefinite-lived intangible assets other than goodwill. The new guidance gives the option to first assess qualitative factors to determine if it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative valuation test. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning on or after September 15, 2012. We will adopt this accounting standard in the fourth quarter of 2012 and we do not anticipate that this adoption will have a significant impact on our financial position, results of operations or cash flows.

Note 2 — Net Income Per Share

Basic net income per share is computed by dividing net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income 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 restricted stock is reflected in diluted net income per share by application of the treasury stock method. The calculation of diluted net income per share excludes all anti-dilutive shares. The following table sets forth the computation of basic and diluted net income per share for the periods indicated:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In millions, except per share amounts)
Numerator:
 
 
 
 
 
 
 
Net income
$
597

 
$
491

 
$
1,859

 
$
1,250

Denominator:
 
 
 
 
 
 
 
Weighted average common shares - basic
1,292

 
1,290

 
1,291

 
1,291

Dilutive effect of equity incentive plans
22

 
19

 
20

 
20

Weighted average common shares - diluted
1,314

 
1,309

 
1,311

 
1,311

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.46

 
$
0.38

 
$
1.44

 
$
0.97

Diluted
$
0.45

 
$
0.37

 
$
1.42

 
$
0.95

Common stock equivalents excluded from income per diluted share because their effect would have been anti-dilutive
3

 
18

 
6

 
17



7



Note 3 - Business Combinations and Divestitures
During the nine months ended September 30, 2012, we completed three acquisitions, two of which are included in our Marketplaces segment and one in our Payments segment, for aggregate purchase consideration of approximately $149 million, consisting primarily of cash. The allocation of the purchase consideration resulted in net liabilities of approximately $21 million, purchased intangible assets of $70 million and goodwill of $100 million. The allocations of the purchase price for these acquisitions have been prepared on a preliminary basis and changes to those allocations may occur as additional information becomes available. The consolidated financial statements include the operating results of the acquired businesses since the respective dates of the acquisitions. Pro forma results of operations have not been presented because the effect of the acquisitions were not material to our financial results.
In May 2012, we completed the sale of Rent.com for proceeds of approximately $145 million, resulting in a gain of approximately $118 million. The results of operations from Rent.com are not material to any period presented.
GSI
We acquired GSI on June 17, 2011. In conjunction with the acquisition of GSI, we immediately divested 100 percent of GSI's licensed sports merchandise business and 70 percent of GSI's ShopRunner and RueLaLa businesses (together, the "divested businesses").
Pro forma financial information
The unaudited pro forma financial information in the table below summarizes the combined results of our operations and those of GSI for the period shown as though the acquisition of GSI and the sale of the divested businesses had occurred as of the beginning of fiscal year 2011. The unaudited pro forma financial information for the period presented includes the business combination accounting effects of the acquisition, including amortization charges from acquired intangible assets. The unaudited pro forma financial information presented below is for informational purposes only, is subject to a number of estimates, assumptions and other uncertainties, and is not indicative of the results of operations that would have been achieved if the acquisition and divestiture had taken place at January 1, 2011. The unaudited pro forma financial information is as follows (in millions, except per share amounts):
 
Nine Months Ended September 30,
 
2011
Total revenues
$
8,658

Net income
1,190

Basic earnings per share
$
0.92

Diluted earnings per share
$
0.91


8

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



Note 4 — Goodwill and Intangible Assets

Goodwill

The following table presents goodwill balances and adjustments to those balances for each of our reportable segments during the nine months ended September 30, 2012:
 
 
December 31,
2011
 
Goodwill
Acquired
 
Disposals
 
Adjustments
 
September 30,
2012
 
(In millions)
Reportable segments:
 
 
 
 
 
 
 
 
 
Marketplaces
$
4,537

 
$
100

 
$
(21
)
 
$
63

 
$
4,679

Payments
2,515

 

 

 
3

 
2,518

GSI
1,293

 

 

 
(18
)
 
1,275

Corporate and other
47

 

 

 

 
47

 
$
8,392

 
$
100

 
$
(21
)
 
$
48

 
$
8,519


Investments accounted for under the equity method of accounting are classified on our balance sheet as long-term investments. Such investment balances include any related goodwill. As of September 30, 2012 and December 31, 2011, the goodwill related to our equity method investments was approximately $27 million.

The adjustments to goodwill during the nine months ended September 30, 2012 were due primarily to changes in tax items and foreign currency translation.

Intangible Assets

The components of identifiable intangible assets are as follows: 
 
September 30, 2012
 
December 31, 2011
 
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
$
1,635

 
$
(928
)
 
$
707

 
5
 
$
1,633

 
$
(787
)
 
$
846

 
5
Trademarks and trade names
727

 
(532
)
 
195

 
5
 
730

 
(469
)
 
261

 
5
Developed technologies
523

 
(302
)
 
221

 
4
 
498

 
(249
)
 
249

 
3
All other
261

 
(150
)
 
111

 
4
 
182

 
(132
)
 
50

 
4
 
$
3,146

 
$
(1,912
)
 
$
1,234

 
 
 
$
3,043

 
$
(1,637
)
 
$
1,406

 
 

Amortization expense for intangible assets was $110 million and $105 million for the three months ended September 30, 2012 and 2011, respectively. Amortization expense for intangible assets was $329 million and $228 million for the nine months ended September 30, 2012 and 2011, respectively.


9

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

Note 5 — Segments

We have three reporting segments: Marketplaces, Payments and GSI. We allocate resources to and assess the performance of each reporting 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 operating segments.

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

results of operations of our X.commerce initiative, which supports our businesses;
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.
 
The following tables summarize the financial performance of our reporting segments and reconciliation to our consolidated operating results for the periods reflected below (data for the nine months ended September 30, 2011 include GSI since the date of acquisition) (1):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In millions)
Net Revenue
 
 
 
 
 
 
 
Marketplaces
 
 
 
 
 
 
 
Net transaction revenues
$
1,490

 
$
1,354

 
$
4,406

 
$
3,988

Marketing services and other revenues
316

 
299

 
942

 
882

 
1,806

 
1,653

 
5,348

 
4,870

Payments
 
 
 
 
 
 
 
Net transaction revenues
1,264

 
1,032

 
3,715

 
2,966

Marketing services and other revenues
102

 
74

 
318

 
206

 
1,367

 
1,107

 
4,033

 
3,173

GSI
 
 
 
 
 
 
 
Net transaction revenues
170

 
148

 
516

 
165

Marketing services and other revenues
57

 
54

 
168

 
62

 
226

 
202

 
684

 
227

Corporate and other
 
 
 
 
 
 
 
Marketing services and other revenues
11

 
3

 
27

 
3

 
 
 
 
 
 
 
 
Elimination of inter-segment net revenue (2)
(6
)
 

 
(13
)
 

Total consolidated net revenue
$
3,404

 
$
2,966

 
$
10,079

 
$
8,272

 
 
 
 
 
 
 
 
Operating income (loss)
 
 
 
 
 
 
 
Marketplaces
$
705

 
$
637

 
$
2,093

 
$
1,911

Payments
309

 
216

 
1,004

 
672

GSI
14

 
6

 
47

 
5

Corporate and other
(361
)
 
(322
)
 
(1,129
)
 
(968
)
Total operating income (loss)
$
667

 
$
537

 
$
2,015

 
$
1,620


(1) Certain amounts may not sum due to rounding.
(2) Represents revenue generated between our reportable segments.

10

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

Note 6 — Fair Value Measurement of Assets and Liabilities

The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011:

 Description
 
Balance as of
September 30, 2012
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1) 
 
Significant Other
Observable Inputs
(Level 2)
 
 
(In millions)
Assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
7,331

 
$
7,331

 
$

Short-term investments:
 
 
 
 
 
 
Restricted cash
 
16

 
16

 

Corporate debt securities
 
1,093

 

 
1,093

Government and agency securities
 
14

 

 
14

Time deposits
 
10

 

 
10

Equity instruments
 
671

 
671

 

Total short-term investments
 
1,804

 
687

 
1,117

Derivatives
 
69

 

 
69

Long-term investments:
 
 
 
 
 
 
Corporate debt securities
 
2,268

 

 
2,268

Government and agency securities
 
47

 

 
47

Total long-term investments
 
2,315

 

 
2,315

Total financial assets
 
$
11,519

 
$
8,018

 
$
3,501

 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Derivatives
 
$
75

 
$

 
$
75




11

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

Description
 
Balance as of
December 31, 2011
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1) 
 
Significant Other
Observable Inputs
(Level 2)
 
 
(In millions)
Assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
4,691

 
$
4,691

 
$

Short-term investments:
 
 
 
 
 
 
Restricted cash
 
20

 
20

 

Corporate debt securities
 
448

 

 
448

Government and agency securities
 
42

 

 
42

Time deposits
 
82

 

 
82

Equity instruments
 
646

 
646

 

Total short-term investments
 
1,238

 
666

 
572

Derivatives
 
112

 

 
112

Long-term investments:
 
 
 
 
 
 
Restricted cash
 
1

 
1

 

Corporate debt securities
 
2,186

 

 
2,186

Government and agency securities
 
71

 

 
71

Total long-term investments
 
2,258

 
1

 
2,257

Total financial assets
 
$
8,299

 
$
5,358

 
$
2,941

 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Derivatives
 
$
60

 
$

 
$
60

 

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 or identical instruments in less active markets. 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. 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 and money market funds.

In addition to the long-term investments noted above, we had cost and equity method investments of approximately $180 million and $190 million included in long-term investments on our condensed consolidated balance sheet at September 30, 2012 and our consolidated balance sheet at December 31, 2011, respectively. At September 30, 2012 and December 31, 2011, we also held $5 million of time deposits classified as held to maturity, which are recorded at amortized cost.

Other financial instruments, including accounts receivable, loans and interest receivable, funds receivable, customer accounts, commercial paper, accounts payable, funds payable and amounts due to customers, are carried at cost, which generally 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 7 — Derivative Instruments

Fair Value of Derivative Contracts

The fair value of our outstanding derivative instruments as of September 30, 2012 and December 31, 2011 was as follows:
 
 
Derivative Assets Reported in Other Current Assets 
 
Derivative Liabilities Reported in Other Current Liabilities
 
September 30,
2012
 
December 31,
2011
 
September 30,
2012
 
December 31,
2011
 
(In millions)
Foreign exchange contracts designated as cash flow hedges
$
20

 
$
75

 
$
38

 
$
3

Foreign exchange contracts not designated as hedging instruments
37

 
29

 
37

 
57

Other contracts not designated as hedging instruments
12

 
8

 

 

Total fair value of derivative instruments
$
69

 
$
112

 
$
75

 
$
60



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 September 30, 2012 and December 31, 2011, and the impact of designated derivative contracts on accumulated other comprehensive income for the nine months ended September 30, 2012:
 
 
December 31, 2011
 
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)
 
September 30, 2012
 
(In millions)
Foreign exchange contracts designated as cash flow hedges
$
72

 
$
(30
)
 
$
60

 
$
(18
)

The following table summarizes the activity of derivative contracts that qualify for hedge accounting as of September 30, 2011 and December 31, 2010, and the impact of designated derivative contracts on accumulated other comprehensive income for the nine months ended September 30, 2011:

 
December 31, 2010
 
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)
 
September 30, 2011
 
(In millions)
Foreign exchange contracts designated as cash flow hedges
$
14

 
$
29

 
$
7

 
$
36




13

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

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 September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In millions)
Foreign exchange contracts designated as cash flow hedges recognized in net revenues
$
16

 
$
(6
)
 
$
42

 
$
(23
)
Foreign exchange contracts designated as cash flow hedges recognized in operating expenses
6

 
(3
)
 
15

 
(8
)
Foreign exchange contracts not designated as hedging instruments recognized in interest and other, net
(2
)
 
15

 
(10
)
 
8

Other contracts not designated as hedging instruments recognized in interest and other, net

 

 
4

 

Total gain (loss) recognized from derivative contracts in the condensed consolidated statement of income
$
20

 
$
6

 
$
51

 
$
(23
)

Note 8 - Debt
The following table summarizes the carrying value of our outstanding debt:
 
Coupon
 
Carrying Value as of
Effective
 
Carrying Value as of
Effective
 
 Rate
 
September 30, 2012
 Interest Rate
 
December 31, 2011
 Interest Rate
 
(In millions, except percentages)
Long-Term Debt
 
 
 
 
 
 
 
Senior notes due 2013
0.875
%
 
$
400

1.078
%
 
$
400

1.078
%
Senior notes due 2015
1.625
%
 
598

1.805
%
 
598

1.805
%
Senior notes due 2015
0.700
%
 
250

0.820
%
 

N/A

Senior notes due 2017
1.350
%
 
999

1.456
%
 

N/A

Senior notes due 2020
3.250
%
 
498

3.389
%
 
497

3.389
%
Senior notes due 2022
2.600
%
 
999

2.678
%
 

N/A

Senior notes due 2042
4.000
%
 
743

4.114
%
 

N/A

Total senior notes
 
 
4,487

 
 
1,495

 
Notes payable
 
 
13

 
 
15

 
Capital lease obligations
 
 
6

 
 
15

 
Total long-term debt
 
 
$
4,506

 
 
$
1,525

 
 
 
 
 
 
 
 
 
Short-Term Debt
 
 
 
 
 
 
 
Commercial paper
 
 
$

 
 
$
550

 
Notes payable
 
 
2

 
 
2

 
Capital lease obligations
 
 
10

 
 
13

 
Total short-term debt
 
 
12

 
 
565

 
Total Debt
 
 
$
4,518

 
 
$
2,090

 
Senior Notes
In July 2012, we issued senior unsecured notes, or senior notes, in an aggregate principal amount of $3 billion, of which $250 million will mature in July 2015, $1 billion will mature in July 2017, $1 billion will mature in July 2022 and $750 million will mature in July 2042. Interest on these senior notes is payable semiannually on January 15 and July 15. Additionally, we have other senior notes outstanding in an aggregate principal amount of $1.5 billion, of which $400 million will mature in October 2013, $600 million will mature in October 2015 and $500 million will mature in October 2020. Interest on these senior notes is payable semiannually on April 15 and October 15.

14



The effective interest rates for our fixed-rate debt include the interest payable, the amortization of debt issuance costs and the amortization of any original issue discount on these senior notes. Interest expense associated with these senior notes, including amortization of debt issuance costs, during the three and nine months ended September 30, 2012 was approximately $21 million and $37 million, respectively. Interest expense associated with these senior notes, including amortization of debt issuance costs, during the three and nine months ended September 30, 2011 was approximately $8 million and $24 million, respectively. At September 30, 2012, the estimated fair value of all these senior notes included in long-term debt was approximately $4.6 billion based on market prices on less active markets (Level 2).

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.
Notes Payable
Notes payable consists primarily of a note that bears interest at 6.3% per annum and has a maturity date of December 2015.
Capital Lease Obligations
We acquired certain warehouse equipment and computer hardware and software under capital leases as part of our acquisition of GSI. The capital leases have maturity dates ranging from December 2012 to September 2014 and bear interest at rates ranging from 3% to 9% per annum. The present value of future minimum capital lease payments as of September 30, 2012 was as follows (in millions):
Gross capital lease obligations
$
17

Imputed interest
(1
)
Total present value of future minimum capital lease payments
$
16

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 September 30, 2012, there were no commercial paper notes outstanding.
Credit Agreement
As of September 30, 2012, 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 September 30, 2012, $1 billion of borrowing capacity was available for other purposes permitted by the credit agreement.   The credit agreement includes customary covenants that, among other things and subject to exceptions, limit our ability to create, assume or permit to exist liens on our property, assets and revenue (other than certain permitted liens) and require that we maintain a minimum consolidated interest coverage ratio, and also includes customary events of default.
As of September 30, 2012, we were in compliance with all covenants in our outstanding debt instruments.

Note 9 — Commitments and Contingencies

Commitments

 As of September 30, 2012, approximately $12 billion of unused credit was available to Bill Me Later accountholders. The individual lines of credit that make up this unused credit are subject to periodic review and termination by the chartered financial institution that is the issuer of Bill Me Later credit products based on, among other things, account usage and customer creditworthiness. Currently, 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 receivables related to the consumer loans extended by the chartered financial institution and, as a result of the purchase, bear the risk of loss in the event of loan defaults. Although the chartered financial institution continues to own each customer account, we own the related receivable, and Bill Me Later is responsible for all servicing functions related to the account.


15

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

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 nine months ended September 30, 2012. 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 9, we are unable to estimate the possible loss or range of losses that could potentially result from the application of such non-monetary remedies.

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 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 sites 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 site 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 will now be 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.


16

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

In May 2009, the U.K. High Court of Justice ruled in the case filed by L'Oréal SA, Lancôme Parfums et Beauté & Cie, Laboratoire Garnier & Cie and L'Oréal (UK) Ltd against eBay International AG, other eBay companies, and several eBay sellers (No. HC07CO1978) that eBay was not jointly liable with the seller co-defendants as a joint tortfeasor, and indicated that it would certify to the European Court of Justice ("ECJ") questions of liability for the use of L'Oréal trademarks, hosting liability, and the scope of a possible injunction against intermediaries. On July 12, 2011 the ECJ ruled on the questions certified by the U.K. High Court of Justice. It held that (a) brand names could be used by marketplaces as keywords for paid search advertising without violating a trademark owner's rights if it were clear to consumers that the goods reached via the key word link were not being offered by the trademark owner or its designees but instead by third parties, (b) that marketplaces could invoke the limitation from liability provided by Article 14 of the ecommerce directive if they did not take such an active role with respect to the listings in question that the limitation would not be available, but that even where the limitation was available, the marketplace could be liable if it had awareness (through notice or its own investigation) of the illegality of the listings, (c) that a marketplace would be liable in a specific jurisdiction only if the offers on the site at issue were targeting that jurisdiction, a question of fact, (d) that injunctions may be issued to a marketplace in connection with infringing third party content, but that such injunctions must be proportionate and not block legitimate trade and (e) that trademark rights can only be evoked by a rights owner as a result of a seller's commercial activity as opposed to private activity. The matter will now return to the U.K. High Court of Justice for further action in light of the ECJ opinion. The case was originally filed in July 2007. L'Oréal's complaint alleged that we were jointly liable for trademark infringement for the actions of the sellers who allegedly sold counterfeit goods, parallel imports and testers (not for resale products). Additionally, L'Oréal claimed that eBay's use of L'Oréal brands on its website, in its search engine and in sponsored links, and purchase of L'Oréal trademarks as keywords, constitute trademark infringement. The suit sought an injunction preventing future infringement, full disclosure of the identity of all past and present sellers of infringing L'Oréal goods, and a declaration that our Verified Rights Owner (VeRO) program as then operated was insufficient to prevent such infringement. The scope of a possible injunction claimed is to be specified after the trial upon remand from the ECJ.

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 four representative suits began in August 2009 in the Seoul District Court, and trial for a group of 23 other suits began in September 2009 in the Seoul 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 District Court ruled that IAC had met its obligations with respect to defending the site from intrusion and, accordingly, had no liability for the breach. This ruling has been appealed by approximately 34,000 plaintiffs to the Seoul High Court. In September 2012, a bench of the Seoul High Court announced its decision upholding the Seoul District Court's 2010 decision for three cases involving 55 plaintiffs. The remaining cases are currently being heard de novo, and a decision is expected in early 2013.

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 GSI 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 businesses 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 range and geographical scope of our services and become subject to laws in jurisdictions where the underlying laws with respect to the potential liability of online intermediaries like ourselves are either unclear or less favorable. We believe that additional lawsuits alleging that we have violated patent, copyright or trademark laws will be filed against us. Intellectual property claims, whether meritorious or not, are time consuming and costly to defend and resolve, could require expensive changes in our methods of doing business, or could require us to enter into costly royalty or licensing agreements on unfavorable terms.

From time to time, we are involved in other disputes or regulatory inquiries that arise in the ordinary course of business, including suits by our users (individually or as class actions) alleging, among other things, improper disclosure of our prices, rules or policies, that our prices, rules, policies or customer/user agreements violate applicable law, or that we have not acted in

17

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

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 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. GSI has provided in many of its major online commerce 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. 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 September 30, 2012, 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 two cash pooling arrangements with a financial institution for cash management purposes. These arrangements allow for cash withdrawals from this financial institution based upon our aggregate operating cash balances held in Europe within the same financial institution (“Aggregate Cash Deposits”) for more efficient cash management and investment purposes. 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 the financial institution as a basis for calculating our net interest expense or income. As of September 30, 2012, we had a total of $5 billion in cash withdrawals offsetting our $5 billion in Aggregate Cash Deposits held within the same financial institution under these cash pooling arrangements.
 
Based on differences in regulatory requirements and commercial law in the jurisdictions where PayPal operates, PayPal holds customer balances either as direct claims against PayPal or as an agent or custodian on behalf of PayPal's customers. Customer funds held by PayPal as an agent or custodian on behalf of our customers are not reflected in our consolidated balance sheet. These off-balance sheet funds totaled approximately $3 billion as of September 30, 2012 and December 31, 2011. These funds represent funds held on behalf of U.S. customers that are deposited in bank accounts insured by the Federal Deposit Insurance Corporation (subject to applicable limits).

PayPal's California regulator, the California Department of Financial Institutions, recently notified PayPal that PayPal's current practice of holding the funds underlying U.S. customer balances as an agent on behalf of its customers, rather than as owner of those funds, means that PayPal cannot treat those funds as liquid assets for purposes of the liquidity rules applicable to California money transmitter licensees. Based on changes to our U.S. PayPal user agreement effective November 1, 2012, PayPal will begin holding U.S. customer balances as direct claims against PayPal, rather than as an agent or custodian on behalf of such PayPal customers.  As a result, effective as of November 1, 2012, all U.S. PayPal customer balances, which are currently reported as off-balance sheet, will be prospectively reflected as assets in our consolidated balance sheet with an associated liability.


18



Note 10 — Stock Repurchase Programs

In September 2010, our Board of Directors authorized a stock repurchase program that provides for the repurchase of up to $2 billion of our common stock, with no expiration from the date of authorization. In June 2012, our Board authorized an additional stock repurchase program that provides for the repurchase of up to an additional $2 billion of our common stock, with no expiration from the date of authorization. These stock repurchase programs are intended to offset the impact of dilution from our equity compensation programs. The stock repurchase activity under our stock repurchase programs during the first nine months of 2012 is summarized as follows:

 
Shares Repurchased
 
Average Price per Share
 
Value of Shares Repurchased
 
Remaining Amount Authorized
 
(In millions, except per share amounts)
Balance at January 1, 2012
35

 
$
31.55

 
$
1,119

 
$
881

Authorization of additional plan in June 2012
 
 
 
 
 
 
2,000

Repurchase of common stock
17

 
37.72

 
641

 
(641
)
Balance at September 30, 2012
52

 
$
33.55

 
$
1,760

 
$
2,240


These repurchased shares were recorded as treasury stock and were accounted for under the cost method. No repurchased shares have been retired.

Note 11 — Stock-Based Plans

Stock Option Activity

The following table summarizes stock option activity for the nine-month period ended September 30, 2012:  
 
Options
 
(In millions)
Outstanding at January 1, 2012
40

Granted and assumed
2

Exercised
(13
)
Forfeited/expired/canceled
(2
)
Outstanding at September 30, 2012
27


The weighted average exercise price of stock options granted during the period was $36.52 per share and the related weighted average grant date fair value was $11.16 per share.

Restricted Stock Unit Activity

The following table summarizes restricted stock unit ("RSU") activity for the nine-month period ended September 30, 2012:  
 
Units 
 
(In millions)
Outstanding at January 1, 2012
40

Awarded and assumed
18

Vested
(13
)
Forfeited
(4
)
Outstanding at September 30, 2012
41


The weighted average grant date fair value for RSUs awarded during the period was $37.13 per share.


19

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

 Stock-Based Compensation Expense

The impact on our results of operations of recording stock-based compensation expense for the three and nine months ended September 30, 2012 and 2011 was as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In millions)
Cost of net revenues
$
13

 
$
14

 
$
41

 
$
43

Sales and marketing
35

 
32

 
99

 
100

Product development
34

 
26

 
101

 
91

General and administrative
40

 
36

 
119

 
112

Total stock-based compensation expense
$
122

 
$
108

 
$
360

 
$
346

Capitalized in product development
$
5

 
$
6

 
$
15

 
$
14


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 and nine months ended September 30, 2012 and 2011:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Risk-free interest rate
0.48
%
 
1.00
%
 
0.71
%
 
1.22
%
Expected life (in years)
3.8

 
3.7

 
4.0

 
3.8

Dividend yield
%
 
%
 
%
 
%
Expected volatility
40
%
 
39
%
 
38
%
 
38
%

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


Note 12 — Income Taxes

The following table reflects changes in unrecognized tax benefits for the nine-month period ended September 30, 2012:
 
 
(In millions)
Gross amounts of unrecognized tax benefits as of January 1, 2012
$
286

Increases related to prior period tax positions
44

Decreases related to prior period tax positions
(8
)
Increases related to current period tax positions
12

Settlements
(1
)
Gross amounts of unrecognized tax benefits as of September 30, 2012
$
333


As of September 30, 2012 and December 31, 2011, our liabilities for unrecognized tax benefits were included in deferred and other tax liabilities, net. The increase in liabilities for unrecognized tax benefits for the first nine months of 2012 relates primarily to the point at which certain foreign earnings became subject to U.S taxation.
 

20

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

We recognize interest and/or penalties related to uncertain tax positions in income tax expense. The amount of interest and penalties accrued as of September 30, 2012 and December 31, 2011 was approximately $113 million and $83 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 2009 tax years. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these examinations. The material jurisdictions where we are subject to potential examination by tax authorities for tax years after 2002 include, among others, the U.S. (Federal and California), France, Germany, Italy, Korea, Israel, Switzerland, Singapore and Canada.
 
Although the timing of the resolution and/or closure of audits is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. However, given the number of years remaining subject to examination and the number of matters being examined, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.
 
During the three and nine months ended September 30, 2012, we provided for U.S. income and foreign withholding taxes on approximately 15% of our non-U.S. subsidiaries' undistributed earnings. The remaining portion of our non-U.S. subsidiaries undistributed earnings is intended to be indefinitely reinvested in our international operations; upon distribution of those earnings in the form of dividends or otherwise, we would be subject to U.S. income taxes (subject to adjustments for foreign tax credits). It is not practicable to determine the income tax liability that might be incurred if the indefinitely reinvested earnings were to be distributed. On a regular basis, we develop cash forecasts to estimate our cash needs internationally and domestically. We consider projected cash needs for, among other things, investments in our existing businesses, potential acquisitions and capital transactions, including repurchases of our common stock and debt repayments. 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 the current period's foreign earnings.

Our effective tax rate differs from the U.S. federal statutory rate due primarily to lower tax rates associated with certain earnings from our operations outside the U.S.

Note 13 - Loans and Interest Receivable, Net
Loans and interest receivable represent purchased consumer receivables arising from loans made by a partner chartered financial institution to individual consumers in the U.S. to purchase goods and services through our Bill Me Later merchant network. During the three months ended September 30, 2012 and 2011, we purchased approximately $775 million and $566 million, respectively, in consumer receivables. During the nine months ended September 30, 2012 and 2011, we purchased approximately $2.1 billion and $1.5 billion, respectively, in consumer receivables. Loans and interest receivable are reported at their outstanding principal balances, net of 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 loan receivable owned by Bill Me Later. The weighted average consumer FICO score related to our loans and interest receivable balance outstanding at September 30, 2012 was 691 as compared to 692 at December 31, 2011. As of September 30, 2012 and December 31, 2011, approximately 56.6% and 59.3%, respectively, of our loans 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 September 30, 2012, approximately 89% of our loans and interest receivable portfolio was current.

21



The following table summarizes the activity in the allowance for loans and interest receivable:
 
Nine Months Ended September 30,
 
2012
 
2011
 
(In millions)
Balance as of January 1
$
59

 
$
42

Charge-offs
(94
)
 
(55
)
Recoveries
7

 
5

Provision
115

 
59

Balance as of September 30
$
87

 
$
51




22





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

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that involve expectations, plans or intentions (such as those relating to future business, future results of operations or financial condition, new or planned features or services, or management strategies). You can identify these forward-looking statements by words such as “may,” “will,” “would,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and other similar expressions. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those discussed in“Part II Item 1A: Risk Factors” of this Quarterly Report on Form 10-Q as well as in our 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 document, we mean eBay Inc., a Delaware corporation and its California predecessor, as well as all of our consolidated subsidiaries.


Overview

eBay is a global commerce platform and payments leader. We enable commerce through eBay, the world's largest online marketplace, which allows users to buy and sell in nearly every country on earth; through PayPal, which enables individuals and businesses to securely, easily and quickly send and receive online payments; and through GSI, which facilitates ecommerce, multichannel retailing and interactive marketing for global enterprises. X.commerce harnesses the developer community of Magento, an ecommerce platform, by providing technology solutions and eBay Inc. capabilities to merchants of all sizes, supporting eBay Inc.'s mission of enabling commerce. We also reach millions of people through specialized marketplaces such as StubHub, the world's largest ticket marketplace, and eBay classifieds sites, which together have a presence in more than 1,000 cities around the world.
 
We have three reportable business segments: Marketplaces, Payments and GSI. Our Marketplaces segment includes our eBay.com platform and its localized counterparts and our other online trading platforms, such as our online classifieds sites and StubHub. Our Payments segment is comprised of PayPal, Bill Me Later and Zong. Our GSI segment consists of GSI Commerce, Inc. ("GSI"), and was added upon the completion of our acquisition of GSI on June 17, 2011. The results of our GSI segment have been included in our consolidated results of operations from the acquisition date.

Net revenues for the three months ended September 30, 2012 increased 15% to $3.4 billion, compared to the same period of the prior year, driven primarily by increases in net revenues from each of our business segments. For the three months ended September 30, 2012, our operating margin increased to 20% from 18% in the same period of the prior year due primarily to an increase in operating margins in each of our business segments. For the three months ended September 30, 2012, our diluted earnings per share increased to $0.45, a $0.08 increase compared to the same period of the prior year, driven primarily by strong growth in net revenues, improvement in operating margin and a lower effective tax rate, partially offset by lower investment gains and higher interest expense. For the three months ended September 30, 2012, we generated cash flow from operations of approximately $1.2 billion, compared to $809 million for the same period of the prior year.

Our Marketplaces segment total net revenues increased $153 million, or 9%, for the three months ended September 30, 2012 compared to the same period of the prior year. The increase in total net revenues was driven primarily by a year-over-year increase in GMV (as defined below) excluding vehicles of 11%, which was attributable to strong growth across all regions, partially offset by the negative impact of foreign currency movements relative to the U.S. dollar. Marketplaces

23



segment operating margin increased 0.5 percentage points for the three months ended September 30, 2012 compared to the same period of the prior year due primarily to operating leverage, partially offset by investments in technology and marketing.
Our Payments segment total net revenues increased $260 million, or 23%, for the three months ended September 30, 2012 compared to the same period of the prior year. The increase in total net revenues was driven primarily by a year-over-year increase in net TPV (as defined below) of 20% and strong growth in Bill Me Later. Our Payments segment operating margin increased 3.1 percentage points for the three months ended September 30, 2012 compared to the same period of the prior year, due primarily to a higher take rate and lower transaction processing costs.
Our GSI segment total net revenues increased $24 million, or 12%, for the three months ended September 30, 2012 compared to the same period of the prior year. The increase in total net revenues was driven primarily by a year-over-year increase in GeC Merchandise Sales (as defined below) of 16%. For the three months ended September 30, 2012, GSI had a segment operating margin of 6.1%, a 3.3 percentage point increase compared to the same period of the prior year.
Some key operating metrics that members of our senior management regularly review to evaluate our financial results include net promoter score (NPS), market share, GMV, GMV excluding vehicles, number of sold items, net TPV, Merchant Services net TPV (as defined below), on eBay net TPV (as defined below), net number of payments, global ecommerce (GeC) Merchandise Sales, penetration rates, active registered accounts, same store sales, funding mix (the mix of payments vehicles, such as credit cards, debit cards, bank accounts and PayPal accounts, used by customers to make payments through our Payments networks), free cash flow (a non-GAAP measure, which we define as net cash provided by operating activities less purchases of property and equipment, net) and revenue excluding acquisitions and foreign currency impact (also a non-GAAP measure).

We define GMV as the total value of all successfully closed items between users on our eBay Marketplaces trading platforms (excluding eBay's classified websites and Shopping.com) during the applicable period, regardless of whether the buyer and seller actually consummated the transaction. We define net TPV as the total dollar volume of payments, net of payment reversals, successfully completed through our Payments networks, Bill Me Later accounts and Zong during the applicable period, excluding PayPal's payment gateway business. We define Merchant Services net TPV as the total dollar volume of payments, net of payment reversals, successfully completed through our Payments networks, Bill Me Later accounts and Zong during the applicable period, excluding PayPal's payment gateway business and payments for transactions on eBay Marketplaces and GSI platforms. We define on eBay net TPV as the total dollar volume of payments, net of payment reversals, successfully completed through our Payments networks during the applicable period for transactions on eBay Marketplaces or GSI platforms. We define GeC 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 the GSI ecommerce services platform during the applicable period, whether we record the full amount of such transaction as a product sale or a percentage of such transaction as a service fee.

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, final value fees (which are fees payable on transactions completed on our Marketplaces trading 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.

24



The following table sets forth the breakdown of net revenues by type and geography for the periods presented. (1)
 
Three Months Ended September 30,
 
Percent
 
Nine Months Ended September 30,
 
Percent
 
2012
 
2011
 
Change
 
2012
 
2011(2)
 
Change
 
(In millions, except percentage changes)
Net Revenues by Type:
 
 
 
 
 
 
 
 
 
 
 
Net transaction revenues
 
 
 
 
 
 
 
 
 
 
 
Marketplaces
$
1,490

 
$
1,354

 
10
%
 
$
4,406

 
$
3,988

 
10
%
Payments
1,264

 
1,032

 
22
%
 
3,715

 
2,966

 
25
%
GSI
170

 
148

 
14
%
 
516

 
165

 
N/A

Total net transaction revenues
2,925

 
2,535

 
15
%
 
8,637

 
7,119

 
21
%
Marketing services and other revenues
 
 
 
 
 

 
 
 
 
 
 
Marketplaces
316

 
299

 
5
%
 
942

 
882

 
7
%
Payments
102

 
74

 
37
%
 
318

 
206

 
54
%
GSI
57

 
54

 
4
%
 
168

 
62

 
N/A

Corporate and other
11

 
3

 
267
%
 
27

 
3

 
800
%
Total marketing services and other revenues
485

 
431

 
13
%
 
1,455

 
1,152

 
26
%
Elimination of inter-segment net revenue (3)
(6
)
 

 
N/A

 
(13
)
 

 
N/A

Total net revenues
$
3,404

 
$
2,966

 
15
%
 
$
10,079

 
$
8,272

 
22
%
Net Revenues by Geography:
 
 
 
 
 

 
 
 
 
 
 
U.S.
$
1,637

 
$
1,428

 
15
%
 
$
4,829

 
$
3,818

 
26
%
International
1,767

 
1,538

 
15
%
 
5,250

 
4,454

 
18
%
Total net revenues
$
3,404

 
$
2,966

 
15
%
 
$
10,079

 
$
8,272

 
22
%
 
(1)
Certain amounts may not sum due to rounding and may not recalculate using the rounded dollar amounts provided.
(2)
Includes data for GSI since June 17, 2011 the date the acquisition of GSI was completed. Accordingly, the percent changes in GSI's revenues between the nine-month periods ended September 30, 2011 and 2012 are not meaningful.
(3)
Represents 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 generate substantial net revenues internationally, 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 September 30, 2012, foreign currency movements relative to the U.S. dollar negatively impacted net revenues by approximately $80 million (net of a $16 million positive impact from hedging activities included in PayPal's net revenue) compared to the same period of the prior year. On a business segment basis, for the three months ended September 30, 2012, foreign currency movements relative to the U.S. dollar negatively impacted Marketplaces, Payments and GSI net revenues by approximately $66 million, $14 million and less than $1 million, respectively, in each case compared to the same period of the prior year (net of the impact of hedging activities noted above).

For the nine months ended September 30, 2012, foreign currency movements relative to the U.S. dollar negatively impacted net revenues by approximately $202 million (net of a $42 million positive impact from hedging activities included in PayPal's net revenue) compared to the same period of the prior year. On a business segment basis, for the nine months ended September 30, 2012, foreign currency movements relative to the U.S. dollar negatively impacted Marketplaces, Payments and GSI net revenues by approximately $170 million, $31 million and $1 million, respectively, in each case compared to the same period of the prior year (net of the impact of hedging activities noted above).

25




The following table sets forth, for the periods presented, certain key operating metrics that we believe are significant factors affecting our net revenues. (1)
 
Three Months Ended September 30,
 
Percent
 
Nine Months Ended September 30,
 
Percent
 
2012
 
2011
 
Change
 
2012
 
2011
 
Change
 
(In millions, except percentage changes)
Supplemental Operating Data:
 
 
 
 
 
 
 
 
 
 
 
Marketplaces Segment:  (2)
 
 
 
 
 
 
 
 
 
 
 
GMV excluding vehicles  (3)
$
16,281

 
$
14,666

 
11
 %
 
$
48,658

 
$
43,842

 
11
 %
GMV vehicles only  (4)
$
1,994

 
$
2,149

 
(7
)%
 
$
5,885

 
$
6,437

 
(9
)%
Total GMV  (5)
$
18,274

 
$
16,815

 
9
 %
 
$
54,543

 
$
50,279

 
8
 %
Payments Segment:
 
 
 
 
 
 
 
 
 
 
 
Merchant services net TPV (6)
$
23,704

 
$
19,314

 
23
 %
 
$
69,251

 
$
55,741

 
24
 %
On eBay net TPV (7)
$
11,455

 
$
9,968

 
15
 %
 
$
34,216

 
$
29,645

 
15
 %
Total net TPV  (8)
$
35,159

 
$
29,282

 
20
 %
 
$
103,467

 
$
85,386

 
21
 %
GSI Segment:
 
 
 
 
 
 
 
 
 
 
 
GeC Merchandise Sales (9)
$
698

 
$
601

 
16
 %
 
$
2,087

 
$
677

 
208
 %
 

(1)
Certain amounts may not sum due to rounding and may not recalculate using the rounded dollar amounts provided.
(2)
eBay's classifieds websites and Shopping.com are not included in these metrics.
(3)
Total value of all successfully closed items between users on eBay Marketplaces trading platforms during the period, regardless of whether the buyer and seller actually consummated the transaction, excluding vehicles GMV.
(4)
Total value of all successfully closed vehicle transactions between users on eBay Marketplaces trading platforms during the period, regardless of whether the buyer and seller actually consummated the transaction.
(5)
Total value of all successfully closed items between users on eBay Marketplaces trading platforms during the period, regardless of whether the buyer and seller actually consummated the transaction.
(6)
Total dollar volume of payments, net of payment reversals, successfully completed through our Payments networks, Bill Me Later accounts and Zong during the period, excluding PayPal's payment gateway business and payments for transactions on eBay Marketplaces and GSI platforms.
(7)
Total dollar volume of payments, net of payment reversals, successfully completed through our Payments networks during the period for transactions on eBay Marketplaces and GSI platforms.
(8)
Total dollar volume of payments, net of payment reversals, successfully completed through our Payments networks, Bill Me Later accounts and Zong during the period, excluding PayPal's payment gateway business.
(9)
Represents the retail value of all sales transactions, inclusive of freight charges and net of allowance for returns and discounts, which flow through the GSI ecommerce services platform during the period, whether we record the full amount of such transaction as a product sale or a percentage of such transaction as a service fee.


26



Seasonality

The following table sets forth, for the periods presented, our total net revenues and the sequential quarterly movements of these net revenues:
 
Quarter Ended
 
March 31
 
June 30
 
September 30
 
December 31
 
(In millions, except percentage changes)
2010
 

 
 

 
 

 
 

Net revenues
$
2,196

 
$
2,215

 
$
2,249

 
$
2,495

Percent change from prior quarter
(7
)%
 
1
%
 
2
%
 
11
%
2011(1)
 
 
 
 
 
 
 
Net revenues
$
2,546

 
$
2,760

 
$
2,966

 
$
3,380

Percent change from prior quarter
2
 %
 
8
%
 
7
%
 
14
%
2012
 
 
 
 
 
 
 
Net revenues
$
3,277

 
$
3,398

 
$
3,404

 

Percent change from prior quarter
(3
)%
 
4
%
 
%
 

 
(1)
Net revenues attributable to the GSI segment are reflected from June 17, 2011 (the date the acquisition of GSI was completed).

We expect transaction activity patterns on our websites to mirror general consumer buying patterns. Our GSI segment is highly seasonal. The fourth calendar quarter typically accounts for a disproportionate amount of GSI's total annual revenue because consumers increase their purchases and businesses increase their advertising to consumers during the fourth quarter holiday season.

Marketplaces Net Transaction Revenues

Marketplaces net transaction revenues increased $136 million, or 10%, while GMV excluding vehicles increased 11% during the third quarter of 2012 compared to the same period in the prior year. The increase in net transaction revenue and GMV excluding vehicles was due primarily to strong growth across all regions, partially offset by the negative impact of approximately $47 million in foreign currency movements relative to the U.S. dollar.

Marketplaces net transaction revenues increased $418 million, or 10%, while GMV excluding vehicles increased 11% during the first nine months of 2012 compared to the same period in the prior year. The increase in net transaction revenue and GMV excluding vehicles was due primarily to strong growth across all regions, partially offset by the negative impact of approximately $119 million in foreign currency movements relative to the U.S. dollar.

Marketplaces net transaction revenues earned internationally (i.e., outside the U.S.) totaled $814 million and $2.5 billion during the third quarter and first nine months of 2012, respectively, representing 55% and 56% of total Marketplaces net transaction revenues during those respective periods. Marketplaces net transaction revenues earned internationally totaled $760 million and $2.2 billion during the third quarter and first nine months of 2011, respectively, representing 56% of total Marketplaces net transaction revenues in each period.

Payments Net Transaction Revenues

Payments net transaction revenues increased $232 million, or 22%, during the third quarter of 2012 compared to the same period of the prior year, due primarily to net TPV growth of 20% and a higher take rate. The increase in net TPV was due primarily to growth in consumer and merchant adoption and use of PayPal both on and off eBay. Our Merchant Services net TPV increased 23% during the third quarter of 2012, compared to the same period of the prior year, and represented 67% of PayPal's net TPV in the third quarter of 2012, compared with 66% in the same period of the prior year. On eBay net TPV increased 15% during the third quarter of 2012, compared to the same period of the prior year and represented 33% of PayPal's net TPV in the third quarter of 2012, compared to 34% for the same period in the prior year. The increase in the take rate was driven primarily by foreign exchange income and gains from hedging activities.

Payments net transaction revenues increased $749 million, or 25%, during the first nine months of 2012 compared to the same period of the prior year, due primarily to net TPV growth of 21% and a higher take rate. The increases in net TPV and take rate were due to the same factors described above. Our Merchant Services net TPV increased 24% during the first nine

27



months of 2012, compared to the same period of the prior year and represented 67% of PayPal's net TPV in the first nine months of 2012, compared with 65% for the same period of the prior year. On eBay net TPV increased 15% during the first nine months of 2012, compared to the same period of the prior year and represented 33% of PayPal's net TPV for the first nine months of 2012, compared to 35% for the same period of the prior year.

Payments net transaction revenues earned internationally totaled $697 million and $2.0 billion during the third quarter and first nine months of 2012, respectively, representing 55% of total Payments net transaction revenues in each period. Payments net transaction revenues earned internationally totaled $545 million and $1.5 billion during the third quarter and first nine months of 2011, respectively, representing 53% and 52% of total Payments net transaction revenues during those respective periods. The increase in international net transaction revenues was due primarily to the growth of our Merchant Services business and increased penetration on eBay Marketplaces platforms internationally.

GSI Net Transaction Revenues

GSI net transaction revenues increased $22 million, or 14%, during the third quarter of 2012 compared to the same period of the prior year, due primarily to the 16% increase in GeC Merchandise Sales in the third quarter of 2012 compared to the same period in the prior year.

GSI net transaction revenues were $516 million during the first nine months of 2012, compared to $165 million for the same period of the prior year. Net transaction revenues attributable to the GSI segment for the first nine months of 2011 are reflected from June 17, 2011 (the date the acquisition of GSI was completed). Accordingly, comparisons with GSI's net transaction revenues in the corresponding 2011 period are not meaningful.

Marketing Services and Other Revenues

Marketing services and other revenues increased $54 million, or 13%, during the third quarter of 2012, compared to the same period of the prior year, and represented 14% of total net revenues for the third quarter of 2012. The increase in marketing services and other revenues was due primarily to growth in our Bill Me Later portfolio of receivables from loans, as well as increased revenue from our advertising business.

Marketing services and other revenues increased $303 million, or 26%, during the first nine months of 2012, compared to the same period of the prior year, and represented 14% of total net revenues for the first nine months of 2012. The increase in marketing services and other revenues was due primarily to revenues attributable to GSI and growth in our Bill Me Later portfolio of receivables from loans, as well as increased revenue from our classifieds and advertising businesses.



28



Summary of Cost of Net Revenues

The following table summarizes changes in cost of net revenues for the periods presented:
 
Three Months Ended September 30,
 
Change from
2011 to 2012
 
Nine Months Ended September 30,
 
Change from
2011 to 2012
 
2012
 
2011
 
in Dollars
 
in %
 
2012
 
2011(1)
 
in Dollars
 
in %
 
(In millions, except percentages)
Cost of net revenues:
 
 
 
 
 
 
 
 
 
Marketplaces
$
314

 
$
298

 
$
16

 
5
%