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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, 2010
 
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 14, 2010, there were 1,303,738,840 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
 
 
December 31,
2009
 
September 30,
2010
 
(In thousands, except par value amounts)
 
(Unaudited)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
3,999,818
 
 
$
4,180,907
 
Short-term investments
943,986
 
 
1,181,615
 
Accounts receivable, net
407,507
 
 
409,807
 
Loans and interest receivable, net
622,846
 
 
725,582
 
Funds receivable and customer accounts
2,157,945
 
 
2,492,856
 
Other current assets
328,106
 
 
463,761
 
Total current assets
8,460,208
 
 
9,454,528
 
Long-term investments
1,381,765
 
 
2,101,405
 
Property and equipment, net
1,314,328
 
 
1,466,047
 
Goodwill
6,143,086
 
 
6,121,481
 
Intangible assets, net
767,812
 
 
586,533
 
Other assets
341,121
 
 
218,068
 
Total assets
$
18,408,320
 
 
$
19,948,062
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
192,412
 
 
$
116,114
 
Funds payable and amounts due to customers
2,157,945
 
 
2,492,856
 
Accrued expenses and other current liabilities
981,784
 
 
1,057,281
 
Deferred revenue
99,305
 
 
94,108
 
Income taxes payable
210,522
 
 
48,550
 
Total current liabilities
3,641,968
 
 
3,808,909
 
Deferred and other tax liabilities, net
929,143
 
 
1,054,999
 
Other liabilities
49,561
 
 
50,202
 
Total liabilities
4,620,672
 
 
4,914,110
 
Commitments and contingencies (Note 7)
 
 
 
Stockholders' equity:
 
 
 
Common stock, $0.001 par value; 3,580,000 shares authorized; 1,297,799 and 1,303,517 shares outstanding
1,486
 
 
1,505
 
Additional paid-in capital
9,986,199
 
 
10,251,510
 
Treasury stock at cost, 188,251 and 201,382 shares
(5,377,258
)
 
(5,678,028
)
Retained earnings
8,359,117
 
 
9,600,891
 
Accumulated other comprehensive income
818,104
 
 
858,074
 
Total stockholders' equity
13,787,648
 
 
15,033,952
 
Total liabilities and stockholders' equity
$
18,408,320
 
 
$
19,948,062
 
 
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,
 
2009
 
2010
 
2009
 
2010
 
(In thousands, except per share amounts)
 
(Unaudited)
Net revenues
$
2,237,852
 
 
$
2,249,488
 
 
$
6,356,430
 
 
$
6,660,924
 
Cost of net revenues
643,908
 
 
640,268
 
 
1,809,067
 
 
1,862,194
 
Gross profit
1,593,944
 
 
1,609,220
 
 
4,547,363
 
 
4,798,730
 
Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
491,461
 
 
483,653
 
 
1,359,277
 
 
1,408,050
 
Product development
205,207
 
 
226,803
 
 
605,126
 
 
662,259
 
General and administrative
272,177
 
 
261,662
 
 
797,966
 
 
800,505
 
Provision for transaction and loan losses
96,682
 
 
97,964
 
 
270,597
 
 
296,025
 
Amortization of acquired intangible assets
72,803
 
 
45,957
 
 
200,066
 
 
148,104
 
Restructuring
12,673
 
 
3,005
 
 
36,937
 
 
20,437
 
Total operating expenses
1,151,003
 
 
1,119,044
 
 
3,269,969
 
 
3,335,380
 
Income from operations
442,941
 
 
490,176
 
 
1,277,394
 
 
1,463,350
 
Interest and other income (expense), net
(4,606
)
 
26,825
 
 
8,957
 
 
47,692
 
Income before income taxes
438,335
 
 
517,001
 
 
1,286,351
 
 
1,511,042
 
Provision for income taxes
(88,599
)
 
(85,072
)
 
(252,160
)
 
(269,268
)
Net income
$
349,736
 
 
$
431,929
 
 
$
1,034,191
 
 
$
1,241,774
 
Net income per share:
 
 
 
 
 
 
 
Basic
$
0.27
 
 
$
0.33
 
 
$
0.80
 
 
$
0.95
 
Diluted
$
0.27
 
 
$
0.33
 
 
$
0.80
 
 
$
0.94
 
Weighted average shares:
 
 
 
 
 
 
 
Basic
1,293,511
 
 
1,308,888
 
 
1,288,150
 
 
1,303,217
 
Diluted
1,311,274
 
 
1,328,415
 
 
1,299,279
 
 
1,324,509
 
 
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,
 
2009
 
2010
 
2009
 
2010
 
(In thousands)
 
(Unaudited)
Net income
$
349,736
 
 
$
431,929
 
 
$
1,034,191
 
 
$
1,241,774
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation
329,745
 
 
624,370
 
 
284,759
 
 
(67,041
)
Unrealized gains (losses) on investments, net
94,724
 
 
167,473
 
 
179,646
 
 
169,605
 
Unrealized gains (losses) on hedging activities
(359
)
 
(31,912
)
 
(46,458
)
 
3,957
 
Tax benefit (provision) on above items
(36,534
)
 
(62,990
)
 
(68,801
)
 
(66,551
)
Net change in accumulated other comprehensive income (loss)
387,576
 
 
696,941
 
 
349,146
 
 
39,970
 
Comprehensive income (loss)
$
737,312
 
 
$
1,128,870
 
 
$
1,383,337
 
 
$
1,281,744
 
 
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,
 
2009
 
2010
 
(In thousands)
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income
$
1,034,191
 
 
$
1,241,774
 
Adjustments:
 
 
 
Provision for transaction and loan losses
270,597
 
 
296,025
 
Depreciation and amortization
610,162
 
 
570,177
 
Stock-based compensation
302,769
 
 
287,832
 
Changes in assets and liabilities
(80,233
)
 
(504,053
)
Net cash provided by operating activities
2,137,486
 
 
1,891,755
 
Cash flows from investing activities:
 
 
 
Purchases of property and equipment, net
(394,156
)
 
(526,445
)
Changes in principal loans receivable, net
7,517
 
 
(138,244
)
Purchases of investments
(468,371
)
 
(2,022,642
)
Maturities and sales of investments
26,971
 
 
1,183,523
 
Acquisitions, net of cash acquired
(1,209,433
)
 
(7,000
)
Repayment of Skype note receivable
 
 
125,000
 
Other
5,889
 
 
(4,924
)
Net cash used in investing activities
(2,031,583
)
 
(1,390,732
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock
51,796
 
 
118,852
 
Purchases of common stock, net
 
 
(297,662
)
Excess tax benefits from stock-based compensation
585
 
 
26,649
 
Tax withholdings related to net share settlements of restricted stock awards and units
(26,361
)
 
(106,925
)
Net payments from borrowings under credit agreement
(800,000
)
 
 
Funds receivable and customer accounts
(397,057
)
 
(334,911
)
Funds payable and amounts due to customers
397,057
 
 
334,911
 
Other
(8,063
)
 
 
Net cash used in financing activities
(782,043
)
 
(259,086
)
Effect of exchange rate changes on cash and cash equivalents
45,071
 
 
(60,848
)
Net (decrease) increase in cash and cash equivalents
(631,069
)
 
181,089
 
Cash and cash equivalents at beginning of period
3,188,928
 
 
3,999,818
 
Cash and cash equivalents at end of period
$
2,557,859
 
 
$
4,180,907
 
Supplemental cash flow disclosures:
 
 
 
Cash paid for interest
$
5,921
 
 
$
 
Cash paid for income taxes
$
278,117
 
 
$
475,026
 
Non-cash investing and financing activities:
 
 
 
Common stock options assumed pursuant to acquisition
$
5,361
 
 
$
 
 
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's purpose is to pioneer new communities around the world, built on commerce, sustained by trust and inspired by opportunity. eBay brings together millions of buyers and sellers every day on a local, national and international basis through an array of websites. eBay provides online marketplaces for the sale of goods and services as well as other online commerce, or ecommerce, platforms and online payment services to a diverse community of individuals and businesses.
 
We currently have two business segments: Marketplaces and Payments. Our Marketplaces segment provides the infrastructure to enable global online commerce on a variety of platforms, including the eBay.com platform and our other online platforms, such as our online classifieds businesses, our secondary tickets marketplace (StubHub), our online shopping comparison website (Shopping.com), our apartment listing service platform (Rent.com), and our fixed price media marketplace (Half.com). Our Payments segment is comprised of our online payment solutions PayPal and Bill Me Later. Historically, we also had a Communications segment that consisted of Skype Technologies S.A. (“Skype”). On November 19, 2009, we completed the sale of Skype to an investor group for cash, a subordinated note and an equity stake of approximately 30 percent in the outstanding capital stock of the entity that purchased Skype (which is now named Skype). Accordingly, Skype's operating results are not consolidated in our 2010 results. However, Skype's results of operations are consolidated in our 2009 results through the date of sale. Our non-controlling interest in Skype is accounted for under the equity method of accounting. Our proportionate share of the net income (loss) of Skype is recognized on a one quarter lag as a component of interest and other income (expense), net in our condensed consolidated statement of income.
 
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 and the recoverability of goodwill and 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. and our majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. We have evaluated all subsequent events through the date the financial statements were issued.
 
The condensed consolidated financial statements include 100% of the assets and liabilities of our majority-owned subsidiaries and the ownership interests of minority investors are recorded as a noncontrolling interest. Investments in private entities where we hold 20% or more but less than a 50% ownership interest and exercise significant influence are accounted for using the equity method of accounting, and our share of the investees' results of operations is included in interest and other income (expense), net. Investments in private entities where we hold less than a 20% ownership interest and where we do not have the ability to significantly influence the operations of the investee are accounted for using the cost method of accounting, where our share of the investees' results of operations is not included in our condensed consolidated statement of income, except to the extent of earnings distributions actually received from the investee. Our investment balance in private entities is included in long-term investments.
 
Recent Accounting Pronouncements

6

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

 
In 2009, the Financial Accounting Standards Board (FASB) issued new accounting guidance that amends the evaluation criteria used to identify the primary beneficiary of a variable interest entity (VIE) and requires ongoing reassessment of whether an enterprise is the primary beneficiary of the VIE. The new guidance significantly changes the consolidation rules for VIEs including the consolidation of common structures, such as joint ventures, equity method investments and collaboration arrangements. We adopted this guidance as of January 1, 2010. The adoption of this guidance did not have a material impact on our consolidated financial statements.
 
In 2009, the FASB issued new accounting guidance related to the recognition of revenue from multiple element arrangements. The new guidance states that if vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, companies are required to develop a best estimate of the selling price for separate deliverables and allocate arrangement consideration using the relative selling price method. We adopted this guidance as of January 1, 2010 on a prospective basis. The adoption of this guidance did not have a material impact on our consolidated financial statements.
 
In July 2010, the FASB issued new disclosure guidance related to the credit quality of financing receivables and the allowance for credit losses. This guidance will require companies to provide more information about the credit quality of their financing receivables in the disclosures to financial statements including, but not limited to, significant purchases and sales of financing receivables, aging information and credit quality indicators. We will adopt this accounting standard upon its effective date for periods ending on or after December 15, 2010, and do not anticipate that this adoption will have a significant impact on our financial position or results of operations.
 
Note 2 — Net Income Per Share
 
Basic net income per share is computed by dividing the 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 the 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 earnings 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,
 
2009
 
2010
 
2009
 
2010
 
(In thousands, except per share amounts)
Numerator:
 
 
 
 
 
 
 
Net income
$
349,736
 
 
$
431,929
 
 
$
1,034,191
 
 
$
1,241,774
 
Denominator:
 
 
 
 
 
 
 
Weighted average common shares - basic
1,293,511
 
 
1,308,888
 
 
1,288,150
 
 
1,303,217
 
Dilutive effect of equity incentive plans
17,763
 
 
19,527
 
 
11,129
 
 
21,292
 
Weighted average common shares - diluted
1,311,274
 
 
1,328,415
 
 
1,299,279
 
 
1,324,509
 
Net income per share:
 
 
 
 
 
 
 
Basic
$
0.27
 
 
$
0.33
 
 
$
0.80
 
 
$
0.95
 
Diluted
$
0.27
 
 
$
0.33
 
 
$
0.80
 
 
$
0.94
 
Common stock equivalents excluded from income per diluted share because their effect would have been anti-dilutive
81,225
 
 
33,486
 
 
105,255
 
 
33,092
 
 

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 during the nine months ended September 30, 2010:
 
 
December 31,
2009
 
Goodwill
Acquired
 
Adjustments
 
September 30,
2010
 
(In thousands)
Reportable segments:
 
 
 
 
 
 
 
Marketplaces
$
4,013,906
 
 
$
4,200
 
 
$
(19,924
)
 
$
3,998,182
 
Payments
2,156,541
 
 
 
 
(5,882
)
 
2,150,659
 
 
$
6,170,447
 
 
$
4,200
 
 
$
(25,806
)
 
$
6,148,841
 
 
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 December 31, 2009 and September 30, 2010, the goodwill related to our equity investments, included above, was approximately $27.4 million.
 
The adjustments to goodwill during the nine months ended September 30, 2010 were due primarily to foreign currency translation.
 
Goodwill is subject to at least an annual assessment for impairment, applying a fair-value based test. We conducted our annual impairment test as of August 31, 2010 and determined there was no impairment. There were no events or circumstances from that date through September 30, 2010 indicating that a further assessment was necessary.
 
Intangible Assets
 
The components of identifiable intangible assets are as follows:
 
 
December 31, 2009
 
September 30, 2010
 
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 thousands, except years)
Intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer lists and user base
$
819,653
 
 
$
(524,667
)
 
$
294,986
 
 
6
 
$
825,317
 
 
$
(604,813
)
 
$
220,504
 
 
6
Trademarks and trade names
634,387
 
 
(300,046
)
 
334,341
 
 
5
 
634,144
 
 
(363,750
)
 
270,394
 
 
5
Developed technologies
225,614
 
 
(152,982
)
 
72,632
 
 
3
 
228,096
 
 
(184,276
)
 
43,820
 
 
3
All other
149,315
 
 
(83,462
)
 
65,853
 
 
4
 
156,985
 
 
(105,170
)
 
51,815
 
 
4
 
$
1,828,969
 
 
$
(1,061,157
)
 
$
767,812
 
 
 
 
$
1,844,542
 
 
$
(1,258,009
)
 
$
586,533
 
 
 
 
Aggregate amortization expense for intangible assets was $92.2 million and $61.4 million for the three months ended September 30, 2009 and 2010, respectively. Aggregate amortization expense for intangible assets was $253.6 million and $197.6 million for the nine months ended September 30, 2009 and 2010, respectively.
 

8

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

Note 4 — Segments
 
Operating segments are based upon our internal organization structure, the manner in which our operations are managed, the criteria used by our Chief Operating Decision Maker to evaluate segment performance and the availability of separate financial information. We have two operating segments: Marketplaces and Payments. Historically, we had a Communications segment that consisted of Skype. On November 19, 2009, we completed the sale of Skype to an investor group for cash, a subordinated note and an equity stake of approximately 30 percent in the outstanding capital stock of the entity that purchased Skype (which is now named Skype). Accordingly, Skype's operating results are not consolidated in our 2010 results. However, Skype's results of operations are consolidated in our 2009 results through the date of sale.
 
The following tables summarize the financial performance of our operating segments:
 
 
Three Months Ended September 30, 2009
 
Marketplaces
 
Payments
 
Communications
 
Consolidated
 
(In thousands)
Net revenues from external customers
$
1,364,583
 
 
$
688,063
 
 
$
185,206
 
 
$
2,237,852
 
Direct costs
790,964
 
 
586,265
 
 
140,372
 
 
1,517,601
 
Direct contribution
$
573,619
 
 
$
101,798
 
 
$
44,834
 
 
720,251
 
Operating expenses and indirect costs of net revenues
 
 
 
 
 
 
277,310
 
Income from operations
 
 
 
 
 
 
442,941
 
Interest and other income (expense), net
 
 
 
 
 
 
(4,606
)
Income before income taxes
 
 
 
 
 
 
$
438,335
 
 
 
Three Months Ended September 30, 2010
 
Marketplaces
 
Payments
 
Consolidated
 
(In thousands)
Net revenues from external customers
$
1,411,323
 
 
$
838,165
 
 
$
2,249,488
 
Direct costs
850,631
 
 
676,497
 
 
1,527,128
 
Direct contribution
$
560,692
 
 
$
161,668
 
 
722,360
 
Operating expenses and indirect costs of net revenues
 
 
 
 
232,184
 
Income from operations
 
 
 
 
490,176
 
Interest and other income (expense), net
 
 
 
 
26,825
 
Income before income taxes
 
 
 
 
$
517,001
 
 
 
Nine Months Ended September 30, 2009
 
Marketplaces
 
Payments
 
Communications
 
Consolidated
 
(In thousands)
Net revenues from external customers
$
3,847,731
 
 
$
2,000,322
 
 
$
508,377
 
 
$
6,356,430
 
Direct costs
2,186,923
 
 
1,678,788
 
 
387,152
 
 
4,252,863
 
Direct contribution
$
1,660,808
 
 
$
321,534
 
 
$
121,225
 
 
2,103,567
 
Operating expenses and indirect costs of net revenues
 
 
 
 
 
 
826,173
 
Income from operations
 
 
 
 
 
 
1,277,394
 
Interest and other income (expense), net
 
 
 
 
 
 
8,957
 
Income before income taxes
 
 
 
 
 
 
$
1,286,351
 
 

9

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

 
Nine Months Ended September 30, 2010
 
Marketplaces
 
Payments
 
Consolidated
 
(In thousands)
Net revenues from external customers
$
4,196,452
 
 
$
2,464,472
 
 
$
6,660,924
 
Direct costs
2,489,375
 
 
1,957,701
 
 
4,447,076
 
Direct contribution
$
1,707,077
 
 
$
506,771
 
 
2,213,848
 
Operating expenses and indirect costs of net revenues
 
 
 
 
750,498
 
Income from operations
 
 
 
 
1,463,350
 
Interest and other income (expense), net
 
 
 
 
47,692
 
Income before income taxes
 
 
 
 
$
1,511,042
 
 
Direct contribution consists of net revenues from external customers less direct costs. Direct costs include specific costs of net revenues, sales and marketing expenses, and general and administrative expenses, such as advertising and marketing programs, customer support expenses, bank charges, internal interest charges related to Bill Me Later, site operations expenses, product development expenses, billing operations, certain technology and facilities expenses, transaction expenses and provision for transaction and loan losses. Expenses such as our corporate center costs (consisting of certain costs such as corporate management, human resources, finance and legal), amortization of intangible assets, restructuring charges and stock-based compensation expense are excluded from direct costs as they are not included in the measurement of segment performance.
 

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 December 31, 2009 and September 30, 2010:
 
Description
 
Balance as of
December 31, 2009
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1) 
 
Significant Other
Observable Inputs
(Level 2)
 
 
(In thousands)
Assets:
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
Bank deposits and money market funds
 
$
3,999,818
 
 
$
3,999,818
 
 
$
 
Total cash and cash equivalents
 
3,999,818
 
 
3,999,818
 
 
 
Short-term investments:
 
 
 
 
 
 
Restricted cash
 
29,123
 
 
29,123
 
 
 
Corporate debt securities
 
73,140
 
 
 
 
73,140
 
Government and agency securities
 
109,807
 
 
 
 
109,807
 
Time deposits
 
310,418
 
 
 
 
310,418
 
Equity instruments
 
421,498
 
 
421,498
 
 
 
Total short-term investments
 
943,986
 
 
450,621
 
 
493,365
 
Derivatives
 
362
 
 
 
 
362
 
Long-term investments:
 
 
 
 
 
 
Restricted cash
 
985
 
 
985
 
 
 
Corporate debt securities
 
457,183
 
 
 
 
457,183
 
Government and agency securities
 
249,360
 
 
 
 
249,360
 
Time deposits and other
 
1,583
 
 
 
 
1,583
 
Total long-term investments
 
709,111
 
 
985
 
 
708,126
 
Total financial assets
 
$
5,653,277
 
 
$
4,451,424
 
 
$
1,201,853
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Derivatives
 
$
5,710
 
 
$
 
 
$
5,710
 
 

11

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

 Description
 
Balance as of
September 30, 2010
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1) 
 
Significant Other
Observable Inputs
(Level 2)
 
 
(In thousands)
Assets:
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
Bank deposits and money market funds
 
$
4,180,907
 
 
$
4,180,907
 
 
$
 
Total cash and cash equivalents
 
4,180,907
 
 
4,180,907
 
 
 
Short-term investments:
 
 
 
 
 
 
Restricted cash
 
31,176
 
 
31,176
 
 
 
Corporate debt securities
 
325,867
 
 
 
 
325,867
 
Government and agency securities
 
107,097
 
 
 
 
107,097
 
Time deposits
 
130,936
 
 
 
 
130,936
 
Equity instruments
 
586,539
 
 
586,539
 
 
 
Total short-term investments
 
1,181,615
 
 
617,715
 
 
563,900
 
Derivatives
 
23,445
 
 
 
 
23,445
 
Long-term investments:
 
 
 
 
 
 
Restricted cash
 
1,932
 
 
1,932
 
 
 
Corporate debt securities
 
1,362,299
 
 
 
 
1,362,299
 
Government and agency securities
 
2,358
 
 
 
 
2,358
 
Time deposits and other
 
4,520
 
 
 
 
4,520
 
Total long-term investments
 
1,371,109
 
 
1,932
 
 
1,369,177
 
Total financial assets
 
$
6,757,076
 
 
$
4,800,554
 
 
$
1,956,522
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Derivatives
 
$
11,629
 
 
$
 
 
$
11,629
 
 
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. As of December 31, 2009 and September 30, 2010, we did not have any assets or liabilities without observable market values that would require a high level of judgment to determine fair value (level 3). 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 short-term in nature, typically 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 mainly comprised of bank deposits and money market funds.
 
In addition to the long-term investments noted above, we had approximately $672.7 million and $730.3 million of cost and equity method investments included in long-term investments on our condensed consolidated balance sheet at December 31, 2009 and September 30, 2010, respectively.
 
In Europe, we have a cash pooling arrangement with a financial institution for cash management purposes. This arrangement allows 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”). This arrangement also allows us to withdraw amounts exceeding the Aggregate Cash Deposits up to an agreed-upon limit. The net balance of the withdrawals and the Aggregate Cash Deposits are used by the financial institution as a basis for calculating our net interest expense or income. As of September 30, 2010, we had a total of $3.4 billion in cash withdrawals offsetting our $3.5 billion in Aggregate Cash Deposits held within the same financial institution under this cash pooling arrangement.
 
Other financial instruments, including accounts receivable, loans and interest receivable, funds receivable, customer

12

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

accounts, accounts payable, 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. Funds receivable and customer account balances include receivables from promotional credit products offered to certain customers that have payment terms of up to 10 months and that represent less than 10% of the total balance.
 
Note 6 — Derivative Instruments
 
We have significant international revenues and costs denominated in foreign currencies, subjecting us to foreign currency risk. We purchase derivative financial instruments in the form of option and forward foreign currency contracts, generally with maturities of 12 months or less, to manage our foreign currency exposure. 
 
All derivative financial instruments are recorded on the balance sheet at fair value. Foreign exchange contracts that qualify for hedge accounting are designated as cash flow hedges and reduce the volatility of cash flows primarily from forecasted revenue transactions denominated in certain foreign currencies. Changes in the fair value of these cash flow hedges are recorded in accumulated other comprehensive income (loss) and are reclassified to revenue when the underlying forecasted revenue transaction occurs. We also purchase foreign currency contracts that do not qualify for hedge accounting, which we refer to as non-designated derivatives, to reduce volatility from changes to the value of our foreign currency denominated assets, liabilities and earnings. Changes in the fair value of outstanding non-designated derivatives are recorded in interest and other income (expense), net, in the condensed consolidated statement of income. Our derivatives program is not designed or operated for trading or speculative purposes.
 
Our derivative instruments expose us to credit risk to the extent that our counterparties may be unable to meet the terms of the agreements. We seek to mitigate this risk by limiting our counterparties to major financial institutions and by spreading the risk across several major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored on an ongoing basis.
 
Fair Value of Derivative Contracts
 
The fair value of our outstanding derivative instruments was as follows:
 
 
Derivative Assets Reported in Other Current Assets 
 
Derivative Liabilities Reported in Other Current Liabilities
 
December 31,
2009
 
September 30,
2010
 
December 31,
2009
 
September 30,
2010
 
(In thousands)
Foreign exchange contracts designated as cash flow hedges
$
27
 
 
$
12,481
 
 
$
4,848
 
 
$
6,098
 
Foreign exchange contracts not designated as hedging instruments
335
 
 
10,964
 
 
862
 
 
5,531
 
Total fair value of derivative instruments
$
362
 
 
$
23,445
 
 
$
5,710
 
 
$
11,629
 
 
Effect of Derivative Contracts on Accumulated Other Comprehensive Income
 
The following table represents the activity of derivative contracts that qualify for hedge accounting as of December 31, 2009 and September 30, 2010, and the impact of designated derivative contracts on accumulated other comprehensive income for the nine months ended September 30, 2010:
 

13

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

 
December 31, 2009
 
Amount of gain (loss)
recognized in other
comprehensive income
(effective portion) 
 
Amount of gain
reclassified from
accumulated other
comprehensive income
to income
(effective portion)
 
September 30, 2010
 
(In thousands)
Foreign exchange contracts designated as cash flow hedges
$
(4,821
)
 
$
(10,268
)
 
$
14,225
 
 
$
(864
)
 
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,
 
2009
 
2010
 
2009
 
2010
 
(In thousands)
Foreign exchange contracts designated as cash flow hedges recognized in net revenues
$
(1,784
)
 
$
6,362
 
 
$
20,248
 
 
$
14,225
 
Foreign exchange contracts not designated as hedging instruments recognized in interest and other income (expense), net
2,104
 
 
(19,795
)
 
10,570
 
 
(9,056
)
Total gain (loss) recognized from derivative contracts in the condensed consolidated statement of income
$
320
 
 
$
(13,433
)
 
$
30,818
 
 
$
5,169
 
 
Note 7 — Commitments and Contingencies
 
Credit Agreement
 
As of September 30, 2010, there were no amounts outstanding under our $1.8 billion unsecured revolving credit facility and we were in compliance with the financial covenants in the credit agreement.
 
Commitments
 
 Effective September 1, 2010, WebBank replaced CIT Bank as the issuer of Bill Me Later credit products. As of September 30, 2010, $6.1 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 WebBank based on, among other things, account usage and customer creditworthiness. We purchase receivables on Bill Me Later customer accounts generated by WebBank.
 
Litigation and Other Legal 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

14

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

decision, and in September 2010, the Paris Court of Appeal reduced the damages award to EUR 5.7 million and modified the injunction. 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 could 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. 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 luxury 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 or 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.
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 questions of liability for the use of L'Oréal trademarks, hosting liability, and the scope of a possible injunction against intermediaries. The U.K. High Court of Justice certified a number of issues to the European Court of Justice and a hearing before the European Court of Justice on the certified issues took place in June 2010. A decision is not expected before 2011. 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. Other damages claimed were to be specified after the liability stage of the proceedings.
In April 2010, the U.S. Second Circuit Court of Appeals upheld the decision of the trial court that eBay was not liable to Tiffany & Co. for direct or contributory trademark infringement and that generalized knowledge of alleged counterfeiting was not sufficient to cause intermediaries to be liable where there was no “willful blindness” by the intermediary to the problem. Tiffany has appealed to the U.S. Supreme Court for certiorari with respect to this decision. The Court remanded to the District Court the issue of false advertising, and in September 2010, the District Court entered judgment in favor of eBay on the false advertising claim. In June 2004, Tiffany (NJ) Inc. and Tiffany & Co. had filed a lawsuit in the U.S. District Court for the Southern District of New York (No. 04 Civ. 4607 (NRB)) claiming that eBay was liable for contributory trademark infringement, false advertising, unfair competition and various related claims based on the listing of alleged counterfeit Tiffany silver jewelry on the eBay website by third parties. The suit sought an injunction, lost profits, punitive damages and attorneys' fees. A bench trial took place in November 2007 and in a ruling in July 2008, the trial court rejected Tiffany's claims, finding that the burden of enforcing trademarks is on the trademark owner and that eBay's anti-counterfeiting efforts were sufficient under the law.
In June 2006, Net2Phone, Inc. filed a lawsuit in the U.S. District Court for the District of New Jersey (No. 06-2469) alleging that eBay Inc., Skype Technologies S.A., and Skype Inc. infringed five patents owned by Net2Phone relating to point-to-point Internet protocol. The suit sought an injunction against continuing infringement, unspecified damages, including treble damages for willful infringement, and interest, costs, and fees. In August 2010, Skype and eBay entered into a settlement agreement with Net2Phone, Inc. and related parties in settlement of all outstanding disputes among the parties.
In March 2007, a plaintiff filed a purported antitrust class action lawsuit against eBay in the Western District of Texas alleging that eBay and its wholly owned subsidiary PayPal “monopolized” markets through various anticompetitive acts and tying arrangements. The plaintiff alleged claims under sections 1 and 2 of the Sherman Act, as well as related state law claims. In April 2007, the plaintiff re-filed the complaint in the U.S. District Court for the Northern District of California (No. 07-CV-01882-RS), and dismissed the Texas action. The complaint seeks treble damages and an injunction. In 2007, the case was consolidated with other similar lawsuits (No. 07-CV-01882JF). In June 2007, we filed a motion to dismiss the complaint. In March 2008, the court granted the motion to dismiss the tying claims with leave to amend and denied the motion with respect to the monopolization claims. Plaintiffs subsequently decided not to refile the tying claims. The plaintiffs' motion on class certification and our motion for summary judgment were heard by the court in December 2009. In March 2010, the District Court granted our motion for summary judgment, denied plaintiffs' motion for class certification as moot, and entered judgment in our favor. Plaintiffs have appealed the District Court's decision, and the matter is fully briefed before the Ninth Circuit Court

15

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

of Appeals. We intend to vigorously oppose plaintiffs' appeal.
In October 2007, PartsRiver filed a lawsuit in the Eastern District of Texas (No. 2-07CV-440-DF) alleging that eBay, Microsoft, Yahoo!, Shopzilla, PriceGrabber and PriceRunner infringed its patent relating to search methods. The suit seeks an injunction against continuing infringement, unspecified damages, and interest, costs, and fees. The U.S. District Court for the Eastern District of Texas has granted defendants' motion to transfer venue and moved the case to the U.S. District Court for the Northern District of California. In August 2009, the District Court granted our motion for summary judgment and ruled that the PartsRiver patent was invalid based on a finding that it was “on sale” more than a year before the filing date of the patent. PartsRiver has appealed the District Court's decision. We intend to vigorously oppose PartsRiver's appeal.
eBay's Korean subsidiary, IAC, 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 147,000 users have sued IAC over this breach in several lawsuits in Korean courts and more may do so in the future. 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 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 to the Seoul High Court, where it is currently being heard de novo.
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 additional patent disputes, and expect that we will increasingly be subject to patent infringement claims as our services expand in scope and complexity. In particular, we expect that we may face additional patent infringement claims involving various aspects of our Marketplaces and Payments businesses. 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 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 resolve, could require expensive changes in our methods of doing business, or could require us to enter into costly royalty or licensing agreements.
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 such prices, rules or policies violate applicable law, or that we have not acted in conformity with such prices, rules or policies. The number and significance of these disputes and inquiries are increasing. Any claims or regulatory actions against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, and result in the diversion of significant operational resources.
 

16

 

Note 8 — Stock Repurchase Programs
 
In January 2008, our Board authorized a stock repurchase program that provides for the repurchase of up to $2.0 billion of our common stock with no expiration from the date of authorization. In September 2010, our Board authorized an additional stock repurchase program that provides for the repurchase of up to an additional $2.0 billion of our common stock, with no expiration from the date of authorization, for the purpose of offsetting the impact of dilution from our equity compensation programs. The stock repurchase activity under these stock repurchase programs during the first nine months of 2010 is summarized as follows (in thousands, except per share amounts):
 
 
Shares Repurchased
 
Average Price per Share
 
Value of Shares Repurchased
 
Remaining Amount Authorized
Balance at January 1, 2010
49,805
 
 
$
26.98
 
 
$
1,343,500
 
 
$
656,500
 
Authorization of additional plan in September 2010
 
 
 
 
 
 
2,000,000
 
Repurchase of common stock
13,093
 
 
22.89
 
 
299,661
 
 
(299,661
)
Balance at September 30, 2010
62,898
 
 
$
26.12
 
 
$
1,643,161
 
 
$
2,356,839
 
 
All of the shares of common stock repurchased by us during the first nine months of 2010 were repurchased during the three months ended September 30, 2010. These repurchased shares were recorded as treasury stock and were accounted for under the cost method. No repurchased shares have been retired.
 
From time to time, we enter into structured equity hedging transactions. We typically enter into and settle these transactions within the same fiscal quarter. The structured hedging transactions are accounted for as equity instruments. According to the terms of these transactions, if the market price of our common stock exceeds a pre-determined price on the maturity date, we have the option to settle these transactions in cash or by repurchasing shares of our common stock. If the market price of our common stock is below that pre-determined price on the maturity date, we are required to settle these transactions by repurchasing shares of our common stock. The number of shares repurchased through the use of structured equity hedging transactions would be included in the table above. The structured equity hedging transactions that settled in cash during the nine months ended September 30, 2010 resulted in aggregate premiums of approximately $2.3 million, which were recorded as additional paid-in capital.
 

17

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

Note 9 — Stock-Based Plans
 
Stock Option Activity
 
The following table summarizes stock option activity for the nine-month period ended September 30, 2010:
 
 
Shares
 
(In thousands)
Outstanding at January 1, 2010
54,048
 
Granted
7,522
 
Exercised
(7,037
)
Forfeited/expired/cancelled
(5,717
)
Outstanding at September 30, 2010
48,816
 
 
The weighted average exercise price of stock options granted during the period was $23.82 per share and the related weighted average grant date fair value was $6.68 per share.
 
Restricted Stock Unit Activity
 
The following table summarizes restricted stock unit ("RSU") activity for the nine-month period ended September 30, 2010:
 
 
Units 
 
(In thousands)
Outstanding at January 1, 2010
42,241
 
Awarded
14,316
 
Vested
(13,645
)
Forfeited
(3,621
)
Outstanding at September 30, 2010
39,291
 
 
The weighted average grant date fair value for RSUs awarded during the period was $23.74 per share.
 
Nonvested Share Activity
 
There was no material activity related to our nonvested shares for the nine-month period ended September 30, 2010.
 
 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, 2009 and 2010 was as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2009
 
2010
 
2009
 
2010
 
(In thousands)
Cost of net revenues
$
11,134
 
 
$
11,833
 
 
$
37,614
 
 
$
36,116
 
Sales and marketing
28,265
 
 
26,350
 
 
91,154
 
 
80,030
 
Product development
22,795
 
 
24,389
 
 
78,546
 
 
75,544
 
General and administrative
30,296
 
 
31,208
 
 
95,455
 
 
96,142
 
Total stock-based compensation expense
$
92,490
 
 
$
93,780
 
 
$
302,769
 
 
$
287,832
 
Capitalized in product development
$
2,644
 
 
$
2,948
 
 
$
6,961
 
 
$
8,027
 
 
 

18

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

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, 2009 and 2010:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2009
 
2010
 
2009
 
2010
Risk-free interest rates
2.0
%
 
0.98
%
 
1.6
%
 
1.4
%
Expected lives (in years)
3.7
 
 
3.1
 
 
3.8
 
 
3.4
 
Dividend yield
%
 
%
 
%
 
%
Expected volatility
43
%
 
40
%
 
47
%
 
37
%
 
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 10 — Restructuring
 
2009 Customer Service Consolidation
 
In 2009, we began the consolidation of certain customer service facilities in North America and Europe to streamline our operations and deliver better and more efficient customer support to our users. The consolidation has impacted approximately 1,000 employees. In connection with this consolidation, we estimate that we will incur aggregate costs of $45.0 million to $50.0 million. During the third quarter and first nine months of 2010, we incurred restructuring charges of $3.0 million and $20.4 million, respectively. Since the inception of the plan through September 30, 2010, we have incurred $47.4 million in restructuring related charges. We expect to complete these activities by the end of 2010.
 
The following table summarizes by segment the restructuring and other related costs recognized during the three months ended September 30, 2009 and 2010:
 
 
Three Months Ended September 30, 2009
 
Three Months Ended September 30, 2010
 
Employee
Severance and
Benefits
 
Facilities
 
Total
 
Employee
Severance and
Benefits
 
Facilities
 
Total
 
(In thousands)
Marketplaces
$
6,617
 
 
$
6,062
 
 
$
12,679
 
 
$
2,977
 
 
$
28
 
 
$
3,005
 
Payments
(3
)
 
(3
)
 
(6
)
 
 
 
 
 
 
 
$
6,614
 
 
$
6,059
 
 
$
12,673
 
 
$
2,977
 
 
$
28
 
 
$
3,005
 
 
The following table summarizes by segment the restructuring and other related costs recognized during the nine months ended September 30, 2009 and 2010:
 
 
Nine Months Ended September 30, 2009
 
Nine Months Ended September 30, 2010
 
Employee
Severance and
Benefits
 
Facilities
 
Total
 
Employee
Severance and
Benefits
 
Facilities
 
Total
 
(In thousands)
Marketplaces
$
28,901
 
 
$
7,836
 
 
$
36,737
 
 
$
17,228
 
 
$
3,200
 
 
$
20,428
 
Payments
190
 
 
10
 
 
200
 
 
9
 
 
 
 
9
 
 
$
29,091
 
 
$
7,846
 
 
$
36,937
 
 
$
17,237
 
 
$
3,200
 
 
$
20,437
 
 

19

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

The following table summarizes the restructuring reserve activity during the nine months ended September 30, 2010:
 
 
Employee Severance
and Benefits
 
Facilities
 
Total
 
(In thousands)
Accrued liability as of January 1, 2010
$
8,827
 
 
$
2,082
 
 
$
10,909
 
Charges
17,237
 
 
3,200
 
 
20,437
 
Payments
(19,979
)
 
(1,595
)
 
(21,574
)
Adjustment
(1,004
)
 
341
 
 
(663
)
Accrued liability as of September 30, 2010
$
5,081
 
 
$
4,028
 
 
$
9,109
 
 
In the table above, adjustments primarily reflect the impact of foreign currency translation.
 
Note 11 — Income Taxes
 
The following table reflects changes in unrecognized tax benefits for the nine-month period ended September 30, 2010:
 
 
(In thousands)
Gross amounts of unrecognized tax benefits as of January 1, 2010
$
838,616
 
Increases related to prior period tax positions
3,323
 
Decreases related to prior period tax positions
(14,590
)
Increases related to current period tax positions
90,020
 
Settlements
(13,073
)
Gross amounts of unrecognized tax benefits as of September 30, 2010
$
904,296
 
 
As of December 31, 2009 and September 30, 2010, our liabilities for unrecognized tax benefits were included in deferred and other tax liabilities, net. The total liabilities for unrecognized tax benefits and the increase in these liabilities in 2010 relate primarily to the allocations of revenue and costs among our global operations.
 
We recognize interest and/or penalties related to uncertain tax positions in income tax expense. The amount of interest and penalties accrued as of December 31, 2009 and September 30, 2010 was approximately $90.5 million and $104.6 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 2008 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, Switzerland and Singapore. Due to ongoing tax examinations, we believe that it is impractical to determine the amount of unrecognized tax benefits that will increase or decrease over the next 12-month period ending September 30, 2011.
 
Note 12 — Skype-Related Transaction
 
In March 2010, Skype paid in full the subordinated note receivable of $125.0 million, which we held as a result of the sale of Skype to an investor group in November 2009, and senior debt securities of $50.0 million. As a result of the payment, we recorded a gain of approximately $22.8 million in interest and other income (expense), net, which had a $13.7 million impact on net income. In the same period, we reinvested approximately $91.4 million in new senior debt securities issued by Skype, which are reflected in other assets on our condensed consolidated balance sheet. These securities mature in five years and offer a variable interest rate based on LIBOR.
 

20

 

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 or financial results, new 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 our condensed consolidated financial statements, related notes, and the other financial 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.
 
Overview
 
We currently have two business segments: Marketplaces and Payments. Our Marketplaces segment provides the infrastructure to enable global online commerce on a variety of platforms, including the eBay.com platform and our other online platforms, such as our online classifieds businesses, our secondary tickets marketplace (StubHub), our online shopping comparison website (Shopping.com), our apartment listing service platform (Rent.com), and our fixed price media marketplace (Half.com). Our Payments segment is comprised of our online payment solutions PayPal and Bill Me Later. Historically, we also had a Communications segment that consisted of Skype Technologies S.A. (“Skype”). On November 19, 2009, we completed the sale of Skype to an investor group for cash, a subordinated note and an equity stake of approximately 30 percent in the outstanding capital stock of the entity that purchased Skype (which is now named Skype). Accordingly, Skype's operating results are not consolidated in our 2010 results. However, Skype's results of operations are consolidated in our 2009 results through the date of sale. Our non-controlling interest in Skype is accounted for under the equity method of accounting.
 
For the three months ended September 30, 2010, net revenues increased 1% to $2.2 billion compared to the same period of the prior year. Excluding prior year revenue from Skype of $185.2 million (sold in November 2009), revenue growth would have been 10%. Payments net revenues increased 22% year over year driven primarily by the Merchant Services business, while Marketplaces net revenues grew by 3%. For the three months ended September 30, 2010, our operating margin increased to 22%, compared to 20% in the same period of the prior year, due primarily to lower amortization costs associated with our acquired intangible assets and productivity gains, partially offset by the impact of a stronger U.S. dollar and faster growth in our lower margin business, PayPal. Our Payments segment margin for the three months ended September 30, 2010 increased 4.5 percentage points compared to the same period of the prior year due primarily to improvements in productivity and higher transaction margin. Our Marketplaces segment margin for the three months ended September 30, 2010 decreased 2.3 percentage points compared to the same period of the prior year due primarily to investments designed to build trust, value and selection and the impact of a stronger U.S. dollar, partially offset by improvements in productivity. For the three months ended September 30, 2010, our diluted earnings per share increased $0.06 to $0.33 compared to the same period of the prior year, driven primarily by the improvement in our operating margin noted above and higher interest and other income (expense), net. For the three months ended September 30, 2010, we generated cash flow from operations of approximately $747.1 million, which is consistent with 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 total payment volume (TPV), net number of payments, free cash flow (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.
 
Outlook
 
We expect growth in the fourth quarter of 2010 to be led by our Payments business, driven by year-over-year growth in net TPV as we continue to execute against our long-term growth strategies and priorities. We expect growth in our

21

 

Marketplaces business to be led by strong results in Europe and stable results in the U.S. We will continue to focus on driving operational efficiencies designed to enable us to reallocate resources to strategies and initiatives that we believe will directly benefit our customers and increase activity on our platforms. We expect growth rates of net revenues and earnings per diluted share for the fourth quarter of 2010 compared to the same period of the prior year to be negatively impacted by a stronger U.S. dollar.
 
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 completed on our Marketplaces trading platforms), fees paid by merchants for payment processing services and, until the sale of Skype on November 19, 2009, fees charged to users to connect Skype's Internet communications products to traditional fixed-line and mobile telephones. Our marketing services revenues are derived principally from the sale of advertisements, revenue sharing arrangements, classifieds fees and lead referral fees. Other revenues are derived principally from interest earned on certain PayPal customer account balances, interest and fees earned on the Bill Me Later portfolio of receivables from loans and from contractual arrangements with third parties that provide services to our users.
 
We generate the majority of our revenue internationally and, accordingly, 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. For the three months ended September 30, 2010, foreign currency movements relative to the U.S. dollar, net of the $6.4 million positive impact from effective hedging activities of PayPal's net revenue, negatively impacted net revenues by approximately $42.9 million compared to the same period of the prior year. On a business segment basis for the three months ended September 30, 2010, foreign currency movements relative to the U.S. dollar negatively impacted Marketplaces and Payments net revenues by approximately $35.6 million and $7.3 million, respectively, compared to the same period of the prior year. For the nine months ended September 30, 2010, foreign currency movements relative to the U.S. dollar, inclusive of the $14.2 million positive impact from effective hedging activities of PayPal's net revenue, positively impacted net revenues by approximately $37.6 million compared to the same period of the prior year. On a business segment basis for the nine months ended September 30, 2010, foreign currency movements relative to the U.S. dollar positively impacted Marketplaces and Payments net revenues by approximately $24.5 million and $13.1 million, respectively, compared to the same period of the prior year.
 
The following table sets forth the breakdown of net revenues by type, segment and geography for the periods presented. In addition, we have provided a table of certain key operating metrics that we believe are significant factors affecting our net revenues.
 

22

 

 
Three Months Ended September 30,
 
Percent
 
Nine Months Ended September 30,
 
Percent
 
2009
 
2010
 
Change
 
2009
 
2010
 
Change
 
(In thousands, except percentage changes)
Net Revenues by Type:
 
 
 
 
 
 
 
 
 
 
 
Net transaction revenues
 
 
 
 
 
 
 
 
 
 
 
Marketplaces
$
1,151,361
 
 
$
1,185,562
 
 
3
 %
 
$
3,242,105
 
 
$
3,541,014
 
 
9
%
Payments
649,159
 
 
797,826
 
 
23
 %
 
1,884,154
 
 
2,335,153
 
 
24
%
Communications
172,957
 
 
 
 
 %
 
471,856
 
 
 
 
%
Total net transaction revenues
1,973,477
 
 
1,983,388
 
 
1
 %
 
5,598,115
 
 
5,876,167
 
 
5
%
Marketing services and other revenues
 
 
 
 
 
 
 
 
 
 
 
Marketplaces
213,222
 
 
225,761
 
 
6
 %
 
605,626
 
 
655,438
 
 
8
%
Payments
38,904
 
 
40,339
 
 
4
 %
 
116,168
 
 
129,319
 
 
11
%
Communications
12,249
 
 
 
 
 %
 
36,521
 
 
 
 
%
Total marketing services and other revenues
264,375
 
 
266,100
 
 
1
 %
 
758,315
 
 
784,757
 
 
3
%
Total net revenues
$
2,237,852
 
 
$
2,249,488
 
 
1
 %
 
$
6,356,430
 
 
$
6,660,924
 
 
5
%
Net Revenues by Segment:
 
 
 
 
 
 
 
 
 
 
 
Marketplaces
$
1,364,583
 
 
$
1,411,323
 
 
3
 %
 
$
3,847,731
 
 
$
4,196,452
 
 
9
%
Payments
688,063
 
 
838,165
 
 
22
 %
 
2,000,322
 
 
2,464,472
 
 
23
%
Communications
185,206
 
 
 
 
 %
 
508,377
 
 
 
 
%
Total net revenues
$
2,237,852
 
 
$
2,249,488
 
 
1
 %
 
$
6,356,430
 
 
$
6,660,924
 
 
5
%
Net Revenues by Geography:
 
 
 
 
 
 
 
 
 
 
 
U.S.
$
1,013,477
 
 
$
1,058,258
 
 
4
 %
 
$
2,941,758
 
 
$
3,094,573
 
 
5
%
International
1,224,375
 
 
1,191,230
 
 
(3
)%
 
3,414,672
 
 
3,566,351
 
 
4
%
Total net revenues
$
2,237,852
 
 
$
2,249,488
 
 
1
 %
 
$
6,356,430
 
 
$
6,660,924
 
 
5
%
 
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, other service provider or, until the sale of Skype on November 19, 2009, the Skype user's Internet protocol address, as the case may be, is located.
 
 
 
Three Months Ended September 30,
 
Percent
 
Nine Months Ended September 30,
 
Percent
 
2009
 
2010
 
Change
 
2009
 
2010
 
Change
 
(In millions, except percentage changes)
Supplemental Operating Data:
 
 
 
 
 
 
 
 
 
 
 
Marketplaces Segment:  (1)
 
 
 
 
 
 
 
 
 
 
 
GMV excluding vehicles  (2)
$
12,191
 
 
$
12,591
 
 
3
 %
 
$
34,112
 
 
$
38,493
 
 
13
 %
GMV vehicles only  (3)
2,388
 
 
2,157
 
 
(10
)%
 
6,765
 
 
6,367
 
 
(6
)%
Total GMV  (4)
$
14,579
 
 
$
14,748
 
 
1
 %
 
$
40,877
 
 
$
44,860
 
 
10
 %
Payments Segment:
 
 
 
 
 
 
 
 
 
 
 
Net TPV  (5)
$
17,682
 
 
$
22,365
 
 
26
 %
 
$
50,246
 
 
$
65,089
 
 
30
 %
 
(1)    
eBay's classifieds websites, Rent.com and Shopping.com are not included in these metrics.
(2)    
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.
(3)    
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.
(4)    
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.
(5)    
Total dollar volume of payments, net of payment reversals, successfully completed through our Payments network and on Bill Me Later accounts during the period, excluding PayPal's payment gateway business.
 

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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 thousands, except percentage changes)
2008*
 
 
 
 
 
 
 
Net revenues
$
2,192,223
 
 
$
2,195,661
 
 
$
2,117,531
 
 
$
2,035,846
 
Percent change from prior quarter
1
 %
 
%
 
(4
)%
 
(4
)%
2009*
 
 
 
 
 
 
 
Net revenues
$
2,020,586
 
 
$
2,097,992
 
 
$
2,237,852
 
 
2,370,932
 
Percent change from prior quarter
(1
)%
 
4
%
 
7
 %
 
6
 %
2010*
 
 
 
 
 
 
 
Net revenues
$
2,196,057
 
 
$
2,215,379
 
 
2,249,488
 
 
 
Percent change from prior quarter
(7
)%
 
1
%
 
2
 %
 
 
*    On November 19, 2009, we completed the sale of Skype to an investor group. Accordingly, Skype's revenue is not consolidated in our 2010 results. However, Skype's results of operations are consolidated in our 2008 and 2009 results through the date of sale.
 
We expect transaction activity patterns on our websites to mirror general consumer buying patterns.
 
Marketplaces Net Transaction Revenues
 
Marketplaces net transaction revenues increased $34.2 million, or 3%, while GMV excluding vehicles increased 3% during the third quarter of 2010 compared to the same period in the prior year. The increase in net transaction revenue was due primarily to growth in the number of sold items and continued growth at StubHub. Marketplaces year over year growth in the third quarter of 2010 was negatively impacted by a stronger U.S. dollar.
 
Marketplaces net transaction revenues increased $298.9 million, or 9%, while GMV excluding vehicles increased 13% during the first nine months of 2010 compared to the same period in the prior year. The increase in net transaction revenues was due primarily to the inclusion of revenue generated from Gmarket, the positive impact of foreign currency movements against the U.S. dollar and growth at StubHub, partially offset by our U.S. buyer loyalty programs and pricing initiatives (including larger discounts to our highest-rated sellers), which are recorded as a reduction in revenue.
 
Marketplaces net transaction revenues earned internationally totaled $644.3 million and $2.0 billion during the third quarter and first nine months of 2010, respectively, representing 54% and 56% of total Marketplaces net transaction revenues during those respective periods. Marketplaces net transaction revenues earned internationally totaled $623.5 million and $1.7 billion during the third quarter and first nine months of 2009, respectively, representing 54% and 53% of total Marketplaces net transaction revenues during those respective periods. The increase during the first nine months of 2010 was due primarily to inclusion of revenues generated from Gmarket and foreign currency movements against the U.S. dollar.
 
Payments Net Transaction Revenues
 
Payments net transaction revenues increased $148.7 million and $451.0 million, or 23% and 24%, respectively, during the third quarter and first nine months of 2010 compared to the same periods in the prior year. The increase was due primarily to net TPV growth of 26% and 30% during the third quarter and first nine months of 2010, respectively, compared to the same periods of the prior year, partially offset by lower take rates due primarily to a shift to larger merchants in our Merchant Services business. The increase in net TPV during the third quarter and first nine months of 2010 was due primarily to growth in consumer and merchant adoption of PayPal. Our Merchant Services net TPV experienced 40% and 44% growth during the third quarter and first nine months of 2010, respectively, compared to the same periods of the prior year. The increase in our Merchant Services net TPV was due primarily to an increase in the number of online merchants offering PayPal as a payment option, as well as an increase in the share of checkout of PayPal's existing customer base of merchants. Merchant Services net TPV represented 62% and 61% of PayPal's net TPV in the third quarter and first nine months of 2010, respectively.
 
Payments net transaction revenues earned internationally totaled $387.6 million and $1.1 billion during the third quarter

24

 

and first nine months of 2010, representing 49% and 48%, respectfully, of total Payments net transaction revenues during those periods. Payments net transaction revenues earned internationally totaled $300.6 million and $853.8 million during the third quarter and first nine months of 2009, representing 46% and 45% 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.
 
Communications Net Transaction Revenues
 
On November 19, 2009, we completed the sale of Skype to an investor group. Accordingly, Skype's revenue is not consolidated in our 2010 results. However, Skype's results of operations are consolidated in our 2009 results through the date of sale.
 
Marketing Services and Other Revenues
 
Marketing services and other revenues increased $1.7 million and $26.4 million, or 1% and 3%, respectively, during the third quarter and first nine months of 2010 compared to the same periods of the prior year, and represented 12% of total net revenues in all periods presented. The increase in marketing services and other revenues during the third quarter and first nine months of 2010 was due primarily to an increase in revenues attributable to our classifieds business and our advertising business, partially offset by the exclusion of marketing services and other revenues attributable to Skype.
 
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
2009 to 2010
 
Nine Months Ended September 30,
 
Change from
2009 to 2010
 
2009
 
2010
 
in Dollars
 
in %
 
2009
 
2010
 
in Dollars
 
in %
Cost of net revenues:
(In thousands, except percentages)
Marketplaces
$
255,083
 
 
$
272,789
 
 
$
17,706
 
 
7
 %
 
$
692,515
 
 
$
791,652
 
 
$
99,137
 
 
14
%
As a percentage of total Marketplaces net revenues
18.7
%
 
19.3
%
 
 
 
 
 
18.0
%
 
18.9
%
 
 
 
 
Payments
302,971
 
 
367,479
 
 
64,508
 
 
21
 %
 
873,113
 
 
1,070,542
 
 
197,429
 
 
23
%
As a percentage of total Payments net revenues
44.0
%
 
43.8
%
 
 
 
 
 
43.6
%
 
43.4
%
 
 
 
 
Communications
85,854
 
 
 
 
(85,854
)
 
 %
 
243,439
 
 
 
 
(243,439
)
 
%
As a percentage of total Communications net revenues
46.4
%
 
%
 
 
 
 
 
47.9
%
 
%
 
 
 
 
Total cost of net revenues
$
643,908
 
 
$
640,268
 
 
$
(3,640
)
 
(1
)%
 
$
1,809,067
 
 
$
1,862,194
 
 
$
53,127
 
 
3
%
As a percentage of net revenues
28.8
%
 
28.5
%
 
 
 
 
 
28.5
%
 
28.0
%
 
 
 
 
 
Cost of Net Revenues
 
Cost of net revenues consists primarily of costs associated with payment processing, customer support and site operations and Skype telecommunications (through November 2009). Significant components of these costs include bank transaction fees, credit card interchange and assessment fees, Bill Me Later related interest charges, employee compensation, contractor costs, facilities costs, depreciation of equipment and amortization expense.
 
Marketplaces
 
Marketplaces cost of net revenues increased $17.7 million, or 7% during the third quarter of 2010, compared to the same period of the prior year. Marketplaces cost of net revenues also increased as a percentage of net revenues, year over year. The increase in both dollars and as a percentage of net revenues was due primarily to increased site operation costs.
 
Marketplaces cost of net revenues increased $99.1 million, or 14%, during the first nine months of 2010, compared to the

25

 

same period of the prior year. Marketplaces cost of net revenues also increased as a percentage of net revenues, period over period. The increase in both dollars and as a percentage of net revenues was due primarily to the addition of Gmarket and increased site operation costs.
 
Payments
 
Payments cost of net revenues increased $64.5 million and $197.4 million, or 21% and 23%, during the third quarter and first nine months of 2010, respectively, compared to the same periods of the prior year. The increase in Payments cost of net revenues was due primarily to the impact of growth in net TPV.
 
Payments cost of net revenues as a percentage of Payments net revenues decreased slightly during the third quarter and first nine months of 2010 compared to the same period of the prior year due primarily to improved leverage of our customer support infrastructure and existing site operations, partially offset by lower take rates and higher interchange fees.
 
Communications
 
On November 19, 2009, we completed the sale of Skype to an investor group. Accordingly, Skype's cost of net revenue is not consolidated in our 2010 results.
 
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 September 30,
 
Change from
2009 to 2010
 
Nine Months Ended September 30,
 
Change from
2009 to 2010
 
2009
 
2010
 
in Dollars
 
in %
 
2009
 
2010
 
in Dollars
 
in %
 
 
 
 
 
(In thousands, except percentage changes)
 
 
 
 
Sales and marketing
$
491,461
 
 
$
483,653
 
 
$
(7,808
)
 
(2
)%
 
$
1,359,277
 
 
$
1,408,050
 
 
$
48,773
 
 
4
 %
Product development
205,207
 
 
226,803
 
 
21,596
 
 
11
 %
 
605,126
 
 
662,259
 
 
57,133
 
 
9
 %
General and administrative
272,177
 
 
261,662
 
 
(10,515
)
 
(4
)%
 
797,966
 
 
800,505
 
 
2,539
 
 
 %
Provision for transaction and loan losses
96,682
 
 
97,964
 
 
1,282
 
 
1
 %
 
270,597
 
 
296,025
 
 
25,428