Edgar Filing: EBAY INC

eBay 10-Q Q1 2013

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


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

For the quarterly period ended March 31, 2013


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

For the transition period from _______ to _______

Commission file number 000-24821




	eBay Inc.
(Exact name of registrant as specified in its charter)



Delaware	77-0430924
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

2065 Hamilton Avenue San Jose, California	95125
(Address of principal executive offices)	(Zip Code)

(408) 376-7400

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	[x]		Accelerated filer	[ ]
Non-accelerated filer	[ ]	(Do not check if a smaller reporting company)	Smaller reporting company	[ ]

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

As of April 15, 2013, there were 1,297,789,554 shares of the registrant's common stock, $0.001 par value, outstanding, which is the only class of common or voting stock of the registrant issued.

PART I: FINANCIAL INFORMATION


Item 1:	Financial Statements

eBay Inc.

CONDENSED CONSOLIDATED BALANCE SHEET



	March 31, 2013			December 31, 2012
	(In millions, except par value amounts)
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	6,530		$	6,817
Short-term investments	2,872			2,591
Accounts receivable, net	743			822
Loans and interest receivable, net	2,150			2,160
Funds receivable and customer accounts	8,897			8,094
Other current assets	1,144			914
Total current assets	22,336			21,398
Long-term investments	3,172			3,044
Property and equipment, net	2,575			2,491
Goodwill	8,455			8,537
Intangible assets, net	1,023			1,128
Other assets	439			476
Total assets	$	38,000		$	37,074
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt	$	411		$	413
Accounts payable	308			301
Funds payable and amounts due to customers	8,897			8,094
Accrued expenses and other current liabilities	1,885			1,916
Deferred revenue	149			137
Income taxes payable	70			63
Total current liabilities	11,720			10,924
Deferred and other tax liabilities, net	832			972
Long-term debt	4,105			4,106
Other liabilities	231			207
Total liabilities	16,888			16,209
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock, $0.001 par value; 3,580 shares authorized; 1,295 and 1,294 shares outstanding	2			2
Additional paid-in capital	12,240			12,062
Treasury stock at cost, 279 and 271 shares	(8,529		)	(8,053		)
Retained earnings	16,675			15,998
Accumulated other comprehensive income	724			856
Total stockholders' equity	21,112			20,865
Total liabilities and stockholders' equity	$	38,000		$	37,074

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

eBay Inc.

CONDENSED CONSOLIDATED STATEMENT OF INCOME



	Three Months Ended March 31,
	2013			2012
	(In millions, except per share amounts)
	(Unaudited)
Net revenues	$	3,748		$	3,277
Cost of net revenues	1,152			983
Gross profit	2,596			2,294
Operating expenses:
Sales and marketing	697			677
Product development	434			374
General and administrative	408			372
Provision for transaction and loan losses	175			134
Amortization of acquired intangible assets	82			84
Total operating expenses	1,796			1,641
Income from operations	800			653
Interest and other, net	9			31
Income before income taxes	809			684
Provision for income taxes	(132		)	(114		)
Net income	$	677		$	570
Net income per share:
Basic	$	0.52		$	0.44
Diluted	$	0.51		$	0.44
Weighted average shares:
Basic	1,295			1,288
Diluted	1,319			1,308

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

eBay Inc.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME



	Three Months Ended March 31,
	2013			2012
	(In millions)
	(Unaudited)
Net income	$	677		$	570
Other comprehensive income (loss), net of reclassification adjustments:
Foreign currency translation	(301		)	218
Unrealized gains (losses) on investments, net	140			217
Tax (expense) benefit on unrealized gains (losses) on investments, net	(54		)	(62		)
Unrealized gains (losses) on hedging activities, net	86			(59		)
Tax (expense) benefit on unrealized gains (losses) on hedging activities, net	(3		)	1
Other comprehensive income (loss), net tax	(132		)	315
Comprehensive income	$	545		$	885

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

eBay Inc.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS



	Three Months Ended March 31,
	2013			2012
	(In millions)
	(Unaudited)
Cash flows from operating activities:
Net income	$	677		$	570
Adjustments:
Provision for transaction and loan losses	175			134
Depreciation and amortization	329			281
Stock-based compensation	111			111
Changes in assets and liabilities, net of acquisition effects	(355		)	(565		)
Net cash provided by operating activities	937			531
Cash flows from investing activities:
Purchases of property and equipment	(299		)	(242		)
Changes in principal loans receivable, net	(29		)	(35		)
Purchases of investments	(1,426		)	(1,016		)
Maturities and sales of investments	1,048			408
Acquisitions, net of cash acquired	(8		)	(3		)
Other	(5		)	(5		)
Net cash used in investing activities	(719		)	(893		)
Cash flows from financing activities:
Proceeds from issuance of common stock	102			85
Repurchases of common stock	(476		)	(240		)
Excess tax benefits from stock-based compensation	116			54
Tax withholdings related to net share settlements of restricted stock awards and units	(153		)	(118		)
Funds receivable and customer accounts	(803		)	(373		)
Funds payable and amounts due to customers	803			373
Net cash provided by (used in) financing activities	(411		)	(219		)
Effect of exchange rate changes on cash and cash equivalents	(94		)	54
Net increase (decrease) in cash and cash equivalents	(287		)	(527		)
Cash and cash equivalents at beginning of period	6,817			4,691
Cash and cash equivalents at end of period	$	6,530		$	4,164
Supplemental cash flow disclosures:
Cash paid for interest	$	34		$	—
Cash paid for income taxes	$	40		$	432

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

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 — The Company and Summary of Significant Accounting Policies

The Company

We are a global technology company that enables commerce through three reportable 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"), which we acquired in the second quarter of 2011.

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 Payments business; therefore, we monitor these areas closely to mitigate potential adverse impacts.

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

Use of estimates

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

Principles of consolidation and basis of presentation

The accompanying condensed financial statements are consolidated and include the financial statements of eBay Inc., our wholly and majority-owned subsidiaries and variable interest entities ("VIE") if we were the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation. Minority interests are recorded as a noncontrolling interest. A qualitative approach is applied to assess the consolidation requirement for VIEs. Investments in entities where we hold at least a 20% ownership interest and have the ability to exercise significant influence, but not control, over the investee are accounted for using the equity method of accounting. For such investments, our share of the investees' results of operations is included in interest and other, net and our investment balance is included in long-term investments. Investments in entities where we hold less than a 20% ownership interest are generally accounted for using the cost method of accounting, and our share of the investees' results of operations is included in our 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, 2012. We have evaluated all subsequent events through the date the financial statements were issued.

Recent Accounting Pronouncements

In 2013, the Financial Accounting Standards Board ("FASB") issued new accounting guidance clarifying the accounting for the release of cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The new standard is effective for fiscal years, and interim periods within those fiscal

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

years, beginning on or after December 15, 2013. We do not anticipate that this adoption will have a significant impact on our financial position, results of operations or cash flows.

In 2013, FASB issued new accounting guidance clarifying the accounting for obligations resulting from joint and several liability arrangements for which the total amount under the arrangement is fixed at the reporting date. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. 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 March 31,
	2013		2012
	(In millions, except per share amounts)
Numerator:
Net income	$	677	$	570
Denominator:
Weighted average common shares - basic	1,295		1,288
Dilutive effect of equity incentive plans	24		20
Weighted average common shares - diluted	1,319		1,308
Net income per share:
Basic	$	0.52	$	0.44
Diluted	$	0.51	$	0.44
Common stock equivalents excluded from income per diluted share because their effect would have been anti-dilutive	1		14

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 three months ended March 31, 2013:



	December 31, 2012		Goodwill Acquired		Adjustments			March 31, 2013
	(In millions)
Reportable segments:
Marketplaces	$	4,732	$	—	$	(85	)	$	4,647
Payments	2,519		4		(1		)	2,522
GSI	1,239		—		—			1,239
Corporate and other	47		—		—			47
	$	8,537	$	4	$	(86	)	$	8,455

The adjustments to goodwill and goodwill acquired during the three months ended March 31, 2013 were due primarily to foreign currency translation and one acquisition in our Payments segment, respectively.

Intangible Assets

The components of identifiable intangible assets are as follows:



	March 31, 2013								December 31, 2012
	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	$	1,632	$	(1,037	)	$	595	5	$	1,644	$	(991	)	$	653	5
Trademarks and trade names	726		(581		)	145		5	743		(569		)	174		5
Developed technologies	525		(338		)	187		4	525		(322		)	203		4
All other	257		(161		)	96		4	252		(154		)	98		4
	$	3,140	$	(2,117	)	$	1,023		$	3,164	$	(2,036	)	$	1,128

Amortization expense for intangible assets was $108 million and $105 million for the three months ended March 31, 2013 and 2012, respectively.

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 4 — Segments

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

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


•	results of operations of various initiatives which support all of our reportable segments;


•	corporate management costs, such as human resources, finance and legal, not allocated to our segments;


•	amortization of intangible assets;


•	restructuring charges; and


•	stock based compensation expense.

The following tables summarize the financial performance of our reportable segments and reconciliation to our consolidated operating results for the periods reflected below:



	Three Months Ended March 31,
	2013			2012
	(In millions)
Net Revenue
Marketplaces
Net transaction revenues	$	1,608		$	1,425
Marketing services and other revenues	349			303
	1,957			1,728
Payments
Net transaction revenues	1,435			1,216
Marketing services and other revenues	113			93
	1,548			1,309
GSI
Net transaction revenues	186			182
Marketing services and other revenues	50			55
	236			237
Corporate and other
Marketing services and other revenues	12			6

Elimination of inter-segment net revenue⁽¹⁾	(5		)	(3		)
Total consolidated net revenue	$	3,748		$	3,277

Operating income (loss)
Marketplaces	$	823		$	669
Payments	374			345
GSI	7			23
Corporate and other	(404		)	(384		)
Total operating income (loss)	$	800		$	653

(1) Represents revenue generated between our reportable segments.

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 5 — Fair Value Measurement of Assets and Liabilities

The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012:



Description	Balance as of March 31, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
	(In millions)
Assets:
Cash and cash equivalents	$	6,530	$	5,295	$	1,235
Short-term investments:
Restricted cash	14		14		—
Corporate debt securities	1,678		—		1,678
Government and agency securities	40		—		40
Time deposits	355		—		355
Equity instruments	785		785		—
Total short-term investments	2,872		799		2,073
Funds receivable and customer accounts	2,500		—		2,500
Derivatives	100		—		100
Long-term investments:
Corporate debt securities	2,830		—		2,830
Government and agency securities	19		—		19
Total long-term investments	2,849		—		2,849
Total financial assets	$	14,851	$	6,094	$	8,757

Liabilities:
Derivatives	$	67	$	—	$	67

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)



Description	Balance as of December 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
	(In millions)
Assets:
Cash and cash equivalents	$	6,817	$	5,685	$	1,132
Short-term investments:
Restricted cash	15		15		—
Corporate debt securities	1,153		—		1,153
Government and agency securities	20		—		20
Time deposits	765		—		765
Equity instruments	638		638		—
Total short-term investments	2,591		653		1,938
Derivatives	55		—		55
Long-term investments:
Corporate debt securities	2,669		—		2,669
Government and agency securities	42		—		42
Total long-term investments	2,711		—		2,711
Total financial assets	$	12,174	$	6,338	$	5,836

Liabilities:
Derivatives	$	86	$	—	$	86

Our financial assets and liabilities are valued using market prices on both active markets (level 1) and less active markets (level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily available pricing sources for comparable instruments, identical instruments in less active markets, or models using market observable inputs. The majority of our derivative instruments are valued using pricing models that take into account the contract terms as well as multiple inputs where applicable, such as equity prices, interest rate yield curves, option volatility and currency rates. Our derivative instruments are primarily short-term in nature, generally one month to one year in duration. Certain foreign currency contracts designated as cash flow hedges may have a duration of up to 18 months. Cash and cash equivalents are short-term, highly liquid investments with original or remaining maturities of three months or less when purchased and are comprised primarily of bank deposits, money market funds and commercial paper. We did not have any transfers of financial instruments between valuation levels during the first three months of 2013.

In addition to the long-term investments noted above, we had cost and equity method investments of approximately $318 million and $327 million included in long-term investments on our condensed consolidated balance sheet at March 31, 2013 and our consolidated balance sheet at December 31, 2012, respectively. At March 31, 2013 and December 31, 2012, we also held $5 million and $6 million, respectively, of time deposits classified as held to maturity, which are recorded at amortized cost.

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

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 6 — Derivative Instruments

The notional amounts associated with our foreign currency contracts at March 31, 2013 and 2012 were $5.7 billion and $4.4 billion, respectively, of which $2.0 billion and $1.5 billion, respectively, were designated as cash flow hedges. Derivative transactions are measured in terms of the notional amount, but this amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the instruments. The notional amount is generally not exchanged, but is used only as the basis on which the value of foreign exchange payments under these contracts are determined.

For our derivative instruments designated as cash flow hedges, the amounts recognized in earnings related to the ineffective portion were not material in each of the periods presented, and we did not exclude any component of the changes in fair value of the derivative instruments from the assessment of hedge effectiveness. As of March 31, 2013, we estimate that approximately $28 million of net derivative gains related to our cash flow hedges included in accumulated other comprehensive income will be reclassified into earnings within the next 12 months.

Fair Value of Derivative Contracts

The fair value of our outstanding derivative instruments as of March 31, 2013 and December 31, 2012 was as follows:



	Derivative Assets Reported in Other Current Assets				Derivative Liabilities Reported in Other Current Liabilities
	March 31, 2013		December 31, 2012		March 31, 2013		December 31, 2012
	(In millions)
Foreign exchange contracts designated as cash flow hedges	$	46	$	1	$	15	$	56
Foreign exchange contracts not designated as hedging instruments	43		43		52		30
Other contracts not designated as hedging instruments	11		11		—		—
Total fair value of derivative instruments	$	100	$	55	$	67	$	86

Under the master netting agreements with the respective counterparties of the foreign exchange contracts, subject to applicable requirements, we are allowed to net settle transactions of the same currency with a single net amount payable by one party to the other. However, we elected to present the derivative assets and derivative liabilities on a gross basis in our balance sheet. As of March 31, 2013, the potential effect of rights of set off associated with the above foreign exchange contracts would be an offset to both assets and liabilities by $62 million, resulting in net derivative assets and derivative liabilities of $27 million and $5 million, respectively. We are not required to pledge nor are we entitled to receive cash collateral related to these derivative transactions.

Effect of Derivative Contracts on Accumulated Other Comprehensive Income

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



	December 31, 2012			Amount of gain (loss) recognized in other comprehensive income (effective portion)		Amount of gain (loss) reclassified from accumulated other comprehensive income to net revenue and operating expense (effective portion)			March 31, 2013
	(In millions)
Foreign exchange contracts designated as cash flow hedges	$	(55	)	$	82	$	(4	)	$	31

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table summarizes the activity of derivative contracts that qualify for hedge accounting as of March 31, 2012 and December 31, 2011, and the impact of designated derivative contracts on accumulated other comprehensive income for the three months ended March 31, 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)		March 31, 2012
	(In millions)
Foreign exchange contracts designated as cash flow hedges	$	72	$	(36	)	$	23	$	13

Effect of Derivative Contracts on Condensed Consolidated Statement of Income

The following table provides the location in our financial statements of the recognized gains or losses related to our derivative instruments:



	Three Months Ended March 31,
	2013			2012
	(In millions)
Foreign exchange contracts designated as cash flow hedges recognized in net revenues	$	—		$	12
Foreign exchange contracts designated as cash flow hedges recognized in operating expenses	(4		)	5
Foreign exchange contracts not designated as hedging instruments recognized in interest and other, net	4			3
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	$	—		$	24

Note 7 — Debt

The following table summarizes the carrying value of our outstanding debt:



	Coupon		Carrying Value as of		Effective		Carrying Value as of		Effective
	Rate		March 31, 2013		Interest Rate		December 31, 2012		Interest Rate
	(In millions, except percentages)
Long-Term Debt
Senior notes due 2015	1.625	%	$	599	1.805	%	$	599	1.805	%
Senior notes due 2015	0.700	%	250		0.820	%	250		0.820	%
Senior notes due 2017	1.350	%	999		1.456	%	999		1.456	%
Senior notes due 2020	3.250	%	498		3.389	%	498		3.389	%
Senior notes due 2022	2.600	%	999		2.678	%	999		2.678	%
Senior notes due 2042	4.000	%	743		4.114	%	742		4.114	%
Total senior notes			4,088				4,087
Notes payable			12				13
Capital lease obligations			5				6
Total long-term debt			$	4,105			$	4,106

Short-Term Debt
Senior notes due 2013	0.875	%	$	400	1.078	%	$	400	1.078	%
Notes payable			2				2
Capital lease obligations			9				11
Total short-term debt			411				413
Total Debt			$	4,516			$	4,519

Senior Notes

The effective interest rates for our fixed-rate senior notes include the interest payable, the amortization of debt issuance costs and the amortization of any original issue discount on these senior notes. Interest on these senior notes is payable semiannually. Interest expense associated with these senior notes, including amortization of debt issuance costs, during the three months ended March 31, 2013 and 2012 was approximately $26 million and $8 million, respectively. At March 31, 2013, the estimated fair value of all these senior notes included in long-term debt was approximately $4.1 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 is comprised primarily of a note that bears interest at 6.3% per annum and has a maturity date of July 2034. We have an accelerated prepayment option exercisable in July 2014.

Capital Lease Obligations

Capital lease obligations are for certain warehouse equipment and computer hardware and software leases. The capital leases have maturity dates ranging from May 2013 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 March 31, 2013 was as follows (in millions):



	March 31, 2013
	(In millions)
Gross capital lease obligations	$	15
Imputed interest	(1		)
Total present value of future minimum capital lease payments	$	14

Commercial Paper

We have a $2 billion commercial paper program pursuant to which we may issue commercial paper notes with maturities of up to 397 days from the date of issue. As of March 31, 2013, there were no commercial paper notes outstanding.

Credit Agreement

As of March 31, 2013, no borrowings or letters of credit were outstanding under our $3 billion credit agreement. As described above, we have a $2 billion commercial paper program and maintain $2 billion of available borrowing capacity under our credit agreement in order to repay commercial paper borrowings in the event we are unable to repay those borrowings from other sources when they become due. As a result, at March 31, 2013, $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 March 31, 2013, we were in compliance with all covenants in our outstanding debt instruments.

Note 8 — Commitments and Contingencies

Commitments

As of March 31, 2013, approximately $13 billion of unused credit was available to Bill Me Later accountholders. While this amount represents the total unused credit available, we have not experienced, and do not anticipate, that all of our Bill Me Later accountholders will access their entire available credit at any given point in time. In addition, the individual lines of credit that make up this unused credit are subject to periodic review and termination by the chartered financial institution that is the issuer of Bill Me Later credit products based on, among other things, account usage and customer creditworthiness. When a consumer makes a purchase using a Bill Me Later credit product, the chartered financial institution extends credit to the consumer, funds the extension of credit at the point of sale and advances funds to the merchant. We subsequently purchase the 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.

Litigation and Other Legal Matters

Overview

We are involved in legal proceedings on an ongoing basis. If we believe that a loss arising from such matters is probable and can be reasonably estimated, we accrue the estimated liability in our financial statements. If only a range of estimated losses can be determined, we accrue an amount within the range that, in our judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, we accrue the low end of the range. Amounts accrued for legal proceedings for which we believe a loss is probable were not material for the three months ended March 31, 2013. Except as otherwise noted, we have concluded that reasonably possible losses arising directly from the proceedings (i.e., monetary damages or amounts paid in judgment or settlement) in excess of our accruals are also not material. For those proceedings in which an unfavorable outcome is reasonably possible but not probable, we have disclosed an estimate of the reasonably possible loss or range of losses or we have concluded that an estimate of the reasonably possible loss or range of losses arising directly from the proceeding (i.e., monetary damages or amounts paid in judgment or settlement) are not material. If we cannot estimate the probable or reasonably possible loss or range of losses arising from a legal proceeding, we have disclosed that fact.

In assessing the materiality of a legal proceeding, we evaluate, among other factors, the amount of monetary damages claimed, as well as the potential impact of non-monetary remedies sought by plaintiffs (e.g., injunctive relief) that may require us to change our business practices in a manner that could have a material adverse impact on our business. With respect to the matters disclosed in this Note 8, we are unable to estimate the possible loss or range of losses that could potentially result from the application of such non-monetary remedies.

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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.

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. In July 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

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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 representative suits began in August 2009 in the Seoul Central District Court, and trial for a group of 23 other suits began in September 2009 in the Seoul Central District Court. There is some precedent in Korea for a court to grant “consolation money” for data breaches without a specific finding of harm from the breach. Such precedents have involved payments of up to approximately $200 per user. In January 2010, one bench of the Seoul Central 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 Central District Court's January 2010 decision for three cases involving 55 plaintiffs (who did not appeal to the Korea Supreme Court). The remaining cases before the Seoul High Court are currently being heard de novo, and a decision is expected in 2013. The Daegu High Court has also issued a decision in favor of IAC in a case with three plaintiffs who proceeded to appeal to the Korea Supreme Court. In January 2013, the Seoul Western District Court ruled in favor of IAC with respect to two cases filed by 2,291 plaintiffs after the January 2010 ruling.

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

Indemnification Provisions

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

of third-party claims, which are indemnities mainly related to various intellectual property rights, and we have provided similar indemnities in a limited number of agreements for our other businesses. In our PayPal business, we have provided an indemnity to our payment processors in the event of certain third-party claims or card association fines against the processor arising out of conduct by PayPal or PayPal customers. PayPal has also provided a limited indemnity to merchants using its retail point of sale payment services. It is not possible to determine the maximum potential loss under these indemnification provisions due to our limited history of prior indemnification claims and the unique facts and circumstances involved in each particular provision. To date, losses recorded in our statement of income in connection with our indemnification provisions have not been significant, either individually or collectively.

Off-Balance Sheet Arrangements

As of March 31, 2013, 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 March 31, 2013, we had a total of $5.7 billion in cash withdrawals offsetting our $5.7 billion in Aggregate Cash Deposits held within the same financial institution under these cash pooling arrangements.

Note 9 — Stock Repurchase Programs

In June 2012, 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. The stock repurchase program is intended to offset the impact of dilution from our equity compensation programs. The stock repurchase activity under our stock repurchase program during the first three months of 2013 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, 2013	—	$	51.89	$	17	$	1,983
Repurchase of common stock	9	55.94		476		(476		)
Balance at March 31, 2013	9	$	55.79	$	493	$	1,507

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

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 10 — Stock-Based Plans

Stock Option Activity

The following table summarizes stock option activity for the three-month period ended March 31, 2013:



	Options
	(In millions)
Outstanding at January 1, 2013	24
Granted and assumed	—
Exercised	(4	)
Forfeited/expired/canceled	—
Outstanding at March 31, 2013	20

The weighted average exercise price of stock options granted during the period was $56.07 per share and the related weighted average grant date fair value was $15.07 per share.

Restricted Stock Unit Activity

The following table summarizes restricted stock unit ("RSU") activity for the three-month period ended March 31, 2013:



	Units
	(In millions)
Outstanding at January 1, 2013	39
Awarded and assumed	1
Vested	(9	)
Forfeited	(1	)
Outstanding at March 31, 2013	30

The weighted average grant date fair value for RSUs awarded during the period was $54.83 per share.

Stock-Based Compensation Expense

The impact on our results of operations of recording stock-based compensation expense for the three months ended March 31, 2013 and 2012 was as follows:



	Three Months Ended March 31,
	2013		2012
	(In millions)
Cost of net revenues	$	13	$	14
Sales and marketing	33		30
Product development	32		30
General and administrative	33		37
Total stock-based compensation expense	$	111	$	111
Capitalized in product development	$	3	$	7

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 months ended March 31, 2013 and 2012:



	Three Months Ended March 31,
	2013		2012
Risk-free interest rate	0.49	%	0.68	%
Expected life (in years)	3.8		3.7
Dividend yield	—	%	—	%
Expected volatility	34	%	41	%

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 11 — Income Taxes

The following table reflects changes in unrecognized tax benefits for the three-month period ended March 31, 2013:



	(In millions)
Gross amounts of unrecognized tax benefits as of January 1, 2013	$	340
Increases related to prior period tax positions	21
Decreases related to prior period tax positions	(5		)
Increases related to current period tax positions	10
Gross amounts of unrecognized tax benefits as of March 31, 2013	$	366

As of March 31, 2013, our liabilities for unrecognized tax benefits were included in accrued expenses and other current liabilities and deferred and other tax liabilities, net. The increase in liabilities for unrecognized tax benefits for the first three months of 2013 relates primarily to the point in time at which certain foreign earnings became subject to U.S. taxation and the retroactive reenactment of the federal research and development credit.

We recognize interest and/or penalties related to uncertain tax positions in income tax expense. The amount of interest and penalties accrued as of March 31, 2013 and December 31, 2012 was approximately $127 million and $117 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. The company is in the process of settlement discussions with various tax authorities that could reasonably result in a significant change to the existing tax reserve balance within the next 12 months. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these examinations or changes. 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 as a result of various tax audit settlements. 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.

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. We have not provided for U.S. income and foreign withholding tax on certain

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

foreign earnings as we intend to indefinitely reinvest these earnings outside the U.S. 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.

Note 12 — 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 March 31, 2013 and 2012, we purchased approximately $849 million and $650 million, 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 March 31, 2013 was 685, as compared to 689 at December 31, 2012. As of March 31, 2013 and December 31, 2012, approximately 53.5% and 55.8%, 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 March 31, 2013, approximately 90% of our loans and interest receivable portfolio was current.

The following table summarizes the activity in the allowance for loans and interest receivable for the periods indicated:



	Three Months Ended March 31,
	2013			2012
	(In millions)
Balance as of January 1	$	101		$	59
Charge-offs	(51		)	(28		)
Recoveries	3			2
Provision	56			31
Balance as of March 31	$	109		$	64

Note 13 — Restructuring

In the fourth quarter of 2012, we implemented a global restructuring plan designed to simplify and streamline our organization and strengthen the overall competitiveness of our existing businesses. The plan included a strategic reduction of our existing global workforce by approximately 600 employees and 300 contractors and related activities, including the closure of certain facilities and asset impairments. The majority of the costs impacted our Payments and GSI segments. In connection with the plan, we have incurred aggregate charges of approximately $26 million as of March 31, 2013, related primarily to severance and benefits, including net credits of $4 million incurred in the three months ended March 31, 2013. The restructuring charges are included in general and administrative expenses on the consolidated statement of income. As of March 31, 2013, all restructuring actions under the plan are substantially complete. The associated liability was $20 million as of December 31, 2012 and decreased to $5 million as of March 31, 2013 due to payments of $9 million and other adjustments (including foreign currency translation) of $6 million.

Note 14 — Accumulated Other Comprehensive Income

The following table summarizes the changes in accumulated balances of other comprehensive income for the three months ended March 31, 2013:



	Unrealized Gains (Losses) on Cash Flow Hedges			Unrealized Gains on Investments		Foreign Currency Translation			Estimated tax (expense) benefit			Total
	(In millions)
Beginning balance	$	(55	)	$	687	$	449		$	(225	)	$	856
Other comprehensive income before reclassifications	82			141		(301		)	(57		)	(135		)
Amounts reclassified from accumulated other comprehensive income	(4		)	1		—			—			(3		)
Net current period other comprehensive income	86			140		(301		)	(57		)	(132		)
Ending balance	$	31		$	827	$	148		$	(282	)	$	724

The following table provides details about reclassifications out of accumulated other comprehensive income for the three months ended March 31, 2013:



Details about Accumulated Other Comprehensive Income Components	Amount Reclassified from Accumulated Other Comprehensive Income			Affected Line Item in the Statement of Income
	(In millions)
Gains (losses) on cash flow hedges - foreign exchange contracts	$	—		Net Revenues
	(1		)	Sales and marketing
	(2		)	Product development
	(1		)	General and administrative
	(4		)	Total, before income taxes
	—			Provision for income taxes
	(4		)	Total, net of income taxes

Unrealized gains on investments	1			Interest and other, net
	—			Provision for income taxes
	1			Total, before income taxes
	—			Provision for income taxes
	1			Total, net of income taxes

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


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.

Overview

Net revenues for the three months ended March 31, 2013 increased 14% to $3.7 billion compared to the same period of the prior year, driven primarily by increases in net revenues from our Marketplaces and Payments segments. For the three months ended March 31, 2013, our operating margin increased to 21% from 20% in the same period of the prior year due primarily to an increase in operating margin in our Marketplaces segment offset in part by declines in operating margins in our Payments and GSI segments. For the three months ended March 31, 2013, our diluted earnings per share increased to $0.51, a $0.07 increase compared to the same period of the prior year, driven primarily by growth in net revenues and a lower effective tax rate, partially offset by higher interest expense. For the three months ended March 31, 2013, we generated cash flow from operations of $937 million, compared to $531 million for the same period of the prior year.

Our Marketplaces segment total net revenues increased $229 million, or 13%, for the three months ended March 31, 2013 compared to the same period of the prior year. The increase in total net revenues was driven primarily by an increase in GMV (as defined below) excluding vehicles of 13% for the three months ended March 31, 2013 compared to the same period of the prior year, which was attributable to strong growth in the U.S. as well as in our advertising business. Our Marketplaces segment operating margin increased 3.3 percentage points for the three months ended March 31, 2013 compared to the same period of the prior year, due primarily to efficiencies in marketing spend, partially offset by continued investments in new initiatives.

Our Payments segment total net revenues increased $239 million, or 18%, for the three months ended March 31, 2013 compared to the same period of the prior year. The increase in total net revenues was driven primarily by an increase in net TPV (as defined below) of 21% for the three months ended March 31, 2013 compared to the same period of the prior year and strong growth in Bill Me Later. Our Payments segment operating margin decreased 2.2 percentage points for the three months ended March 31, 2013 compared to the same period of the prior year, due primarily to a decrease in foreign currency gains, a shift to large merchants with lower take rates and investments in consumer awareness and product initiatives.

Our GSI segment total net revenues decreased $1 million for the three months ended March 31, 2013 compared to the same period of the prior year. Our GSI segment operating margin decreased 6.7 percentage points for the three months ended March 31, 2013 compared to the same period of the prior year, due primarily to a lower take rate on GeC Merchandise Sales (as defined below) as well as continued investment in our commerce platform.

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, penetration rates, active registered accounts, funding mix (the mix of payments vehicles, such as credit cards, debit cards, bank accounts, Bill Me Later accounts and PayPal accounts, used by customers to make payments through our Payments networks), global ecommerce (GeC) Merchandise Sales, same store sales, enabled commerce volume (ECV), free cash flow (a non-GAAP measure, which we define as net cash provided by operating activities less purchases of property and equipment) 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 Marketplaces trading platforms (excluding eBay's classifieds websites, brands4friends 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 our 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 and Bill Me Later accounts during the applicable period for transactions on our Marketplaces and 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. We define ECV as the total commerce and payment volume across all three segments consisting of GMV, Merchant Services net TPV and GeC Merchandise Sales.

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.

The following table sets forth the breakdown of net revenues by type and geography for the periods presented.



	Three Months Ended March 31,
	2013			2012
	(In millions, except percentage changes)
Net Revenues by Type:
Net transaction revenues
Marketplaces	$	1,608		$	1,425
Payments	1,435			1,216
GSI	186			182
Total net transaction revenues	3,229			2,823
Marketing services and other revenues
Marketplaces	349			303
Payments	113			93
GSI	50			55
Corporate and other	12			6
Total marketing services and other revenues	524			457
Elimination of inter-segment net revenue ⁽¹⁾	(5		)	(3		)
Total net revenues	$	3,748		$	3,277
Net Revenues by Geography:
U.S.	$	1,789		$	1,581
International	1,959			1,696
Total net revenues	$	3,748		$	3,277


(1)	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 generated a majority of our net revenues internationally in recent periods, including the three months ended March 31, 2013 and 2012, we are subject to the risks of doing business in foreign countries as discussed under "Part II - Item 1A - Risk Factors." In that regard, fluctuations in foreign currency exchange rates impact our results of operations. We have a foreign exchange risk management program that is designed to reduce our exposure to fluctuations in foreign currencies; however, the effectiveness of this program in mitigating the impact of foreign currency fluctuations on our results of operations varies from period to period, and in any given period, our operating results are usually affected, sometimes significantly, by changes in currency exchange rates. Fluctuations in exchange rates also directly affect our cross-border revenue. We calculate the year-over-year impact of foreign currency movements on our business using prior period foreign currency rates applied to current year transactional currency amounts.

For the three months ended March 31, 2013, foreign currency movements relative to the U.S. dollar negatively impacted net revenues by approximately $1 million (net of a positive impact from hedging activities included in PayPal's net revenue of less than $1 million) compared to the same period of the prior year. On a business segment basis, for the three months ended March 31, 2013, foreign currency movements relative to the U.S. dollar positively impacted Marketplaces net revenues by approximately $2 million and negatively impacted Payments and GSI net revenues by approximately $3 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, in the case of Payments net revenues).

The following table sets forth, for the periods presented, certain key operating metrics that we believe are significant factors affecting our net revenues.



	Three Months Ended March 31,				Percent
	2013		2012		Change
	(In millions, except percentage changes)
Supplemental Operating Data:
Marketplaces Segment:⁽¹⁾
GMV excluding vehicles⁽²⁾	$	18,326	$	16,206	13	%
GMV vehicles only⁽³⁾	$	1,686	$	1,871	(10	)%
Total GMV⁽⁴⁾	$	20,012	$	18,077	11	%
Payments Segment:
Merchant services net TPV⁽⁵⁾	$	28,087	$	22,433	25	%
On eBay net TPV⁽⁶⁾	$	12,953	$	11,424	13	%
Total net TPV⁽⁷⁾	$	41,040	$	33,857	21	%
GSI Segment:
GeC Merchandise Sales ⁽⁸⁾	$	807	$	715	13	%


(1)	eBay's classifieds websites, brands4friends and Shopping.com are not included in these metrics.


(2)	Total value of all successfully closed items between users on our 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 our 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 our 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 networks, Bill Me Later accounts and Zong during the period, excluding PayPal's payment gateway business and payments for transactions on our Marketplaces and GSI platforms.


(6)	Total dollar volume of payments, net of payment reversals, successfully completed through our Payments networks and Bill Me Later accounts during the period for transactions on our Marketplaces and GSI platforms.


(7)	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.


(8)	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.

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)
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		$	3,992
Percent change from prior quarter	(3		)%	4		%	—		%	17		%
2013
Net revenues	$	3,748		—			—			—
Percent change from prior quarter	(6		)%	—			—			—


(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 $183 million, or 13%, consistent with the increase in GMV excluding vehicles of 13%, in each case during the first quarter of 2013 compared to the same period in the prior year. The increase in net transaction revenue and GMV excluding vehicles was due primarily to growth both in the U.S. and internationally.

Marketplaces net transaction revenues earned internationally (i.e., outside the U.S.) totaled $888 million during the first quarter of 2013, representing 55% of total Marketplaces net transaction revenues during the period. Marketplaces net transaction revenues earned internationally totaled $789 million during the first quarter of 2012, representing 55% of total Marketplaces net transaction revenues in the period. The increase in international net transaction revenues was due primarily to growth in our existing international markets.

Payments Net Transaction Revenues

Payments net transaction revenues increased $219 million, or 18%, during the first quarter of 2013 compared to the same period of the prior year, due primarily to net TPV growth of 21%, partially offset by a lower take rate. The increase in net TPV was due primarily to growth in consumer and merchant use of PayPal both on and off eBay. The lower take rate is due primarily to a decrease in currency hedging gains and a shift to larger merchants who pay lower rates based on volume. Our Merchant Services net TPV increased 25% during the first quarter of 2013 compared to the same period of the prior year and represented 68% of PayPal's net TPV in the first quarter of 2013 compared to 66% in the same period of the prior year. On eBay net TPV increased 13% during the first quarter of 2013 compared to the same period of the prior year and represented 32% of PayPal's net TPV in the first quarter of 2013 compared to 34% for the same period in the prior year.

Payments net transaction revenues earned internationally totaled $791 million during the first quarter of 2013, representing 55% of total Payments net transaction revenues in the period. Payments net transaction revenues earned internationally totaled $658 million during the first quarter of 2012, representing 54% of total Payments net transaction revenues during the period. The increase in international net transaction revenues was due primarily to the growth of our Merchant Services business outside the U.S.

GSI Net Transaction Revenues

GSI net transaction revenues increased $4 million, or 2%, during the first quarter of 2013 compared to the same period of the prior year, due primarily to the 13% increase in GeC Merchandise Sales, offset by a lower take rate.

Marketing Services and Other Revenues

Marketing services and other revenues increased $67 million, or 15%, during the first quarter of 2013 compared to the same period of the prior year, and represented 14% of total net revenues for both the first quarter of 2013 and 2012, respectively. 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 and lead referral fees.

Summary of Cost of Net Revenues

The following table summarizes changes in cost of net revenues for the periods presented:



	Three Months Ended March 31,						Change from First Quarter 2012 to First Quarter 2013
	2013			2012			in Dollars			in %
	(In millions, except percentages)
Cost of net revenues:
Marketplaces	$	356		$	299		$	57		19	%
As a percentage of total Marketplaces net revenues	18.2		%	17.3		%
Payments	617			515			102			20	%
As a percentage of total Payments net revenues	39.9		%	39.3		%
GSI	175			145			30			21	%
As a percentage of total GSI net revenues	74.2		%	61.2		%
Corporate and other	4			24			(20		)	(83	)%
Total cost of net revenues	$	1,152		$	983		$	169		17	%
As a percentage of net revenues	30.7		%	30.0		%

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

Marketplaces

Marketplaces cost of net revenues increased $57 million, or 19%, during the first quarter of 2013 compared to the same period of the prior year, due primarily to investment in site operations infrastructure and customer support programs, which resulted in the cost of net revenues as a percentage of Marketplaces net revenues increasing by 0.9 percentage points year over year.

Payments

Payments cost of net revenues increased $102 million, or 20%, during the first quarter of 2013 compared to the same period of the prior year, due primarily to the impact of growth in net TPV, which resulted in the cost of net revenues as a percentage of Payments net revenues increasing by 0.6 percentage points year over year.

GSI

GSI cost of net revenues increased $30 million, or 21%, during the first quarter of 2013 compared to the same period of the prior year, due primarily to the increase in GeC merchandise sales volume as well as continued investment in GSI's commerce platform, which resulted in the cost of net revenues as a percentage of GSI net revenues increasing by 13 percentage points year over year.

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

The following table summarizes changes in operating expenses, non-operating items and provision for income taxes for the periods presented:



	Three Months Ended March 31,						Change from First Quarter 2012 to First Quarter 2013
	2013			2012			in Dollars			in %
	(In millions, except percentage changes)
Sales and marketing	$	697		$	677		$	20		3	%
Product development	434			374			60			16	%
General and administrative	408			372			36			10	%
Provision for transaction and loan losses	175			134			41			31	%
Amortization of acquired intangible assets	82			84			(2		)	(2	)%
Interest and other, net	9			31			(22		)	(71	)%
Provision for income taxes	(132		)	(114		)	(18		)	16	%

The following table summarizes operating expenses, non-operating items and provision for income taxes as a percentage of net revenues for the periods presented:



	Three Months Ended March 31,
	2013		2012
Sales and marketing	19	%	21	%
Product development	12	%	11	%
General and administrative	11	%	11	%
Provision for transaction and loan losses	5	%	4	%
Amortization of acquired intangible assets	2	%	3	%
Interest and other, net	—	%	1	%
Provision for income taxes	(4	)%	(3	)%

Sales and Marketing

Sales and marketing expenses consist primarily of advertising costs and marketing programs (both online and offline), employee compensation, contractor costs, facilities costs and depreciation on equipment. Online marketing expenses represent traffic acquisition costs in various channels such as paid search, affiliates marketing and display advertising. Offline advertising includes brand campaigns, buyer/seller communications and general public relations expenses. A significant portion of our sales and marketing expense is attributable to our online marketing programs, primarily paid search, which include keyword advertising and third party lead generation costs, in order to drive traffic to our Marketplaces and Payments websites.

Sales and marketing expenses increased $20 million, or 3%, during the first quarter of 2013 compared to the same period of the prior year. The increase in sales and marketing expense was due primarily to higher employee-related expenses (including consultant costs, facility costs and equipment-related costs), partially offset by a decrease in marketing program costs. Sales and marketing expense as a percentage of net revenues was 19% and 21% for the first quarter of 2013 and 2012, respectively.

Product Development

Product development expenses consist primarily of employee compensation, contractor costs, facilities costs and depreciation on equipment. Product development expenses are net of required capitalization of major site and other product development efforts, including the development of our next generation platform architecture, migration of certain platforms, seller tools and Payments services projects. Our top technology priorities include mobile, user experience, search, platform and new products such as PayPal Here. Capitalized site and product development costs were $49 million in the first quarter of 2013, compared to $47 million in the first quarter of 2012, and are reflected primarily as a cost of net revenues when amortized in future periods.

Product development expenses increased $60 million, or 16%, during the first quarter of 2013 compared to the same period of the prior year. The increase was due primarily to higher employee-related costs (including consultant costs, facility costs and equipment-related costs) driven by increased investment in platform, mobile and offline. Product development expenses as a net percentage of revenues were 12% and 11% for the first quarter of 2013 and 2012, respectively.

General and Administrative

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

General and administrative expenses increased $36 million, or 10%, during the first quarter of 2013 compared to the same period of the prior year. The increase was due primarily to higher employee-related costs (including consultant costs, facility costs and equipment-related costs). General and administrative expenses as a percentage of net revenues were 11% for both the first quarter of 2013 and 2012.

Provision for Transaction and Loan Losses

Provision for transaction and loan losses consists primarily of transaction loss expense associated with our consumer protection programs, fraud, chargebacks, and merchant credit losses; bad debt expense associated with our accounts receivable balance; and loan loss reserves associated with our loan receivables balance. We expect our provision for transaction and loan loss expense to fluctuate depending on many factors, including macroeconomic conditions, our consumer protection programs and the impact of regulatory changes.

Provision for transaction and loan losses increased $41 million, or 31%, during the first quarter of 2013 compared to the same period of the prior year. This increase was due primarily to higher transaction volume and growth in our Bill Me Later portfolio of receivables from consumer loans. The increase was partially offset by a reduction in our Marketplaces bad debt expense. Provision for transaction and loan loss expense as a percentage of net revenues was 5% and 4% for the first quarter of 2013 and 2012, respectively.

Amortization of Acquired Intangible Assets

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

Amortization of acquired intangible assets decreased by $2 million, or 2%, during the first quarter of 2013 compared to the same period of the prior year.

Interest and Other, Net

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

Interest and other, net decreased $22 million during the first quarter of 2013 compared to the same period of the prior year. The decrease in interest and other, net was due primarily to an increase in interest expense of approximately $18 million as a result of our issuance of $3 billion of senior notes in July 2012.

Provision for Income Taxes

Our effective tax rate was 16.3% for the first quarter of 2013, compared to 16.7% for the same period in the prior year. The decrease in our effective tax rate for the first quarter of 2013 compared to the same period of the prior year was due primarily to a decrease in nondeductible expenses, partially offset by discrete items.

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

We are regularly under examination by tax authorities both domestically and internationally. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these examinations, although we can provide no assurances that this will be the case given the inherent uncertainties in these examinations. Due to the ongoing tax examinations, we believe it is impractical to determine the amount and timing of these adjustments.

Liquidity and Capital Resources

Cash Flows



	Three Months Ended March 31,
	2013			2012
	(In millions)
Net cash provided by (used in):
Operating activities	$	937		$	531
Investing activities	(719		)	(893		)
Financing activities	(411		)	(219		)
Effect of exchange rates on cash and cash equivalents	(94		)	54
Net increase/(decrease) in cash and cash equivalents	$	(287	)	$	(527	)

Operating Activities

We generated cash from operating activities of $937 million and $531 million in the three months ended March 31, 2013 and 2012, respectively. The increase in cash provided by operating activities during the three months ended March 31, 2013 compared to the same period of the prior year was due primarily to a decrease in cash paid for income taxes of $392 million and an increase in net income of $107 million.

Investing Activities

The net cash used in investing activities of $719 million in the three months ended March 31, 2013 was due primarily to net cash paid for the purchases of investments of $1.4 billion and purchases of property and equipment of $299 million, partially offset by proceeds of $1 billion from the maturities and sale of investments.

The net cash used in investing activities of $893 million in the three months ended March 31, 2012 was due primarily to net cash paid for the purchases of investments of $1 billion and purchases of property and equipment of $242 million, partially offset by proceeds of $408 million from the maturities and sale of investments.

Financing Activities

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

The net cash used in financing activities of $219 million in the three months ended March 31, 2012 was due primarily to cash outflows of $240 million to repurchase common stock as well as cash paid for tax withholdings in the amount of $118 million related to net share settlements of restricted stock units and awards. These cash outflows were partially offset by cash inflows of $85 million from the issuance of common stock in connection with the exercise of stock options and the effect of $54 million of excess tax benefits from stock-based compensation.

The negative effect of exchange rate movements on cash and cash equivalents during the three months ended March 31, 2013 was due to the strengthening of the U.S. dollar against other currencies, primarily the Euro. The positive effect of exchange rate movements on cash and cash equivalents during the three months ended March 31, 2012 was due to the weakening of the U.S. dollar against other currencies, primarily the Euro and Korean Won.

Stock Repurchases

In June 2012, 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. The stock repurchase program is intended to offset the impact of dilution from our equity compensation programs. During the three months ended March 31, 2013, we repurchased approximately $476 million of our common stock under our stock repurchase program. As of March 31, 2013, approximately $1.5 billion remained for further repurchases of our common stock under our stock repurchase program.

Shelf Registration Statement and Long-Term Debt

At March 31, 2013, we had an effective shelf registration statement on file with the Securities and Exchange Commission that allows us to issue various types of debt securities, such as fixed or floating rate notes, U.S. dollar or foreign currency denominated notes, redeemable notes, global notes, and dual currency or other indexed notes. Each issuance under the shelf registration will require the filing of a prospectus supplement identifying the amount and terms of the securities to be issued. The registration statement does not limit the amount of debt securities that may be issued thereunder. Our ability to issue debt securities is subject to market conditions and other factors impacting our borrowing capacity, including our credit ratings and compliance with the covenants in our credit agreement.

We issued $3 billion of senior notes in an underwritten public offering in July 2012. These senior notes remain outstanding and consist of $250 million aggregate principal amount of 0.70% notes due 2015, $1 billion aggregate principal amount of 1.35% notes due 2017, $1 billion aggregate principal amount of 2.60% notes due 2022 and $750 million aggregate principal amount of 4.00% notes due 2042. We issued $1.5 billion of senior notes under a prior shelf registration statement in an underwritten public offering in 2010. These senior notes remain outstanding and consist of $400 million aggregate principal amount of 0.875% notes due 2013, $600 million aggregate principal amount of 1.625% notes due 2015 and $500 million aggregate principal amount of 3.250% notes due 2020.

The indenture pursuant to which the senior notes were issued includes customary covenants that, among other things, and subject to exceptions, limit our ability to incur, assume or guarantee debt secured by liens on specified assets or enter into sale and lease-back transactions with respect to specified properties, and also includes customary events of default.

Commercial Paper

We have a $2 billion commercial paper program pursuant to which we may issue commercial paper notes with maturities of up to 397 days from the date of issue in an aggregate principal amount of up to $2 billion at any time outstanding. As of March 31, 2013, there were no commercial paper notes outstanding. We may elect, subject to market conditions, to issue additional commercial paper notes from time to time in the future.

Credit Agreement

As of March 31, 2013, no borrowings or letters of credit were outstanding under our $3 billion credit agreement. As described above, we have a $2 billion commercial paper program and maintain $2 billion of available borrowing capacity under our credit agreement in order to repay commercial paper borrowings in the event we are unable to repay those borrowings from other sources when they become due. As a result, at March 31, 2013, $1 billion of borrowing capacity was available for other purposes permitted by the credit agreement. The credit agreement contains customary representations, warranties, affirmative and negative covenants, including a financial covenant, events of default and indemnification provisions in favor of the banks. The negative covenants include restrictions regarding the incurrence of liens, subject to certain exceptions. The financial covenant requires us to meet a quarterly financial test with respect to a minimum consolidated interest coverage ratio.

Notes Payable and Capital Lease Obligations

In addition to the debt described above, as of March 31, 2013, we had notes payable of $14 million and capital lease obligations of $14 million.

As of March 31, 2013, we were in compliance with all covenants in our outstanding debt instruments.

Commitments

Liquidity and Capital Resource Requirements

As of March 31, 2013 and December 31, 2012, we had assets classified as cash and cash equivalents, as well as short-term and long-term non-equity investments, in an aggregate amount of $12 billion. As of March 31, 2013, this amount included assets of these types held outside the U.S. in certain of our foreign operations totaling approximately $8 billion. If these assets were distributed to the U.S., we may be subject to additional U.S. taxes in certain circumstances. We actively monitor all counterparties that hold these assets, primarily focusing on the safety of principal and secondarily improving yield on these assets. We diversify our cash and cash equivalents and investments among various counterparties in order to reduce our exposure should any one of these counterparties fail or encounter difficulties. To date, we have not experienced any material loss or lack of access to our invested cash, cash equivalents or short-term investments; however, we can provide no assurances that access to our invested cash, cash equivalents or short-term investments will not be impacted by adverse conditions in the financial markets. At any point in time we have funds in our operating accounts and customer accounts that are deposited with third party financial institutions.

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

We believe that our existing cash, cash equivalents and short-term and long-term investments, together with cash expected to be generated from operations, borrowings available under our credit agreement and commercial paper program, and our access to capital markets, will be sufficient to fund our operating activities, anticipated capital expenditures, Bill Me Later portfolio of loan receivables and stock repurchases for the foreseeable future.

Off-Balance Sheet Arrangements

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”). 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 March 31, 2013, we had a total of $5.7 billion in cash withdrawals offsetting our $5.7 billion in Aggregate Cash Deposits held within the same financial institution under these cash pooling arrangements.

Indemnification Provisions

In the ordinary course of business, we have included limited indemnification provisions in certain of our agreements with parties with which we have commercial relations, including our standard marketing, promotions and application-programming-interface license agreements. Under these contracts, we generally indemnify, hold harmless and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with claims by a third party with respect to our domain names, trademarks, logos and other branding elements to the extent that such marks are applicable to our performance under the subject agreement. In certain cases we have agreed to provide indemnification for intellectual property infringement. GSI has provided in many of its major ecommerce agreements an indemnity for other types of third-party claims, which are indemnities mainly related to various intellectual property rights, and we have provided similar indemnities in a limited number of agreements for our other businesses. In our PayPal business, we have provided an indemnity to our payment processors in the event of certain third-party claims or card association fines against the processor arising out of conduct by PayPal or PayPal customers. PayPal has also provided a limited indemnity to merchants using its retail point of sale payment services. 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.


Item 3:	Quantitative and Qualitative Disclosures About Market Risk

The information in this section should be read in connection with the information on financial market risk related to changes in interest rates and non-U.S. currency exchange rates in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended December 31, 2012. Our market risk profile has not changed significantly during the first three months of 2013.

Interest Rate Risk

The primary objective of our investment activities is to preserve principal while at the same time improving yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents and short-term and long-term investments in a variety of asset types, including bank deposits, money market funds, government bonds and corporate debt securities. As of March 31, 2013, approximately 52% of our total cash and investment portfolio was held in bank deposits and money market funds. As such, changes in interest rates will impact interest income. Fixed rate securities may

have their fair market value adversely affected due to a rise in interest rates, and we may suffer losses in principal if we are forced to sell securities that have declined in market value due to changes in interest rates. Additionally, changes in interest rates will impact interest expense on borrowings under our revolving credit facility, which bear interest at floating rates, and the interest rate on any commercial paper borrowings we make and any debt securities we issue in the future and, accordingly, will impact interest expense or cost of net revenues (or both).

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

Investment Risk

As of March 31, 2013, our cost and equity method investments totaled $318 million, which represented approximately 3% of our total cash and investment portfolio and were primarily related to equity method investments in privately held companies. We review our investments for impairment when events and circumstances indicate a decline in fair value of such assets below carrying value is other-than-temporary. Our analysis includes a review of recent operating results and trends, recent sales/acquisitions of the securities in which we have invested and other publicly available data.

Equity Price Risk

We are exposed to equity price risk on marketable equity instruments due to market volatility. At March 31, 2013, the total fair value of our marketable equity instruments (primarily related to our equity holdings in MercadoLibre) was $785 million, which represented approximately 6% of our total cash and investment portfolio.

Foreign Currency Risk

We have significant operations internationally that are denominated in foreign currencies, primarily the Euro, British Pound, Korean Won and Australian Dollar, subjecting us to foreign currency risk which may adversely impact our financial results. We transact business in various foreign currencies and have significant international revenues as well as costs. In addition, we charge our international subsidiaries for their use of intellectual property and technology and for certain corporate services provided by eBay and by PayPal.

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

European Debt Exposures

We actively monitor our exposure to the European markets, including the impact of sovereign debt issues associated with Cyprus, Greece, Ireland, Italy, Portugal and Spain. As of March 31, 2013, we did not have any direct investments in the sovereign debt of these countries or in debt securities issued by corporations or financial institutions organized in these countries. We maintain a small number of operating bank accounts with Spanish, Italian and Portuguese banks that have balances that we do not consider material.


Item 4:	Controls and Procedures

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

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

PART II: OTHER INFORMATION


Item 1:	Legal Proceedings

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


Item 1A:	Risk Factors

Risk Factors That May Affect Results of Operations and Financial Condition

Our operations and financial results are subject to various risks and uncertainties that could adversely affect our business, financial condition, results of operations and cash flows, as well as the trading price of our common stock and debt offerings.

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

•

general economic conditions, including the possibility of a prolonged period of limited economic growth or possible economic decline in the U.S. and Europe; adverse effects of the ongoing sovereign debt crisis in Europe, including increased Euro currency exchange rate volatility, the negative impact of the crisis and related austerity measures on European economic growth, potential negative spillover effects to the rest of the world, the “contagion” risk of the crisis spreading to additional countries in Europe, the possibility that one or more countries may leave the Euro zone and re-introduce their individual currencies, and, in more extreme circumstances, the possible dissolution of the Euro currency; the possibility of greater austerity in the U.S. due to, among other factors, automatic sequesters, failure to raise the “debt ceiling,” or other related actions (or failure to take actions) by the U.S. Congress and executive branch and, more generally, the impact of uncertainty regarding the fiscal policy of the U.S. government; disruptions to the credit and financial markets in Europe, the U.S., and elsewhere; contractions or limited growth in consumer spending or consumer credit; and adverse economic conditions that may be specific to the Internet, ecommerce and payments industries;


•	our ability to manage the rapid shift from online commerce and payments to mobile and multi-channel commerce and payments;


•	our ability to improve the quality of the user experience on our websites and through mobile devices (including our customer support in the event of a problem) to keep pace with the improved quality of the user experience generally offered by competitive platforms;


•	our ability to upgrade and develop our systems (including the migration to GSI's new technology platform and our need to “replatform” our base PayPal technology), infrastructure and customer service capabilities to accommodate growth and to improve the functionality and reliability of our websites and services at a reasonable cost while maintaining 24/7 operations;

•

the primary and secondary effects of previously announced and possible future changes to our pricing, products and policies, including, among other changes, restrictions or holds on payments made to certain sellers or in connection with certain transactions; changes to our dispute resolution process and buyer and seller protections; upgrades to eBay checkout services, including the introduction of an eBay shopping cart/basket that enables buyers to add items from multiple sellers and pay in a single checkout; changes to our fee structure; changes to the design, navigation and functionality of the eBay.com website, including a redesigned homepage, a new “eBay Feed” that allows users to establish a personalized feed of items on their homepage and the display of larger images and product information; changes to the checkout process, including the ability for users to connect their eBay and PayPal accounts more easily; new functionality for sellers to specify shipping, payment and return policies (collectively referred to as “business policies), which sellers will automatically be opted into beginning in mid-June 2013 and which will become mandatory in 2014; enforcement of new picture quality requirements for listed items starting in July 2013; and other products and features through which we are increasingly intermediating more aspects of transactions between buyers and sellers using our platforms;


•	our ability to retain an active user base, attract new users, and encourage existing users to list items for sale and purchase items through our websites and mobile platforms, or use our payment services, especially when consumer spending is weak;


•	consumer confidence in the safety and security of transactions using our websites and technology (including through mobile devices) and the effect of any changes in our practices and policies or of any events on such confidence;


•	the actions of our competitors, including the introduction of new stores, channels, sites, applications, services, products and functionality, or changes to the provision or prices of services important to our success, including interchange, Internet search and smartphone operating systems;


•	our ability to manage the costs of and administer our user protection programs;

•

our ability to comply with existing and new laws and regulations as we expand the range and geographical scope of our products and services and as we grow larger, including those laws and regulations discussed below under the caption “If our Payments business is found to be subject to or in violation of any laws or regulations, including those governing money transmission, electronic funds transfers, money laundering, terrorist financing, sanctions, consumer protection, banking and lending, it could be subject to liability, licensure and regulatory approval and may be forced to change its business practices”;

•

new laws or regulations (such as those that may stem from the proposed Anti-Counterfeiting Trade Agreement (ACTA) and Trans-Pacific Partnership Agreement (TPP), the European Consumer Rights Directive and the proposed revisions to the European Data Protection Directive) and interpretations of existing laws or regulations, including national court interpretations of the European Court of Justice's decision in the L'Oréal case (see “Item 1: Legal Proceedings” above), that impose liability on us for the actions of our users or otherwise harm our business models, especially as we become more actively involved in various aspects of transactions on our platforms;


•	regulatory and legal actions imposing obligations on our businesses or our users, including the injunction related to certain cosmetic and perfume brands (see “Item 1: Legal Proceedings” above);


•	the impact on PayPal or Bill Me Later of regulations enacted pursuant to new laws regulating financial institutions, including the Dodd-Frank Wall Street Reform and Consumer Protection Act in the U.S., or the Dodd-Frank Act;


•	our ability to manage the costs of compliance with existing and new laws and regulations that affect our businesses;


•	the volume, velocity, size, timing, monetization, and completion rates of transactions using our websites or technology;


•	our ability to reduce the loss of active buyers and sellers and increase activity of the users of our Marketplaces business, especially with respect to our top buyers and sellers, and increase activity of PayPal account holders, particularly in our merchant services business;


•	our ability to develop product enhancements, programs, and features on different platforms and mobile devices at a reasonable cost and in a timely manner, including our initiatives to make PayPal solutions available at the retail point of sale;


•	changes to our use of advertising on our sites;


•	the costs and results of litigation or regulatory actions that involve us;


•	technical difficulties or service interruptions involving our websites;


•	disruptions to services provided to us or our users by third parties;


•	our ability to manage the transaction loss rate in our Marketplaces, Payments and GSI ecommerce services businesses;


•	our ability to manage funding costs, credit risk and interest-rate risk associated with our Bill Me Later business;


•	our ability to successfully and cost-effectively integrate and manage businesses that we acquire;


•	the amount and timing of operating costs and capital expenditures relating to the maintenance and expansion of our businesses, operations and infrastructure;


•	our ability to comply with the requirements of entities whose services are required for our operations, such as payment card networks and banks;


•	the cost and availability of traditional and online advertising, and the success of our brand building and marketing campaigns;


•	our ability to attract new personnel in a timely and effective manner and to retain key employees;


•	the continued healthy operation of our technology suppliers and other parties with which we have commercial relations;


•	continued consumer acceptance of the Internet and of mobile devices as a medium for commerce and payments in the face of increasing publicity about data privacy issues, including breaches, fraud, spoofing, phishing, viruses, spyware, malware and other dangers; and


•	macroeconomic and geopolitical events affecting commerce generally.

It is difficult for us to forecast the level or source of our revenues or earnings accurately. In view of the rapidly evolving nature of our business, we believe that period-to-period comparisons of our operating results may not be meaningful, and you should not rely upon them as an indication of future performance. We do not have backlog, and substantially all of our net revenues each quarter come from transactions involving sales or payments during that quarter. Due to the inherent difficulty in forecasting revenues, it is also difficult to forecast income statement expenses as a percentage of net revenues. Quarterly and annual income statement expenses as a percentage of net revenues may be significantly different from historical or projected

rates. Our operating results in one or more future quarters may fall below the expectations of securities analysts and investors. In that event, the trading price of our common stock would almost certainly decline.

We invest heavily in technology, marketing and promotion, customer support, protection programs and further development of the operating infrastructure for our operations. Some of this investment entails long-term contractual commitments. As a result, we may be unable to adjust our spending rapidly enough to compensate for any unexpected revenue shortfall, which may harm our profitability.

The growth of Internet users is slowing in many countries where we have a significant presence. As our growth rates in established markets slow, we will increasingly need to focus on keeping existing Marketplaces users (especially our top buyers and sellers) and PayPal account holders (especially in our merchant services business) active and increasing their activity level on our websites and mobile platforms and their use of our payment services, respectively, in order to continue to grow those businesses. The growth of Internet users is accelerating in some countries and regions where we do not have a significant presence (e.g., Brazil/Latin America, Russia, China and certain other countries in which we do not have a meaningful (or, in some cases, any) domestic business). If we are unable to establish our businesses and drive adoption of our services in such markets, our future growth would be negatively impacted.

Our Marketplaces business continues to face increased competitive pressure online and offline. In particular, the competitive norm for, and the expected level of service from, Internet ecommerce and mobile commerce has significantly increased, due to, among other factors, improved user experience, greater ease of buying goods, lower (or no) shipping costs, faster shipping times and more favorable return policies. If we are unable to change our services in ways that reflect the changing demands of the Internet ecommerce and mobile commerce marketplaces, particularly the higher growth of sales of fixed-price items and higher expected service levels (some of which depend on services provided by sellers on our platforms), our business will suffer.

We regularly announce changes to our Marketplaces business intended to drive more sales and improve seller efficiency and buyer experiences and trust. Some of the changes that we have announced to date have been controversial with, and led to dissatisfaction among, our sellers, and additional changes that we announce in the future may also be negatively received by some of our sellers. This may not only impact the supply of items listed on our websites, but because many sellers also buy from our sites, it may adversely impact demand as well. Given the number of recent changes that we have made and continue to make to our policies and pricing, it may take our sellers some time to fully assess and adjust to these changes, and sellers may elect to reduce volume on our sites while making such assessments and adjustments or in response to these changes. If any of these changes cause sellers to move their business (in whole or in part) away from our websites or otherwise fail to improve gross merchandise volume or the number of successful listings, our operating results and profitability will be harmed.

We believe that the mix of sales under our traditional auction-style listing format and fixed-price listing format will continue to shift towards our fixed-price format. Accordingly, we have eliminated some of the features related to our traditional auction-style format and expect others will continue to become less meaningful to, and used less frequently by, our sellers, resulting in a corresponding decrease in revenues from those features. We also expect that the costs associated with our seller discount programs will increase as more sellers become eligible for such discounts. In addition, because a large percentage of PayPal transactions originate on the eBay platform, declines in growth rates in major Marketplaces markets also adversely affect PayPal's growth. The expected future growth of our PayPal, GSI, StubHub and our other lower margin businesses may also cause downward pressure on our profit margins because those businesses have lower gross margins than our Marketplaces platforms.

The sluggish economy and the sovereign debt crisis could harm our business.

Our Marketplaces, Payments and GSI ecommerce services businesses are dependent on consumer purchases, and our GSI business is also impacted by the offline businesses of our GSI clients. The economic downturn resulted in reduced buyer demand and reduced selling prices, and the slow recovery and possible impact of automatic sequesters or a failure to raise the “debt ceiling” in the U.S., as well as the impact of the sovereign debt crisis and resulting austerity measures in Europe, may reduce the volume and prices of purchases on our Marketplaces platforms, the volume and prices of transactions paid for using our Payment services and the online and offline businesses of our GSI clients, which would adversely affect our business. These macroeconomic factors could also have a negative and adverse impact on companies with which we do business, which in turn could have an adverse effect on our business.

We are exposed to fluctuations in currency exchange rates and interest rates.

Because we generate a majority of our revenues outside the U.S. but report our financial results in U.S. dollars, we face exposure to adverse movements in currency exchange rates. In connection with its multi-currency service, PayPal fixes exchange rates twice per day, and may face financial exposure if it incorrectly fixes the exchange rate or if exposure reports are delayed. Given that PayPal also holds some corporate and customer funds in non-U.S. currencies, its financial results are affected by the translation of these non-U.S. currencies into U.S. dollars. In addition, the results of operations of many of our internationally focused websites are exposed to foreign exchange rate fluctuations as the financial results of the applicable subsidiaries are translated from the local currency into U.S. dollars upon consolidation. If the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions will result in increased revenues, operating expenses and net income. Similarly, if the U.S. dollar strengthens against foreign currencies, our translation of foreign currency denominated transactions will result in lower net revenues, operating expenses and net income. If the U.S. dollar strengthens against major European currencies (e.g., the Euro and British pound) due to the ongoing sovereign debt crisis in Europe, worsening economic conditions or for any other reasons, our revenues and operating results would be adversely impacted. For the quarter ended March 31, 2013, foreign currency movements relative to the U.S. dollar negatively impacted our net revenues of $3.7 billion by approximately $1 million (net of a positive impact from hedging activities included in PayPal's net revenue of less than $1 million) compared to the same period in the prior year. As exchange rates vary, net revenues and other operating results, when translated, may differ materially from expectations. In particular, to the extent the U.S. dollar strengthens against the Euro, British pound, Korean won, Australian dollar or Canadian dollar, our foreign revenues and profits will be reduced as a result of these translation adjustments. While from time to time we enter into transactions to hedge portions of our foreign currency translation exposure, it is impossible to predict or completely eliminate the effects of this exposure. In addition, to the extent the U.S. dollar strengthens against the Euro, the British pound, the Australian dollar or other currencies, cross-border trade related to purchases of dollar-denominated goods (or goods from those Asia-Pacific countries whose currencies tend to follow the dollar) by non-U.S. purchasers will likely decrease, and that decrease will likely not be offset by a corresponding increase in cross-border trade involving purchases by U.S. buyers of goods denominated in other currencies, which would adversely affect our business.

In addition, we face exposure to fluctuations in interest rates. Relatively low interest rates have continued to limit our investment income, including income we earn on PayPal customer balances.

Bill Me Later's operations depend on lending services provided by an unaffiliated lender.

In November 2008, we acquired Bill Me Later, a company that facilitates credit services offered by an unaffiliated bank. Bill Me Later is neither a chartered financial institution nor is it licensed to make loans in any state. Accordingly, Bill Me Later must rely on a bank or licensed lender to issue the Bill Me Later credit products and extend credit to customers to offer the Bill Me Later service. 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 made 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.

In September 2010, WebBank became the issuer of the Bill Me Later credit products. WebBank is an industrial bank chartered by the State of Utah. Any termination or interruption of WebBank's ability to lend could result in our being unable to originate any new transactions for the Bill Me Later service, which would require us to either reach a similar arrangement with another chartered financial institution, which, if possible at all, may not be available on favorable terms, or to obtain our own bank charter, which would be a time-consuming and costly process and would subject us to a number of additional laws and regulations, compliance with which would be burdensome.

In 2010, a lawsuit was filed against Bill Me Later, PayPal and eBay in the U.S. District Court for the Northern District of California, alleging that in its relationship with the chartered financial institution, Bill Me Later is acting as the true lender to customers in violation of various California laws, including the state's usury law. The court dismissed the usury claims in December 2010, but breach of contract and other claims remain. WebBank requested to intervene in the action and has been added as a party to the action, and in October 2011, the court transferred the case to the U.S. District Court for the District of Utah. The Utah Court allowed plaintiffs the opportunity to amend the complaint; the complaint was amended and plaintiffs re-alleged the usury claims that were previously dismissed. We and WebBank have filed a motion to dismiss the lawsuit. A hearing on the motion was held by the court in September 2012. We believe that plaintiffs' allegations are without merit and intend to defend ourselves vigorously. However, this area of law is uncertain and if the lawsuit is successful, Bill Me Later may be

required to change its methods of operations, pay very substantial damages and reduce some of its charges and fees, which would adversely affect our business.

If our Payments business is found to be subject to or in violation of any laws or regulations, including those governing money transmission, electronic funds transfers, money laundering, terrorist financing, sanctions, consumer protection, banking and lending, it could be subject to liability, licensure and regulatory approval and may be forced to change its business practices.

Our Payments business is subject to various laws and regulations in the U.S. and other countries where it operates, including those governing money transmission, electronic funds transfers, money laundering, terrorist financing, sanctions, consumer protection, banking and lending. The legal and regulatory requirements that apply to our Payments business vary in the markets where we operate. While PayPal has a compliance program focused on compliance with applicable laws and regulations and has significantly increased the resources of that program in the last several years, there can be no assurance that we will not be subject to fines or other enforcement actions in one or more jurisdictions or be required to make changes to our business practices or compliance programs to comply in the future.

While PayPal currently allows its customers with credit cards to send payments from approximately 190 markets, PayPal only allows customers in 110 of those markets (including the U.S.) to receive payments, in some cases with significant restrictions on the manner in which customers can withdraw funds. These limitations may affect PayPal's ability to grow in these markets. Of the markets whose residents can use the PayPal service, 31 (27 countries plus four French overseas departments) are members of the European Union, or EU. Since 2007, PayPal has provided localized versions of its service to customers in the EU through PayPal (Europe) S.à r.l. et Cie, SCA, a wholly-owned subsidiary of PayPal that is licensed and subject to regulation as a bank in Luxembourg by the Commission de Surveillance du Secteur Financier (CSSF). Accordingly, PayPal (Europe) is subject to significant fines or other enforcement action if it violates the disclosure, reporting, anti-money laundering, capitalization, funds management, corporate governance, information security, sanctions or other requirements imposed on Luxembourg banks. Any fines or other enforcement actions imposed by the Luxembourg regulator could adversely affect PayPal's business. PayPal (Europe) implements its localized services in EU countries through a “passport” notification process through the Luxembourg regulator to regulators in other EU member states pursuant to EU Directives, and has completed the “passport” notification process in all EU member countries. The regulators in these countries could notify PayPal (Europe) of local consumer protection laws that apply to its business, in addition to Luxembourg consumer protection law, and could also seek to persuade the Luxembourg regulator to order PayPal (Europe) to conduct its activities in the local country through a branch office. These or similar actions by these regulators could increase the cost of, or delay, PayPal's plans for expanding its business in EU countries. In addition, national interpretations of regulations implementing the EU Payment Services Directive, which established a new regulatory regime for payment services providers in 2009, may be inconsistent, which could make compliance more costly and operationally difficult to manage.

In 2011, we began implementing a new payment process in Germany and Austria in which eBay intermediated payments, receiving funds directly from buyers for items purchased from newly registered sellers on the localized eBay websites in those countries and subsequently paying the sellers upon shipment of the items. The German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and the Austrian Finanzmarktaufsicht (FMA) subsequently determined that eBay was required to obtain a license in order to introduce the new payment method. eBay's payment processing unit is based in Luxembourg and is governed by the CSSF, which had advised that there was no need for such a license. In accordance with the BaFin and FMA positions, eBay has stopped intermediating payments in this manner.

In Australia, PayPal serves its customers through PayPal Australia Pty. Ltd., which is licensed by the Australian Prudential Regulatory Authority as a purchased payment facility provider, which is a type of authorized depository institution. Accordingly, PayPal Australia is subject to significant fines or other enforcement action if it violates the disclosure, reporting, anti-money laundering, capitalization, corporate governance or other requirements imposed on Australian depository institutions. In China, PayPal is affiliated with Shanghai Wangfuyi Information Technology Ltd., which is licensed as an Internet Content Provider and operates a payments service only for Chinese customers and only for transactions denominated in Chinese currency. The People's Bank of China (PBOC) has enacted regulations to establish a new type of license, called a Payment Clearing Organization (PCO) license, which will be required for non-bank payment services. The PBOC regulations leave unclear whether a foreign-owned company such as PayPal can control or invest in a PCO, and whether Wangfuyi or PayPal's wholly-owned subsidiary in China would be eligible to obtain a PCO license. Nonetheless, PayPal has applied for such a license.

To date, PayPal has obtained licenses to operate as a money transmitter in 45 U.S. states, the District of Columbia and Puerto Rico. PayPal is also licensed as an escrow agent in one U.S. state. PayPal is applying for money transmitter licenses in

two additional states and one U.S. territory to facilitate its planned offering of payment services at the retail point of sale. The two remaining U.S. states where PayPal has not applied for a license do not currently regulate money transmitters. As a licensed money transmitter, PayPal is subject to restrictions on its investment of customer funds, reporting requirements, bonding requirements, and inspection by state regulatory agencies. If PayPal were found to be in violation of money services laws or regulations, PayPal could be subject to liability and/or additional restrictions, forced to cease doing business with residents of certain states, forced to change its business practices, or required to obtain additional licenses or regulatory approvals that could impose a substantial cost on PayPal. Any change to PayPal's business practices that makes the service less attractive to customers or prohibits its use by residents of a particular jurisdiction could also decrease the velocity of trade on eBay and websites operated by GSI's clients that accept PayPal as a form of payment, which would further harm our business.

In 2012, PayPal's California regulator, the California Department of Financial Institutions (DFI), notified PayPal that PayPal's 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, meant that PayPal could not 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 2012, PayPal began 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 November 2012, all U.S. PayPal customer balances, which were previously reported as off-balance sheet, have been reflected as assets in our consolidated balance sheet under "Funds receivable and customer accounts," with an associated liability under "Funds payable and amounts due to customers." In addition, this change disqualified the customer balances from pass-through FDIC insurance and resulted in U.S. PayPal customers becoming general creditors of PayPal with respect to such customer balances. This change could also result in decreased revenue to PayPal if it decides to shift the funds from interest-bearing deposit accounts to securities that bear lower interest rates or non-interest bearing deposit accounts.

In markets other than the U.S., the EU, Australia, the China domestic business and Brazil, PayPal serves its customers through PayPal Private Ltd., a wholly-owned subsidiary of PayPal that is based in Singapore. PayPal Private Ltd. is regulated in Singapore as a stored value issuer. Because PayPal Private Ltd. is regulated as a stored value issuer, and not as a remittance service, PayPal Private Ltd. is not able to offer personal remittance payments in Singapore and many of the other markets served by PayPal Private Ltd.

In many of the markets other than Singapore served by PayPal Private Ltd., it is not clear whether PayPal's Singapore-based service is subject only to Singaporean law or, if it were subject to local laws, whether such local law would require a payment processor like PayPal to be licensed as a bank or financial institution or otherwise. In such markets, the business may rely on partnerships with local banks to process payments and conduct foreign exchange in local currency. Local regulators who do not have direct jurisdiction over Singapore-based PayPal Private Ltd. may use their local regulatory power to slow or halt payments to local merchants conducted through the local banking partner. Such regulatory actions impacting local banking partner arrangements could impose substantial costs and involve considerable delay to the provision or development of PayPal services in that market, or could prevent PayPal from providing any services in a given market. For example, in January 2010, the Reserve Bank of India directed the Indian affiliate of PayPal's processing bank to suspend withdrawals to the Indian bank accounts of PayPal customers